Cleveland-Cliffs Inc. (CLF) Q3 2012 Earnings Report, Transcript and Summary

Good morning, my name is Mimi and I'm your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2012 Third Quarter Conference Call. [Operator Instructions] At this time, I would like to introduce Jessica Moran, Director, Investor Relations. Ms. Moran?

Thanks, Mimi. I'd like to welcome everyone to this morning's call. Before we get started, let me remind you that certain comments made on today's call will include predicative statements that are intended to be made as forward-looking within the Safe Harbor protection of the Private Securities Litigation Reform Act of 1995. Although the company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that could cause results to differ materially are set forth in reports on Form 10-K and 10-Q and news releases filed with the SEC, which are available on our website. Today's conference call is also available and being broadcast at cliffsnaturalresources.com. At the conclusion of the call, it will be archived on the website and available for replay. Joining me today are Cliffs' Chairman, President and Chief Executive Officer, Joseph Carrabba; and Senior Vice President and Chief Financial Officer, Terry Paradie. At this time, I'll turn the call over to Joe for his initial remarks.

Thanks, Jess, and thanks to everyone for joining us this morning. Before I discuss the quarter's results, I'd like to take the opportunity to acknowledge the executive leadership changes that took place during the quarter. Effective October 1, Laurie Brlas, our former CFO, assumed the responsibility of President, Global Operations. In her new role, Laurie will be accountable for all mining operations, including development projects in iron ore and ferrochrome. As CFO, Laurie successfully managed and executed several large-scale projects that directly contributed to the company's success over the past several years. Laurie will bring a focus to cost management and capital allocation as we work towards improving our cash cost position across our portfolio of assets. Joining me today is Terry Paradie, who has been named CFO. Terry has been with Cliffs since 2007 and has served as the company's Corporate Controller and Chief Accounting Officer for the majority of that time. Over the last 8 months, Terry has been working as Assistant General Manager at our Michigan operations. This operations experience has provided Terry with hands-on mine management skills which I think will be invaluable to him in his new position. Also as part of the announcement, Steve Raguz was appointed chief strategy Officer; and Jim Michaud was appointed as Chief HR Officer. Executive team members from Global, Commercial, Business Development and our Legal and Environmental groups remain unchanged. I believe these changes focus our executive leadership team on the company's most critical, current and future business requirements. Looking back at the quarter, the lack of major stimulus program in China, as well as the ongoing uncertainty in Europe, have weighed on global economic growth. This uncertainty contributed to the quarter's volatile pricing environment for the commodities we sell. We believe the 2 weeks of sub $100 iron…

Thank you, Joe. I appreciate the introduction and your kind remarks, and I look forward to being part of the new executive leadership team. For the third quarter, seaborne pricing for iron ore decreased 36% when compared to prior year's third quarter. This resulted in a 26% decrease in consolidated revenues to $1.5 billion for the quarter. Consolidated sales margin was $198 million and was unfavorably impacted by lower pricing and increased labor, mining and maintenance costs. During the quarter, we reported Sonoma Coal's result as a discontinued operation. This was a result of our previously disclosed agreement to sell our economic interest in the operation. We still plan on closing the sale and collecting cash proceeds of AUD 141 million in the fourth quarter. Due to the lower year-to-date average iron ore fines price, we decreased our expected full year average spot price assumption for seaborne iron ore to approximately $128 per ton delivered into China. This iron ore assumption is the price upon which full year revenue expectations for our iron ore segments are based. Turning to U.S. Iron Ore results. Revenue per ton decreased to $111 per ton from last year's third quarter result of $138 per ton. The prior year results included a favorable impact of $9 per ton related to the full consolidation of Empire. Excluding this adjustment, revenues decreased 14% over prior year's quarter, primarily driven by a lower year-over-year pricing for iron ore and changes in customer mix. Cash cost per ton decreased to $68 from $74 in 2011's third quarter. Last year's results included an unfavorable impact of $11 per ton due to the additional cost recognized related to the full consolidation of Empire. Excluding this adjustment, cash cost increased 8% year-over-year, primarily driven by higher stripping and maintenance costs. The current…

Mimi, that concludes our prepared remarks for today's call. Please open the line to begin the question-and-answer session.

[Operator Instructions] Our first question comes from Jorge Beristain of Deutsche Bank.

I have a lot of questions, but I guess the first one is, you're implicitly lowering your 2013 U.S. legacy guidance by about 4 million tons from what was your prior high point of 23 million to potentially the low point of 19 million. And I just wanted to understand, does this imply any idling of a specific mine? And if not, would this not raise your average unit cost into 2013 because of lower fixed cost dilution?

Yes, Jorge, good question. As we go through this, let me first address the volume of the 23 million to the 19 million tons, at the very high to where we're at now. Combination of factors, as you can imagine, RG exiting earlier this year, took capacity in the blast furnace consumption down. We are seeing imports on the rise, taking steel capacity out of our customers' base, as we go forward. And with the lower prices, it's not advantageous for us right now to ship out of the Great Lakes. And we're not shipping there to break even, we're actually looking to make money as we do. As we said in the past, shipping, exporting out of the Great Lakes is a spot business for us. When it's fortuitous for us, we'll do it. And when it's not, we won't, as it comes forward. So the volume is a combination of factors, plus, we see a blast furnace utilization next year of 70%, which is down slightly than the full year average of this year, as we go from there. We are evaluating -- customer nominations continue to come in. They have until next month to finalize nominations for next year. That will balance out the plant mix that the need, to figure out what -- where we go. And I think, similar to this year, we would look at things like, with Empire, with the lower volumes and coming close to end of mine life, do we run it out and shut it down? There are things like that. There's some higher cost lines. The smaller, older lines in North Shore, do we idle a few of those lines, as we come through? Do we take a line down in Hibbing? As you can see, the flexibility of the operation is, there's a number of combinations that we can do. We're analyzing the best way to do that, to give the customer mix as we go forward. The reason we haven't done it yet, to this point in time is, one is, we have to customer nominations in for next year, so we could put our plan in place. But more importantly, if you remember in the fourth quarter, this is our heavy shipping season, to get in and we have commitments to get product out and across the Great Lakes before they shut the locks down. So yes, we've got a lot of combinations that go with that. They're the standards ones that we've used in the past in '08 and '09, and it will certainly bring our -- some of our costs up as we lower the tonnage down. It's a heavy fixed cost business, as you know.

Great. And just my second question. If -- with seaborne prices that we saw in the third quarter of $113 for the benchmark, it does seem, broadly speaking, that you're seaborne-exposed operations did not generate a lot of money. How do you intend to deliver profit growth at those seaborne-exposed businesses, given that the guidance is implying basically flat year-on-year volumes and the pricing environment looks to be flat, from here on out?

Well, Bloom Lake, and I think that's as -- as we said in the press release and, as you folks know, that's where the focus has been for the year, that's where it continues to be maintained and focused. We're very pleased with the progress we see at Bloom Lake. We have opened up the west pit now, so that we have 3 different areas of the mine to blend from. The west pit ore is coming in where we thought it would, it has less magnetite in it, which increases the yield and that's a little coarser as it goes into the mill. So this has just been opened up. We've got a heavy stripping campaign that goes on through the rest of the year with that. But that was one of the big levers we needed to get the volume and the throughput that comes through, that goes with it. Our Oberlin conveyor, that many of you saw in the construction phase when you were up there with us in July, August, is right on track to be finished by year end. That will reduce our trucking cost that come in from there, as well. Our tailings pond is on track as well, and as well as the pumping stations versus that expensive contractor haulage that you saw as well. So the dock has been completed, as I just discussed in my remarks, that gets rid of the second transloader. And the Dimarriage [ph] is also going the way as well as we've reduced now loading times to 5 days. So all of the things we talk about, Jorge, in the past is, hopefully I can demonstrate, we do have a plan. There are specific areas that we are working on, that we track and watch as we go forward. And it all seems to be going in a very positive direction. We still expect to exit the year and, for December, as we said, not for the quarter, the fourth quarter, but for December, on track to hit our mid-$60 range and the 7.2 million-ton run rate.

Our next question comes from Evan Kurtz of Morgan Stanley.

Just a quick question on taxes, first. Seems like you got a nice benefit this quarter from -- on the tax line. And I just wanted to figure out if there's any discrete pieces that we should be aware of, and if you can quantify why that happened this quarter, and kind of how we should think about tax rates going forward.

Yes. Evan, the big issue here is around our permanent tax benefits items, including our percentage depletion in the U.S. business. So those stay pretty consistent from quarter-to-quarter and for the full year. So as you reduce your pretax income, which happened with our latest forecast, it has a significant impact on our rate. So what has happened is that our effective rate for the full year will be around 8%, but we do have discrete impact related to our MRRT resource tax that we took during the, I think the second quarter time period. So from a go-forward standpoint, we don't expect our tax rate to be around 8% forward rate into 2013. We traditionally have been in that sort of 20% to 25% tax rate, and that's where I think we'd be going forward. There weren't any specific discretes in the third quarter for this rate, it was just the catch up for truing up our tax rate for the quarter.

Okay, got you. And then maybe a question on Wabush. It seems to be losing money. I was wondering what is kind of the long-term plan there for that particular mine. I mean, how long do kind of continue to run a loss there before you make some, maybe, bigger decisions?

Well, I think that's a fair question. And as we've said all the way through this thing, we are at a loss in Wabush. That will continue for the next -- into 2013, for sure. Our focus has been on Bloom. We have done a capital review to see what it would take to bring Wabush up to standards, to get it back on track once again. And in 2013, we will start the operational review to see where that goes, and pull all that together with that. In the meantime, through year end, we do have customer commitments for the volume. And we will keep those commitments as we go forward. We'll have to make some decisions in next year, but it will be into the second quarter before we are ready to make the final decisions on where we go with Wabush, both from the positive, do we spend money and get it back on track? There's a number of different options, do we shut pelletizing down and run concentrate only? Or do we do more drastic measures? Those things are all on the table. We're working through all of those, but through year end, we do have customer commitments, and we will maintain them.

Our next question comes from Timna Tanners of Bank of America.

A couple of questions, if I could. All right. So I wanted to just clarify on the cost side, that the Asian cost pressures were indeed onetime, Bloom Lake is on schedule and U.S. had some extraneous issues that are getting fixed, is that a fair characterization? The Asian ones where the ones that surprised us.

Yes, I think -- let me go into a little more depth. I think I've explained Bloom Lake, Timna, already, where we think we're on track at this point. On Asia-Pacific, in the expansion with -- in Koolyanobbing, what we also had to do were open up 3 new pits. These are not large mining areas in Australia that we have, they're more of fashioned to short-term gold mining pits, if you could think of them in that nature. When we got into those pits, the assumptions that we had placed in the geological model that we've seen in the last set of pits that we had opened, did not hold up. The siliceous cap, if you will, extended further than we thought it would, hence, we had a lot of low grade material that we moved, lowering the price of the product into Asia-Pacific in the third quarter. And we had to ramp our stripping up tremendously, obviously, because we didn't get the amount of ore up that we thought. What you will see in 2013 is not a cost effect of that magnitude, but cost will go up in Australia as these mines do continue to have higher stripping ratios with that. But it was dramatic, we're back on track on the grade, within APIO. And we expect to hit our grades next year, in the fourth quarter of next year, going forward. But the stripping will go up. I don't have the magnitude for you today, but this was an extraneous event in the third quarter.

So my other 2 questions, one about met coal. The loss on the quarter happened despite the fact that the benchmark price didn't really roll over, at least until the fourth quarter. And I know it's hard to make long term decisions on short-term price moves, but I mean, other companies are saying it could be until the second quarter until the recovery happens in that product. So can you give us any thoughts about what your plans might be there, and how quickly you could respond on the met coal side?

Well, again, we continue to evaluate that. While there was a loss, it was very close to a breakeven at this point in time. As we went forward, we are continuing to build customer confidence and our ability to deliver, something we haven't done in the last few years. Again, if we can operate at these rates at a breakeven in this business, we'll continue to do so. As you know, it's really important that we do that right now as U.S. coal contracts are under negotiation right now, until December 31, then going into Europe in the first quarter of next year, we want to make sure that we have the ability to supply if these contracts come forward and the market does turn. So that's the analysis I'd give you on this business.

Tim, I'd like to add, year-to-date, the cash margin at the coal business is over $70 million, and we're expecting cash margin for a full year of $100 million out of this business. So from a GAAP standpoint, it's just about breakeven, but from a cash margin, it's attributing pretty good for us.

If I could get a final one, and just on the DRI seed stock that we've discussed in the past, if you could give us some update on your progress there. It could be an interesting volume upside eventually given new course plans.

Yes, it certainly could. We continue to investigate in a very heavy fashion, if you will, into some pretty deep metallurgical testing, particularly at our UTAC mine. Right now, that seems to be the one most favorable for DRI potential product to come out of there. We're looking at that mine right now in a lot of depth, we've got a project team dedicated to it. And we should get some results on the metallurgy and the cost analysis of it probably later this year. So we are -- something that we're very excited about and we're pursuing heavily, but we've got to get the science in place first to make sure we can produce the product. But we are pursuing that with the project team.

Our next question is from Nathan Littlewood of Credit Suisse. Nathan Littlewood - Crédit Suisse AG, Research Division: Just a couple of questions about the U.S. sales number for next year in particular. That 19 million to 20 million tons is a lot lower than we'd expected and I suspect others as well. You did mention the 70% utilization assumption in the U.S. But could you talk a little bit about some of the other macro assumptions behind that, like the iron ore price? And if we, for example, serve better utilization and better iron ore price, what is the risk for that forecast? How high or low could it get each way?

Well, I think as one of the earlier folks on the call side, you can see this business, it bounces from 23 million tons seems to be about the high, Nathan, in the ability, in the best of times within the U.S. steel manufacturers capacity to produce that goes with it. And in the low times of 2008 and 2009 in Draconian times, we were at about 17 million tons, I think, for that year. So that will give you a macro range, if you will. We don't think we're anywhere near the 17 million tons. The 19 million to 20 million as we look at that and the 70% range of utilization as we go through and do our math and our economists continue to look at the macro, I mean, as you know, the steel industry in the U.S. is really only being driven by 2 factors at this point in time, which is auto sales, which are projected to go up once again in the U.S., but most of those sales you have to really dive into the numbers. It's also -- it's really coming from cars being imported from Japan and Europe. So while it's good news on car sales, you have to dive into those numbers to see how much it affects the steel. The other is still the drilling and the pipe that goes along with the natural gas finds within the U.S., but there's also a lot of heavy imports of pipe coming into the U.S. right now to dampen that market somewhat. We don't see 2013 housing starts moving -- they're in a positive direction, but not in a particularly high fashion. And we don't see any infrastructure construction coming along right now as well with the funding that's coming out of Washington D.C. So if you put those factors altogether, it's pretty much in line with what we're seeing in the back half of this year from the macros to support that 19 million to 20 million tons, and then the other factors, if you drill down into it, that I just gave to one of the other callers that came with it, that's affecting the volumes in the U.S. right now for us. Nathan Littlewood - Crédit Suisse AG, Research Division: It make sense. The next question was just about cash. If I understand correctly, you've still got about $600 million that you need to spend at Bloom Lake for 2013. I'm just wondering if you could talk about what the ROI and annual [ph] price hurdles are that you need to justify the deployment of that cash. Following on to that, can you also talk about how that CapEx deployment at Bloom Lake would rank relative to the dividend payment if you have to prioritize one or the other. And thirdly, would you be willing to draw down on the revolver in order to pay -- continue paying in dividends?

Let me cover the ROI. As we don't have that level of detail, what I'd like to kind of offer up today, today's spot price of $120, and ultimately, we think with the cash cost somewhere in the mid-60s, you look at -- we would expect a net back price of over $100 a ton on those tons with the cost of, say, mid-60s, you can sort of do the math, it's $35, $40 margin. So I think if you look at the payback period over a period of time on that investment, it's a pretty quick payback period.

Even with the math, Nathan, with where we're at, with 60% completion for the concentrator right now. We are, we were down into the fine detail into the piping and studying the equipment at this point in time. So you will see that move at about 10% a month right now. It rapidly comes to a close with that. To shut that project down right now can be done. That's a lever we do have, but every day we go forward, obviously it's less and less effective that goes with it. That's also the future of the company. To get into that, we would draw into the revolver if we needed to, to finish Bloom. With that, obviously that's a discussion that we'll have with the Board in our next upcoming meeting. But Bloom is the future of the company. It does provide the sales, and as Terry just explained, the cash margin with that and we need to very effectively drive through that as we can. So it is our #1 priority as we continue on. Nathan Littlewood - Crédit Suisse AG, Research Division: Okay. And would you be willing to draw on the revolver to pay the dividends?

I think that will be a balanced discussion that we'll have with the Board in the upcoming weeks that go with it. So I will refer -- unfortunately, I'm going to have to refer that one. That's a Board decision. I don’t mean to dodge the question. I apologize for that. But I don't want to preempt my Board either and we'll have that conversation in the upcoming month.

Our next question comes from Michael Gambardella of JPMorgan. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Just a follow-up on a previous question about this DRI iron ore that you could ship from UTAC. Wouldn't that be pretty costly to get all the way around to Louisiana?

Yes, it certainly would and that wouldn't be in our plans, Mike. The math just doesn't work on that. But there are -- the work that our marketing folks have done, there are numerous outlets for DRI that sits within an adequate shipping range of Minnesota as well. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Okay, so that would be new facilities or would that be something like sending it to Steel Dynamics, which you've sold the property to already?

We would look at a variety of existing facilities within the shipping range of Minnesota. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Okay, and then on the last call that you had, on the second quarter call, you said you expected to ship about 1.4 million tons of iron ore out of the Great Lakes. I think you had done 300,000 in the second quarter. I'm assuming that's going to be -- how much was that in the third quarter and is that going to be 0 in the fourth?

Yes, I think what we've done in the third quarter is maybe around 500,000 tons, and because of the pricing environment, we actually have some available to ship, but we're not comfortable shipping it at this price.

Yes, at this point in time, Mike, where the pricing is, we don't see anything in the fourth quarter. But as prices are moderately and slowly rising, if we get the opportunity with that, we do have product staged in Québec City, already sitting there to ship. If we can get favorable pricing on it, obviously we'll take advantage of that in the fourth quarter. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: And what type of pricing do you need?

We need to be north of where we are today, not substantially, but north of today's pricing. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: And then just last question, on Amapa, you had a pretty big spike in the losses there in the third quarter. Could you give us some feel for what's the game plan for Amapa?

Yes, let me give you the game plan, then I'll have Terry explain the losses with that. Anglo is conducting a sales process that we have agreed to. They are working through that process right now with prospective buyers around the world as that goes through. That process will continue probably through year end to see if we have any conclusions or not from there, but there's an active sales process on Amapa moving forward. And Terry, you might want to comment on the cost?

Yes. From the quarter's standpoint, we had a $14 million loss related to Amapa. $4 million is really related to the pricing environment on the shipments we've had but we also had a settlement -- Amapa had a settlement with one of their logistics suppliers that they've been in dispute with over the last couple of years, and that was about $10 million this quarter that's come through. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: And then you're looking for like another $5 million in losses in the fourth quarter?

I think that's not unreasonable to think.

Yes, that's right. That's nothing extraneous. Again, that's a pricing issue with the lower grade products. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Okay. And then final, final question on Wabush. You've always said Wabush is a high-cost facility because of labor. Is that an issue with the number of employees up there? Or is that a unit cost labor issue?

I think it's more of a unit cost issue. And really, Mike, as it goes into it, I don't want to put this all on the employees or the labor cost that goes with it. It's shared. It's -- that facility for many, many years was run under a different philosophy. Its capital spending is desperately behind, and the problems we continue to run into are heavy maintenance cost in many of the major components that sit within that concentrator for the most part. So it's a combination of everything, and as I said earlier to one of the earlier callers, we are taking our time to look at it, we don't like the losses, we'd like to be more aggressive on it, but the staff and everybody is focused on Bloom first. It's with a de minimis amount of material that we're working with and the losses we're retaking. We've taken that path and that's been a deliberate choice by management, but we are working through the capital spend to see what it would take to get that plant back up on its feet, if it's worth doing economically, and we're doing the operational look at it in a deep dive in the first quarter, and we'll see where the numbers come out and where the market is.

Our next question comes from Brian Yu of Citi.

Joe, what these export tons where you guys dialed back your expectations, I imagine some of that is because of the collapse in the pellet premiums, too. Can you just give us a sense of where that stands today? And then also, it looks like Valley [ph] on their call today has been saying that with their pellet capacity shutting in, that they're expecting premiums to get back up to $35, $40 per ton. If we do assume no change in the IODEX, would that rise and the pellet premium by itself be sufficient to allow you to start exporting more tons again?

Brian, that's a difficult question to answer. I mean, you've been privileged to listen to the Valley [ph] call today. Obviously we've been a little focused here today with where we've been. If you'll give us a chance to do the analysis in that, I think Jess can come back offline with you. But I can't comment on Valley's [ph] call this morning and project premiums on pellets.

But where you're seeing pellets premiums today, is it in the $15 to $20? So let's say it do go up $20 a ton, would that type of the increase be sufficient to make those export tons economic?

Yes, they would be -- if we could get that type of premium on the pellets that you've described from the Valley [ph] call, that would make those pellets exportable.

Okay. And then if we assume that the IODEX stays at 115, 120, what is your spending on those exploration or how should we view the spending on exploration in the chrome project in 2013? Are there likely remaining constant or up or down?

They'll be down, just like everything. The first thing that always goes is exploration and R&D from any mining company that goes with it. Again, we're in our planning session right now. Exploration will go down in 2013. I don't have a number for you and the planning session we're in at this point in time. And as I've discussed earlier on the call, we are not in any early capital spending out on chrome, so that number will go down as well. That may push the project out a year into 2017. We do want to finish feasibility which will come in this summer, which is primarily around the engineering that will continue on and getting the environmental assessment done with that. We need to get this to a bankable feasibility study. So, one, we can finish our agreements with the government, and with the first nations. And secondly, if they do choose to take a partner on in a number of different arrangements, we've got to have a document that the valuation of that property can be done on appropriately. So the spend will be primarily just around the finishing up the feasibility. We will not do any preliminary or early capital outlays that we would have planned on doing in the past.

Our next question comes with Sal Tharani of Goldman Sachs.

A couple of questions. First, the Bloom Lake cash cost issue. You are expecting sort of mid-60s exiting December of this year. I was just wondering, how should we think about when the Phase II comes in, it probably will most likely start at a higher cost, or the blended cost will be higher, Bloom Lake until time [ph] ramps up for 6 to 9 months?

Yes indeed, Sal. That's exactly our expectation. I think you're right on it that even though -- while it should be a better experience on the startup of Phase II, these concentrators is one thing that we're learning the hard way from Amapa, as well as Phase I here as they are -- they do have a lot of nuances and they're difficult to do that. So we see the cost in the first half of starting up Bloom in line with the cost we have today with that, and then the blended rate would be the Phase I getting down into the mid-60 rate.

Okay, great. And the next question, you mentioned you have a lot of levers to pull and you have already decided to postpone the chrome project. I was wondering how far you will go in order to build -- depending on the dividends or the balance sheet is. Is Phase III of Bloom Lake or even divesting some of the [indiscernible] operations in Canada, Australia, or coal [ph]. Are these all on the table in your consideration?

They absolutely are, yes, I mean it's a balanced view. When you take one of those, we could do some very deliberate changes right now and shut down Bloom Lake like we talked about earlier before. But we feel like that's the future of the company and we need to finish it this time. So in all of these conversations that go on, it's complex and it takes a number of factors including the future of the company. We do not see the future of the iron ore business as gloom and doom, we don't see a lot -- China is in a slowdown right now. We are still very optimistic on Chinese steel production and demand. We do think we'll see a stimulus after the Chinese New Year next year, and our customers are reflecting those thoughts as well. So we still see a bright future going forward for our products, Sal, and we just got to work through the next period of time in a volatile commodity cycle that commodities go through.

Yes, and then also one more thing. In Canada, there is a news in the press that ArcelorMittal will be trying to sell either all or a portion of their business, which is close to where you guys are. Is there any synergy for you to think of getting into a portion or taking a portion of that ore assets?

At this point in time, we're focused strictly on Bloom Lake Phase II, getting that built and on Phase I getting the cost down and a good quality product consistently out to the product. Sal, even if we were, we wouldn't comment on those types of activities within the company.

Our next question comes from Mark Parr of KeyBanc.

Just looking for a point of clarification about Asia-Pacific pricing guidance. You talked about $100 to $105 a metric ton, and that implies, I think, a fourth quarter pricing of somewhere around $80 a metric ton, based on the volume guidance. And I just -- I guess, maybe I don't have the math right, but if you could just reiterate what you said there, or maybe give some more color on that.

Yes, mark, I can certainly cover that. I think today, with the price of, say, $115 from a Platts standpoint, with the freight rates moving from a dry to wet ton, as well as some of the ore grade were below 62%, Platts were closer to that $90 versus the $80. I think the $80 is a little low, which you're quoting are coming into your calculations.

Okay. So you said you won't be shipping any low grade ore, so that is correct, is that right?

That's correct.

Our next question comes from Shneur Gershuni from Macquarie.

I guess a lot of the questions I have were asked and answered. But I was wondering if we just spend a couple of minutes on the U.S. realizations this past quarter. They seem to be a little bit -- they moved a lot more than the guided sensitivities in the past. Is that somewhat related to the fact that you booked higher revenue at the beginning of the year and there's sort of catch-up within contract as you sort of think about the full year average delivered price or is there some change in sensitivity that we're not aware of?

No, I think that's exactly right. I think as the year moves along, those prices are long-term set prices based on an average Platts rate, a lot of them over a period of time. So as we move further closer to the year end, those sensitivities become less impactful.

And we begin to true up as well.

Okay. And so if pricing, let's say, took a dive again in the fourth quarter -- I'm not saying to the $120, but everything changes again and potentially could be another catch-up or you'd sort of catch yourself up to where...

I think we're caught up to where we're at now. I think our guidance that we've provided is pretty solid.

We're so far into the year. There's less and less sensitivity to pricing volatility in the last few months of the year to change our guidance.

Okay. And then 2 small items. You'd mentioned, you sort of reviewed the strategic opportunities with respect to Wabush, fixing it or selling the product as concentrate or possibly closing it. What would be this cost savings of you spending the capital of trying to fix the issues in terms of being able to convert into pellets and so forth?

I'm sorry, I don't have those numbers today. We're still working through it.

Okay. And then finally, you still remain committed to the mid-60s exit rate for Bloom Lake. There was some progress this quarter, but, and I guess it's not linear as to how you got there. But how much is dependent on -- where are you, I guess, in terms of your progress, in terms of -- you'd laid out your $18 improvement on the volume side, as well as what you're doing with contractors and so forth. What boxes have we ticked off in terms of getting towards that exit rate?

Well, as I've said earlier, in that we've ticked off the logistics side of the business with the second transshipment going and Dimarriage [ph] starting to leave and go out. The West pit is just starting to come on. The development of that pit that we've discussed that will, one get us a better ore blend going into the mill, which will raise the throughput rates that go forward. We just saw the beginning of that. We just had our first production shot in the last 6 weeks or so that went through. We see rates from 1.2 to 1.4 quarter-to-quarter, but that's not the real story as well. We're having a good month this month, and we continue to see the productivity as we drive towards that 1.8 million tons per quarter rate, if you will, from there. Talked about the other aspects going on of correcting the tailings pond, getting the pumping system in place versus all of the haulage that we do right now with contractors and the conveyor belt on its way to eliminate the truck haulage going into the ore sheds. So those are the big pictures that we discussed in the past. Those are the ones that we're tracking and the guys are on progress in each one of those areas.

Our next question comes from Aldo Mazzaferro of Macquarie.

A question on the new labor contract. Is there -- can you give us a little bit of information on what the hourly rate may change to in the U.S. iron ore mines?

Well, we have a tentative agreement, it's not ratified. So I apologize, but I'm not going to be able to have any conversations on that until we have ratification of the agreement. My apologies, and we'll be glad to talk about it after the ratification.

All right. Great. And then an issue about the dividend. The Board has made a very strong statement about the sustainability being very important to you. And I'm wondering, do you think they would really refuse in the short-term to fund it out of the credit line if it came down to that? It appears you're going to be fine in the fourth quarter, at least that's my view on the cash flow versus dividend. But as you get into first and second, where you draw the working capital lines you're going to be borrowing on the credit line, I'm wondering whether you might just take another $90 million on the credit line and do the dividend, or what do you think? I mean, is it a 50-50 proposition to you or do you think there's more -- something's behind it on the Board level?

I think a CEO speculating on the Board moves is highly risky for the CEO is what I think. The Board is always been supportive in what management is focused on. It is their decision as you know. We've laid out hopefully today in very clear terms what we're focused on, but those really are Board conversations that go along with optionality around pricing that all of you are working on and thinking about today, where the debt is, as well as the progress of our projects, which gives the growth in the future of this company. So all of that will be wrapped up with the Board with that, and we'll work through it from there. But the focus continues from management on those 3 areas.

Mimi, we've reached the top of the hour. I think, in respect to everyone's time, we'll end our call today. As always, I'll be available in this afternoon if you have follow-up questions with anyone.

Thank you all very much.

Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.