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Overview: Cliffs Natural Resources' 2Q14 earnings

Part 2
Overview: Cliffs Natural Resources' 2Q14 earnings (Part 2 of 4)

Why the shipments and cost profile beat market expectation

Shipments and cost profile

Conditions were difficult for this segment due to the freezing of the Great Lakes, which resulted in a 24% decline in shipments year-over-year (or YoY). This also lowered the volumes for the full year to the lower end of the previously announced range of 22–23 million tons. However, shipments for June and July have returned to normal which signals a normal second half.

Sales Volumes&amp;Cash cost_Q214Enlarge Graph

Eastern Canada iron ore—volume beat

Volumes for the second quarter were two million tons. Cash costs per ton came down from $114 to $87. This reduction was primarily driven by the absence of Wabush Mine’s higher cost production. This mine was idled in the 1Q14. The improved mine plan has led to lower strip ratio—waste removed to ore mined—which fell from 1.30 to 0.86. This helped lower the cash cost per ton. Volumes were revised to the higher end of the previously guided range of six to seven million tons for the full year.

Asia Pacific iron ore—improving costs

Sales volume declined to 2.9 million tons from three million tons in the 2Q13. Cash costs per ton declined to $53 from $64 in the same quarter last year. This decrease was caused by structural improvements. We’ll discuss this later in the series.

North American coal—volume beat

Sales volume decreased 2% to two million tons. Cash costs per ton declined to $83 from $88 in previous period. This decline was mainly due to fixed cost leverage from increased production volumes and lower royalties.

Volumes and price realizations were down YoY. However, these were better than the market expectations due to various productivity and cost control measures that the company undertook. We’ll discuss this later in the series.

Cliffs Natural Resources’ (CLF) peers like Rio Tinto (RIO), BHP Billiton (BHP) and Vale SA (VALE) will be releasing their returns in a few weeks. It’s clear from Cliffs’ results that their realizations per ton would also suffer YoY decline. However, productivity and cost control measures and their guidance updates would provide a longer-term sense of the commodities environment. The SPDR S&P Metals & Mining ETF (XME) is also exposed to the iron ore industry and the previously mentioned companies.

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