CLIFFS NATURAL RESOURCES:EXTRACTING PRODUCTIVITY
JANUARY 16, 2015
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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EXECUTIVESUMMARY
ANALYSIS
RISKS & CONTINGENCIES
IMPLEMENTATION
CONCLUSION
AGENDAINTRODUCTION:
Current Situation
High-Level Overview
Analysis
Risk & Contingencies
Implementation Strategy
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EXECUTIVESUMMARY
ANALYSIS
RISKS & CONTINGENCIES
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
RISKS & CONTINGENCIES
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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EXECUTIVESUMMARY
ANALYSIS
RISKS & CONTINGENCIES
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
RISKS & CONTINGENCIES
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
RISKS & CONTINGENCIES
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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EXECUTIVESUMMARY
ANALYSIS
RISKS & CONTINGENCIES
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
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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
RISKS & CONTINGENCIES
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
A
SITUATION
CURRENT SITUATION:
BUSINESS SEGMENTS
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EXECUTIVESUMMARY
ANALYSIS
RISKS & CONTINGENCIES
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
RISKS & CONTINGENCIES
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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EXECUTIVESUMMARY
ANALYSIS
RISKS & CONTINGENCIES
IMPLEMENTATION
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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IMPLEMENTATION
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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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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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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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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IMPLEMENTATION
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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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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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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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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ANALYSIS
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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
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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
RISKS & CONTINGENCIES
IMPLEMENTATION
CONCLUSION
CANADIAN OPERATIONS: BLOOM LAKEANALYSIS:
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
RISKS & CONTINGENCIES
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
CANADIAN OPERATIONS: BLOOM LAKEANALYSIS:
ANALYSIS
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EXECUTIVESUMMARY
ANALYSIS
RISKS & CONTINGENCIES
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
RISKS & CONTINGENCIES
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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SITUATION
EXECUTIVESUMMARY
ANALYSIS
RISKS & CONTINGENCIES
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:
RISKS &CONTINGENCIES
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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
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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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FALLING CREDIT RATINGRISKS & CONTINGENCIES:
RISKS &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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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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CONCLUSION• Long-term strategy focused on increasing
shareholder value
CONCLUSION