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Asia-Pacific iron ore: EBITDA positive despite lower prices

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Asia-Pacific iron ore operations

Cliffs Natural Resources Inc’s (CLF) Asia-Pacific iron ore operations (or APIO) consist of one wholly-owned iron ore complex. It’s located in Western Australia in Koolyanobbing. It produces iron ore lump and fines. For more on this topic, read Why the quality spread on iron ore products is widening.

APIO serves the Asian iron ore markets with directly shipped fines and lump ore. The segment competes with big iron ore players in this market such as BHP Billiton Limited (BHP), Rio Tinto (RIO), and Vale SA (VALE). The SPDR S&P Metals and Mining ETF (XME) gives investors broader access to these companies.

 

APIO

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APIO mainly sells under three-year supply agreements with Chinese steel producers and two-year supply agreements with Japanese customers. Pricing for other customers involves shorter-term pricing mechanisms of various lengths as short as one month. These arrangements are based on the daily spot price average.

Asia-Pacific operating performance

APIO volumes increased by 11% to 3.1 million tons, from 2.8 million tons in the third quarter of 2013. The increase is mainly attributable to rail and vessel timing.

APIO also reported adjusted EBITDA of $46 million. This was despite much lower iron ore prices for the quarter. Rather, the shift came from cash production cost in the low $50 per ton range. A weaker Australian dollar also provided a marginal benefit to this division since its revenues are in U.S. currency, while most of its costs are denominated in Australian dollars.

As noted in a previous series on Cliffs, the remaining APIO mine life is just six years. Management has guided for a total of only $50 million in capital expenditures, or capex, for these six years. Management also guided for cash costs of $48 per ton for 2015. With these low cash costs, the company says it’s not in a hurry to sell off this division, but it won’t operate beyond the end of the mine, either.

Outlook

The company maintained its full-year 2014 expected sales and production volumes of ~11 million tons. Cliffs expects the product mix to contain 53% lump.

Cliffs lowered its 2014 full-year cash cost per ton expectation to $50 to $55 from its previous expectation of $55 to $60. Depreciation, depletion, and amortization is anticipated to be ~ $13 per ton for full-year 2014.

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