Cleveland-Cliffs Inc. (CLF) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Sally, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2016 First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. The company reminds 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 the 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 the company 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. The company will also discuss results, excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. At this time, I would like to introduce Kelly Tompkins, Executive Vice President and Chief Financial Officer. P. Kelly Tompkins - Chief Financial Officer & Executive Vice President: Thank you, Sally, and thanks to everyone joining us on this morning's call. I'm joined today by our Chairman and CEO, Lourenco Goncalves. I will lead off the call with a review of our first quarter results, outlook for the remainder of this year and provide some additional comments around our most recent debt exchange. Once again this quarter, the performance at our U.S. and Australian operations was outstanding despite a challenging commodity environment. Disciplined cost control coupled with an uptick in iron ore and steel prices not only drove our strong first quarter financial performance but also suggest a more optimistic outlook on the balance of the fiscal year. Starting with the U.S. market, the impact of successful trade case rulings and a drop in imports have pushed steel prices dramatically higher since our last conference call with hot-rolled steel prices settling above $520 per short ton compared to the sub $400 per short ton prices in the fourth quarter. If the current steel prices persist, let alone improve, our cash margins in the U.S. should improve as well. For now we are holding our current price forecast for hot-rolled steel at $450 per short ton for the full year but will adjust as the market and our order book evolves. In the first quarter, we realized $84 per long ton of pellets. Our cash production cost at USIO was $48 per long ton during the quarter, a 26% reduction from the $65 per long ton performance reported in the 2015 first quarter. This quarter-over-quarter reduction in production costs can be attributed to reduced repair costs, lower diesel fuel and natural gas rates and drastically reduced labor expenses. Just to reaffirm our full year 2016 guidance, we are maintaining our outlook on full year cash production costs of $50 to $55 per long ton as well as our cash cost of goods sold guidance of $55 to $60 per long ton. With our United Taconite and Northshore mines down for the entire quarter, we incurred $25 million of idle expenses. As you saw in our March 14 announcement, Northshore will resume production in May and we expect to restart UTAC in the fourth quarter. Accordingly, our remaining idle expenses for the balance of the year will be in the range of $40 million or approximately $65 million for the full year if you include the first quarter idle costs. USIO adjusted EBITDA for the quarter was $46 million. Our 1.9 million long tons was generally in line with our sales volume expectations during what is our seasonally lightest quarter of shipments. Consistent with the seasonality of our business, shipments are starting to pick up right now. We expect to ship about 3.5 million long tons in the second quarter, with the shipping season hitting full stride in the third and fourth quarters to fill out our 17.5 million long ton order book for the full year. Before reviewing the Asia Pacific iron ore results for the year, let me briefly touch on the encouraging increase in seaborne iron ore prices since the beginning of the year. Among other factors which Lourenco will address, Chinese steel mills increased output upon signs of an economic recovery, which drove the global iron ore prices back above $50 per metric ton during the quarter and reaching as high as $70 last week. While the IODEX price has a limited impact on our realized prices in the United States, given the structure of our domestic pellet supply contracts, our Australian business benefited substantially from higher seaborne spot prices during the quarter, reporting an adjusted EBITDA of $23 million. On the cost side, similar to our USIO team, our APIO team continued to outperform our expectations. The focus on costs and productivity delivered first quarter cash production costs of $27 per metric ton compared to $37 per metric ton reported in the prior year's first quarter. Compared to the fourth quarter of 2015, cash production costs for the first quarter were up slightly due to a small headwind from the Aussie dollar exchange rate. If we stripped out the Aussie dollar impact, our APIO business has reported seven consecutive quarters of cost reduction. For the full year, we are maintaining our Australian cash production cost guidance of $25 to $30 per metric ton and our cash cost of goods sold expectation of $30 to $35 per metric ton despite our new assumption for the Aussie dollar of an appreciation of $0.06 from $0.69 to $0.75. Our expected improvement in price realizations due to the recent run-up in iron ore prices can be calculated based on the revenue outlook table provided in our press release this morning. We have also seen lower freight charges and improved lump premiums, which has bolstered our revenue per metric ton expectations in Australia. Moving to capital expenditures and SG&A expenses for the quarter, we continued to show year-over-year reductions in both areas. Our cash capital spending dropped to $10 million this past quarter, a 35% reduction when compared to last year's first quarter spend of $16 million. Our previous full year capital expenditure outlook of $50 million was increased to $75 million this quarter as we prepare to begin investing later this year in the equipment and flow sheet modifications required to produce the superflux Mustang pellet at United Taconite. Lourenco will be providing more detail on this in his remarks. As for corporate overhead, despite some onetime, non-cash charges we had to take in both SG&A and misc net related to writing off some unneeded office space at our corporate office in Cleveland, we still showed a year-over-year reduction in SG&A. For the full year, we are increasing slightly our full year SG&A guidance to account for these charges as well as some higher than anticipated legal expenses. That all said, we will continue to aggressively manage our corporate overhead for appropriate cost reduction opportunities. Let's move on to liquidity. We ended the quarter with over $300 million of total liquidity net of outstanding letters of credit. Liquidity was down quarter-over-quarter due primarily to the higher rate of interest payments in Q1, both normal coupons and the cash payout of accrued interest related to the secured notes exchange, and an $80 million usage of working capital related to payables and accrued expenses. We also used about $60 million in cash as we built inventory during the quarter; however, we retained the majority of the value of this as borrowing base liquidity on our ABL facility. Furthermore, we made over $70 million in repayments on our outstanding equipment loans during the quarter, which was a use of cash but was effectively awash from a liquidity standpoint since our letters of credit subsequently were released. We have $60 million of cash on hand and no borrowings on our asset-based lending facility at the end of the quarter. We will be converting inventory into cash in the second half of the year as shipments peak. This working capital benefit will be even greater this year as our expected sales exceed our expected production volumes by 1.5 million long tons. This working capital benefit, the seasonal pickup in shipments, combined with our still historically low CapEx, reduced cash interest expense, and increased price levels provides us with ample liquidity to operate our business. Before turning the call over to Lourenco, the final topic I will touch on is our debt. During the quarter, we completed our largest liability management initiative to date, a secured debt exchange that created implied equity value of nearly $300 million and which also reduced our annual cash interest expense by almost $15 million. As a result, our cash interest expense expectation has been reduced to $185 million for the full year 2016. Because of the accounting treatment of this debt exchange, our new 1.5 lien notes will sit on our books at their $219 million face value plus the total undiscounted interest to be paid until maturity of $79 million. No future interest expense will be recorded on these notes as a result of this accounting treatment, but the interest will be reflected in our future cash flows, as such, we reported gain of $175 million, does not fully reflect the $294 million face value debt reductions that we actually realized in the exchange. We did record a small tax expense of $8 million during the quarter primarily related to the gain on this transaction. Overall, we see this as yet another successful step in better aligning our debt and EBITDA but also with the understanding that we've got plenty more work to do. So with that, I'll now turn the call over to Lourenco. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thank you, Kelly, and thanks to everyone for joining us on this morning's call. I have spent a great deal of time on these quarterly calls explaining that the majors' stated intention to overproduce iron ore and push iron ore prices down to force their competition out of business was their strategy of self-destruction. Several times I expressed my belief that the Board of Directors of these companies would act to separate their respective companies from the individuals who publicly say that lower iron ore price is something beyond their control and not a consequence of what they do, how they manage their business, and mainly how they communicate their actions to the public. Well, we finally saw the inevitable come to fruition during the past quarter. First, the Executive Vice President of Iron Ore for BHP, Jimmy Wilson was fired. Mr. Wilson was the most vocal Australian on how to intentionally destroy international iron ore prices. He is on record with the statements about deliberate overproduction and his lack of concern on the impact that might cause on others. As a representative of BHP in the Samarco joint venture with Vale, Jimmy Wilson was also the Chairman of the Board of Samarco, where we can only assume he also left his mark. Later the CEO of Rio Tinto, Sam Walsh was told by his Board of Directors that his finger nails would only support his weight until this coming June. From that point on, gravity would play its magic and for Mr. Walsh, there will be no more "hanging on by his finger nails" to his job, exactly like I predicted and informed you during our last quarter Investors Conference Call. We can only hope that these high level departures are indicators that, going forward, the individuals that are now in charge at these majors will show better common sense and will express themselves in public venues in a more responsible manner, one that's best for their shareholders, very importantly, for their host country, Australia, for their is to making (15:51) clients located in several continents, and for everyone else directly or indirectly affected by what they say and what they do. Coincidently or not, just like last week, both Rio Tinto and BHP announced cuts to their full year iron ore production plans, quickly followed by a similar announcement made by Vale. Immediately after these announcements, we saw a drastic improvement in the price of iron ore. That should help their bottom lines as well as our own, especially in our Asia Pacific Iron Ore business. Speaking of our APIO business, let me give you a typical example of a real cost-cutting initiatives applied by Cliffs. In Australia, when a mine is located in a remote location, the mining company uses their fly-in fly-out method to bring its employees to the work sites. All the Australia majors mining in the Pilbara do that. And Cliffs in the (17:10) was no different, not anymore. Since the second quarter of last year, Cliffs APIO started using their bus-in bus-out method. Instead of using very costly chartered airplanes to fly in our employees from their homes in Perth to the mine in Koolyanobbing 250 miles away, we bring them by bus, it's a lot cheaper. This is just one of the many consistent and sustainable cost-cutting initiatives we have implemented in our company since August 2014 in Australia and here in United States. Time and time again, we have demonstrated that we know how to cut costs for real, in a way that cost-cutting initiatives are translated into real gains. At Cliffs, the results of our actions have a real impact on our cost of goods sold. They show in our audit financials and can be identified in our public filings. Different from what we see out there, at Cliffs, these gains ultimately translate into positive EBITDA. With that, let's now move on to our core business division, U.S. Iron Ore. A lot has been said and written about the difficulty the North American steel industry has been going through related to dumping activity and unfair subsidies of foreign steel that stole an unprecedented market share in the United States last year. The excessive amount of unfairly traded steel imports denied all the domestic steel mills the full appreciation of the benefits of a pretty decent market, with some steel companies being hit a lot harder than others. What's good for Cliffs is that one steel company suffering the most is not one of our clients, it is U.S. Steel. That has been a real positive for Cliffs' well established long-term customers. What's good for Cliffs' customers is good for Cliffs. And the shrinking steel footprint of U.S. Steel is actually an overall positive for Cliffs. I will be glad to explore this issue during the Q&A portion of the call. Starting late last year and going through the first quarter, the United States Department of Commerce has found injury to the domestic steel industry and imposed preliminary duties on different steel products imported from several countries. While the DOC continues to review the pending trade case, now including our very important new one just filed related to steel plates, hot-rolled steel prices in the U.S. recovered more than 40% from $360 per net ton a few months ago to more than $520 per net ton as of now. And as I have said before, when our customers win, Cliffs wins. As for our business specifically, our first quarter that's light on shipments is something we always deal with at USIO. Segment EBITDA came in at $46 million, a good number for Q1. As it always happens with us in the U.S. due to the seasonality of the business, we should expect higher EBITDA in Q2. More importantly, the EBITDA margin of this business continues to be strong at 25% for the quarter, with revenues at $84 per long ton and cash production cost at $47.88 per long ton of pellets. Confusion between long tons and net tons may lead to wrong conclusions, and therefore we feel the need to clarify this point. Our reported number is equivalent to $42.75 per net ton of pellets. And just to make abundantly clear, our reported cost of $47.08 per long ton is exactly the same as $42.75 per net tons. Cliffs reports cost results using long tons, while U.S. Steel adopts net tons for their steel, as all other steel companies do, and also for their pellets. We don't actually make our costs $5 cheaper if we report the same results in dollars per net ton. After reading the press today and before a misrepresentation becomes the truth by exhaustive repetition, we feel the need to clarify this point. At this time, we are still maintaining our USIO sales and production forecasted numbers for the full year at, respectively, 17.5 million long tons and 16 million long tons included in the forecast as tonnage associated to two previously undisclosed commercial arrangements which, combined, support the estimates that we guided to last quarter. The first one is a new agreement to supply pellets to U.S. Steel Canada. Since the first quarter of this year, Cliffs started supplying pellets to this steel mill, which was a former captive customer of U.S. Steel when it was part of their organization. As soon as the CCAA court allowed U.S. Steel Canada to act freely, they came to Cliffs to have us supplying them with pellets. In Q2, we will be supplying nearly the totality of U.S. Steel Canada's pellet needs. The second is the supply of pellets to Algoma restarting in the third quarter. This is a consequence of the settlement of our well-known legal dispute. Cliffs and the CCAA monitor recently reached an agreement to settle within the scope of Algoma's CCAA filing. The settlement was reached just three days ago and is currently being properly documented. We will provide additional disclosure after final court procedures, as appropriate. Before I close my prepared remarks, I would like to give you information regarding our pellet supply contracts renewals with ArcelorMittal, which involve approximately 9 million long tons of pellets per year. Cliffs and our long-time customer equally recognize the importance of one another and our similar necessity to sustain profitable businesses. The pellet business in the United States is based on producing and supplying tailor-made pellets designed to optimize the performance of specific blast furnaces and supported by long-term contracts. Developing a tailor-made pellet takes a lot of time and a lot of technical cooperation between the client's engineers and our Cliffs' team. We have been working for some time with ArcelorMittal on the development of the new superflux pellet called Mustang, which will replace the Viceroy pellets currently produced at our soon to be idle Empire Mine. The investment required to produce the Mustang pellet is now part of our revised CapEx forecast. During the Q&A part of the call, please feel free to ask any questions you may have about this important subject. Finally, you should feel free to ask questions related to subjects that may be relevant for you, such as the already successfully resolved Bloom Lake CCAA or pellet supply competition coming from U.S. Steel or Essar Minnesota. With that, I'll turn it over to the operator to direct the Q&A part of the call.

Thank you. . Thank you. Your first question comes from the line of Nick Jarmoszuk with Stifel. Your line is open. Nicholas Jarmoszuk - Stifel, Nicolaus & Co., Inc.: Hi, good morning. Thanks for taking my question. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Good morning, Nick. Nicholas Jarmoszuk - Stifel, Nicolaus & Co., Inc.: Good morning. So first one, let's talk about Arcelor; you guys are investing to make the superflux pellets. Is the direct implication that the contract is renewed and can you give color as to how long the duration is and any details on the economics? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Well, I will start with the details on the economics. The CapEx involved to retool, if you will, to do the modification at United Taconite to produce the Mustang pellets are around $65 million. We booked $25 million and that's what we would spend if we start deploying the capital later in this year. We still have the two contracts in place. We have plenty of time to complete our negotiation and we are not in a hurry. We continue to work together with the client to produce the perfect pellet as soon as we are ready to do so. Our commitment is to keep the client in good shape, and as soon we are done with the inventory of Viceroy, we should have Mustang to replace that. Nicholas Jarmoszuk - Stifel, Nicolaus & Co., Inc.: Okay. So nothing has been signed yet but everything is progressing in the right direction, is that the (29:56). C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: That's correct. That's a perfect assumption. Nicholas Jarmoszuk - Stifel, Nicolaus & Co., Inc.: Okay, then onto U.S. Steel, they've been talking about how they're long pellets and could potentially look to sell pellets in the Great Lakes, are you seeing them in any negotiations, are you hearing anything regarding how they're positioning themselves? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Well, I would like to start with your statement that they are long pellets because that's probably a fact, but we need to take a step back to understand why they are long pellets. It all started when they shut down Fairfield and announced that they would replace their blast furnace over there with an electric arc furnace. So, it would be like improving their production facility to a more modern, more efficient whatever. Anyway, never heard about the electric arc furnace anymore, so Fairfield remained shut down. Then they shut down other locations and even the big location of Granite City, and then they had no choice other than shut down Keetac, because pellet inventories accumulate fast as you know. That's the reason they are long pellets and they may continue to be longer based on what I hear. But the problem is that in order to participate in the Great Lakes market for pellets, you need to have clients, and even the captive client U.S. Steel Canada, formerly known as Stelco, is now a Cliffs client. So, I don't know of any development going on – engineering development going on between U.S. Steel and ArcelorMittal, but we live in the Iron Range, all the mines are close by: Northshore, Keetac, Minntac, Hibbing, UTAC, Minorca, and we pretty much know everything that goes on over there. So, I can very comfortably tell you that there is no development of any customized pellets going on between U.S. Steel and ArcelorMittal, unless next week ArcelorMittal in their conference call tells you exactly the opposite. So, with this being said, I don't see how customized pellets will be replaced by opportunistic availability of pellets, even being completely aware of the fact that if there is a person in this industry that has been very vocal about introducing anti-dumping and countervailing duties and restrictions on imports is Mario Longhi, the CEO of U.S. Steel. And I understand that he is doing that just to bring his own steel capacity back to operation. And if he bring his steel capacity back to operation, all this conversation about being long pellets will be long gone because he will need his pellets to feed his own facilities. So, I wish U.S. Steel to fix their own thing, to go back into being a steel mill. If they will not be able to do that, which I'm working side by side with Mario to be able to have this playing field reestablished here in United States, and then we all can thrive together, but if that will not be the case, look, I'm a warrior, I'm ready to compete. Nicholas Jarmoszuk - Stifel, Nicolaus & Co., Inc.: Okay. And then, with the supply arrangement with Stelco and Algoma relative to the 17.5 million ton shipments, does the 17.5 million tons include the Stelco and Algoma tons or is there upside to this year? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Look, we always had in our forecast that we would settle with Algoma. So, as soon as we were able to establish a decent communication with the monitor, we got it done. So the Algoma thing was always part of our 17.5 million tons. And we also booked a new business, because at the time that we announced our forecast, we were very close to supply U.S. Steel Canada, what materialized and actually increased toward almost full capacity for Q2. So all these things so far are included in our 17.5 million tons. Any new business coming from more supply to AK Steel or, potentially, more supply to ArcelorMittal are not part of this number and they will revise the number accordingly. But so far, everything has been included in the original 17.5 million tons because we planned ahead and we knew what we were doing to get this number done. Nicholas Jarmoszuk - Stifel, Nicolaus & Co., Inc.: Okay. And then last question, I'll hop back in the queue. Equities had a really incredible run. At what point do you start thinking about issuing equity to address the debt? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Look, Nick, I am a larger shareholder, every single action that I have taken in this company here since August 7, 2014 was to protect the shareholders. I will continue to do so. Everything I will do going forward will be exactly like everything I have done so far, to protect the shareholders. This being said, I take shareholder dilution very seriously but we consider all tools in our tool box and this is not a phrase that I say lightly or a cookie-cutter type of statement from CEOs, I have been very creative so far in deploying different types of liability management exercises, making – start to happen here with very little resources against a backdrop of a very, very, very tough business environment, not only here in United States but also in the international arena, and we are winning. We are squeezing the freaking shorts and we are going to take them out one by one. I'm going to make them sell everything to get out of my way and they are going to lose their pants. How am I going to get there? The tool box is full. Go back to the queue, take further questions.

And your next question comes from the line of Tony Rizzuto with Cowen and Company. Your line is open.

Lourenco, you made me giggle there a little bit. Good morning Lourenco and Kelly, it's great to see your initiatives, and (37:05) P. Kelly Tompkins - Chief Financial Officer & Executive Vice President: Thanks Tony. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thanks, Tony. Good morning.

Yeah, it's good to see everything bearing fruit and the market cooperating a bit, with perhaps the majors exhibiting some discipline as you alluded to. I want to follow up on ArcelorMittal a little bit. It would seem that with the seaborne opportunities for their Canadian ops clearly on the rise and even sort of less attractive for them to supply their the U.S. mills, it would seem that that would seem to be working in your favor, and the comments you made about U.S. Steel and the more temporary nature, if they were to supply – look to supply, on a merchant basis, would that be a fair statement, I mean just beyond the U.S. Steel, just the further comments about ArcelorMittal? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yes, absolutely. Sure.

All right. And your volumes, and just a follow-up there, I want to make sure I understand this, because it seemed to me that the volumes for USIO would appear to be somewhat conservative. You're restarting Northshore and then you just talked about UTAC later in the year, does the UTAC restart, does that require an assumption of restarting of idled mills in the U.S. at all? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yeah, it's more than that. The restart of United Taconite is a necessity in order to continue to supply our biggest client ArcelorMittal. So United Taconite will have – we are going to restart United Taconite this year. That's how I read the market going forward at this point. You're saying (38:47) there is upside. Look, I'm a pretty conservative person, that's the reason we have been so successful. We have been working very close to the line but we never cross the line. We had been challenged to drive this company here into situations that they look complicated, and they are complicated. But we have a great team here and we continue to make the right decisions by playing aggressively, but very conservatively. And that's the way I continue to position our forecast going forward.

Understood, that's a good positioning I think to have. Just how should we think about the idling expenses in the second quarter and the rest – remainder of year, obviously, you indicated $40 million, but should we assume second quarter level will be similar to first quarter and then trailing downwards, how should we think about from a modeling perspective on that? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yeah, I will let Kelly Tompkins answer that, Tony. P. Kelly Tompkins - Chief Financial Officer & Executive Vice President: Hey, Tony, we'll be looking at about $50 million of idle expense for the year, given the fact that Northshore will be starting up in May and the assumption that we'll restart UTAC later in the year, I mean we're not going to get into a precise start date but I think it will be sometime in the fourth quarter. So, I think that's a reasonable assumption you could use in your model.

Okay, okay. And then shift gearings to APIO and the vastly improved seaborne market year-to-date, has the market opened up enough to create increased the buying interest there in your Australian ops or maybe just, more specifically, for the Port of Esperance? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Tony, look, in the last two years, we have been producing at capacity.

I know you have... C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Last year was record and then the previous year was a then record at the time. This year we are going in record levels of production over there. So demand is not a problem. The problem is all the negativity regarding prices. And a lot of the negativity regarding prices is generated by the commodities desk of the banks. We are getting to a point right now that Morgan Stanley, Citigroup, Goldman Sachs and several others with less importance, and some with absolutely no importance, they will just have to have a Q3 of negative prices in order for their average price for the year to be correct. Let me explain what I mean. Prices are so much higher right now and they keep going to their bosses and say price will go down, price will go down, price will go down and – because that they need to keep prices fixed at the end of the year. So the fulcrum is Q3. So in Q3 I see Rio Tinto, BHP and Vale not only selling iron ore for free, but also giving some money to the clients in order to make this price forecast to be correct. But people like to believe in stuff that they don't understand. So be my guest; I understand this stuff. We're going to continue to do well over there.

Understood, understood, good stuff. I'll get back in the queue. Thank you. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Just a question for you, Tony.

Yeah? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Does Cowen have an iron ore price forecast?

I think that given the prospects, we've got Roy Hill coming on, you've got S11D that looks a little bit ahead of expectations, I would think that it would be reasonable to expect some type of retracement, but I'm not looking for prices to go really below $45. I think there's going to be good support in kind of a $45 to kind of $65 range here over the near term. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Look, prices will not go below $45 because below $45 (43:04).

I don't think they will. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yeah, I know, I know. I'm agreeing with you; price will not go below $45 because below $45, the majors get crazy. The majors who start to try to stretch payables, things like that. Because it's not about – this business, Tony, is not about cash production cost per ton, this business is about cost and value in use. Cost per ton is just a metric. You produce for a demand that doesn't exist, you are going to get hurt. You have to carry a terrible, horrible, tremendous overhead. In Singapore, a lot of people doing absolutely nothing, scratching their heads all day long, but they are not counted in the cash production cost. If the executives of these companies believe that the Board of Directors are not seeing, they are wrong. But anyway, good luck for their training. (44:04)

Thank you for that, Lourenco. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thank you.

We do have to monitor, obviously, the Chinese equation to that, obviously – what's going to happen with production going forward here too. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yeah. Okay.

Thanks very much. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yeah. All right, appreciate it. Thanks a lot, Tony.

And your next question comes from line of Michael Gambardella with JPMorgan. Your line is open. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Hi, Mike.

Michael Gambardella if your line is on mute, please un-mute. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Mike Gambardella went back to check the (44:35).

(44:37) C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Mike?

Yes, hi, Lourenco. My question was answered already. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: But mine was not, what's the current price expectation of the desk of JPMorgan for iron ore, Mike?

Well, let me just say they're below your expectations. I realize that our commodity team (44:59). C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: When are you guys going to fire these guys at the desk; they are making your company look ugly.

Okay. Well, I guess they can be thankful you're not their boss, but thank-you very much Lourenco. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Please say hello to Jamie. Next time we meet at the elevator, I promise I will talk with him about the commodities desk of JPMorgan.

I will. All right. Thanks. Bye bye. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Bye now.

Your next question comes from the line of Matthew Fields with Bank of America Merrill Lynch. Your line is open.

Hi, Lourenco. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Hi, Matthew.

As long as you're entertaining offers if you'd like to join the research team at Bank of America, we'd love to have you. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I can't. I was not even included in the line-up for your conference in Miami and I live in Fort Lauderdale. I didn't make for (45:52) the market cap. Because $1 times 200 million shares is $200 million; at $5 it's $1 billion. But don't invite anymore. I'm not going to go. What's your question, Matthew.

You're always invited to the Credit Conference. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I know that. I'm giving you a hard time.

I wanted to ask a little bit about the iron ore dynamics in China with a couple of different angles. One, at what price do you see kind of incentive for some domestic Chinese producers to restart production? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: No price. Because the problem in China right now is how China will position themselves to continue to behave as a superpower and not to behave like a rogue country. China is in a very decisive moment. Are they going to be part of the developing world or they are going to continue to be something very big but very bothering (46:57) for everyone else. And I believe that I know the answer. I believe that China will be a superpower, will be a first world country. We saw that happening several times in Asia. During the 1960s in Japan they grew production, curbed pollution, improved the quality of life of the Japanese; this is still in place. Then we saw that happen in Korea during the 1970s; same very thing. South Korea became a first world country, very well behaved, great air quality, great quality of life for the Korean citizens. Then we saw in a very kind of pilot scale happening in Taiwan during the late 1980s early 1990s. Taiwan was a very, very polluted country when I started selling steel in Kaohsiung, Taiwan. Three years, four years later, we could see the difference. 10 years later, it was night and day. The moves are starting to happen in China. China will control pollution; China will curb overproduction. China will reduce their production of sinter feed. China will move more toward EAF. China will use a lot more scrap. The air in China will be a lot better than it is right now. But in the meantime, if they don't do that, they can't be accepted as a market economy. The WTO will not accept that. We have been talking very seriously with a USTR, the U.S. Trade Representative ambassador Michael Froman, in order to educate the administration in terms of having the right position in terms of China. Europe has been reacting as well. So China will have to comply, Matthew. So it's not a matter of at what level. This is too much of an illusion. What's going on in China right now is that they need to improve their behavior, they need to change. Otherwise, they are not going to make it.

All right, thanks for that perspective. And then there's been a lot of noise lately about sort of financial speculation on the Dalian Exchange with credit loosening and whatnot, and then that exchange is trying to sort of put limits on – to sort of curb margin, et cetera. I know you talked about supply discipline by the majors, but do you see some sort of financial speculation playing a part in the recent strength in iron ore, or is that overstated? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: No it's not, there is a lot of speculation going on in the Dalian Commodity Exchange. Chinese people are gamblers. You go to Las Vegas, you'll see a lot of Chinese. You go to Macau, you'll only see Chinese. So they like to gamble. And the Dalian Commodity Exchange is another casino for the average Chinese. The cabbies discuss our iron ore, that's the way it is. Go to China, you'll see that. I have been going to China since 1982, so I know a little bit about that country. The problem is not the Dalian Commodity Exchange, the problem is not the behavior of the Chinese. The problem is the fact that iron ore is not pork bellies, iron ore is not soybeans, iron ore is not gold, iron ore is not a commodity like any other commodity, iron ore is a controlled commodity. There are three companies that control everything in the iron ore business, and four companies that, together, have 84% of the market. BHP, Rio Tinto, Fortescue and Vale. So it only takes one of this four or two of this four to say, enough is enough, or to start charging a premium over IODEX, or even say, you know what, my friends, Chinese, I'm not going to use your Dalian Commodity Exchange index anymore as my reference. You want to buy my iron ore, you're going to have to negotiate with me one on one. It was like that before. So we're not going to change the Chinese because their culture comes from at least a few thousand years and we will probably not be able to change the Dalian Commodity Exchange procedures even though we can mitigate here and there. But there are four companies in the iron ore world that they can change everything, if they change their bad behavior in terms of pretending that they don't have pricing power. They do have pricing power. These commodities are controlled commodities. Prices go up and down because of BHP, because of Rio Tinto and because of Vale. They can deny this as long as they want, but every time their stock price is in the trash can, they change their behavior. Every time their executives speak out of school (52:14), one is fired. So if the new guy that took over, over there, if they continue their speech, they will be next. And they are a bunch of Australians and now they are using people from other nationalities, so there are bunch of people in the world that can replace these guys. But Australian Board of Directors have a strange ways to do their thing. So it's a lot more about how the Board of Directors of the majors behave and how they manage their business then the (52:45) Dalian Commodity Exchange, the Dalian Commodity Exchange has speculation, will continue to have speculation.

All right, thanks and then lastly, I just want to sort of follow up on a question Tony asked earlier about Asia Pacific. I think – I don't know what he was trying to say about demand or increased sort of buying was – do you see any more buyers for the business, like M&A wise now that prices have stabilized. (53:10) C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Oh yeah. If price is stabilized at a more decent level, well, we may have some buyer for the business. But you know what, I'm good keeping the business, it's a great business, we have a great team in Australia. We have a very well established business in Japan. Our one man operation in Tokyo with Yamada produced more business than at least one of the majors out of Australia, in Japan. So we are good, we are feeling good about our prospects in Australia. But if a buyer comes with a – and pays the right price, I will be glad to sell.

No incoming bids just yet? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: It's a lot of tire kicking but you know what, a sale is a sale only after we have a bunch of cash in my pocket. Before that, it's just a good night chitchat talk.

Fair enough. All right. Well, thanks very much, as always, Lourenco, I appreciate it? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thanks, Matthew.

Your next question comes from the line of Evan Kurtz with Morgan Stanley. Your line is open. Evan L. Kurtz - Morgan Stanley & Co. LLC: Hey, good morning, Lourenco. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Good morning, Evan. Evan L. Kurtz - Morgan Stanley & Co. LLC: I got a question for you on APIO as well. So say we are living in this world with $60, $70 iron ore, maybe better going forward, are there any levers you can pull there to lengthen the mine life to some development work maybe and extend the volumes there a few years? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yes, we can do that with the right economics, with the right reward, we would be able to do that. And that's true for every single mine in the world, but you asked me specific about our APIO business, and the answer is a firm yes. Evan L. Kurtz - Morgan Stanley & Co. LLC: Any kind of specifics, like if it's $60 to $70, is that enough to change the mine plan there, or do you need to see something higher than that? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I will not go into specifics but I'll give you, directionally, you are on the right track. Evan L. Kurtz - Morgan Stanley & Co. LLC: Okay, great. Thanks. And then my other question was just on the Nashwauk half built iron ore mine. Read an interesting article in the Duluth News about something you said as far as bringing that maybe into the Cliffs Corporation and putting the DRI plans on top of it, which first take on my end was, that makes strategic sense, second take was, how would you pay for it? And I just wondered how real of a target is that for you and is that something you see happening? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Well, first of all, just to keep the record straight, I never said exactly that, the press interprets things a lot. So, I never said exactly that. What I believe will be the next thing with that you said half built is a lot less than half built pellet plant over there, but anyway, I believe that this thing is hopeless. Bondholders or loan holders, whatever you call – your friends in New York will end up owning that thing. I like the iron ore that's on the ground and we will be talking. But it's too early because that hasn't happened yet, but it's coming. We are the big guy in the Range. We are the ones that can make happen. We are the ones that can generate employment over there. We are the ones that pay the bills. So it's natural that anyone that wants to do something in that site would come to talk to us. And by the way, it's a not a bad site to have a DRI facility. When I say DRI, I'm talking HBI, I am talking virgin stuff. So you know that I have that in mind, so it's pretty important to me that we have one there. If I don't have that site, I'll do it at Northshore, but that site works for me. Evan L. Kurtz - Morgan Stanley & Co. LLC: Is there something special about that site for DR pellets that's better than anything that you currently own, or it doesn't really – Northshore – indifference between the two? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Well, it's very different, but the good thing about that site, of course if I take over that site, it's abundantly clear that I kick Essar Minnesota out. And a year ago, this call will be all about, oh, when Essar Minnesota starts producing pellets, what's going to happen? And I haven't heard any questions about that. By the way, I haven't got the invitation for the grand opening of the Essar Minnesota facility, I don't know if you got, because they should be up and running less than two months. So anyway. Evan L. Kurtz - Morgan Stanley & Co. LLC: Great. Thanks, Lourenco C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Oh, but before you go, Evan, let me ask you a question, what's the iron ore price in the commodity desk of Morgan Stanley? Evan L. Kurtz - Morgan Stanley & Co. LLC: I thought I was going to get off the hook. So yeah, we have a big fall in iron ore prices in the second half of the year, in the third quarter, we have a 30% drop or in the low $30s and then in kind of the $40-ish range for the next two years and then up again. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: And can you explain why that's going to happen? Evan L. Kurtz - Morgan Stanley & Co. LLC: The house view is that in the back half of the year you have seasonality as a headwind instead of a tailwind, as we've seen the first half of the year. Also, we're looking for demand to decrease over the next couple of years and there would be a deficit in the market – I'm sorry, surplus in the market over the next couple of years before the majors really step in and try to tighten up in the market in 2018. That's the house view. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Evan Kurtz, I can hear the conviction in your voice. Thank you very much. Evan L. Kurtz - Morgan Stanley & Co. LLC: Bye, Lourenco. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thanks.

Thank you, ladies and gentlemen. I will now turn the call back over to the presenters for closing remarks. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thank you very much for your time and interest in Cliffs. We are very excited about our prospects for the balance of 2016 and beyond, and we look forward to speak with you again next quarter. Thanks a lot and have a great day.

Thank you, ladies and gentlemen, for your participation today. This concludes today's conference call. You may now disconnect.