Good morning, ladies and gentlemen. My name is Jessica, and I am your conference operator today. I would like to welcome everyone to the Cliffs Natural Resources Q1 2014 Conference Call. [Operator Instructions] I would now like to introduce you to your host for today's call, Jessica Moran, Director of Investor Relations. Ms. Moran, you may proceed.

Thanks, Jessica. I'd 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 protections 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 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 presentation, which is posted on our website at cliffsnaturalresources.com. Joining me today are President and Chief Executive Officer, Gary Halverson; Executive Vice President and Chief Financial Officer, Terry Paradie; and Executive Vice President, External Affairs, and President, Global Commercial, Kelly Tompkins. At this time, I'll turn the call over to Gary.

Thank you, Jess, and thanks to everyone listening on today's call. Before I review our results for the quarter, I want to briefly address the matter of ongoing shareholder engagement. As you may know, one of our shareholders, Casablanca Capital, has nominated director candidates for election to our Board of Directors. We welcome open communications with all of our shareholders and strive to maintain a constructive dialogue with them. We also remain committed to acting in the best interest of our shareholders. Although we will not take questions on Casablanca today, we do have an update regarding the annual meeting. After taking into account what the company's board and management believe to be in the best interest of Cliffs' shareholders with respect to our attempts to resolve the ongoing situation with Casablanca, we have set a record date of June 2 for the annual meeting, which will be held on July 29, 2014. With that said, the focus of today's call is on our earnings results, so we ask that you please keep your questions focused on that topic. We do not intend to make any further comments or statements during this call regarding Casablanca, and I thank you for your cooperation in that regard. In my first few months at Cliffs, we announced a number of decisions to cut spending, suspend projects, idle underperforming assets and sharpen our capital allocation discipline. During the first quarter, we successfully and safely idled Wabush's Mine and processing plant. While I regret that this decision impacted the jobs of 500 people, we must strive for continuous improvement in lowering our cost profile. I am pleased to report that our first quarter capital expenditures were 55% lower year-over-year, and our SG&A and exploration expenses decreased 30%, excluding severance-related charges. These severance costs were associated…

Thank you, Gary. Despite the pricing and weather, we ended the quarter with over $1.9 billion in total liquidity, a 32% increase compared to the prior year. This is the result of having a higher cash balance of $364 million and amounts drawn under our existing credit facilities of $225 million, a reduction of nearly 60% from the first quarter of 2013. Our success in cutting capital, overhead and operating costs has enabled us to significantly minimize our debt borrowings in our seasonally slowest cash-generating quarter. The covenant suspension period implemented in partnership with our revolver bank group during the first quarter of 2013 expired at the end of the first quarter of 2014. We have now resumed our measurement under the facility's previous covenant structure. This includes a 3.5x maximum debt-to-EBITDA ratio and a 2.5x minimum interest coverage ratio. At quarter end, we were well beneath the debt-to-EBITDA covenant requirement, with a ratio of less than 2.5x. While uncomfortable with our current leverage position, especially considering the headwinds we face and the normal first quarter seasonality, our near-term target will be to reduce our debt profile. Consolidated revenues for the first quarter were $940 million, down $201 million from the prior year. The lower pricing impacted our first quarter revenues by $173 million, with the remainder driven by lower sales volumes. Cost of goods sold decreased slightly to $877 million, primarily driven by favorable foreign exchange rate variances totaling $45 million and $29 million related to the lower sales volumes. These decreases were partially offset by incremental lower-cost-or-market inventory charges of $33 million. Consolidated sales margin for the quarter decreased to $63 million, which also included a $25 million sales margin loss from our Wabush Mine operations. Our first quarter SG&A and exploration expenses decreased 30% year-over-year to $50…

That concludes our prepared remarks for today's call. [Operator Instructions] Operator, can you please open the lines to begin our question-and-answer session?

[Operator Instructions] And your first question comes from Mitesh Thakkar.

My first question is on the U.S. Iron Ore side. It looked like weather-driven issues had increased the costs for the balance of the year for that segment to perform. How do you think about the amount of inventory you have and what it means for the cash flows for the back half of -- for the remaining 9 months? And are there any potential logistics constraints, which could show up and prohibit you from achieving the guidance on the full year basis?

Thanks, Mitesh. Maybe Terry will chime in, but basically, as we said, we're still maintaining the full year guidance on total shipped product to our customers. Obviously, the weather plays into it. If I looked at last year's weather, we had an early close to the season. If -- based on what we're looking at for current shipping and the availability by quarter, we think that we're going to be able to make it. And we won't get it all back in the second quarter, but we're looking at late third quarter, possibly into the fourth quarter, barring any terrible weather for this coming winter.

Yes, Mitesh, from a cash flow standpoint, obviously, the first quarter traditionally is a quarter where we build up our inventory balances. So in the second part of -- the second half of the year is when we wind down those inventory balances so it will generate positive cash flow. You can see for the quarter, we had negative cash flow from operations of $82 million, with a good portion of that a result of the build in inventories.

Do you have any way to quantify that?

From a timing standpoint? I think it will be based on how we schedule out the remaining tons for the year. So we're keeping our guidance at 22 million to 23 million tons. We're done just under 3 million tons for the quarter. So you could probably spread that maybe less in the second quarter, more in the third and fourth quarters because we're still dealing with weather and ice conditions in the Great Lakes.

Mitesh, this is Kelly. Just a couple other comments, because I'm sure other analysts are questioning our ability to meet the volume for the balance of the year, given the condition on the lakes. I think there's a couple of things to consider. One, we fully expect idled vessel capacity will come online. There certainly will be an economic incentive for some of these vessel carriers to come online. Secondly, lake levels will be up so we'll load a little heavier. And then I think equally important, we typically have a lull in the summer months, so we would expect to ship on a much more ratable basis across the remaining quarters of the year. And we do always build in a little bit of a contingency in the fourth quarter just because it's uncertain in terms of how early or late winter conditions will arrive. So we have factored in some of that contingency as well. So that gives us reasonable confidence that we can meet the volume commitments.

And your next question comes from Michael Gambardella from JPMorgan.

How much of the total tonnage so far year-to-date in the Great Lakes has been affected, do you think, by the weather?

Shipping was 2.8 million, so it's -- we normally don't have any product during that time period anyway. So the total is -- I'm not sure what the total is.

Last year, it was 3.1 million, so, but in...

About 10% and...

At least. And then there's other guys on the Great Lakes that are shipping vessels, too. I don't know how much they've missed out, but...

Yes, but our expectation, as Kelly mentioned, that we'll be able to move the tons in the second, third and fourth quarter. And we historically haven't been able to hit those average volumes in those quarters.

Yes, and I guess our focus, Michael, just to say -- go ahead.

I would just say if one of your customers has been delayed on a shipment from you into another quarter, what's the pricing that they get on that shipment?

Mike, we wouldn't comment on particular customer pricing. But we are working -- I was up at one of our customers for most of the day on Wednesday and a couple of my sales guys are out with customers today. We are working hand-in-hand with them. And part of the challenge for a number of our customers, of course, as they work their inventory down low, is they're managing their working capital. So the days of having had some buffer inventory is not there. So our customers recognize that they're part of the solution here as well. So it's a customer-by-customer, hand-in-hand working relationship to work through this. And they all understand they're in a similar situation and are supportive of our efforts.

But is the customer -- if, say, a customer shipment is delayed by 3 months, and if the pricing, I'm not asking for the specific pricing, but say the pricing is referenced off of seaborne, is it the seaborne when he was supposed to get it or is it the seaborne when you ship it 3 months later?

It's going to be -- vary by customer. It's going to be reflected in their particular contract pricing.

Okay. And then last question, how much of a penalty did your costs get in the quarter due to higher energy costs?

The total -- if I use the -- USIO is the biggest impact for all the sites. The total there, that was about $45 million. On an annualized basis, that's about $2 a ton. Obviously, from an impact first quarter, it's where we're expecting it all to land. About 2/3 of that was driven by natural gas pricing and 1/3 by electricity, mainly in Michigan.

Yes, the $45 million increase would have been over Q1 of 2013's energy rate.

Right.

Right. And as I mentioned in my comments, too, Mike, is that's probably a lot of that's built in the inventory that's on the balance sheet now and we'll see some of those costs coming through in the second, third and fourth quarters as we move those tons.

Okay. And then when you bring on -- when people bring on some of this idled vessel capacity to accommodate additional flows of iron ore in the second, third and fourth quarter, who pays for that? Is that the customer or is that you?

Mostly paid by the customer, but it varies by contract.

Your next question comes from Tony Rizzuto from Cowen and Company.

My first question is more strategic in nature. And I guess, Gary, I'd like to know what you're finding from your evaluation, thus far, of the technical and engineering aspects of Bloom Lake. And I'm just trying to understand better your costs and why they're so high compared to others. Obviously, you were operating in the Trough at much lower costs. And I know certainly volumes are a factor and efficiencies of scale, et cetera, economies of scale. But do you think the engineering there is flawed in some ways? I'd like to hear your thoughts on that, please.

Sure. You're spot on from -- mainly it's a volume driver for Bloom Lake when you compare it to what the neighbors are producing there as well. And that's why we see the opportunity for reducing off of Phase I. Obviously, if you expand it to 13 million, 14 million tons, you do see that net drop. There are some fundamental differences as well as to how we grind and produce our product. It's based on us using spiral concentrators in there. There's no magnetite recovery process to it. So it all factors into some of the variability that you'd see to -- it's comparing fruit but not apples to apples between the products. That being said though, we're still in the early days of that project. And I -- as I said at the beginning, seeing a record of 1.5 million tons is the first thing out of the chute. The challenge I gave to the guys was just within the last couple of months of how can we focus just on Bloom 1 and extract maximum value, both in terms of capital and operating costs. One of the things we've seen is now we're getting increased productivity improvements and what you're going to see coming after that is a definite lowering of unit costs coming off the back of that. But there's a bit of a lifetime, first comes the production and then comes the lower cost. Overall, the difference in focus with the guys and what they can do, we've seen some pretty good daily production rates and it's just smoothing out and understanding the ore body and how we mine it. We also had some increased costs in Q1 just based on where we're at from our stripping ratios and overburden. Overburden in the past has been capitalized, we now take it as operating. And that overburden essentially goes from close to 1 million tons to 0 in second quarter. So there's changes occurring in that that's going to continue to make us more efficient at that flat.

Well, I appreciate that. Now I understand, correct me if I'm wrong, but I think I have heard that in the bankable feasibility study, when it was done on Bloom Lake, that it originally called for a magnetic recovery system, or is it magnified recovery, I forget, but I'm wondering -- and then I understand that, that was going to be installed at a later point. I wonder if you could tell me how has that affected your recoveries there. And if you were to implement that system, what kind of capital costs are you talking about? Is that something that you think is required there?

Let me give you a quick snapshot. CT did have, in the original feasibility document, a plan to put in a magnetic recovery plant. They grossly underestimated it at the time the amount of capital to go into it. Our -- based on this low pricing we're in, just based on what I see for recoverability of the magnetic iron, I don't see the feasibility of heading down there. I think our focus right now is really on what we currently have in front of us, what we can do to partner up into Phase II to actually extract that -- the volume based on the current plant the way it is. If there's an opportunity in a rising market down the road, I think we've got to refocus on that based on that disciplined capital that we'd look at.

Okay, all right. And then my second question is on a different matter, but overall, your guidance appeared somewhat conservative and I was wondering, is that by design? Or, for example, with respect to Asia Pacific, are you building in some currency reversal? It sounded like some of the factors you described were more sustainable in nature, so I'm just wondering why the continued same guidance for the year despite a very stellar first quarter cost performance there, that type of thing.

It is only first quarter and we're early out of the gate. I can get Terry to comment on a couple of aspects to that, but part of it's driven by changes in FX rate and -- well, I'll give it to Terry.

Yes, I think, Tony, from the standpoint -- our range that we've given guidance was $65 to $70. We're at the low end of the range. We're still within that range. The biggest piece that we've seen this quarter where we're at is the effect of currency. And from a plan standpoint, the Aussie dollar, we plan for about $0.90. Right now, today, the Aussie dollar is at $0.93, $0.94, and therefore, there is some risk with respect from a cost standpoint with the Aussie dollar. So I think there's -- we're at the low end of that range. But again, in the first quarter, the fact that we're dealing with, I think, some currency exposure on where we're at from a plan standpoint, versus where it is today, we're comfortable with that range at this point.

Okay. And just one more quick question, just back to Bloom Lake for a second, Gary. And I just want to -- do you think there was adequate delineation of the ore body? And what are you guys -- it sounded like you've got obviously higher mining expenditures. You've been doing pushbacks and you've had some higher stripping, et cetera, but just your thoughts on that.

Sure. I guess the easy answer is we need more delineation and we identified that towards the end of last year, was -- we were just doing our analysis of the 3 ore bodies -- or 3 pits, based on total iron. And we actually differentiate that to get a better feel for recoveries within the circuit. So we're doing that. But part of it is we're stepping back and looking at the actual drill core data to actually get a better differentiation from there as well. Overall, it doesn't change where we're at from mining the 3 pits. It's looking at optimizing mine planning and where we go forward from blast-hole data and from understanding the ore body with more clarity. So that will lead to better focus of where material goes in terms of feeding and blending.

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

I just wanted to get a little more sense about the export opportunity, if you could refresh us on how that's proceeding, given the pellet premiums and how exports look going forward and what they might have looked like in the quarter.

Yes, Timna, it's Kelly. I think you'll recall our guidance was 1 million tons of export this year, compared to a little over 2 million last year. So we're still holding to that guidance. Now if there's opportunities throughout the course of the year to retain some of that tonnage in the Great Lakes, we'll do that. But there is a healthy pellet premium right now, we know. But at this point, we're just holding to the 1 million ton guidance for exports.

There was 100,000 tons in the quarter, Timna.

Okay, that's helpful. And then also, sorry if I missed it, did you give us -- on the weather resolution, it sounded like there'll still be some spillover into Q2 in terms of Great Lakes still thawing out, but -- and it will take throughout the year to kind of resolve that situation. Is that the way to think about it, that there'll be some spillover?

Yes, that's a good summary. We're still seeing some effects. We still have Coast Guard guidance of the vessels, and with a bit of mother nature going in the right direction here, that will rapidly increase and everybody's hoping for that. But based on our analysis, we have the capacity to recover Q3, Q4.

Okay, it makes sense. The only other little question I had, if I could, was on the coal side. What is it going to take for you to make the decision on whether to continue? Is it going to be a couple of quarters? I mean, you noted that other people shutting is helping the situation, but what would it take for Cliffs to make a decision on shutting? You said flatter, below current levels, but I was just wondering what time frame you might be making a decision.

Yes, thanks, Timna. The guys have done a great job of continuing to lower the unit costs. And as I said, we're continuing to hit new records in productivity. So with that, we're in that lower 1/3 quartile for North American producers. And we've seen -- we're starting to see in this -- I think I mentioned last time, we're just the war of attrition, which is a natural evolution to take some of the supply out of the market. We're seeing that coming into play. But specifically for our assets, we want to focus, each mine has a different characteristics that we have to look at for, it's cost of, net cost of operating, the cost to idle, and to look at the customer base and marketing of that. We're currently in the process of doing that, based on where we're at. But at the end of the day, as I said, we're -- we don't want to be cash negative. So we're looking at what the effects are and what the trigger points are. Once we do that analysis, we can make a quick decision on that. But the issue is when you make an idling decision, it's for a longer period of time. So we want to make sure that we do this right but we're -- the guys are on top of it now. Kelly?

Yes, Timna, just maybe a couple of other supplemental points. One, we would want to gear timing of the -- relative to a longwall move just so it's least disruptive to operations. So that would play into it. But -- and at this point, we're estimating there's been close to 10 million tons have been taken out of the domestic market already in terms of actual idled capacity or at least on the verge of idling based on other announcements. And so we're looking at it with where we're at on the cost curve, the strength of our product mix, customer base. All those things have to be factored into the decision along with, obviously, the hard analysis of the economics, which is well underway. But at this point, we're still in monitoring mode.

[Operator Instructions] Your next question comes from Jorge Beristain from Deutsche Bank.

My question, I guess, is more of a strategic nature for Gary. Just if you could talk to the recent announcement from voestalpine that you guys will be one of the suppliers of iron ore for their HBI facility, and you've been talking about the DRI opportunity in North America for a while. Could you talk, in terms of the sort of 21 million ton baseline that you're doing for U.S. legacy, how much of that could ultimately start to go to the alternative mini-mill market? And what would be the kind of CapEx per each million ton that you start to supply to that market?

I can't speak specifically on -- I think, as I said in the beginning, I think we're positioned pretty well as a supplier for the DR, DRI marketplace. And that's -- we believe that's going to come onstream over the next 3 to 5 years. In terms of our -- I think I mentioned the last time, we've actually done all the test work on Northshore. We can produce about 3 million tons of product, DR-quality, low-silica pellet. The cost of that, based on our pre-feas level, is sub-$100 million. And part of our process is to make sure that based on the various people that are out there, other companies, that we position ourselves for the long term to be able to step into this in the right way. Kelly?

Yes. Jorge, as Gary said, I mean, we're not going to comment on particular partner or customer opportunities. But I think it's fair to say that we're comfortable with the technical feasibility. We've reasonably narrowed down the CapEx estimates for making the pellet, and really, right now, we're evaluating a number of possible options and that's whether to just purely be a DR-grade pellet supplier or whether we would go into a JV structure, for example, with a, in a DRI facility. And I think as we've said on other calls, geographic considerations are very important. So looking at EAF opportunities around the Great Lakes from a regional standpoint to really maximize the margin potential and the transportation factor will be a key ingredient in our decision-making process. But again, we see it as a very viable market opportunity to maybe offset some of the export tons down the road.

Great. And if I could just have a follow-up. On the coal business, could you just remind us of your volume targets for 2014? How much of that is already fixed price contracted?

Yes, 60% has already been priced and committed for the year. So the remainder of the 7 million to 7.5 million tons that were -- we've put in our guidance is met coal products that hasn't been priced or committed to yet.

And it's an average price of $85 a ton, the 60%.

The 60%, right.

And is the remaining uncommitted product at this point viable, given where market prices are in the U.S.? In other words, are you cash flow positive?

It depends on -- we're really looking at how we sell that product into the market. We've been fairly particular with negotiating with customers on it. So it's a bit of a give and take there. And that factors in, as Kelly said, to the overall balance point of whether you idle an asset. We certainly don't want to go negative but we're running right on a fine wire right now.

Your next question comes from Evan Kurtz from Morgan Stanley.

I just want to get an update on Asia Pac. You mentioned in the press release that you moved a little bit less material this quarter, and I was wondering -- I mean, the [indiscernible] mines, I just wanted to get kind of the outlook for where you see stripping ratios going, and haul distances and so forth. Surprised to see that was actually moving in the right direction.

Yes, it actually was, so it was good. As per our plan for first quarter was to have a stripping ratio of 5.0 and we actually ended the quarter at 3.6. So it was quite a drop in total movement. We actually mined at 5 million tons a month. Most of that -- we have a whole series of pits and a lot of the movement was out of the Windarling pits, I think W1, W4. And it's coming back a little bit better and we've been -- the guys have done some good inroads to steepen pit walls and obviously pull in that strip back. So that's just optimization that the guys are continuing to do. I can't really say forward in the plan, but that's a good indication of some of the cost savings focus that the guys have.

Yes, Evan, I think the team has really been -- we had a big change going from one large pit to these multiple pods. So the team's focused in on their mine plan and operating efficiencies. And they continue to focus on how to be -- extract the most ore out of this at the lowest strip ratios and that will be continuing to focus as they move to the end of life of mine.

Okay. And one other question on Bloom Lake. You said -- you mentioned you set up a data room. Have any potential parties come to you so far in the process?

I just can't comment on specific parties.

Not specifics but is there any interest coming towards you? No names or anything like that but...

Yes, there has been interest, and obviously, it is a process and we're in the early stages of it. So it's a little too early to comment on anything specific, I guess, within that. But it's fair to say that we have been specifically approached already.

Great. And maybe just one follow-up on Tony's question. I thought it was interesting, the initial project called for a magnetic recovery plant. If I recall, I mean, the problem seems to be that the mill feed is not really homogenous and you're having trouble tuning some of the spiral separators. It seems like that would be a solution to that problem. And so I was just trying to get a sense. I mean, you mentioned that the CapEx was very high. I was hoping you could provide maybe a range or neighborhood of where you think that might be. And then, is that really required to get a major step-function change in costs? And what do you think that could actually deliver?

Yes, in generalities, the numbers are around $200 million to $300 million of CapEx to do that. I'd be pulling my memory banks to figure out the percentage. But it was in the order of 5% to 8% or something of the product that you could effectively recover against that. When we did the analysis back on it, we just couldn't justify today's price environment to -- you got a couple of things going on there and you got a -- it's the grind size of that material, a lot of energy costs and then you got to run everything across those magnets. And then, obviously, that's a big differentiator to say other mines, especially in our USIO mines. That being said, it's not as -- it's a different product mix in those pits.

Yes, just to clarify also on the Consolidated Thompson data. When they talk about the mag line, it was also just based on the main pit and the east pit. We have since explored into the west pit, which is a higher hematite sort of pit. So it's a different sort of ballgame that we're dealing with today than what they initially had.

And your next question comes from Nathan Littlewood from Credit Suisse.

Listen, I just had a question, first off, about Eastern Canada and pricing there. You guys have dropped the IODEX reference price from $128 to $120 a ton. And when I look at the sensitivities that you provided previously there, one would've thought there would also have been a downgrade to the pricing guidance for Eastern Canada to correspond with that. That doesn't seem to have been the case. You've actually maintained that pricing guidance. When I look at what's going on, with sort of value in use premiums at the moment, and the freight market, I struggle to sort of reconcile that. So I was just wondering if you could talk a little about what is behind the apparent upgrade to your Eastern Canada pricing expectations there.

Yes, Nathan, what's really happening here is we give a pricing band. So your expectation that we should have lowered to the next band downwards is absolutely correct. There's a couple of things happening there from -- you've got to step back and look at that is one variable that we look at in the sensitivity. But we also make estimates around Fe content from a premium standpoint. We also look at freight costs and what our expectations are there. So what's happening is the market price has taken us to that lower band, but we've also seen higher Fe premiums than what we had planned for in our expectations in our original outlook. As well as from a freight standpoint, we're also seeing -- we're receiving better freight rates because we're doing a higher mix of Chinamax vessels than we had previously planned for. And that's taking you from down that 8% and then it's putting you back into the sort of the mid-pack of that band we left it in.

Okay. The other question was just on sort of liquidity in the balance sheet. When I look at the consensus estimates for free cash flow for this year, they're just over $300 million. I would expect that there's probably going to be a bit of a reversal of the working capital situation from the March quarter consuming part of that $300 million for a full year. So it doesn't look like there's going to be a whole lot of cash generated and therefore, not much change to the total net debt position. As you know, the covenants have come back from holiday now and it looks to me that on both sort of the consensus, or our own price deck, you guys are potentially going to have problems with that 3.5:1 debt-to-EBITDA covenant by the September quarter of this year. Just wondering if you could talk a little bit about where you're at with refinancing and maybe how you're thinking about the capital structure going forward.

Yes, Nathan, the way I look at it is we're sitting here with a position, liquidity position. We're back on the debt-to-EBITDA ratio. We ended the quarter under 2.5x. We monitor that very, very closely and we look at our own plan. We look at -- we sensitize that and we're always taking a hard look on when do we think we're going to have some challenges if pricing goes down. So it's something we're really focused on as a management team. That being said, I don't necessarily -- depending on what price you see happening, I'm not sure third quarter would be a problem for us, based on the way we look at it. But in any event, we have good relationships with our banking partners, and if we needed to go for another amendment or some covenant relief, we are comfortable we can make that happen. And we'll do that far in advance of us having any challenges from the 3.5x debt-to-EBITDA coverage.

That concludes our call for today. I'll be around for the remainder of the day, if any of you has follow-up questions. Thank you.

This concludes today's conference call. You may now disconnect.