Cliffs Natural Resources 2Q17 Earnings Call Notes

C. Lourenco Goncalves – Cliffs Natural Resources, Inc.

Section 232 investigation should help us

“The fact that we are in the United States. The American business environment is predictable, and we operate in a very mature economic and legal environment. The most recent example of our country taking real action was the implementation during the last year of the Obama administration of several anti-dumping and countervailing duties, imposed against illegally traded steel from several different countries. While some countries and some players within the United States did not get the underlying message of these three cases and continue to find ways to cheat the system, the next thing is a Section 232 investigation, self-initiated by the Trump administration. The Department of Commerce recognized the importance of steel to our national security, not just on defense-related products, but on a lot of other things, from infrastructure to energy. While the 232-final determination has been delayed for reasons completely unrelated to the issue itself, we remain confident that some level of restrictive measure will be recommended soon.”

I continue to see a lot more reasons for iron ore prices to go up than down

“Unlike the vast majority of the experts and commodities desk, I continue to see a lot more reasons for iron ore prices to go up than to go down. There will be always volatility, even extreme volatility, as we have seen during the last six months. But I definitely recognize the conditions for iron ore prices to trend upward. Goldman Sachs got to this conclusion during the night today. That’s good to know.

China will continue to need iron ore to meet their production and employment needs, not even consider the impact of the one-belt, one-road initiative. And last but not least, with all the geo-political issues we see in the world right now, iron ore becomes that much more important, as it pertains to several countries’ defense and military endeavors. Again, I will be more than happy to elaborate on that in the Q&A, if you feel like doing so.

The only thing that I could see causing iron ore prices to go down, is if BHP keeps the same failed playbook that they have been operating under for way too long. ”

The big iron ore companies are just selling to traders

“what these guys are doing, these guys mean, for abundance of clarity, Fortescue, BHP and Rio Tinto, Vale and even the midget, Roy Hill, they sell to traders. And these traders do not have blast furnaces. They buy because it’s cheap to borrow money in Chinese banks. Then they put that iron ore in the ground, not in a blast furnace, at the port. And then they go back to the banks, and say, hey, I have collateral, can I borrow more? And the banker say, yes, and they borrow more, and they buy more for the same idiots. And then their port site keeps growing because there is no blast furnace over there. But they need to open space for more. It’s not because they want to sell anything. They’re in the business of buying more, borrowing more because they use money for other things besides iron ore. But they need to open space. Then they go ahead and sell for any price to the blast furnace, the same blast furnace that the miners would sell to. That’s my problem with the business in Australia. Then comes the question, will this be happening forever? Yes or no? Of course, the answer is no. One day, this bubble will burst. And on that day, people will say, oh, we are surprised that we are not seeing iron ore inventories going up. ”

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.”

Cliffs Natural Resources 3Q16 Earnings Call Notes

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.”

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.”

Cliffs Natural 1Q16 Earnings Call Notes

Cliffs Natural Resources (CLF) C. Lourenco Goncalves on Q1 2016 Results

We finally saw boards of the major iron ore producers rein in management teams

“I have spent a great deal of time on these quarterly calls explaining that the majors’ stated intention to overproduce iron ore and push iron ore prices down to force their competition out of business was their strategy of self-destruction. Several times I expressed my belief that the Board of Directors of these companies would act to separate their respective companies from the individuals who publicly say that lower iron ore price is something beyond their control and not a consequence of what they do, how they manage their business, and mainly how they communicate their actions to the public. Well, we finally saw the inevitable come to fruition during the past quarter.”

High level departures at BHP and Rio hopefully portend more rationality in production

“We can only hope that these high level departures are indicators that, going forward, the individuals that are now in charge at these majors will show better common sense and will express themselves in public venues in a more responsible manner, one that’s best for their shareholders, very importantly, for their host country, Australia”

The shrinking footprint of US steel is positive for Cliffs

“What’s good for Cliffs is that one steel company suffering the most is not one of our clients, it is U.S. Steel. That has been a real positive for Cliffs’ well established long-term customers. What’s good for Cliffs’ customers is good for Cliffs. And the shrinking steel footprint of U.S. Steel is actually an overall positive for Cliffs. I will be glad to explore this issue during the Q&A portion of the call.”

I’m a shareholder and everything I do will be to protect shareholders

“Look, Nick, I am a larger shareholder, every single action that I have taken in this company here since August 7, 2014 was to protect the shareholders. I will continue to do so. Everything I will do going forward will be exactly like everything I have done so far, to protect the shareholders”

This business is not about cash production costs, it’s about cost and value in use

” price will not go below $45 because below $45, the majors get crazy. The majors who start to try to stretch payables, things like that. Because it’s not about – this business, Tony, is not about cash production cost per ton, this business is about cost and value in use. Cost per ton is just a metric. You produce for a demand that doesn’t exist, you are going to get hurt. You have to carry a terrible, horrible, tremendous overhead.”

Goncalves is still crazy

Analyst: Yes, hi, Lourenco. My question was answered already.
C. Lourenco Goncalves – Chairman, President & Chief Executive Officer: But mine was not, what’s the current price expectation of the desk of JPMorgan for iron ore, Mike?
Analyst: Well, let me just say they’re below your expectations. I realize that our commodity team (44:59).
C. Lourenco Goncalves – Chairman, President & Chief Executive Officer: When are you guys going to fire these guys at the desk; they are making your company look ugly.”

China will have to decide whether they will be a superpower or a rogue country

“the problem in China right now is how China will position themselves to continue to behave as a superpower and not to behave like a rogue country. China is in a very decisive moment. Are they going to be part of the developing world or they are going to continue to be something very big but very bothering (46:57) for everyone else. And I believe that I know the answer. I believe that China will be a superpower, will be a first world country.”

Iron ore is not a typical commodity

“The problem is not the Dalian Commodity Exchange, the problem is not the behavior of the Chinese. The problem is the fact that iron ore is not pork bellies, iron ore is not soybeans, iron ore is not gold, iron ore is not a commodity like any other commodity, iron ore is a controlled commodity. There are three companies that control everything in the iron ore business, and four companies that, together, have 84% of the market. BHP, Rio Tinto, Fortescue and Vale. So it only takes one of this four or two of this four to say, enough is enough, or to start charging a premium over IODEX, or even say, you know what, my friends, Chinese, I’m not going to use your Dalian Commodity Exchange index anymore as my reference. You want to buy my iron ore, you’re going to have to negotiate with me one on one. It was like that before.”

There are four companies in iron ore that control everything

” there are four companies in the iron ore world that they can change everything, if they change their bad behavior in terms of pretending that they don’t have pricing power. They do have pricing power. These commodities are controlled commodities. Prices go up and down because of BHP, because of Rio Tinto and because of Vale. They can deny this as long as they want, but every time their stock price is in the trash can, they change their behavior. Every time their executives speak out of school (52:14), one is fired. So if the new guy that took over, over there, if they continue their speech, they will be next. “

Cliffs Natural Resources 4Q15 Earnings Call Notes

Lourenco Goncalves

Iron Ore and Steel prices have changed a lot since 2014

“Let’s just start reviewing what changed since August 2014 when I joined Cliffs as Chairman and CEO. Iron ore prices changed a lot. The IODEX pricing for sinter feed fines sold in China went from around $100 per ton when I joined Cliffs to a recent low of $38 per ton. The steel prices changed as well. In the United States, they are above $600 per ton average price for hot-rolled steel in place since 2010; hit a 10-year low of $360 per ton in 2015. The steel production and the massive consumption in China changed too, despite the mistaking assumption by the Australian and Brazilian iron ore majors, insisting on increasing their supply to a never growing demand of their imaginary China.”

Major iron ore producers are now changing their rhetoric

“Last but not least, the elegant statements of the major iron ore producers are gone. Once is staking that the seaborne price in the $30 range was actually a good thing because it would make for the complete elimination of all other mining companies in the entire world. These major players are now realizing that they will bear the consequences of their own bad behavior. At this point in time, we can no longer hear their excitement about becoming low cost per ton producers by means of investing billions of dollars to increase their tons to unnecessary levels. In fact these companies are now realizing that the returns on investments that they promise to their respective boards have not been achieved and will not materialize.”

I laid out our strategy with the assumption that China’s steel demand is shrinking not growing

“16 months ago I laid out our strategy for Cliffs predicated on one fundamental fact, China’s steel demand is actually shrinking not growing. ”

It’s been reported that iron ore is building at Chinese ports again

“Demand for steel in China which account for about half of global steel production is shrinking, as the growth of their economy is lost, prompting the Chinese steel mills to a scale back production. It has been reported that inventory levels of iron ore at the Chinese ports continue to build over the past couple months heading back to above 100 million tons.”

The Chinese are shutting down steel plants

“Earlier this month, China’s biggest steel producing province announced that that the steel output will be cut this year to ease pollution and help curb oversupply. Three days ago, the Chinese Premier, Li Keqiang, released target numbers for steel production cuts to the order of 100 million tons to 150 million tons. The pressure on the pollution issue in China continues to mount.”

The Chinese can only solve their pollution problem with changes to their steel production process

“I have said this before, and I will state it again, China will resolve its pollution problem and it cannot do so without a major impact on its steel production, and a significant reduction of the consumption of sinter feed fines. One of the root causes of pollution in China is environmentally unfriendly characteristics of the production of sinter from iron ore clients. Differently from the United States and Europe, the vast majority of the blast furnaces in China use sinter as feedstock and not pellets. Making matters worse, a good number of Chinese sintering plants utilize lower grade iron ore sinter feed fines purchased from the iron ore majors, as well as from their own domestic mines.”

Pleased with the duties coming in from Washington on foreign steel

“So far I have been generally pleased with the preliminary duties coming from Washington on the steel trade case, especially the extremely punitive percentages placed on China. That has already started to positively affect the order books of our clients.”

In the US steel market there’s a clear difference between the end markets

“in the domestic steel market we have a clear differentiation between the steel mills that are focused on automotive and the high end of the market, more towards the cold-rolled and galvanize the steel and the ones that are more leveraged to help in. Fortunately we serve the ones that are more leveraged to the markets that are performing well like I provide the best example is the automotive market. So I will leave it at that but that’s the way we’re seeing our market developing in 2016.”

The impact of the trade case will be real

“the impact of the trade case will be real and it has already been started to be realized by the order books of the clients, our clients at least, and we expect that only to improve.”

This is the United States of America, we’re not going anywhere

“I would just one additional comment it’s more like a when we bring back production, not if, we will bring back production. This is United States of America, we’re not going anywhere. We’re going to continue to have a resilient economy, domestic steel production, domestic steel consumption, and we’re going to continue to sell pellets.”

Have a nice day Evan Kurtz

“But now that you’re talking here I have a question for you Evan Kurtz, why you’re still calling Cliffs high cost reducer, if you’re saying that we have been cutting cost so much… Yes, cost is my guidance; cost is numbers that we publish every quarter. We did it in Q3 2014, Q4 2014, Q1 2015, Q2 2015, Q3 2015, Q4 2015; you are still calling me high cost producer. So it’s hard to confuse people when they don’t want to be confused. Have a nice day Evan Kurtz.”

The mini mills of today are not the mini mills of the early 90s

“the mini-mills of today are not the mini-mills of the early 90s. The mini-mills of the early 90s were really low cost scrap, easily available driven big reservoir, nobody tapping to produce flat roll. That was when Crawford sued can [ph] corporation in 1989 and then Hickman, then the Steel Dynamics plants, and so on and so forth, you and I saw that happening real time. Fast forward we are in 2016 we have a much more material market a bigger huge presence, majority presence of mini-mills in the marketplace they have done a phenomenal job in improving the quality of their steel and their ability to produce high end materials and to be competitive against the Esperance producers, including some markets that were not the markets that were designed for as high as automotive.”

Cliffs Natural Resources 2Q15 Earnings Call Notes

Let me state that we have ample liquidity

“Let me state right out of the gate that Cliffs has ample liquidity, as we ended the quarter with cash and available capacity on our ABL facility in excess of $600 million, net of existing letters of credit commitments.”

As the absurdly high rate of imported steel reverts back to normal levels..

“Bottom line, as the absurdly high rate of imported steel penetration reverts back to normal levels and our clients’ blast furnaces return to normal operating levels, we expect to be able to adjust our production and our sales volume accordingly.”

China does not need low iron content iron ore and we don’t need subsidized imported steel fed by that ore

“China does not need any more low iron content iron ore as a major source of pollution, and our U.S. market does not need any more subsidized imported steel fed by that ore.”

This could be a painful few years for those who bet heavily on China. Luckily we bet on the US

“As this unfolds, the next year or even the next two years or three years could be very painful for those that bet their farm on China. Luckily, we have the ability to separate ourselves from this catastrophe before it is too late and focus on a U.S. market whose worst days are likely behind us.”

Spreadsheet specialists and computer screen wizards…

“Spreadsheet specialists and computer screen wizards do not know a good pellet from a bad one and have never built a pellet plant within a realistic budget and against a real tight timetable.”

I know it’s a tough battle here

“I know it’s a tough battle here; I knew coming in. I wasn’t even invited to come in. I came in because I wanted and the shareholders elected me to come here. But a difficult war like that will take a lot of difficult decisions and I’m ready to take them at the right time.”

Minimills need to go toward iron based scrap substitutes

“it’s not just a matter of cost, it’s a matter of market, it’s a matter of the ability to do things that they can’t do or produce products that they can’t produce and address markets that they can’t address if they stay only with scrap, let alone the fact the availability and quality of good scrap has been deteriorating quickly in the United States. So going toward iron-based scrap substitutes is not only a matter of cost, even though cost will always be a factor”

The current situation for iron ore is not sustainable

“we need to really understand that the current situation for iron ore in the world is unsustainable. It’s not going to persist forever. You can argue that it’s going to last another year, another two years or another six months or just a quarter. But one thing we all know, the Australians and the Brazilians will not be able to continue to finance their business, their dividend policies, their political goals within their respective countries giving iron ore to the Chinese at $50 per ton.”

Everyone is waiting for my demise. It’s not going to happen

“You’re going to have to sit still, sit tight, and continue to see Lourenço in action, as you have seen for a long time at Metals USA and you are seeing for a year here. It will be fun to watch…Lots of people are looking forward to my – for Lourenço to crash to the ground. It’s not going to happen. Any other questions, Tony?”

Cliffs Natural Resources 1Q15 Earnings Call Notes

The big three majors cannot support their CapEx without allowing iron ore prices to increase

none of the three majors can continue to support their massive CapEx needs without allowing iron ore price to increase and if they still decide to keep iron ore prices artificially low as they had been doing so far, they are advertized massive capacity increases will not materialize due to insufficient cash flow generation.”

The problem for iron ore is that the big three companies continue to say that they are going to expand

“People talk a lot about the world being flooded with iron ore. That is a true statement that at this point, but the biggest problem for iron ore price at this point is not even the fact that the world is being flooded with iron ore. It is the fact that the market and the press and the investors are being flooded with that information about the expansion plan of three companies and these three companies are Rio Tinto, BHP and Vale.”

Iron ore companies are saying they’re going to add a huge amount of production

” we will have for example just to give you a good number, easy one to understand, you have Vale saying, we produced 310 million tons a year, but I am going to 460, so that is another 40 SKU on top of what they have right now.

You have currently Rio Tinto producing something like 250 million tons, but saying that they are going to produce 360. That is two Roy Hills on top of the existing production. You have Roy Hill producing nothing, because Roy Hill – they are just the landlord of Rio Tinto, but saying that starting September, we are going we are going to add 55 billion tons to the trade, so these news are the ones that are destroying the future view of iron ore sinter feed fines in the world, but we have to see this thing in the contest of how these things are being played.”

They are trying to scare everyone else

“Rio Tinto and BHP more Rio Tinto than BHP, they are playing the game of scaring everybody else, and some people are getting really scared, some others are not. Some others are acting. I put myself in Cliffs, in the side of the one that take these things as face value that’s it is what it is, so this important marketing is doomed, is cursed a place not to be in. I can’t wait to get out of Australia. That is the bottom-line, because I already shutdown completely in Canada and soon as soon as I get to the end of life of mine in Australia, I am out of here.”

They don’t have the money for these projects

“Another point to consider is that there is not enough CapEx for these guys to do what they are doing other than current cash flow generation. I really would like to see analysis on that, where is the money coming from for the massive deployment that’s necessary for BHP, Rio Tinto and Vale.

Serra Sul, the S11D project alone, we are talking of something like $20 billion. The do not have that money, period, full stop. They are scrambling to make [ph] right now at Vale. I am a Brazilian guy as you know. I know what’s going on there, a lot more than they believe, so they can talk a good gain, but the reality is completely different.”

These big projects are not coming

“Long story short these big projects are not coming”

I have no idea how long it will take for people to realize what’s going on

“How long it will take for everyone to perceive the game, I do not know. I am in the business of clarifying that as much as I can, because it is affecting me. I could care less about that, but it is affecting Cliffs. We are having to reduce our footprint in Australia, because of that. I know that the Western Australian government is not happy with the way they are handling their natural resources over there, so there is a lot going on and a lot can change between now and then in next year for example.”

This company has a good management team, the board was just messed up

My biggest surprise when I got to Cliffs is that this company has a very, very strong management team. It is amazing how badly the board was handling this company. This has been fixed. It was fixed nine months ago since then we have been working hard and we will continue to work.”

Oh, Nathan, one more thing…about your model…

“Nathan, before you go, just a reminder, you have an EBITDA target for Cliffs Natural Resource for the year of $170 million. In Q1 alone and Q1 is the frozen quarter, is the quarter that we are not shipping, because you can walk between here and your home country in Canada, you know that.”

“Even with this difficulties, we are able to generate $94 million reasonable in Q1, so now based on your EBITDA target, I am $76 million away from reaching your EBITDA target and I have three quarters to do it just a reminder.”

Oh ya, and look at your price target too…

“Take a look at your price target as well, because you went from 10 to 1, baked into your report the assumption that Cliffs Natural Resource by now would be would be bankrupt, so you were wrong. I am not bankrupt, I am not heading to bankruptcy. Your assumptions are all wrong and the outcome has been bad so far.”

I believe that what the big three are doing is on purpose

“I believe that what they are doing is on purpose and I believe that what they are doing is not right and I believe that they are generating a lot of unemployment in Australia and that should have serious consequence for the years to come.”

If this were LIBOR these people would be going to jail

“It is tactics of scaring everyone else, it is a tactics that plays well for the future markets they are base on the IODEX and that is manipulation of an index. If it were the LIBOR, people would go to jail, but because it is IODEX, people do not go to jail, but shareholders that realize what is going on they may take action and that is what I am talking about, so when are they going to be rational, when they get scared when are they going to get scared, I do not know.”

Board members are a lot more responsible than CEOs

“They are basically terrorizing the market with the prospect of CapEx that at the end of the day will not be deployed. Do you know why they will not be deployed, because board members are a lot more responsible than CEOs, they are not bullish, they have fiduciary duties and they are responsible for what actions they take, if they do, they will responsible.”