Cleveland-Cliffs Inc. (CLF) Q2 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Kelly, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2016 Second 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 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, Kelly, and thanks to everyone joining us on this morning's call. I'm joined today by our Chairman, President and CEO, Lourenco Goncalves. Our financial results this quarter were outstanding, yet the most significant events in the second quarter are not part of our financial statements, but instead deal with several positive commercial and competitive developments, which Lourenco cover in his remarks. Second quarter of 2016 is the first quarter since Q4 of 2014 that we have eclipsed the $100 million mark for adjusted EBITDA and that is largely without help from iron ore prices. The Q2 Platts IODEX average of $56 per metric ton during the quarter was actually lower than the comparable period last year, yet we generated $35 million more in adjusted EBITDA this quarter. Despite lower year-over-year iron ore prices, several other factors drove this improvement, including higher domestic steel prices. As our investors know, a certain of our customer agreements are set up to be mutually dependent. In short, when the customer wins, we win. As the steel trade cases have reduced the massive amounts of illegally dumped steel into the United States, we saw domestic steel prices climb back to more normalized levels, which directly improved the bottom line of our U.S. iron ore business. Second, the cost reduction initiatives we implemented over the past two years are increasingly reflected in our operating results. Our USIO and APIO operating teams generated 15%-plus year-over-year cost reductions and we have steadily cut our SG&A. Now, to highlight the results of our two segments. Starting with USIO, the improvement in steel prices offset the negative impacts from iron ore prices leaving our revenues per ton flat year-over-year at $78 per long ton. Cash production costs were $46 per long ton during the quarter, a 17% reduction from the $56 per long ton performance reported in the 2015 second quarter. Improved maintenance practices and reduced repair expenses based on condition-based monitoring, lower diesel fuel and natural gas rates, as well as substantially lower employment costs were the main drivers. USIO adjusted EBITDA for the quarter was $97 million. Our sales volume of 4.1 million long tons reflects the seasonally expected mid-quarter pickup in shipping on the Great Lakes. We are now moving product on the Lakes at full stride. Based on customer nominations, we expect to ship approximately 5.5 million long tons in the third quarter with the remaining 6.5 million long tons coming in the fourth quarter to fill our 18 million ton order book. Based on customer mix and year-to-date average, compared to the revenue guidance table we provided, we do expect a slight dip in our revenue per ton rate in Q3 before closing out the year around our projected average. With United Taconite down for the entire quarter and Northshore down for about half of it, we incurred $20 million of idle expenses during Q2. With Northshore now back and with the earlier than anticipated restart of United Taconite, our total full-year idle cost expectation has been reduced to $55 million from our previous expectation of $65 million. For the full year, we are maintaining our USIO cash production cost guidance of $50 per long ton to $55 per long ton and our cash cost of goods sold expectation of $55 per long ton to $60 per long ton. Now moving over to APIO, a $50-plus IODEX price allows this business to be a healthy cash flow generator for us and that was clearly evident during the quarter. The APIO operating team continued to outperform our aggressive expectations delivering second quarter cash production cost of $28 per metric ton, a 17% decrease from the $34 per metric ton cash cost reported in the prior-year quarter. As a result of this, we were able to outperform our prior-year Q2 adjusted EBITDA, which in spite of the lower Platts Index was the highest quarterly EBITDA mark out of this business unit since 2014. For the full year, we are maintaining our Australian cash production cost guidance of $25 per metric ton to $30 per metric ton and our cash cost of goods sold expectation of $30 per metric ton to $35 per metric ton, assuming an Aussie dollar exchange rate of $0.75. Our expected full year price realizations can be calculated based on the outlook table in our press release. Our spending remains very disciplined. Cash capital spending was $10 million this past quarter, a 45% reduction when compared to last year's second quarter spend of $18 million. Our capital expenditure budget for the full year remains $75 million, which includes about $25 million of spend related to producing a specialized superflux pellet at our United Taconite mine for ArcelorMittal or what we call the Mustang project. We've spent a limited amount towards this project year-to-date, but expect it to pick up in the back half now that we have the new agreement with ArcelorMittal. The bulk of that $25 million will be spent evenly between the third quarter and fourth quarters. The remaining $40 million of the $65 million total project cost will be spent over the first three quarters of 2017. SG&A expense decreased 27% to $23 million for the quarter as we continue to aggressively manage our corporate overhead. As our operating performance has improved, and inventory and receivables begin to turn, our overall liquidity has improved. We ended the quarter with $108 million in cash and $313 million in ABL capacity for a total of $421 million in liquidity, up over $100 million sequentially from Q1. In addition to our good working capital performance, we received $31 million as part of a long-term arrangement with Minnesota Power that will ensure we have very cost effective power rates for our Northshore and United Taconite mines in the future. In addition, we repaid the remaining balance on our equipment loans during the quarter, which was a $23 million cash outflow. Finally, looking at the back half of the year, based on our guidance, we will be selling 2.7 million more tons than we produce in Q3 and Q4. As a result, we will be generating over $200 million in cash from inventory. So with that, I will 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 call. When I started at Cliffs, almost two years ago in August of 2014, the company was immersed in too many self-inflicted problems, all of them completely ignored. Adding complication to a bad situation, an avalanche of unfairly traded steel into our core U.S. market was in full development, making our domestic clients sell fewer tons of steel for fewer dollars per ton. On top of that, Cliffs was forced to fight for sanity in a seaborne iron ore market, proof of the stupidity entrenched at the C-suites of the biggest international miners. To those of you who witnessed Cliffs make it through this difficult time and now believe we have gotten to a great spot, we would like to say four things. First, yes, we won. All the problems we encountered here two years ago have been resolved. Second, we knew we would win. Third, we are just getting started. Fourth, Cliffs's best days are still ahead of us. On our conference call last quarter, I publicly recognized one major iron ore producer, Rio Tinto, for removing Sam Walsh, the key architect of the disaster that they inflicted upon themselves. Since then, in late June, Rio Tinto announced another high-profile departure. The head of iron ore, Andrew Harding was let go. Harding was the executive who declared in March of 2015 during a presentation in Perth, Australia, "At the end of the day, what the customer really wants is lower prices". Such logic may be correct if we were a used car salesman, but does not apply to a complex multi-national supply chain such as iron ore miners, the steelmakers, downstream steel users in which everyone knows everything in real-time including the transaction prices. Point in case, Harding's used car lot wisdom does not apply to the vast majority of his clients, such as the Japanese and South Korean steel mills whose respective domestic markets were flooded with cheap Chinese steel enabled by cheap iron ore. Even more importantly, I am encouraged by the refreshing message coming out of Rio Tinto's new leadership. It is good to hear that the leading iron ore miner is now pursuing value, performance and shareholder returns instead of the misguided goals of the previous regime, market share, volume for volume's sake and not paying taxes in Australia. Iron ore is not your normal commodity like copper, wheat, soybeans, or pork bellies. The global iron ore market is dominated by only three mining companies who hold the vast majority of supply. From their office in the tax haven of Singapore, they can move iron ore prices in one direction or another. Long story short, it is good to see sanity back in the seaborne iron ore market. At this point, we can only hope that Rio Tinto moves toward a more rational behavior will continue and bear fruit, so far so good. With that, let's now move into our other major macro driver, the health of the domestic steel industry. The consistent rise in the price of domestic steel since the beginning of the year is indicative of what a level playing field can do for our customers, the steel mills and for Cliffs. The American steel mills attacked this problem in the most effective manner they possibly could with anti-dumping and countervailing trade cases that are rock solid and airtight. More importantly, the verdict applied to all trade cases so far confirmed what we have always said that the lower steel prices we see from foreign sources are not a consequence of these foreigners being more efficient or more cost effective. They are just the consequence of illegal dumping. Based on previous anti-dumping and countervailing cases, the duties imposed at this time around will be in place for at least the next five years, until they are due for a sunset review, and will likely stay in place for some more years after the sunset review. Of course 2016 and 2017 market prices for steel in the United States will fluctuate up and down in sync with demand, the way a mature market should behave. However betting that imported steel will come back soon and flood the market, forcing prices down is, at this point, a very bad bet to take. We also hear a lot of chatter from analysts and investors that the Chinese will circumvent this punitive anti-dumping and countervailing duties by using other countries like Vietnam as a pass-through, I know that. You know that. But the good news is that the U.S. government knows that as well. The current trade cases were all put in place with this reality in mind. If and when we see a lot of Vietnamese steel or any other country's steel coming to our borders, you will see counteraction. If my explanation is not clear enough, or if you still disagree with my assessment, please feel free to ask any questions you may have during the Q&A portion of the call. Between the encouraging message coming from the seaborne iron ore market and the once again healthy domestic steel market, we expect Cliffs to thrive for the remainder of 2016. And in 2017, with these factors fully reflected, we will do even better. At this time, based on current market prices for seaborne iron ore and domestic steel and the range of variation we expect for these prices between now and 2017, we expect our EBITDA in 2017 to surpass $500 million. Of course, if the eternal bears at the commodities desks of the big banks and the research analysts that get their steel price information from middlemen working out of their respective basements are all correct, our 2017 forecast of more than $0.5 billion of EBITDA in 2017 would not be achieved. On the other hand, any improvements beyond current international iron ore prices or domestic steel prices will cause our actual 2017 EBITDA to increase above the forecast. In sum, we believe that our $500 million forecast is actually pretty conservative. Let's now get into the accomplishments of what was a remarkable all around quarter for Cliffs. In the United States iron ore business unit, segment EBITDA came in at $97 million, more than double what we recorded in Q1. As shipments has started to pick up after the winter in Q2, cost continued to come down and we began the restart of Northshore in May. The EBITDA margin of this business continues to be strong at 30% for the quarter with revenues at $78 per long ton of pellets; I repeat long ton of pellets. And cash production costs at $46 per long ton of pellets; for the ones that are not familiar, long ton is different from net ton. During the second quarter, we successfully completed a new customer agreement with U.S. Steel Canada, which exceeded our original sales expectation to our new client. As a result, our total USIO sales volume forecast for 2016 increased to 18 million long tons along with our production forecast increasing to 16.5 million long tons. This new agreement with U.S. Steel Canada was also the reason why we were able to bring our employees at United Taconite back to work earlier than previously expected. It is very clear that U.S. Steel Canada prefers our pellets over the stuff that they were using before and we love having U.S. Steel Canada as a Cliffs's client. At this point, we can only hope that their CCAA process will be resolved soon and in a way that this important Canadian steel mill will be independent from U.S. Steel and therefore no longer forces to use pellets of inferior quality, just because they are supplied by their parent company. As I said during our last quarter conference call, I love to compete. Furthermore, during the quarter, we received $31 million in cash from Minnesota Power as part of a long-term power purchase arrangement for our Northshore operation. With the deal, we extended our previous agreement with Minnesota Power and locked in low-cost electricity rates for the long-term at Northshore and United Taconite. As you can see, we're not only the supplier of choice on the Minnesota Iron Range, but also the customer of choice. Why we take very seriously our permission to operate in Minnesota, others have not. We saw this firsthand just recently with another one of our so-called competitors, Essar Minnesota, also known as "neverland", never finished, never producing pellets, never paying anyone. After years of lies and broken promise, the local community came to realize that the future of the Iron Range is not with Essar, but with Cliffs Natural Resources. The State of Minnesota's government came to the same conclusion. We applaud Governor Mark Dayton's decision to terminate the State's iron ore mineral leases at the Nashwauk mine site and are pleased that workers, contractors and vendors will no longer be subject to any misguiding statements about that project from the Essar folks. We have presented to Governor Dayton and to other members of his administration our ideas on how to develop the Nashwauk site as part of our future plans for supply, the EAF steel industry with DRI and HBI. We recognize that the situation is not simple and may take some time to be resolved within Essar's Chapter 11 process, but we will continue to pursue an adequate solution while also staying mindful of our balance sheet and other competing capital allocation priorities. Our most significant highlight of the quarter was the 10-year pellet supply contract signed in May with our largest customer, ArcelorMittal, USA. Since the day I started at Cliffs, I have constantly heard from the vast majority of the outsiders that there were several other options available to this client, that we would lose contracted tonnage, that we didn't have any leverage, you name it. However, constant repetition of something inaccurate does not make that same thing accurate. It only makes these people repeating the thing time and time again look uninformed and plain wrong. At this time, instead of trying to educate these stubborn individuals and try to explain why they are wrong I would just tell them one thing, do your homework. The pellet business in the United States is based on producing and supplying high-quality tailor-made pellets designed to optimize the performance of specific blast furnaces. That's what Cliffs provides, and will continue to provide for the next 10 years and beyond to ArcelorMittal USA. The new contract is great for us and great for ArcelorMittal. We will be supplying the entirety of their pellet needs covered by these current two contracts which will expire later this year. The new contract also establishes a minimum purchase requirement of 7 million long tons, which is higher than the minimum level from the current two contracts combined. The new deal also preserves our position at ArcelorMittal's sole supplier from the outside. With the signature of this contract, any potential competitor of Cliffs within the Great Lakes will have 10 years to start producing pellets or to improve the quality of their pellets just to try again. As I said before, I love to compete. With the contract signed, we have then started our spending on the Mustang project. As a reminder, the Mustang project involves developing and producing a customized super-flux pellet that has shown to work effectively at the customer's blast furnace. We will break ground at United Taconite next month and for the next eight months we'll be building a storage facility, new silos and a limestone crusher, as well as adding new conveyors. We are on track to deliver Mustang pellets to ArcelorMittal when the shipping season starts next year. As you may know the Mustang pellet is being developed by Cliffs as a replacement to the Viceroy pellets that is currently produced at the Empire pellet plant, which will be transitioning to indefinite idle status later this year. This reality has been well known for many years by Cliffs, by our joint venture partner ArcelorMittal, by our employees, and by our investors. Empire has been a great mine, since 1964, but due to the lack of minable ore in the ground we will be moving to an indefinite idle in the coming months. We are thankful that we found a quality replacement for Empire with our UTAC mine, and we look forward to the future of our USIO business with the four top-tier assets we will continue to operate; Tilden, Hibbing, Northshore and United Taconite. Let's now discuss the great contribution of our other business unit, Asia Pacific Iron Ore. APIO segment EBITDA came in at $27 million. Thanks again to our continued discipline on the cost management side, as well as a $50 plus iron ore pricing for most of the quarter. We also continue to explore one of our most important advantages in Australia, our very favorable 50%-50% mix of lump ore and fines. With that, our biggest client in Asia is not in China, it is POSCO in South Korea. Additionally, we have more business in Japan than Fortescue, even though Fortescue is approximately 13 times bigger than Cliffs APIO. Finally, before we go to Q&A, I would like to address one last item – the balance sheet. In less than two years, we got rid of the money losing Canadian assets. We sold all the coal mines. We sold the Ring of Fire chromite – bad idea. We drastically improved the cost structure in the United States and in Australia. We renewed the ArcelorMittal contract. We got new business from U.S. Steel Canada. And we terminated the contract with Essar Algoma and then reinstated the contract when we decided to do so. On top of that, we took advantage of the skepticism around our ability to turn Cliffs around. And with that, we paid down a lot of debt. As you likely saw, on June 16 we filed our draft S-1 with the SEC, showing our intention to issue equity to retire more debt. I hope you recognize that I'm being forthcoming, when I say that we view this action as the next logical step in what has been a very successful turnaround of Cliffs Natural Resources. However, due to the usual restrictions with an S-1 under review, I would not be able to dig into the details surrounding the S-1. With that, I will turn it over to the operator to direct the Q&A part of the call.

Your first question comes from the line of Michael Gambardella of JPMorgan. Your line is open.

Good morning. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Good morning, Mike.

Congratulations on just a wonderful effort over the last two years, you and your team; it's been a spectacular turnaround. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thank you very much, Mike. I appreciate your kind words and more than everything I appreciate you being the great analyst that you are and not being afraid of putting some kinds of opinion that are not mainstream. And I appreciate the great words. Thanks a lot.

Thank you. Thank you. I have a question with the recent bankruptcy at Essar. How are you working with the government to get your hands on those leases? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: We have a signed commitment with Governor Dayton that we have – we are – as soon as Essar vacates the site, the lease are ours. So that covers 41.6%, so almost 42% of the land that's currently occupied by Essar. So it is a matter of time. It's not a matter of if, it's a matter of when. They are in breach of everything. They are not paying anyone. They don't pay the bus drivers that takes the politicians to visit their site. They don't pay any bills. So, they are really a strange type of people over there. So it took long, longer than it should have taken to kick them out, but anyway, now they did what they normally do. That's their MO, they filed for bankruptcy. They have bankruptcies all over the world. They've filed for more bankruptcies than companies. It's amazing. So, anyway, just to stay on track, so as soon as they vacate, we are in. That's the bottom line. We have a signed document with the Governor. And we have support from Governor Dayton, Senator Amy Klobuchar, Senator Al Franken, Congressman Rick Nolan, one of our best champions, the Chief of Staff of the White House, Denis McDonough. So we have a few people supporting us. It may work. I don't know. It can work.

So without that lease someone, it would be impossible for someone to come in and try to restart the construction effort to build that facility, is that correct without those leases? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Well, I'm going to be the landlord. I will be the leaseholder.

Right. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: So, do you want to ask me, if I will allow anyone else to do something over there? The answer is no.

(35:33) C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yeah. And on top of that – yeah, on top of that with the lease surrounding, the center lease that's owned by the State of Minnesota on the hands of the other private owners, there's no way that once I have this center, anyone else will have the surroundings. So we're in control. We just need to be patient, and allow the Chapter 11 process to follow through the motions.

One last... C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: That site is ours. It's just a matter of time, Mike.

Got it. One last question, the – your sensitivity to HRC prices and to seaborne pellet prices, is that – does that include the new metal contract going forward? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I'm sorry, I did not understand the beginning of the question. Can you repeat one more time?

Okay. The new metal contracts that will take place at the end of this year and the beginning of next year, will that change the sensitivities that you have to pellet and steel sheet pricing? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Okay, I understand. Look, the sensitivity tables that we have in our press release and we have in all of the publishing only apply to these two contracts. But these two contracts will be no longer valid coming January 1, 2017. So for next year the sensitivities will be different, because the new contract is different from the two contracts we have now. The table is only valid for the balance of 2016, the table that we've put on the press release. As far as 2017 I'm giving the guidance and I'm normally conservative in our price assumptions as history proves. But based on my conservative assumptions we are highly confident that $500 million of EBITDA in 2017 is a good number.

Okay. All right. Thank you very much. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thank you, Mike.

Your next question comes from the line of Anthony Young of Macquarie. Your line is open. Anthony Young - Macquarie Capital (USA), Inc.: Good morning, guys. Thanks for taking the questions. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Good morning, Anthony. Anthony Young - Macquarie Capital (USA), Inc.: Good morning. Congratulations on a good quarter. First question, just on Australia, the – you're solidly profitable there, like how long did you guys envision that facility running with iron ore prices in the mid to high $50 range? I mean, is that something that could keep on going for longer than what you previously thought about? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yeah. If prices stay in this $50, $60 range, we have another four years to five years in Australia. Anthony Young - Macquarie Capital (USA), Inc.: Okay. And I mean, if pricing goes higher, could it run for longer than that or would you have to spend some capital to do some exploration work? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Yes and yes. We can run longer, but we're going to have to spend some capital. So, it all depends on how higher, Anthony. Anthony Young - Macquarie Capital (USA), Inc.: Okay. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I'm not going to take capital risk over there. However, if price moves higher in a way that we feel is consistent, we may two years down the road consider deploying some capital to open new areas. Anthony Young - Macquarie Capital (USA), Inc.: Okay. And then on the commentary this morning, there was no talk of the DRI facility. Is that – I mean, I assume that's dependent on you guys getting the lease in Minnesota first, or how should we think about that going forward? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Look, DRI is in our to-do list, DRI will happen. We totally – we are totally committed with supplying the EAF side of the business here in United States. This being said, our preferred bet is to do it in Nashwauk So, it's not like we got delayed, it was part of our plan, we knew that Essar would file for bankruptcy. That's their MO, that's what they do for a living. They file for bankruptcy and try to get the assets free and clear, not paying their bills. That's what they – how they operate. So there's no change in our time to have DRI, but we are going to have to be patient and go through the process, but we knew that and so it's part of the plan. Keep in mind I believe that the next 10 years is a big window of opportunity to produce iron substitute in United States. China will become a big importer of scrap, before they will be self-sufficient in scrap. So, that will create a big window of opportunity here. But that's not going to happen next quarter and not next year, it will be longer than that. So again, we are playing with the cards we have and we are planning three moves, four moves ahead in this chessboard and this bankruptcy was right on cue. I told Governor Dayton that they will file for bankruptcy way ahead of their filing. So, all good. Anthony? Anthony Young - Macquarie Capital (USA), Inc.: Okay. I appreciate the time, guys. Yes. So, I appreciate the time, guys. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I thought you had heart attack or something. You went so quite. Anthony Young - Macquarie Capital (USA), Inc.: No. I appreciate the time. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: All right. Thanks, Anthony, always nice talking to you.

And your next question comes from the line of Matthew Fields from Bank of America. Your line is open.

Hey, Lourenco, congratulations on the quarter and congratulations on the couple of your long-standing predictions coming true. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thank you so much. Matt, I appreciate the recognition.

If you have lottery numbers I'd love to know. But, your other forecast of $500 million for next year for EBITDA. Can you just talk a little bit about sort of some underlying assumptions about what's going into that whether there's incremental volume from maybe a new customer or two customers, or any kind of pricing just any sort of color behind that $500 million? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Sure. I'll be glad. Start with volume. The volume number that we have baked into our forecast for next year is 19 million long tons in the United States, production and sales because that's pretty much what we're going to have as installed capacity going into 2017 without Empire, and 11.5 million metric tons in Australia because that's pretty much our nameplate capacity out of APIO. So, no big deal on that, so, we are going to be full on both U.S. and Australia. As far as prices, I'm a very conservative person when it comes to forecast. So, I am forecasting iron ore prices next year, IODEX prices, at $60 per ton, six-zero, that's the number that's baked into our forecast to get to the $500 million EBITDA. And by the way that's today's price, that's today's IODEX price and today's Metal Bulletin price as well, Platts price. So we have the Platts and we have the Metal Bulletin price both at $60 as we speak right now, just a coincidence. But that's my forecast for next year. And then you may say, look, but the commodities desk of the big banks they are forecasting that prices will go down to $40 and $30 and stuff like that. Well, I'm expecting them to forecast a fifth quarter for 2016, that's the only chance that they have to be right this year. Why should we believe that they will be right next year? There's a big change in the behavior of the big mines. The Three Stooges are gone. So we have a new CEO at Rio Tinto. We have BHP getting the region out of Samarco. They need money to pay their own disaster over there. In Vale same thing with a lot of debt to pay associated of that bad investment S11D. So they have no choice. There is no more time for empty speeches. They need to get these iron ore prices right, even if they have to cut production. Because this – number one, this business is not about cash cost per ton, there's a lot of other costs, a lot of other things including safety and environmental, if you don't do this, look at Samarco, that needs to be taken care of. So they need to generate EBITDA, they need to generate shareholder returns and more or less what apparently the new management at Rio Tinto and the board of directors of Rio Tinto are already doing. So we should expect the other two to follow: Vale and BHP. So my $60 may be pretty conservative and the commodities desk will say whatever they want. As far as U.S., I tried to explain in my prepared remarks, how this countervailing and anti-dumping duty is imposed and the ones that will be imposed because of the suits are still in the preliminary phases. But, anyway, how these duties work? This is airtight. This is good and if we see steel from other sources coming to the United States, we will counteract. The mills are very prepared for that. We are totally aware. So I believe that predicting stable prices at the levels that we're seeing right now in the U.S. is a good assumption. Prices will fluctuate, they may go down $10, $20, $30, I don't how much and then they will go up $10, $20 $30, $40, $50, I don't know. But the reasonable number is the numbers that we're seeing right now or better. But there is a big differential between the price of steel in the United States and the price of steel in China, and so what? What's the reason why those prices are so low in China? Is it because the Chinese are more competent or more efficient than the American mills? Of course not. It's a combination of subsidies, artificial lower ore prices, more iron ore into their market than they should be receiving, all these things altogether. Once we correct the cause, the effect is predictable and it's not to make the mills in China more efficient, it's just making the mills producing less and that will fix their problem over there and their price will increase not ours will decrease. I'm probably giving you a lot more details than you were asking for. But my price assumptions are in the range of iron ore prices that we're seeing right now and the range of steel prices that we're seeing right now.

That's great detail. I appreciate it. And then on your cost side, is it sort of going to be reasonably consistent with 2016? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Look. You know what, I'm going to have Kelly answer the first question. Please go ahead. P. Kelly Tompkins - Chief Financial Officer & Executive Vice President: Yeah, Matt, we would expect to – as we maintain our cost guidance for the balance of this year, would expect next year to be in that same ZIP code of cost and again we expect to have incrementally higher volume next year which will also help, so long story short, consistency on the cost front. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: We are not going to have any – well, Matt, we are not going to have any violent move in our cost, but we are responsible miners. We're not running these mines for next quarter or for next year, we're running these mines for the next 100 years. So every now and then we're going to see a quarter that's going to have a little more cost because we have to move some earth in order to open new mining areas, that's the way the mining business is. There is no such a thing as cash cost per ton Q1 stuff like that. We've got to be responsible holders of the assets of the shareholders, that's what we are here, we work for the shareholders, we work for the long run, we don't work to deliver quarter results. So we're going to act accordingly. But all-in-all you should – in your model, if I were in your shoes, I would plus the number you have right now, you are not going to be too far from the reality.

All right. Thanks. And then just sort of lastly, you've gone after the 2018 notes a few times now, is there any remaining kind of appetite to try to make another run at those or do you think you'll just sort of wait till near to maturity to kind of pay them off? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Look when we announced our intention to raise equity, we put the usual procedures regarding the 2018s and that did not change. We are going to extend the runway by eliminating the 2018s and the 2018s, there's a big component on the 2018s of bonds owned by retail and this guys can't participate in exchange against anything, so my intention is to retire them for cash.

Okay. That's good to hear. Thanks again for all the detail and we appreciate it. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thanks Matt.

Your next question comes from Evan Kurtz of 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: Congrats, great job handling SR Minnesota and the middle contract credits due. Just wanted to ask a couple questions, maybe get your view on U.S. Steel Canada any thoughts on the outcome of that CCAA case, I know it's something you're following pretty closely? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: No, look, we are working and we know how CCAA process works. We know that any other owner of the assets at the end of the CCAA process different from U.S. Steel will have U.S. Steel Canada as a long-term client because they like our pellets better than the stuff that they were using before, supplied by U.S. Steel. This being said, if U.S. Steel, the one that is the biggest creditor in CCAA, becomes the owner at the end, they will probably go back to the old, same old and they will impose their pellets on U.S. Steel Canada. I feel bad for my good friends at Stelco, the real name of U.S. Steel Canada, but at that point I can't do anything about it other than regret. This being said, we have alternatives to sell pellets to other clients, so for us, it would do not mean much, but for U.S. Steel Canada it will mean having the right pellets or having something else. Evan L. Kurtz - Morgan Stanley & Co. LLC: Are you concerned at all that there might be a scenario where the blast furnaces at those mills are idled? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I'm not – so if I'm seeing that even if the assets end up with U.S. Steel and they can't supply pellets, and they are still in operation not using my pellets, I'm not concerned. If the blast furnaces are shut down, it's even better than that from that standpoint because I will be supplied the same amount of pellets, it means zero, and they will not be able to produce any more steel, so they are not going to be producing virgin steel from pellets. They may be rerolling – they will be doing some (53:09) stuff, I don't know, I don't care at that point. Evan L. Kurtz - Morgan Stanley & Co. LLC: Got it. Okay. And then just one more, on diesel, what is your usage or percent of cost in USIO and Asia-Pac, how should we think about that? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I'm sorry what was the question? Can you say it again? Evan L. Kurtz - Morgan Stanley & Co. LLC: Question is just on diesel cost, I know you've been getting some benefit from them, just trying to quantify like how much of diesel they actually use across the company? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I will ask Kelly to take that one. Kelly please? P. Kelly Tompkins - Chief Financial Officer & Executive Vice President: Yeah, as kind of a rule of thumb, Evan, look at it at about 5% to 10% of our cost components, so we've seen PPIs in our commercial contracts, we've not gotten quite the benefit of inflation there, but we got more benefit on the cost side, energy in particular along with all the other things we talked about in the prepared remarks in addition to maintenance, lower employment costs, et cetera. But kind of 5% to 10% of cost is a good rule of thumb. Evan L. Kurtz - Morgan Stanley & Co. LLC: Okay. Appreciate that. Thanks, guys. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thank you. Operator, let me just ask one question to Evan Kurtz, Evan, what's the commodity desk price forecast for Morgan Stanley? Evan L. Kurtz - Morgan Stanley & Co. LLC: So, we're at $42 for next year. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Good. I'm glad. Okay, operator, let's move on.

Your next question comes from Jeremy Sussman of Clarkson. Your line is open.

Hey, Lourenco, congratulations and thanks very much for taking my question. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Oh, Jeremy, always a pleasure.

So, at $500 million in EBITDA next year, it seems like you generate a lot of free cash, what would be the first use of proceeds on that front? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: The first use of proceeds will be paying down debt, always, always, always, that's our main goal. Until I see this – look we already paid down close to $1.5 billion in net debt since I came to the company, but until I pay another $1 billion, I will not be ready to talk about other things as far as use of capital. We're going to continue to pay down debt as if there is no tomorrow. We are going to continue to retire debt in this company.

Understood. That's loud and clear. And just more of a, I guess, modeling question, what benchmark hot-rolled is in the second half 2016 assumption to kind of get to the 4.80% full-year figure in the sensitivity table? I mean is it safe to say that low spot hot-rolled prices in the beginning of this year kind of hurts your 2016 realizations, but that should be a tailwind for 2017. Am I thinking about that correctly? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Look, no, you are not correct. Our current contracts by and large they are based on customer full-year average price and includes a lot of things and some sales have lagged pricing. Of course, current hot-rolled prices is not reflected yet, so you can't really tie one to the other the way you want. I would recommend you to stay with the tables that we provide, that would be the best way to replicate what we have in our existing contract sales instruments.

Understood. Thanks very much, and good luck again. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thanks Jeremy.

Your next question comes from Lucas Pipes of FBR & Company. Your line is open. Lucas N. Pipes - FBR Capital Markets & Co.: Hey good morning everybody and not to sound like a broken record, but I would like to add my congratulations for a great job, not just this past quarter, but since you started your tenure. I wanted to follow up a little bit on 2017, tremendous amount of detail and appreciate all of that. In terms of the sensitivity to iron ore prices, maybe to follow up just a little bit on that. When I go back to your initial 2016 guidance, it looked like just about $2 or so in USIO price realization changes for every $10 change in the IODEX. For 2017, what do you think is a good range to be thinking about? C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: We haven't developed the tables yet for 2017. So actually at this point Lucas, I don't even know if we're going to continue to have the same type of table, of course, Paul Finan and Kelly Tompkins will be talking to you guys in getting your feedback on that, each one of the research analysts that cover Cliffs to see if that is helpful or not helpful. Sometimes I feel that the table is not really helpful. You heard the last question from Jeremy Sussman that he was trying to do a different way of concluding the price, so not using the tables. So if the table is not a helpful tool, probably it's better not having the table, but the fact of the matter at this time, we don't have the 2017 tables finalized yet. So I can't tell you that. What I can tell you is that, I feel a lot better with the new contracts in 2017 as far as our ability to generate EBITDA than I view today with the existing instruments. Keep in mind more than half of our demand for next year is covered by ArcelorMittal contract. And this ArcelorMittal contract is mine, so they are the contracts I inherited when I got here. So I feel good about our ability to generate that $500 million or more, but I'm a conservative person, so I keep it low. Lucas N. Pipes - FBR Capital Markets & Co.: Great. Well, appreciate that and good luck. Thank you. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Thanks Lucas and I appreciate the upgrade you recently gave us in our stock prices, the upgrade for how much, I forgot the number? Lucas N. Pipes - FBR Capital Markets & Co.: Absolutely. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Absolutely not a number, what's the number? Lucas N. Pipes - FBR Capital Markets & Co.: My number as of the most recent report published is $7 per share. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: So it went from $4 to $7, and now we are $7.95, you are late again. So I recommend you to take another look. Lucas N. Pipes - FBR Capital Markets & Co.: I always do, I certainly take all the information in. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: I appreciate that Lucas. Thank you so much. C. Lourenco Goncalves - Chairman, President & Chief Executive Officer: Operator, it's great to have one Kelly in this call, today. I have two. So we're good to wrap up and at this point we're not going to take any more questions. Thank you so much for continuing the attention to our moves here at Cliffs. Like I said before, we are far from done. We have a lot to do, the best years of Cliffs are ahead of us, especially when we have even smaller debt in our balance sheet. We will continue to work on that. And we will continue the dialogue with all of you. Thank you so much and have a great day.

This concludes today's conference call, you may now disconnect.