Cliffs Natural Resources 1Q17 Earnings Call Notes

C. Lourenco Goncalves – Cliffs Natural Resources, Inc.

Demand for steel in the US is good

“One thing we’ll always be confident in is the resilience of the U.S. economy, and by extension, the health of the domestic steel industry. The steel prices in the United States are at their highest since I have been with Cliffs, and all signs point to a sustained healthy year. The noise about Chinese and domestic steel price arbitrage is irrelevant now with the trade cases we have in place and a strong commitment to enforce them. The reality is demand for steel in the United States is good. Our clients are doing well in their markets, and the measures to curb illegally traded imports have been put in place.”

I don’t think you need to be concerned about trade cases with Wilbur Ross around

“Just to give an idea, Mr. Wilbur Ross was the guy that put together Bethlehem Steel and LTV Steel just after the debacle of the two companies around 2001, 2002. And that was a result of trade case. So, Wilbur Ross knows trade cases very well. So, I don’t know what you’re concerned about”

US sectors are in good shape

“The part of the world that you should be focused on at this point is the United States of America, because our economy is growing. All sectors are in good shape. Some sectors are surprisingly strong at this point like agriculture, like non-residential construction. Automotive has not come down. Actually, we are seeing automotive turning back up. And we have a limited amount of domestically generated steel available for all these uses.”

Cliffs Natural 4Q16 Earnings Call Notes

C. Lourenco Goncalves

We finally have sanity back in the seaborne iron ore market

“The most important point I would like to make today, we finally have sanity back in the seaborne iron ore market. I truly commend Rio Tinto and Vale for eliminating their reckless behavior that had infected the market for a number of years and destroyed several billions of dollars in equity value. Once the market analysts saw iron ore prices at $40, they believed that this was the new normal. Not the case. For a controlled commodity like iron ore, in which only three big players have the ability to move market price up or down, this should never be the case. Iron ore at $40 is not, nor will it ever be normal.

Encountered new dynamics in Chinese market

“We have also encountered some new dynamics in the Chinese market, between the improved profitability of the Chinese steel mills, the elevated prices of coking coal, and most importantly the increasingly serious crackdown on pollution sponsored by the Chinese Government, demand for higher-grade iron ore has risen significantly. As a consequence, low-grade 56% iron content ore is having a tougher time to find a home with good clients. This is evident as we observe the wider spread between the 62% Fe reference price in the price of low iron content ore.”

Iron Ore piling up at Chinese ports is low quality

“Previously, when the Chinese mills were not being forced to pay attention to pollution and coking coal prices were extremely low, iron content didn’t matter. Now, it does matter. And that’s why we continue to see higher ore inventories at the ports. They stopped accumulate in port side; it’s not the good ore. It is pollution heavy, low-iron content material. In some, these port stocks could stay high or even go further up and that will continue to have a very limited influence on the 62% iron ore price index.”

Trump rhetoric adds to the positive environment

“In the U.S. market, on top of the reduction of imports associated with the positive outcome of the trade cases, a major event with a potential to positively impact the market in 2017 and beyond is the result of the presidential election. All other matters aside, President Trump, delivers a message that is positive for Cliffs and for our customers, the domestic steel mills. The stated commitment of President Trump to create real conditions for the resurgence of manufacturing in America can only help and enhance the environment we are operating in. While we cannot give the new president all or even most of the credit for this improved outlook as it’s actually a result of the 2016 trade cases, President Trump’s directives on buy American and build in America have the potential to multiply the benefits of the current positive environment for manufacturing in the United States.”

Service centers have also been beneficiaries of dumped steel

“Talking about bad actors, foreign steel mills and trading companies benefiting from subsidies to produce steel and then dump it into the United States are not alone as perpetrators of this illegal activity. A number of steel buyers within the boundaries of United States including, but not limited to, distributors and service centers have built their respective business on being the final recipients of illegally traded steel. With that, they benefit from an unfair advantage against other steel buyers in service centers that play by the rules.”

If Trump delivers on a portion of his promises it will be great for us

“In sum, if President Trump delivers on, not all, but just a portion of what he promises he’s going to deliver while in office regarding domestic manufacturing, and with the 2016 anti-dumping countervailing and circumvention trade cases in place and being strict to enforce it, Cliffs will benefit significantly in 2017 and beyond.”

China is transitioning

“Iron ore demand, okay. Well, China continues to perform. China is moving toward a more responsible way of performing. The pollution combat in China is real now and we are going to see more and more and more and more moves toward China becoming a lot more like Japan, a lot more like South Korea, because don’t forget, Japan and South Korea in the mid- to late-1990s transitioned from what China is now to what they are now. So, the dynamics will be exactly the same.”

China is going to keep buying Ore

“We’re not going to see China not producing, not buying iron ore, not deploying fixed assets. It’s the opposite. They will continue to grow fixed asset investments. They’ll continue to buy iron ore, but they will be more selective. So, the times of the so-called low-cost iron ore – and nobody talks about iron content, nobody talks about other properties, nobody talks about residuals – it’s gone. China is no longer in elementary school. China is at least a senior in high school. Wait until China gets to college, it will be impossible for this guy that produce black stuff, and they called it the black dirty iron ore, to continue to be called suppliers of iron ore. It’s a different ballgame that’s moving in China. But demand is phenomenal. It’s great. We’ll continue to support production of good stuff. And the bad stuff, for now, we accumulate at the port. Very soon, we will be accumulating in Australia. ”

JP Morgan Analyst

sucking up to management

“I just wanted to say a couple of things. First of all, congratulations, but most of all, thank you for making my job so much easier in covering Cliffs. You’ve been so honest and you’ve given everyone the details of your analysis of the iron ore marketplace over the last year-and-a-half. You’ve been spot-on and anyone who listen to you would be spot-on too with their call on Cliffs. So again, congratulations and thank you.”

Freeport McMoRan 4Q16 Earnings Call Notes

Freeport-McMoRan’s (FCX) CEO Richard Adkerson on Q4 2016 Results

Don’t give bows for Act I when the audience is looking for Act II

“as I started thinking about my presentation today I recall a comment that Jack Welch made several years ago and it was, ‘don’t be giving bows for Act I when the audience is looking for Act II’, and I know everyone here is focused on Indonesia. It’s the focus of our senior management team as we go into 2017, but having said that I’m very proud of what our team did during this past year.”

Background on Indonesia

“In 2009, the Government of Indonesia passed a new mining law and implement new regulations over, the law was passed in 2009 and it took time to put regulations in place and really the governing regulations were not completed until 2012. The law provides specifically that existing CoWs remain in effect until they expire. It also instructed the government to seek amendments to the CoW make contracts of work more consistent with the new mining law within one year.

We actually, began discussions with the designated senior representatives of government in 2011. And in 2012, the government established an evaluation team early that year to review CoWs. We’ve been in discussions with the government since 2011, 2012, but have never been able to reach a mutually acceptable agreement on reconciling the contract of work with the new mining law. The law says that the contract remains in effect.

In early 2014, concentrate exports were halted for more than six months following a troubling January regulation on exports. We didn’t export for more than six months. It cost the government roughly a $1 billion in taxes and royalties, it cost us slightly less than that. But a very substantial amount. In that year, we resolved the ban on exports by entering into an MOU with the government, in July, that covered six main points. Exports, smelter development, divestiture, all of these were subject to negotiation of legal and physical certainty and an extension of our operations from 2021 to 2041.

It was contemplated that that MOU would be resulted amendments to the CoW in six months. The government changed in late 2014, the MOU was extended in 2015 and we continued discussions with the government. That led to the government providing our company a letter of assurance regarding extension of the CoW, regarding legal and physical certainty beyond 2021. And it was that assurance, in that letter and in the MOU and in the CoW, the government has, in Freeport have honored this CoW since the first one was signed in the 1960s, and the new one signed in 1991, that has given us the confidence to make the ongoing level of investments that we’ve been making and developing our underground resources.

Now just in January of this year the government has introduced new regulations and these new regulations require CoW holders to convert to licenses called IUPK in order to export, and with a license in and of itself there is no assurance of legal and physical certainty and we have been unwilling to give up our CoW to go to strictly a license. And so, what I want to do now is, and this is in our slides and so you can review this and follow up with questions, but I want to point out what our contract of work actually says.

If we are not allowed to export it will have a significant impact on our company

“So, we’re committed to start working immediately on that. We’ve been given indications that we will be allowed to export, but I want to note specifically, we have not yet been approved for that. If in fact, we are not allowed to export, the significant impact on our company. Each day, it’s 70 million pounds of copper and 100,000 each month — 70 million pounds of copper and 100,000 ounces of gold for each month. The nature of copper concentrate is that it’s bulk material and we don’t have the ability to inventory this to any great extent. We would be allowed to ship domestically to the smelter at Gresik and we would have to restructure our business to allow us to do that, but it would be a major curtailment of our business. Unlike 2014, at this point where our company is not in a position to maintain the existing operations without being able to export.”

At this point we don’t believe that we will have to take steps to curtail operations

“So, we would have to take steps to curtail operations, curtail costs, that means very large layoffs and the cutbacks in capital spending, and we have developed plans to do that. I will say we don’t expect to have to do that based on very recent discussions with the ministry. But we — it still remains for us to get these exports approval and we’ve been given assurances that we will.”

There is the option of international arbitration

“We have the rights to pursue claims against the government in the form of international arbitration. And our legal team advises us that our case is very strong in doing that. We have consistently represented to the government that we don’t want to do that, I don’t believe that would be advantageous for us, but I also think it would be very negative for the Government of Indonesia. So, we have and as long as we have the opportunity to try to resolve these matters in good faith we’ll continue to do it through trying to reach an amicable mutually agreeable situation. But if we get to that point where we can’t and that point would include not being able to export, then we would be left no choice and we’re prepared to do that.”

EPA regulation is important to us

“The area that we’re watching that could have a big influence on us is EPA regulations. Because we inherited legacy environmental obligations all over this country from historical operations that go back into the 19th Century. And we just entered into a settlement that you may have seen with EPA and the Navajo Indian tribe in the Four Corners area with some significant historical uranium clean-up sites. We were very pleased with that, the government I going to pay significant part of that and we’re going to deal with some of those obligations on behalf of our company. So, these EPA regulations which is a big focus of the new administration is important to us.”

Alcoa 2Q16 Earnings Call Notes

Alcoa’s (AA) CEO Klaus Kleinfeld on Q2 2016 Results

Revenue down 1% y/y

‘Revenues of 3.4 billion, that’s down 1% year-over-year and this basically reflects the customer adjustments of the delivery schedules in the aerospace industry, softness in the North American commercial transportation market, pricing pressures partially offset by the North American automotive volumes.”

Demand for aircraft is pretty flat, softening demand in wide body segment

“In the third quarter, we’ve seen large commercial aircraft deliveries up 3%. The growth year-to-date is kind of flat and so we believe that the year 2016 is more likely to come out at the low end of the range and the range being 0 to plus 3%. We also see solid growth of narrow and softening demand for wide body segment.”

North American auto growing 1-2%

“So let’s move on to automotive and let’s go to North America. We believe it’s going to grow 1% to 2%. In the second quarter we had a range still between 1 to 4, but we are now seeing there’s rather a narrow range than the one that we had planned. What we do see is product is up 2.4%, but it’s really a tale of two cities.”

100m vehicles older than 12 years in the US

“The demand we believe for longer term, we do see a sustained demand picture in the US. If you just look at the vehicles that are 12 years and older the number is more than 100 million out of 258 million that are in operation. So it’s a big chunk that potentially is kind of sitting there as future demand.”

China could actually be better than what we saw in the last quarter

“On China, we actually believe that it’s going to be better than what we saw in the last quarter, 6% to 8% we see here up from the 3% to 5% that we saw before. Production is up almost 11%, sales up 11%, and some of the legislation is helping us to get boosted. So that’s the picture on automotive.”

Packaging actually a little higher than we saw before

“Packaging, actually we do see global growth rather a little bit higher than what we saw before. Before we said one to three, and we said 2 to 3 very strongly driven by the US where we saw minus 1 to 0 as a picture before and we think now it’s a little bit 0 to 1”

William Oplinger

Weakness in heavy duty truck offset by growth in construction

“As we look to the fourth quarter, we expect continued weakness in the North American heavy duty truck market to be offset by growth in our building and construction business, and productivity gains. Overall, fourth quarter ATOI is expected to be up 8% to 10% year-over-year to $43 million to $44 million.”

Global consumption expected to be 60m tonnes

“Now I’ll move to review the aluminum market fundamentals. Global demand remains robust at 5%, while supply has increased slightly from last quarter, keeping the overall market balance of our 2016 aluminum balance in depths at range of 615,000 metric tons. Global consumption is projected to reach 59.7 million metric tons.”

Alumina market is in deficit

“We then turn to alumina; the alumina market is in deficit of approximately 1.6 million metric tons, representing a larger market deficit than what we had reported in the second quarter. The deficit increased due to the combined impact of three main factors; higher alumina demand in both China and the rest of the world from increased smelter production, lower rest of the world supply, as (inaudible) curtailment and slowed expansion in India combined to lower the overall rest of the world supply. And in China a few faster restart in additional expansion have increased 2016 Chinese alumina supply. “

NovaGold 3Q16 Earnings Call Notes

NovaGold Resources’ (NG) CEO Greg Lang on Q3 2016 Results

Just a matter of time before we secure necessary permit

“There is a still a lot of work ahead prior to making a construction decision. But we can all see that it is just a matter of time before we can expect to have secured the necessary permit for Donlin Gold. This is a major achievement and an important step of project derisking as we work to unlock Donlin Gold’s ability to become a significant cash flow generator for many decades to come.”

We are getting close to the finish line

“We are getting close to the finish line.”

Few new issues ahead of final EIS

“Carefully reviewing the draft EIS comments is an important part of preparing a final EIS, and ensures that all technical issues are thoroughly considered and addressed in the analysis. Overall, few new issues were raised during the public comment period and most matters had already been addressed in the draft EIS. The Corps is working to release the target date for the final EIS, which will bring forward a record of decision on Donlin Gold’s Clean Water Act Section 404 (wetland) permit.

40m ounces of gold reserves

“‘ll briefly recap the attributes that makes the Donlin Gold project unique. We’ve got reserve and resources of almost 40 million ounces of gold and addition of 6 million ounces inferred material. Turning to Slide 12, when you compare Donlin to the other development stage projects throughout the industry, it is far and away the largest. When you look at the production profile of these emerging producers, Donlin Gold is better than twice the closest competitor. It will produce 1.5 million ounces a year at first five years followed by a life mine average of 1 million ounces a year.”

Final EIS should be in the next 10-16 months

“John, the corps of engineers is updating the work plan to get to the final EIS. Could be 10 months, could be 16 somewhere in that range. At this stage, we are not overly concerned about a month or two either way but will certainly update everyone when the corps publishes their final schedule.”

Construction decision will be made next year

“right now we are working with our partner on developing the plan of action for next year. That will really drive the schedule to a construction decision. And I’d expect we will provide you detail on that with our yearend news release.”

Glencore 2Q16 Earnings Call Notes

Glencore’s (GLCNF) CEO Ivan Glasenberg on Q2 2016 Results

12 fatalities

“Regrettably, we’ve had 12 fatalities from four incidents at our mines and once again these fatalities have occurred at our focused assets and while these are Kazakhstan, Zambia and DRC. And we’re already putting in maximum effort to improve the culture and the mining operations in these focused assets and we’re already working hard to ensure we have zero fatalities across the board.”

No new coal mines being funded around the world

“Where do we see coal going forward over the next 12 to 24 months, the big thing we got to look at in coal is no new supply in the world which is a very important issue. You don’t see anyone building new mines or increasing production of mines, so I would say we’ve got to look carefully at supply. You don’t see new supply coming into any of the markers, okay, China we will talk about separately but you do see Indonesia and countries like that producing the export of their coal, and we see in Indonesia reduce from the top 421 million tonnes of exports during 2014 and they dropping this year on to 350 million tonnes. So a significant decrease coming down from Indonesia, no new supply from Australia, from Colombia, South Africa, et cetera, that’s all relatively stable and no new big mines being built anywhere in the world.”

We don’t develop greenfield projects

“Yes, regarding exploration as you know we are not lovers of Greenfield projects, so we don’t have an exploration team going out there, exploring and looking for new discoveries, that’s definitely not part of us. Where we do have a bit of exploration is around our existing asset base to ensure that we always got replacement and we are not losing production at our existing asset base and extending the life of our existing assets and that’s what we are always looking to do and we know around our existing assets there is a lot of reserves around which haven’t been fully explored and that’s where we will really do the exploration. So it’s obvious that’s why we have a lot lower exploration costs than our peers who are looking for big and new discoveries, that’s not part of our game because we have no intention of developing a new Greenfield project.”

Platform Specialty (PAH) Q2 2016 Earnings

Platform Specialty (PAH) CEO Rakesh Sachdev called out oil and gas orders as notably weak

“Organic sales declined 2% driven primarily by weak demand from oil and gas end markets and continued softness in the electronics business in Asia.”

Expecting demand to strength in the latter half of the year

“We still expect the electronics demand picture to begin to turn in the second half of the year. Combined with some share gains that we are already seeing, I expect an improvement in the second half.”

Asia microelectronics business hopefully bottomed out during the quarter

“As everybody has been reporting this last quarter we do think we’ve seen pretty much of bottoming in electronics business in Asia with some slight growth in the second half of the year. The drivers are still the same as we have been talking about in the past new releases from Apple for example, etc.”

Their business will benefit as the amount of electronics into automobiles goes up

“We’re very, very confident about our position on a global basis for the auto industry as it relates to both industrial and our electronics business. Clearly electronics content in vehicles is going to continue to grow so regardless of the automotive production itself, the value or the opportunity for us per vehicle will continue to increase. We think we’re really well positioned for the expansion that the automakers are making in localized manufacturing and assembly in Mexico for example and parts of Southeast Asia and Eastern Europe. So even if growth rates of total numbers of units should slow versus the last three or four years, the available content to us per vehicle is going to continue to increase. So we’re very optimistic about the future and our position in the auto business on a global basis.”

AGCO 2Q16 Earnings Call Notes

AGCO (AGCO) Martin H. Richenhagen on Q2 2016 Results

Chided the IR guy for mispronouncing his name

“Thank you, Greg, and I hope that one day you learn how to pronounce my last name properly. It’s not Riken-hagen, it’s Rishen-hagen.”

Continued decline in industry sales

“The outlook of healthy global crop production, especially in commodity prices, and estimates call for 2016 farm income to be at or below 2015 levels. In North America, relatively young machinery fleet and dealers’ efforts to reduce inventory levels have contributed to a continued decline in our industry sales through the first half of the year. Weaker demand from the row crop sector resulted in significantly lower industry retail sales of high horsepower tractors, combine harvesters and sprayers.”

More supportive policies have finally contributed to higher sales in that market

“Regional industry demand declined most significantly in South America during the first half of 2016. In Brazil, political and economic uncertainty is curtailing investment in farm equipment. More supportive government policies in Argentina have contributed to higher sales in that market finally.”

Record harvest and low corn prices have different dynamic effects

” I think it’s a mixed picture, so that means there are certainly farmers who will be in a record harvest. And so, even with lower corn or crop prices, they still will be very, very profitable. And then on the other hand, there are farmers who benefit from it. Everybody who has then (29:57) chicken, pigs and so on, of course enjoys lower commodity prices. So therefore, it’s a very, very difficult picture, and very interesting to understand. But overall, what we know is that farm income is very important. I think that farmers in America still have money and still want to invest, but maybe not on the record level we saw maybe between 2010 and 2013.”

British will likely try to replace European subsidies with British subsidies

“And then I think that, in the UK, in order to avoid any major problems with Brexit, the government wants to – I met the Secretary of Agriculture of England, who is actually – no, I shouldn’t make that comment in public – but I think they will try to basically replace European subsidies by British subsidies. That’s at least the plan. So I don’t think that we will see a huge upswing next year in Europe, but I also don’t see a big downswing either.”

Rio Tinto 2Q16 Earnings Call Notes

Rio Tinto’s (RTPPF) CEO Jean-Sebastien Jacques on Q2 2016 Results

Pilbara cost is $14.30 per ton

“Our Pilbara business, they were operating cash flow of $9.71 billion, cost reduced by $138 million in the first half and fully loaded unit cost decreased from $16.20 per ton in the first half of 2015 to $14.30 per ton in the first half of this year. The business as again delivered strong margins, with an EBITDA margin of 58%. But there is more we can do and we’ve three stars already to move iron ore, we will continue to focus on maximizing the value of our Pilbara system.”

It’s clear that construction industry has picked up in China

“There is no doubt that the market remains volatile and we have seen higher prices in the recent months. This was mainly due to improved macro-economic trends especially in China. On my most recent trip to China, I met with a number of our customers, partners and government officials. It is clear the construction industry has picked up with the drawdown of housing inventory. This positively impacted commodity prices such as iron ore and met coal. But the recovery is not wide ranging and it’s mainly driven by credit.”

Inventory in tier 1 and tier 2 cities is down

“Had the opportunity in the last few months to go to China to meet some of our customers, some of our partners and some of the government officials. As I said earlier, it is fair to say that the construction market will pick up in the first half of this year, of the housing inventory of stuff where you want to apply especially in Tier 1 and Tier 2 cities of have gone down.”

The iron ore strategy is about value not volume

“we stated a few months ago, the iron ore strategy is not about volume, it’s about value, okay. We have the infrastructure for 360 at the port level, we have the capacity more in the mine, we don’t have it today in terms of railway. But what we are trying to achieve is about the optimization of free cash flow profile for the next five to 10 years down, and it’s synchronization of three things, it’s about the cost, it’s about the mix, products and about the CapEx. And the old question for us is what are the right decisions, what are the right parameters that we should target in order to optimize the free cash flow of the business for the next 10 years. So we will not give you any indication of when we will get to 360 because that’s now irrelevant, we will get there at the right time. As I said, the iron ore strategy is about value and not about volume”

A lot of uncertainty around China

“Malaysia, anyway. So what we are just saying is there is a lot of uncertainty around China that is as simple as it was. So we need to make sure that under any kind of scenario we, all assets perform well and our free cash flow positive. And that’s what we are doing. We don’t control the market. Now if the market is better and prices are better for sure we would be happy but we can’t assume a quick recovery China that will not happen. The truth of matter is quite simple, China is slowing down that’s the fact, the top of growth in China is changing dramatically that’s a fact as well. Now I had the question earlier today is if I look at the order books that we have and my point is not really but I know which is about copper as well as and this could be bauxite we do not have any issues in placing material into China. So for planning purposes we are very cautious but at the same time is we don’t have any issues today in placing the material.”

Cliffs 2Q16 Earnings Call Notes

Cliffs Natural Resources (CLF) C. Lourenco Goncalves on Q2 2016

We won

“To those of you who witnessed Cliffs make it through this difficult time and now believe we have gotten to a great spot, we would like to say four things. First, yes, we won. All the problems we encountered here two years ago have been resolved. Second, we knew we would win. Third, we are just getting started. Fourth, Cliffs’s best days are still ahead of us.”

Cheap iron ore allowed Chinese cheap steel to flood foreign markets

“Harding’s used car lot wisdom does not apply to the vast majority of his clients, such as the Japanese and South Korean steel mills whose respective domestic markets were flooded with cheap Chinese steel enabled by cheap iron ore.”

I’m encouraged by RIO’s new leadership

” I am encouraged by the refreshing message coming out of Rio Tinto’s new leadership. It is good to hear that the leading iron ore miner is now pursuing value, performance and shareholder returns instead of the misguided goals of the previous regime, market share, volume for volume’s sake and not paying taxes in Australia.”

Lower foreign steel prices was the consequence of illegal dumping

“the verdict applied to all trade cases so far confirmed what we have always said that the lower steel prices we see from foreign sources are not a consequence of these foreigners being more efficient or more cost effective. They are just the consequence of illegal dumping. Based on previous anti-dumping and countervailing cases, the duties imposed at this time around will be in place for at least the next five years, until they are due for a sunset review, and will likely stay in place for some more years after the sunset review.”

We think our 500m 2017 EBITDA forecast is conservative

“Of course, if the eternal bears at the commodities desks of the big banks and the research analysts that get their steel price information from middlemen working out of their respective basements are all correct, our 2017 forecast of more than $0.5 billion of EBITDA in 2017 would not be achieved. On the other hand, any improvements beyond current international iron ore prices or domestic steel prices will cause our actual 2017 EBITDA to increase above the forecast. In sum, we believe that our $500 million forecast is actually pretty conservative.”