Cliffs Natural Resources Inc (NYSE:CLF) reported first-quarter results for the period ended March 31, 2017. The Company reported consolidated revenues of $462 million, an increase of 51 percent compared to the prior year’s first-quarter revenues of $306 million, as a result of increased sales volumes and seaborne iron ore prices. Cost of goods sold increased by 33 percent to $366 million compared to $275 million reported in the first quarter of 2016, as a result of increased sales volumes in both business segments.
The Company recorded a net loss of $30 million in the first quarter, including a $72 million, or $0.27 per share, loss on extinguishment/restructuring of debt attributable to the liability management activities that reduced total debt by $550 million during the quarter. This compares to net income of $117 million recorded in the prior-year quarter. The net income recorded in the prior-year quarter included a $179 million gain on extinguishment/restructuring of debt.
Total debt at the end of the first quarter of 2017 was $1.6 billion, approximately $900 million lower than $2.5 billion total debt at the end of the prior-year quarter. Cliffs had net debt of $1.3 billion at the end of the first quarter of 2017, compared to $2.4 billion of net debt at the end of the first quarter of 2016. The Company had no borrowings on its asset-based lending facility at the end of the first quarter of 2017 or 2016.
For the first quarter of 2017, adjusted EBITDA was $92 million, a 156 percent increase compared to $36 million reported in the first quarter of 2016.
Lourenco Goncalves, Cliffs’ Chairman, President and Chief Executive Officer, said, “During the first quarter, we put our finishing touches on what has been a remarkable operational, commercial and financial transformation of this company. Over the last two and half years, Cliffs has transformed itself into a lean and focused company, with a strong balance sheet and a lot less to pay in interest expense. This is particularly evident in our strong first quarter results, which exceeded our expectations in revenues, EBITDA and earnings per share.” Mr. Goncalves concluded: “We expect 2017 to be a phenomenal year of EBITDA and free cash flow generation.”
U.S. Iron Ore pellet sales volume in the first quarter of 2017 was 3.1 million long tons, a 63 percent increase when compared to the first quarter of 2016 as a result of increased customer demand.
As Cliffs’ management previously guided, first-quarter revenues per ton of $79.35 decreased by 5 percent compared to the prior-year quarter. The decrease is a result of carryover pricing impacts from both 2015 and 2016, and changes in customer mix. The majority of tons sold in the first quarter are from products shipped under the prior-year contract pricing. Contracts that have been priced based on 2017 pricing have been favorable to prior year due to higher benchmark iron ore and hot-rolled coil steel pricing.
Cash cost of goods sold and operating expense rate in U.S. Iron Ore was $58.57 per long ton, a 7 percent decrease from $62.88 per long ton in the prior year’s first quarter. The decrease was primarily due to having no idled active mines during the first quarter of 2017, compared to having two idled mines during the prior-year quarter.
First-quarter 2017 Asia Pacific Iron Ore sales volume increased 9 percent to 3.0 million metric tons, from 2.8 million metric tons in the first quarter of 2016. The volume increase was primarily related to the timing of shipments.
Revenues per ton of $54.35 increased by 32 percent compared to the prior-year quarter, driven by improved seaborne market prices. This was partially offset by larger price adjustments to meet market competition, timing of contract settlements and increased freight rates.
Cash cost of goods sold and operating expense rate in Asia Pacific Iron Ore was $37.27 per metric ton in the first quarter of 2017, a 15 percent increase from $32.42 in the prior-year quarter. The increase was attributable to higher royalties, increased mining costs driven by a higher strip ratio, and an unfavorable exchange rate compared to the prior-year quarter.
Other Income Statement Items
Cliffs’ first-quarter 2017 SG&A expenses were $26 million. This represents a 7 percent decrease when compared to the first-quarter 2016 expenses of $28 million. The decrease was driven primarily by reduced charges related to corporate office space.
Cliffs’ net interest expense during the first quarter was $43 million, a 25 percent decrease when compared to the first-quarter 2016 expense of $57 million as a result of the nearly $900 million in total debt reduction. The Company noted that of the $43 million expense, $36 million was a cash expense and the remainder was non-cash.
Miscellaneous-net income of $12 million included, among other items, favorable foreign exchange remeasurements of $14 million, partially offset by $7 million in charges related to the indefinite idle at Empire mine.
Capital expenditures during the quarter were $28 million compared to $10 million in the prior-year quarter. The increase was driven primarily by spending related to the Mustang Project at the United Taconite mine.
Based on the assumption that iron ore and steel prices will average for the remainder of 2017 their respective April month-to-date averages, Cliffs expects to generate approximately $380 million of net income and $700 million of adjusted EBITDA for the full-year 2017. This new outlook incorporates revised assumptions around Asia Pacific Iron Ore revenue realizations, which are impacted by the lower IODEX price, larger iron ore content discounts, and lower lump premiums.
U.S. Iron Ore Outlook (Long Tons)
Cliffs full-year sales and production volumes expectation is unchanged at approximately 19 million long tons.
Cliffs’ full-year 2017 U.S. Iron Ore cash cost of goods sold and operating expense2 expectation is unchanged at $55 – $60 per long ton.
Asia Pacific Iron Ore Outlook (Metric Tons, F.O.B. the port)
Cliffs’ full-year 2017 Asia Pacific Iron Ore expected sales and production volume is unchanged at approximately 11.5 million tons. The product mix is expected to contain 50 percent lump ore and 50 percent fines.
Based on a full-year average exchange rate of $0.75 U.S. Dollar to Australian Dollar, Cliffs’ full-year 2017 cash cost of goods sold and operating expense2expectation is unchanged at $34 – $39 per metric ton.
SG&A Expenses and Other Expectations
The full-year 2017 SG&A expenses expectation of approximately $100 million is unchanged. Cliffs also notes that of the $100 million expectation, approximately $25 million is considered non-cash.
The Company’s full-year 2017 interest expense is expected to be approximately $135 million, a $40 million dollar reduction compared to its previous expectation of $175 million. Of this $135 million, approximately $20 million is expected to be non-cash.
Capital Budget Update
Cliffs full-year 2017 capital expenditures budget is unchanged at $105 million.
Cliffs Natural shares are down nearly 5% to $6.82 in pre-market trading Thursday. CLF has a 1-year high of $12.37 and a 1-year low of $2.77. The stock’s 50-day moving average is $8.15 and its 200-day moving average is $8.49.
Cliffs Natural Resources, Inc. operates as an international mining and natural resources company, which engages in the exploration of iron ore and metallurgical coal. It serves the North American steel industry from its mines and pellet plants located in Michigan and Minnesota. The company also operates an iron ore mining complex in Western Australia and serves the Asian steelmaking market.