Cleveland-Cliffs Inc. (CLF) Q1 2013 Earnings Report, Transcript and Summary

Timna Tanners – Bank of America Merrill Lynch Michael Gambardella – JPMorgan Securities LLC Brian Hsien Yu – Citigroup Global Markets Inc. Sal Tharani – Goldman Sachs & Co. Jorge Beristain – Deutsche Bank Securities, Inc. Jason Brocious – KeyBanc Capital Markets Aldo Mazzaferro – Macquarie Group Limited Tony Rizzuto – Cowen Securities LLC Steve Bristo – RBC Capital Markets

Good morning, my name is Ashley and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2013 First Quarter Conference Call. (Operator Instructions) After the speakers’ remark there will be a question-and-answer session. At this time I would like to introduce Jessica Moran Director, Investor Relations. Ms. Moran?

Thanks, Ashley. I would like to welcome everyone to this morning’s call. Before I turn the call over, let me remind you that certain comments made on today’s call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor projections of the Private Securities Litigation Reform Acts 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 Forms 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. We will also discuss our results excluding certain special items, which is a non-GAAP financial measure. A reconciliation for Regulation G purposes can be found in our earnings release which is so said on our website at cliffsnaturalresources.com. Joining me today are Cliff’s Chairman, President and Chief Executive Officer Joe Carrabba and Executive 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 would like to take this opportunity to address recent concerns over the long-term sustainability of our U.S. iron ore business. As many of you know our U.S. iron ore segment has really been the core of Cliffs’ global operations. We have been operating on the iron range but well over a century. At year-end we had over 800 million tons of proven and probable reserves in the U.S. alone. We are the pioneers in developing the pelletizing process which takes low grade ore and increases the iron content to a complex beneficiation process. Over the last decade, we have significantly increased our market position enabling us to become the largest merchant supplier of iron-ore pellets to steel mills in the United States. As many of you know, most of the U.S. iron-ore volumes sold to customers in North America are under long-term requirements contracts, meaning that if our customers are running their furnaces they are required to use Cliffs’ palettes. A significant amount of our U.S. iron-ore volume will sold under these contracts for the next 3.5 years. We acknowledge that over the last two years new iron ore supply projects have been announced within the Great Lakes. Naturally, we are monitoring these projects on a regular basis and we are well aware of the potential competition we could face later this decade. As an owner and operator of low-grade mines we understand the front-end challenges of building and developing a mine. We also understand that day in and day out planning that is necessary to consistently produce a reliable high quality product for our customers. Our U.S. mines are well capitalized, well maintained, and run by the best operators in the…

Thank you, Joe. Before I jump to the results, I wanted to review some of the recent changes to our capital structure. During the quarter, we successfully completed an equity offering raising a total of $995 million and net proceeds after commissions, discounts and fees. The offering consisted of two types of securities and the proceeds from growth offerings were used to pay down the balance on our outstanding term loan of $847 million. This decision to eliminate the term loan is consistent with our goal of enhancing financial flexibility and de-risking the balance sheet. At quarter end, our total debt stood at $3.4 billion, which included $550 million strong on our $1.75 billion revolving credit facility. Also during the quarter and previously discussed we received unanimous support from our lenders to adjust our debt covenants for the quarterly reporting periods in 2013. The details of the amendment can be found with last night’s press release within our Form 10-K. Based on the actions we took during the quarter both Moody’s and S&P improved their outlook to stable on our investment grade ratings. Global seaborne iron ore pricing for 62% Fe fines product, a significant driver of our profitability remain relatively flat averaging a $148 per ton or 3% higher than last year’s first quarter. Consolidated revenues for the first quarter were $1.1 billion 6% lower than previous year driven by a 10% decrease in year-over-year iron ore sales volume. Lower sales volumes resulted in a 2% decrease in cost of goods sold to $903 million for the quarter. Net income attributed to common shareholders was $97 million or $0.66 per diluted share compared with net income of $376 million or $263 per diluted share in the first quarter of 2012. First quarter of 2013 results included income tax benefit…

Ashley, that concludes our prepared remarks for the call today, can you please open the line for questions.

Thank you. (Operator instructions). Our first question is from Timna Tanners of Bank of America Merrill Lynch. Your line is open. Timna Tanners – Bank of America Merrill Lynch: Yes, hi, good morning.

Good morning. Timna Tanners – Bank of America Merrill Lynch: I wanted to ask a little bit more about the long-term contract structure that you discussed in terms of the exports for iron ore pellets and longer term options there.

Timna, we don’t use a lot of long-term contracts, we do that on a spot basis when we do the export of the pellets, and then it really just is a decision on margin and where the market is and who is looking for pellets at the time with that. So, it’s driven on margin and spot basis as we have used this. I don’t see a huge amount of additional opportunity coming out of Great Lakes. A lot of it is logistics drive. There is just not a lot of shipping capacity for those size of vessels that are currently for charter coming up and down the seaway. And in Quebec City there is also limitations on where you have to transload. So, the 1.5 million and 2 million it’s a nice piece of business that our commercial group is built over the last couple of years starting with nothing and they balance it just in the marketplace. Timna Tanners – Bank of America Merrill Lynch: I think, I asked that wrong, I apologize. So, you said, you send a trial cargo to Japan, and we are sending to Europe, and I confused that with the St. Lawrence Seaway volumes that was really more Eastern Canada and you had mentioned some long-term contracts there.

Yeah, we did do a trial contract. I mean, we are very bullish on being able to diversify our suppliers that comes as it goes around the world, it’s been a stated goal of ours since the beginning of the project as it goes and just as we stated people are understanding the how to use the iron ore concentrate they like the chemistry of the higher iron and the low aluminum and (inaudible) that goes along with it, but when we lowered the silica while it gave us a lot of operational challenges that also gave us a good competitive edge as well. So [traps] are going very well, they are very cautious as they should be to put products into their mills, but we think we can diversify quite a bit of Bloom Lake’s capacity into other markets.

Yes, and we also did sign a couple of contracts with couple of Chinese customers this quarter that are greater than a year and couple of cargos a year for the next few years. Timna Tanners – Bank of America Merrill Lynch: Right. So that’s based off of its spot market contract basis I assume and I was just wondering if there is like a color or how you structure those to make sure that you can remain profitable in up or down market?

They are primarily spot yes contacts, yes. Timna Tanners – Bank of America Merrill Lynch: Okay. My only other question if I could is really about Australia, if you could give us a little bit more color you talked about some challenges there, so I was just trying to understand is that just price, is it also cost, is it temporary, how to think about that? Thanks.

Let me comment on the operational and Terry can fill in the facts with the numbers to go with it. We’ve got the operation stabilized now at this point as we talked about when we did our expansion, which was very successful on the project side of hitting the mark on total dollars getting the tonnage that we look like. The complexity of opening that up several new pits while closing coming to closure of several of our older pits, the modeling was wrong on the geology and the ore decline that we are seeing across Western Australia, is also catching up with us and as in our mines, while last year was a surprise. This year we are starting to build it in. So, we won’t see the condition go back up to if you will at 62%, 62.5% Fe. We’re going to be in that 59% to 60% range, it looks right now and we will update folks on our product specifications, as we get a better handle on it, but we think we have settled the modeling issue that we had, and the go forward is the decline in our grade, but not slow and study if you will from where we are, but maintaining that step down and change in the grade.

Yes, as a result for that Timna, that’s why we adjusted our pricing forecast by $5 a ton. So, you look at 1.5 to 2 points of Fe degradation. So, it’s about $5 to $6 a ton impact. Timna Tanners – Bank of America Merrill Lynch: Okay. Thank you.

Thank you. Our next question is from Michael Gambardella of JPMorgan. Your line is open. Michael Gambardella – JPMorgan Securities LLC: Good morning Joe and congratulations on the strong quarter.

Thanks Mike. Michael Gambardella – JPMorgan Securities LLC: I have a couple of questions. One, on your Great Lakes iron ore market, what do you think the potential is for increased demand for iron ore from the emergence of DRI. We have the plant down in the Louisiana by Nucor. There’s another plant that’s getting funding right now in Ohio, and some others out there. What do you think the potential is for increased demand for iron ore and the Great Lakes for that?

I think as Nucor has led the way, Mike, as you’ve talked about, I think, that strengthened people’s belief in the financial model of the conversions of these DRI grades and I think they’ve stated publicly what the – how much they can lower their cost to go with it. So, given that in mind we’re out talking to a lot of different mills within our area of influence if you will. We’re shipping out of Central Minnesota where the two mines are that we can do with that. I’ll come back with the number, we’re just now doing our marketing study if you will and going to the mills and see it what stage there in with that, but its substantial, I mean we feel at this point in time, our goal would be to offset any losses we may incur and we believe that we can do that in the future if these New York facilities are built. I mean there are about, if I understand them, but the normal module is about a million tons to a 1.5 million tons. Most folks like to have that inside of their gate, so they can get the advantage of the heat value and those cost advantages go well. And there are several potentials that are starting to form up for looking at any gaps we maybe able to cover, if there are any potential losses in our current iron ore business. Michael Gambardella – JPMorgan Securities LLC: Yes, that’s great. Thanks. Another question a lot has been made recently of the transportation costs that you have to go from the Great Lakes through the stand lines out through the Atlantic, I guess somewhere around $30 a ton and you’re doing that and you’re making money on those export sales right now. But the same is true in terms of transportation costs coming from the Atlantic into you market into the Great Lakes. When you look at the exploration of your Great Lakes contracts for iron ore, which are based on formulas that only take in partial consideration to seaborne price, if you were to go to a seaborne price in the Great Lakes today, what would that do to your price, average price for your Great Lakes business?

I don’t have a specific number for your Mike that gives, with that but I think that just as we look forward obviously everybody does their netback offs for [freight] and it’s from there we think we would be very competitive and our pricing when we put our margin side to fend off the competitors would be greater, not lesser as we look at today’s marketplace. So, we think there is a lot of opportunity here on the upside and they are still fending off the (inaudible) on potential products coming into the marketplace as well.

Yes, you look at low cost of our production at our U.S. iron ore. That’s a great competitive advantage we have, call it mid 60s. The freight differential of $30, so it gives us an opportunity to price appropriately to our customers to protect our…

That’s right. Because you know we have a – most of our material is through the Great Lakes and again with very low Great Lake shipping as well. So we have a huge competitive advantage and we would exercise as much of that for increased margin, which we think we could get as well as with the DRI, starting to put pressure on that market. We think the future looks pretty good for us. Michael Gambardella – JPMorgan Securities LLC: And Joe with your Great Lakes costs, cash costs somewhere, 65 to 70, something like that. That’s for pellets, and pellets obviously a price for the premium to the seaborne price that everyone talks about. So, in general, as these contracts in a great lakes expire, even if you were to go to seaborne with a little bit of discount or whatever given the transportation costs that competitors would face to get NPO market from the Atlantic. You would see your prices going up right now as those contracts roll off, everything else being the same in terms of market pricing.

It absolutely would, Mike. I mean you got the numbers right, that’s exactly how the math works, prices would go up. Michael Gambardella – JPMorgan Securities LLC: Thanks Joe.

Thank you, Mike.

Thank you. Our next question is from Brian Yu with Citi. Your line is open. Brian Hsien Yu – Citigroup Global Markets Inc.: Thanks and good morning. Hey, Joe you admit that the DR grade covered. Can you give us a sense of what the cost, if there’s incremental cost associated with that besides the three point difference in the Fe content?

We’re just not there yet. We ran this trial very successfully. We’ve done a number of bench scale trials with that, but up at North Shore we ran the 30,000 tons if you will, just to start getting the sense of that that we want to do. We will go because we said we will continue to trial bulk samples throughout the year with different flow sheets to see what the effect is on the yields to go with it, but we’re really just not there yet, to throw any number out would be way too soon with that. I think by the time we get into the late summer, into the third quarter, we’re going to have a pretty good handle on which flow sheet we design, how we optimize our cost. Make no mistake, North Shore can make product, and bulk as you saw – as we discussed here, and we will start working on the optimization of the process now to bring the cost in line. But we will report on that when we have a number we can hang our hat on if you will and stand behind. Brian Hsien Yu – Citigroup Global Markets Inc.: Got it. Then from a logistical standpoint, would you be able to service new cores facility down in Louisiana, and will it be a combination like we’re embargoed as to keep the cost flow?

I would – logistics, we would always look at the best and cheapest option. Right now, my answer would be yes, we could put products in the new core, I know there’s a lot of – are in the Louisiana are in the south. If you think about it right now, U.S. steel supply was – their products from Central Minnesota into the Fairfield plant have for many, many years. And we supply customers on a continuous basis in Mexico on a real basis with that. So there are customers that compete than the blast furnace markets right now with the same logistics model and I don’t know why this would be any different and we are certainly looking at options on how to optimize the cost down there.

Okay. Thank you.

Thank you. Our next question is from Sal Tharani of Goldman Sachs. Your line is open. Sal Tharani – Goldman Sachs & Co.: Good morning, Joe. Good morning, Terry. Good morning, Jessica.

Good morning Sal. Sal Tharani – Goldman Sachs & Co.: Wanted to ask you a little bit more on DRI, you mentioned that you have identified two mines. Can you tell us, which one is also beside the North Shore and if North Shore is the only one you going to pursue. Second, what do you think you’re going to need in terms of capital equipment to do that? And lastly this 30,000 ton you’ve produced what changes did you make to get that, and do you think that the equipment you use is sufficient or you will need more equipment and also who has tested this DRI in their steel plant?

So, a lot of questions, and good ones. Thank you for opening that up Sal. The other mine is the UTAC mine that sits in the Central Minnesota as well. We found North Shore at this point in time to be the low capital cost option. It would certainly take some minimal capital to convert the two furnaces that we ran the facility on. North Shore has the ability to have a lot of small furnaces. It’s an older facility. So we can isolate two of the furnaces down there that we ran these trials and test on with that and it’s more of piping and pumping if you will and conveyance of material than it is modifying, putting new mills in and extra grinding and flotation capacity that we would have to do up at UTech, so Northshore right now has a competitive advantage in the two mines from a CapEx standpoint on a preliminary basis where we have just not done enough work yet to know where the operating the OpEx is on those two mines. On the product side we’ve isolated enough of that product but if someone didn’t want to put in a trial shipment of (inaudible) isolated have a look at it we’ve yet we segregated that stock pile if we don’t sell it then throughout the year we’ll just blended into the rest of the stock pile and settle of this last one of speed. But we are holding that stock pile for a while to see if there is an interest in trial [Congress]. Sal Tharani – Goldman Sachs & Co.: And just one more thing is any of the how much volume Northshore has how much you think can be converted into DRI and also is any of this volume committed to some furnaces in the U.S. which you may not be able to change over to DI?

No we’ve got enough additional capacity you remember we shut Northshore down several of those furnace lines, the one that we are testing right now, earlier this year when we – the volume was lost to the bankruptcy and that volume left the U.S. as well. So we have that additional capacity right now, if a mill were to start up. But, I think, Sal the way to think about it is really in and for everybody is where, and this is where we want to get, we are way ahead of the curve if you will doing where potential DRI plants to be built. And, I would think for them to go to do their feasibility studies, they want to know that they got a product that's close to market and they can work first before they go forward and build the plant. So it's going to take several years through permitting to build these plants, and I think we are well ahead of the curve if you will by at least a year for our customers to be – to feel very safe and very satisfied that they got a product in place with the right quality they can design into whichever process they would select. But, I think we would have plenty of products to start off with, to start up at least one standard DRI facility. Sal Tharani – Goldman Sachs & Co.: Great, thank you very much.

Thank you. Our next question is from Jorge Beristain of Deutsche Bank. Your line is open. Jorge Beristain – Deutsche Bank Securities, Inc.: Good morning, Joe and everybody. My question is just circling back on the Quebec taxation issue, and you mentioned that it may impact your capital decisions there. Could you just quantify if the proposed tax rates, royalties go through as proposed, what kind of a per ton difference that would make in cash flow that's my first question?

I think we have that number in total, but again I think in reading the press and talking with the government and everything, you are probably more in tune with it than I am. But, the initial proposal was of 5% gross royalty, and I think you just apply the math using that is what we would do at this point in time in investment decisions, because we don’t have a better guide post, but the government’s proposal at this point in time is 5% on gross revenue. So, that would be difficult and a very difficult taxation regime wherever you compare it across the world at this point in time. So I would use that as the guideline until there is further clarification from the government. Jorge Beristain – Deutsche Bank Securities, Inc.: And what the decision to move forward on the phase II restart in anyway be contingent on resolving the tax situation in Quebec?

It will certainly be a big proponent of it. I mean, again with all of the uncertainty that is setting around the world with all the other factors no matter what commodity business you’re in that has to be resolved first in my mind before you could make the viable economic decision for the long-term. Jorge Beristain – Deutsche Bank Securities, Inc.: And then could you also quantify where you are in the process with the Ontario government. You said there has obviously been the change of government. But is this the kind of back to square one in terms of dealing with them on issues of road and energy subsidies or do you think that you’re able to keep a lot of the work that was done under the prior administration, and just trying to getting a sense as to how realistic the chromite project is under the previously stated timelines given the change in the government.

Well, we had a term sheet that we announced with the government, the predecessor in May of 2012. We worked with them very diligently and let me just say and very cooperatively with the government to get the definitive agreement nail down. Just we didn’t get it done on either side prior to the change of government. I think there was a lot of goodwill on both sides to try and get there and we just couldn’t reach that. I think with the new provincial government as cabinet shifts are made and people get settled back into their seat. It’s just a restart from priorities, I think, it’s in no way that we’ve seen at this point in time, a backing away from the term sheet, but it’s getting the definitive agreements in place with the new group of cabinet ministers, if you will. But, I would say both from the first nation’s perspective from [Ontario] government, again we are in negotiation phases, but people want this project to go forward. We just got a lag right now, while the other government gets reorganized, but they seem to have been still very positive on this project, and it’s not a restart, but it’s certainly is a lag in time, and again I don’t have a sense of the time either until the government is ready to reengage once they go through their changes. Jorge Beristain – Deutsche Bank Securities, Inc.: Thank you. And, thought if I could squeeze one, last one in. Where are you with the excess premiums on the Bloom Lake product? Since start up, you have not been able to really affect those higher percentage Fe premiums. Are you making headway with clients? The market obviously for pellets has come back. Can you talk to that a bit in terms of, is that really 2014, normalization of the extra premiums you should be getting?

Yes, I think it will be more of 2014, as we talked about our first goal is to make sure the product introduction is there, are concentrated as we talked about it as a new product particularly in Asia with this high grade type of chemistry, but pioneer to go into the centre blends. It’s taken a lot of work, mutual work between the steel companies, and our technical approach to start introducing these blends with the appropriate ways, so that they can see the value in use. As always you discount when you go into these markets, again we’ve been successful on the product. Technical manuals are being developed as it goes forward, and I think in 2014 once we get our customers diversification in place we can start getting back to the normal premium amounts you would look on Fe above 62%. Jorge Beristain – Deutsche Bank Securities, Inc.: Great, thank you.

Thank you. Our next question is from Mark Parr of KeyBanc Capital Markets. Your line is open. Jason Brocious – KeyBanc Capital Markets: Hey, good morning guys. It’s Jason Brocious in for Mark Parr.

Hey, good morning Jason.

Good morning Jason Jason Brocious – KeyBanc Capital Markets: I was just wondering if you could just give few details around the 1% effective tax rate, I think you guys have been typically in the low to mid 20s in the past.

Yeah, I think we probably need to step back a little bit, back in February, I think, we didn't really have any guidance on the effective tax rate but we did say on the call that we had a cash tax rate somewhere between 20% to 25%. Reality, we have a couple of permanent tax benefit items are percentage depletion, as well as we have some income that is not taxed in certain foreign jurisdictions that we get a benefit from a rate standpoint. Those stay pretty flat during a period of time, so when we increased our forecast for the additional tons, obviously our pre-tax income is going up. So, the fact is we actually had a planned tax benefit back in February, now we’ve raised that, because our income is going higher, our tax rate is going up to that 1%. So, from a cash tax standpoint, we said 20% to 25%. I think you’re going to have to add a real 5 points to that number to get where our cash tax rate will be now. Jason Brocious – KeyBanc Capital Markets: Okay. All right. And, I just wanted to clarify in the – I’ll dig into it more on my own but the Quebec mining tax proposal 5% of gross revenue so that’s not going to take into account at all the profitability of the mines being taxed?

No, not at the initial proposal, that’s the concerning piece of this. Jason Brocious – KeyBanc Capital Markets: And, just on the comments you made about provisional pricing impacting the realizations in Eastern Canada and typically most of that business is priced on the spot. So can you explain where the provisional factor came in?

Yes. So what happens is we have different contracts with different customers, but when we load the ships – that’s when we will recognize the revenue, but we have to estimate the time it takes to get to the ports in China, which is when the price gets settled. So, as we are estimating shipments in the fourth quarter when they actually got there and the price was realized we are a little bit conservative in our estimates and realty is that prices came in higher for the quarter and that’s what drove higher pricing there. Jason Brocious – KeyBanc Capital Markets: Okay. And what’s the typical shipment time from Eastern Canada over to Northern Chinese port.

Yes, it can go anywhere from high 30 to 45, so sometimes perhaps they’re based on when the boat leaves the dock and other contracts that are based on an average of a discharge in China, so that’s where you’re getting the provisional pricing coming into play. Jason Brocious – KeyBanc Capital Markets: Okay. So in the market like we saw 4Q, I mean, that can be quite a factor.

That’s right. Jason Brocious – KeyBanc Capital Markets: Okay. Yes, that takes care of me. Thank you very much guys.

Thanks, bye.

Thanks.

Thank you. Our next question is from Aldo Mazzaferro of Macquarie. Your line is open. Aldo Mazzaferro – Macquarie Group Limited: Yeah. Hi, good morning. Thank you. I just have two quick questions to follow-up. On the comment you made about the better (inaudible) demand driving the U.S iron ore. Can you say whether those are minimal customers for DRI or is that integrated producers?

It’s all integrated producers. We don’t sell anything into the mini mills at this point in time. Aldo Mazzaferro – Macquarie Group Limited: Great. Thanks, and then a question on the tax rate again. I think you just answered a lot of question I had but I guess in simple terms. How do you end up with the $43 million or $46 million deferred tax charge in the cash flow statement if didn’t have any tax accruals in the income statement.

Well, what you have is I think the cash flow has an income. It’s a benefit that’s going through, and that’s why the rate is an accounting. You have a deferred portion of your tax expense, as well as a current portion, but you’re seeing as a cash flow is the deferred portion benefit, which is non-cash. Aldo Mazzaferro – Macquarie Group Limited: Great, but those deferred all that’s the benefit I get it $46 million is the deferred benefit.

Yes, yes. So it’s sitting in income, but its non-cash, so it’s a (inaudible). I got cash flow statement. Aldo Mazzaferro – Macquarie Group Limited: Okay. Thanks. Thanks very much.

Thank you. Our next question is from Tony Rizzuto of Cowen Securities. Your line is open. Tony Rizzuto – Cowen Securities LLC: Thank you very much. My question, one of my questions is just a follow-up on the Eastern Canada price realization, and it seems that your realization was higher than your guidance seem to imply, and I understand a portion of that is the provisional pricing. So when we look ahead, should we expect that to be more closely in line with the guidance that you guys have put out there.

No, I think that’s those events depends on the volatility on a quarter end, when we’re estimating pricing for those ultimate delivery. So I think it’s just back from circumstances this time through.

Yes, Tony, I think you’ll just get a whole mix of lead and lag.

Yes.

If you will and you’ve got to put customer mix in there as well and vessel timing that goes in on the shipments, it will move around I say quite a bit. But I don’t think the variation will be off that huge unless there is a huge pricing of that one where the other and vessel timing happens to coincide with it. So that will be difficult want to put your finger on. Tony Rizzuto – Cowen Securities LLC: And just also with regard to Eastern Canada. So as you are gaining more traction with customers there, and it sounds like you are – they’re utilizing more of your material and it is a working process initially you break into the market and you’re getting a little bit of a discount there. Even more of that impact, we should begin to see that as more overly the premiums begin to follow in that’s more of a 2014 thing.

Yes, we’re still doing a lot of trials and a lot of test to go with that. Again as I said, it is appropriate for a steel mill, but it just don’t take any product as you would expect and we are targeting some very important customers that are very high class customers if you will, the quality is extremely important to them. This is a very slow if you will, but methodical, technical steps if you go through and it will be a 2014 event as we step through it. But we think its well writhen to get the right customer base diversified. Tony Rizzuto – Cowen Securities LLC: Okay. And then just shifting to the U.S. for a second. The sustainability of the first quarter level. Your guidance seems to imply that costs will rise obviously year-on-year the costs were down a little bit. You talked about lower maintenance a little bit, but I’m wondering are you guys seeing some lower cost pressures we’re seeing other mining companies talking about that. Are you seeing this is well and specifically if you are in which areas and I’m got a follow-up on that as well?

Well, I think as a general statement as the heat of the mining business the events slow down as always expected. We do start to seeing some pricing contract or availability becomes more competitive in the space your bidding processes can become more competitive than that. I would say in generally, we’re starting to see a little easing of that those pressures have come with it, but to be specific of were big downside cost reductions have coming. I don’t think there is any that that would pop in the mind or shows up in the line items that we look at in the more detail here. Tony Rizzuto – Cowen Securities LLC: Okay.

Yes, and I think and other things for the cost for the quarter is, we are experiencing higher in energy and labor cost, but we also had a couple from a timing standpoint. Couple of major repairs that happened in the first quarter of 2012, and it’s just the timing thing. So, we’re leaving our guidance to $65 to $70, because it’s timing of majors, but the team has done a nice job in really managing their costs in light of the inflationary environment they’re seeing on the energy and labor side. Tony Rizzuto – Cowen Securities LLC: Got it. And then generally, my final question. Just to think about your ore grades there at the U.S. operations in the haulage profiles, all that as we think about the remaining quarters in 2013 and going into 2014, 2015. How is that likely be change, any meaningful way?

No, I mean grades are stable. They have been for many years in these mines as they go forward. Of course, as the many mine and spaces advancing over the whole distances get a little longer each year they never get any shorter Tony as they go with it, but nothing dramatic. We’re not opening new pits or new mines or going to new areas that would have a substantial change to haulage distances and effect cost going into 2014. Tony Rizzuto – Cowen Securities LLC: Okay. Just overall, I mean, would it be safe to say that your cost guidance is maybe on the side of conservatism, given what we saw on the first quarter and maybe given some of the comments here today, a little bit more sustainable.

Now, if we thought they were we would change our guidance, as I think we’ve always tried to stay transparent with everybody. Again, as we smooth the maintenance curves as we go out in the first quarter. We work very hard at matching cost with revenues as they come in, it’s a slow quarter for us, it’s always with the locks being shut down. And quite frankly too if you don’t have to do a lot of those maintenance in the first quarter with the weather and the severe temperatures we’ve seen this year, everybody is just that much more productive. So, now we would maintain our guidance. Tony Rizzuto – Cowen Securities LLC: All right. Got it. Thank you very much.

Thank you, Tony.

Ashley, we’ll take one more caller.

Thank you. Our last question is from Steve Bristo of RBC Capital Markets. Your line is open. Steve Bristo – RBC Capital Markets: Yes, thanks and congrats on the strong quarter. I just had a question on preferred dividends. I saw that you had some preferred dividends coming through the income statement, but on the mandatory converts you weren’t supposed to have a dividend until May 1. I’m just wondering what that dividend represents and where we show up in the cash flow.

It’s accrued in the balance sheet, because from the calculation for an EPS standpoint we have to accrue for that and back that out to calculate net income available to common shareholders of Cliffs. So, it’s accrued, it hasn’t been paid, but sitting in the accrued liability. Steve Bristo – RBC Capital Markets: Okay. And then, why was the declared dividend of $0.34 less than the 7%?

Because we raised the equity in the middle of the quarter and February 21 was the close date.

Per rated.

Per rated.

Yes. Steve Bristo – RBC Capital Markets: So that declaration is in for the entire second quarter that’s just for the first quarter portion.

That’s right.

Yes. Steve Bristo – RBC Capital Markets: Okay. All right. Perfect.

Okay. Thanks everyone for joining us for today’s call. I’ll be available for the rest of the day. If you have any further questions. Thank you.

Thank you all very much.

Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.