Cliffs Natural Resources 3Q16 Earnings Call Notes

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C. Lourenco Goncalves

No more race to the bottom in iron ore prices

” In the third quarter, we witnessed some remarkable stability in iron ore pricing with the index trading within a tight range for the entire quarter. Once again, the analysts who predicted that iron ore prices would fall off a cliff were wrong. Wrong again. As I always say, iron ore is not your typical commodity as the vast majority of the supply is controlled by a small number of producers. For some time, iron ore prices were going down because a few executives in positions of power with the major iron ore producers were working very hard to drive these iron ore prices down. However, after the Boards of Directors of the Australian producers took action and all but one of these executives were let go from their respective jobs, these companies under new management are now generating better margins and more decent returns for their shareholders. No more race to the bottom. The Australian-Brazilian championship of stupidity is over. Check the box.”

Steel distributors are keeping their inventories dangerously low

“Back in our domestic U.S. market, the price of steel was not exciting during the quarter. We believe the recent weakness in steel prices is demand driven rather than supply driven. Our customers, the blast furnace steel mills, have remained disciplined. Unfortunately, the steel buyers, particularly the service centers, have decided to keep their inventories dangerously low, and as such their steel mill order books were weak. This being said, the illegally dumped steel from other countries no longer represent the type of threat we were worried about a few months ago.”

DRI fed EAFs are the future of steelmaking in this country

“Now with the steel industry in the United States readily moving toward a different method of production, we need to evolve again. I believe that DRI-fed EAFs is the future of steelmaking in this country, and Cliffs will play an active part on this process as well. We have made great progress on this so far, as at our Northshore mine, we have reduced and continue to produce DR-grade pellets for shipment to our client in Trinidad.”

Dumped steel is illegal stuff. We’re going to get the slowest guys

“At this point, dumped steel is illegal stuff. If you are a service center, your business model is based on buying illegal stuff, you are putting yourself in a situation that can be very, very dangerous for you, for your business and for yourself as an individual. We are getting evidence, and of course we are not going to hit a lot of people, we’re going to hit just two or three. You don’t need to – when you are running from a lion, you don’t need to be the fastest you just need to be faster than the other guys. So we’re going to get the slowest guy, one more or two, but this is coming.”

Service center inventories too low

” I see a lot of service centers working with inventories below two years. That’s crazy – two months, I’m sorry, two months. You can’t operate a service center business with inventories that low. Service centers are in the business of carrying inventory. If they don’t want to carry inventory, they’re in the wrong business. So as prices start to go back up, even the guys that are not doing anything illegal, they are exposing themselves to price appreciation that can be extremely bad. So these are the main things about the current situation in service centers. Service centers provoked the weakness of prices one more time.”

Don’t get distracted by this temporary weakness in prices in the US

“So don’t get distracted by this temporary weakness in prices in the US domestic market because these service centers that are working with less than three months of inventory, two months of inventory on hand, they will have to restock and I don’t see them to be able to even get all this – they need to restock all of them altogether, let alone to accommodate their typical double order, triple order that they do in situations like that. So we are going to see a price movement up here in the United States, and this price movement up can be pretty significant, pretty aggressive. And then things will slow down a little bit and then they will stabilize.”

Imported dumped steel is over, forget about it

“What we are now going to see next year in this domestic market is imported steel. Forget about it. That thing is over. That thing is over. Illegal dumped imported steel in this country is over for 2017. It doesn’t mean that prices will go to $1000 per ton, that’s not what I’m saying. But they will go back to the high $500, $600 mark. ”

You can be bullish but I can’t, because if I’m bullish and wrong I lose a lot of people a lot of money

“All right. So just one thing. I’m not bullish. You can be bullish. I can’t. Because if I’m bullish and I’m wrong, we are going to hurt a lot of people, a lot of investors. A lot of money will be lost, money that’s mine, money that’s not mine, from my investors. So I’m never bullish. I’m always very, very, very protective over our thing. That’s the reason we have been so successful because I play with a lot of caution – with a lot of cushion in our forecasts.”