Cliffs Natural Resources presentation

CLIFFS NATURAL RESOURCES:EXTRACTING PRODUCTIVITY

JANUARY 16, 2015

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SITUATION

EXECUTIVESUMMARY

ANALYSIS

RISKS & CONTINGENCIES

IMPLEMENTATION

CONCLUSION

SAMICATHERINE STEVEN

INTRODUCTION:

WHO WE ARE

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SITUATION

EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

AGENDAINTRODUCTION:

Current Situation

High-Level Overview

Analysis

Risk & Contingencies

Implementation Strategy

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SITUATION

EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

Mission Statement:Cliff’s Natural Resources strives to be a leader in mining and natural

resources.

CLIFFS NATURAL RESOURCESCURRENT SITUATION:

SITUATION

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Snapshot:• Major producer of Iron Ore and significant producer of

high and low volatile metallurgical coal• Largest manufacturer of iron ore pellets in the U.S. Steel

Industry

• Value of Operations:• Iron Ore Pricing• State of Steel Industry• Penetration of International Expansion• Diversified Mining Initiatives (graphite investments, coal

operations)

CLIFFS NATURAL RESOURCESCURRENT SITUATION:

SITUATION

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SITUATION

EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

CURRENT SITUATION:

IMPORTANT & RECENT EVENTS

SITUATION

Where Do You Go From Here?

JAN 2 2015

Completes Sale ofLogan County Coal

(WV) for $174 mil + $80 – 100 mil in tax

savings

Operations at Bloom Lake shut down

completely

TODAY

AUG 7 2014

Lourenco Gonclaves appointed Chairman, President and CEO

AUG 25 2014Share Repurchase

Plan (up to $200 million)

NOV 19 2014

CLF seeks to pursue exit options for

Canadian operations

NOV 21 2012CLF sells 20% stake in

Zenyatta Albany Project – Graphite Mine in the Ring of

Fire

OCT 27 2014

CLF posts a $5.7 billion loss on asset

write-down

SEPT 26 2014

Australian Mining Companies express interest in acquiring

CLF’s Australian assets

DEC 24 2014

CLF ordered to pay CAD $7.5 million for fisheries damage at

Bloom Lake

JAN 1 2011

CLF buys Consolidate Thomson (Bloom

Lake)

OCT 7 2014

CLF bonds cut to Junk (BB- to BBB-) after

iron ore plunge

OCT 28 2014

Gonclaves states that Ring of Fire won’t be

developed in his lifetime

JAN 12 2015

Executive members of CLF exercise equity

purchase

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Threats:• Short-Term

• Iron ore pricing• Declining need of iron ore in China• Investor confidence is at an all time low

• Opportunities:• Short-Term

• Diversified business• Largest producer of iron ore pellets in NA• Significant producer of coal in North America

EXTERNAL CONSIDERATIONSCURRENT SITUATION:

SITUATION

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Threats:• Long-Term

• Interest rate risk: maturing debt was ballooning• Unprofitable assets• Core business is US operations which is the majority of profits• Global demand

• Opportunities:• Long-Term

• Continued growth in the US Economy

EXTERNAL CONSIDERATIONSCURRENT SITUATION:

SITUATION

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ANALYSIS


IMPLEMENTATION

CONCLUSION

UNITED STATES

• 5 mines in Michigan and Minnesota

• 55.4 million tonne capacity

• Primary sales to integrated steel companies

• 85% of business to5 major customers

UNITED STATES

SITUATION

CURRENT SITUATION:

BUSINESS SEGMENTS

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

UNITED STATES

CANADA

CANADA

• 2 mines in Eastern Canada – one in production

• 58.8 million tonne capacity

• Currently operating at 13.5% capacity

• Sales to Asia, Europe and rest of North America

SITUATION

CURRENT SITUATION:

BUSINESS SEGMENTS

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

ASIA PACIFIC

• 3 mining areas in Koolyanobbing, Mount Jackson, and Windarling

• Increasing production over three years – now at 11.1 million metric tonnes

• Under contract with mainly Chinese and Japanese steel companies

UNITED STATES

CANADAAUSTRALI

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SITUATION

CURRENT SITUATION:

BUSINESS SEGMENTS

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Eastern Canadian operations are costing money• Coal operations costing money• US and Asia-Pacific Iron Ore are only profitable

segments• Company spread thing over many areas

• No advantages over profits

CLF is no longer focused on the Value Proposition,which has affected long-term profitability

TODAYEXECUTIVE SUMMARY:

EXECUTIVESUMMARY

SITUATION

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Stop bleeding at the Bloom Lake operations• Refocus on US Iron Ore segment• Maintain Asia-Pacific at current operations• Improve debt rating to industry average• Increase investor confidence in management

SOLUTIONEXECUTIVE SUMMARY:

EXECUTIVESUMMARY

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CONCLUSION

VALUATIONANALYSIS:

ANALYSIS

Base Case ProjectionsUSD Millions FP2014 2015 2016 2017 2018 2019

Revenue 4,179 3,527 3,616 3,802 3,999 4,208Cost of Sales 3,767 2,838 2,981 3,132 3,291 3,460

Gross Profit 412 689 635 670 708 748Gross Margin % 10% 20% 18% 18% 18% 18%

EBITDA 467 716 668 703 740 780

Depreciation 485 239 249 261 273 285

EBIT (18) 477 418 442 468 495

Interest 201 186 166 144 121 98Tax Benefit / (Expense) 77 (102) (88) (105) (121) (139)

Net Income (152) 189 164 194 225 258

AssumptionsEastern Canada Iron Ore FP2014 2015 2016 2017 2018 2019Gross Profit (115) - - - - -

US Iron Ore FP2014 2015 2016 2017 2018 2019Volume / 1,000 tons 22,000 22,000 22,715 23,453 24,215 25,002Cost / 1,000 tons 70 70 72 75 77 80Revenue / 1,000 Tons 100 100 100 103 107 110Depreciation / 1,000 Tons 5 5 5 5 6 6

Gross Profit / 1,000 Tons 25 25 23 23 24 25Gross Profit 550 550 513 546 582 621

AP Iron Ore FP2014 2015 2016 2017 2018 2019Volume / 1,000 tons 11,000 11,000 11,000 11,000 11,000 11,000Cost / 1,000 tons 55 56 57 58 60 61Revenue / 1,000 Tons 81 81 81 83 84 86Depreciation / 1,000 Tons 13 8 8 8 8 9

Gross Profit / 1,000 Tons 13 17 16 16 16 17Gross Profit 145 188 174 177 181 185

NA Coal FP2014 2015 2016 2017 2018 2019Volume / 1,000 tons 7000 5100 5202 5306 5412 5520Cost / 1,000 tons 85 87 88 90 92 94Revenue / 1,000 Tons 75 85 87 88 90 92Depreciation / 1,000 Tons 14 8 8 8 8 9

Gross Profit / 1,000 Tons (24) (10) (10) (10) (10) (10)Gross Profit (168) (49) (51) (54) (56) (58)

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CONCLUSION

VALUATIONANALYSIS:

ANALYSIS

Risk-free Rate 1.73%Market Risk Premium 6%Beta 2.15Cost of Equity 14.63%

Cost of Debt 6.5%Tax Rate 35%After-tax Cost of Debt 4.25%

Market Value of Debt 3,044Book Value of Equity 31Weight of Debt 98.99%Weight of Equity 1.01%

WACC 4.4%

Cash Flows to Firm 2014 2015 2016 2017 2018 2019 TV

Net Income (152) 189 164 194 225 258Depreciation 485 239 249 261 273 285Interest Expense 201 186 166 144 121 98

FCF 8,228 549 11 41 72 105 4,517

Discount Factor 2014 2015 2016 2017 2018 2019 TVTime Period 0 1 2 3 4 5 5WACC Reciprocal 1.00 0.96 0.92 0.88 0.84 0.81 0.81PV of FCF 8,228 526 10 36 61 85 3,645

Terminal Value 3,645Enterprse Value 4,363Net Debt 2,627Equity Value 1,736

Shares Outstanding 153,085Price / Share $11.34

TV Growth 2%

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

VALUATION ON STRATEGYANALYSIS:

New WACC 3.7%

New Cost of Debt 5.5%Tax 35%After-Tax 3.6%

Cash Flows to Firm 2014 2015 2016 2017 2018 2019 TV

Net Income (152) 189 164 194 225 258Depreciation 485 239 249 261 273 285Interest Expense 209 106 106 106 106 106

Change in NWC (534) (500) (475) (510) (545) (560)Change in Capex 8,228 0 0 0 0 0

FCF 8,236 34 45 51 59 89 5,2031 2 3 4 5 5

PV 33 42 46 51 74 4,329

Terminal Value 4,329Enterprise Value 4,574Net Debt 1,627Equity Value 2,947

Shares 153,085Price / Share $19.25

ANALYSIS

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IMPLEMENTATION

CONCLUSION

$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

$200.00

IRON ORE PRICINGANALYSIS:

ANALYSIS Feb 2011

$187.18

Oct 2012

$113.95

Dec 2014

$68.80

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IMPLEMENTATION

CONCLUSION

IRON ORE PRICINGANALYSIS:

ANALYSIS

Jan 2011 Jan 2012 Jan 2013 Jan 2014

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%IRON ORE %CFL %

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CONCLUSION

DRIVERS OF SHARE VALUEANALYSIS:

ANALYSIS

Increased Production to Capacity (Tonnage Sales)

Rev. per Tonne 21,300 22,500 24,000 25,500 27,000 28,500 30,000 31,500 33,000

$ 50.00 -$ 201.91

-$ 203.54

-$ 208.43

-$ 213.32

-$ 218.21

-$ 223.10

-$ 227.99

-$ 232.88

-$ 237.77

$ 55.00 -$ 180.56

-$ 181.70

-$ 185.13

-$ 188.57

-$ 192.00

-$ 195.43

-$ 198.87

-$ 202.30

-$ 205.73

$ 60.00 -$ 159.20

-$ 159.86

-$ 161.84

-$ 163.81

-$ 165.79

-$ 167.77

-$ 169.75

-$ 171.72

-$ 173.70

$ 70.00 -$ 116.49

-$ 116.18

-$ 115.24

-$ 114.31

-$ 113.37

-$ 112.44

-$ 111.50

-$ 110.57

-$ 109.63

$ 80.00 -$ 73.78

-$ 72.50

-$ 68.65

-$ 64.80

-$ 60.95

-$ 57.11

-$ 53.26

-$ 49.41

-$ 45.57

$ 94.00 -$ 13.98

-$ 11.34

-$ 3.42

$ 4.51

$ 12.43

$ 20.35

$ 28.28

$ 36.20

$ 44.13

$ 100.00 $ 11.64

$ 17.93

$ 27.80

$ 37.68

$ 47.55

$ 57.43

$ 67.30

$ 77.18

$ 87.05

$ 113.00 $ 67.17

$ 71.65

$ 85.11

$ 98.57

$ 112.03

$ 125.48

$ 138.94

$ 152.40

$ 165.85

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IMPLEMENTATION

CONCLUSION

DRIVERS OF SHARE VALUEANALYSIS:

ANALYSIS

Costs per Metric Ton Increased Production to Capacity (Tonnage Sales)

21,300 22,500 24,000 25,500 27,000 28,500 30,000 31,500 33,000

$ 78.00 -$ 25.86 -$ 23.49 -$ 16.38 -$ 9.26 -$ 2.15 $ 4.96 $ 12.08 $ 19.19 $ 26.30 $ 74.00 -$ 7.11 -$ 4.31 $ 4.08 $ 12.47 $ 20.87 $ 29.26 $ 37.65 $ 46.04 $ 54.44 $ 72.00 $ 2.27 $ 5.28 $ 14.31 $ 23.34 $ 32.37 $ 41.41 $ 50.44 $ 59.47 $ 68.50 $ 70.00 $ 11.64 $ 14.87 $ 24.54 $ 34.21 $ 43.88 $ 53.55 $ 63.22 $ 72.89 $ 82.57 $ 68.00 $ 21.02 $ 24.46 $ 34.77 $ 45.08 $ 55.39 $ 65.70 $ 76.01 $ 86.32 $ 96.63 $ 66.00 $ 30.40 $ 34.05 $ 45.00 $ 55.95 $ 66.90 $ 77.85 $ 88.80 $ 99.75 $ 110.70 $ 64.00 $ 39.78 $ 43.64 $ 55.23 $ 66.82 $ 78.41 $ 90.00 $ 101.58 $ 113.17 $ 124.76

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

PROFIT DRIVERSANALYSIS:

47%

17%

22%

14%

USA

CANADA

ASIA PACIFIC

Iron Ore

Coal

1) LOCATION SPECIFIC

• US operations drive 61% of total sales for the business through Iron Ore and Coal

2) ASSET SPECIFIC

• 86% of business is in Iron Ore

• 14% of business is from Coal

3) CUSTOMER SPECIFIC• US operations driven by 5

major players (85% of revenue)

ANALYSIS

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

PROFIT DRIVERSANALYSIS:

4) IRON ORE PRICE

• The price of iron ore has a substantial impact on the revenue and profit of CLF

US Iron Ore PelletPricing & Share Value

$ 50.00 -$ 201.91 $ 55.00 -$ 180.56 $ 60.00 -$ 159.20 $ 70.00 -$ 116.49 $ 80.00 -$ 73.78 $ 94.00 -$ 13.98 $ 100.00 $ 11.64 $ 113.00 $ 67.17

ANALYSIS

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

ANALYSIS:

CANADIAN OPERATIONS: BLOOM LAKE

ANALYSIS

Purchased in Jan 2011• Iron ore price was high (Peak:

$187.18 [Feb 2011])• Speculation fueled expansion

Declining ore prices diminished the value of the operations

Iron ore pricing combined with oversupply caused unprofitable operations

Required over $1-billion in investment

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• What went wrong:• High production costs• Decline in iron ore pricing

• Value of assets diminished with iron ore price decline

• Oversupply in iron• Increase in international capacity• Increased production from competitors to take advantage of

China’s buying and drive up profit margins

• No investors for Phase II• Operations required $1.2 billion in investment for potential return

CANADIAN OPERATIONS: BLOOM LAKEANALYSIS:

ANALYSIS

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION


ANALYSIS

• Where were at:• Bloom Lake was shut down• $6-billion in assets written down

• What this means:• Prediction of potential bankruptcy in light of this• Share’s have hit all time low• Investor confidence in waning

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Concerns:• Lack of research and development• Analysis on ROI vs. projections

• Operations already ceased• Bloom Lake has possible potential for someone

else:• Divest assets to refocus on profitable segments• Use capital to buy back debt


ANALYSIS

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Demerger of BHP Billiton

• Cutting costs to inflate margins

• Chinese are buying volume at record-low prices

ANALYSIS:

TRENDS IN MINING

ANALYSIS

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Iron ore is available in excess• Combined that with excess steelmaking capacity

and low margins

• Mitigation:• Refocus on US core business• Expand capacity to compete with competitors

profitability

OUTPUT FROM COMPETITORSRISKS & CONTINGENCIES:

EY Global Steel 2014

“Excess capacity is the biggest threat to the sector.”

RISKS &CONTINGENCIES

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• 86% of business is in iron ore pellet manufacturing• CLF is largest North American manufacturer of iron

ore pellets• Declining prices shown to drive profits down• Competitors have cut costs while increasing

production to inflate profits

IRON ORE PRICESRISKS & CONTINGENCIES:


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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

IRON ORE PRICESRISKS & CONTINGENCIES:

• Mitigation:• Restructure costs and find new efficiencies• Increase productivity to at or near capacity

• Lower per unit production, increasing margins and profitability

• Chinese iron ore market continues to purchase excess production as prices are low

• No opportunity cost of pursuing higher productionRISKS &

CONTINGENCIES

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

• Higher interest rates in the future if credit rating not improved

• Current credit rating is below industry norms and results in an impact on interest expense

• Doubling the dividend could result in cash leak that doesn’t fix the overleverage issue

FALLING CREDIT RATINGRISKS & CONTINGENCIES:

RISKS &CONTINGENCIES COMPANY S&P Rating Moody's Rating

BHP BILLITON LIMITED A+ A1RIO TINTO PLC A- A3VALE SA-PREF A- Baa2FORTESCUE METALS GROUP LTD BB+ Ba1CLIFFS NATURAL RESOURCES INC BB- Ba3ALPHA NATURAL RESOURCES INC B B3SUNCOKE ENERGY INC B Ba3

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IMPLEMENTATION

CONCLUSION

FALLING CREDIT RATINGRISKS & CONTINGENCIES:


Long-term Debt Maturity Interest Rate Carrying Value Fair Value

Senior Notes - 700 Million 2021 4.89% 699.5 539.6Senior Notes - 1.3 Billion (500M - 800M) 2020/2040 4.83% - 6.34% 1289.8 974.7Senior Notes - 400 Million 2020 5.98% 398.6 341.8Senior Notes - 500 Million 2018 4.14% 497.1 433Revolving Loan 2017 1.87% 0 0Equipment Loan Facilities 2020 Various 124.6 124.6Fair Value Adjustment to Interest Rate Hedge 2.9 2.9

Total Long-term Debt 3,012.5 2,416.6

• Mitigation:• Paying off debt to increase rating agency confidence

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CONCLUSION

STRATEGYIMPLEMENTATION:

IMPLEMENTATION

Timeline of Implementation (2015)Feb Mar Apr May Jun Jul

Sell Canadian Assets

Increase Production

Improve Credit Rating

Reassess Asian Pacific Operations

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EXECUTIVESUMMARY

ANALYSIS


IMPLEMENTATION

CONCLUSION

CONCLUSION• Long-term strategy focused on increasing

shareholder value

CONCLUSION

Cliffs Natural Resources presentation

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Transcript of Cliffs Natural Resources presentation