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Implications for Cliffs if it exits Canadian operations

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Closure costs

Cliffs Natural Resources Inc. (CLF) management indicated that in the event of total closure, the costs for the company will range between $650 and $700 million over the next five years.

Meanwhile, management has indicated to several sources including Reuters that this is the worst case scenario. These estimates include the rail take-or-pay liability, which means the rail operations either need an advance notice of three years, or the company will see costs incurred for that time period.

The liability amounts to $150 million per year for three years, so a total of $450 million. There could be other ways of minimizing total liability, such as ringfencing the parent company from losses in its Canadian unit. We’ll discuss this in the next part of this series.

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Loss of production

Bloom Lake Phase I currently produces 6 to 6.5 tons of iron ore. With its closure, Cliffs will forego this production. But, this production was cash negative. The cost of producing per ton of iron ore at Bloom Lake in 3Q14 was $106.30 against realized revenue per ton of $70.90. That means an operating loss of $35.40 per ton. Idling the mine would help stem this cash outflow.

Selling Bloom Lake is also an option, but Cliffs’ management has made it clear that it will only sell Bloom Lake if the buyer is ready to take on the liabilities.

Selling non-core assets has become more of a norm across the sector with BHP Billiton Limited (BHP), Rio Tinto plc (RIO), and Vale SA (VALE) following suit to make operations leaner in this low commodity price environment. The SPDR S&P Metals and Mining Index ETF (XME) provides exposure to these stocks.

Loss on arbitration claim

Cliffs lost an arbitration claim it had filed against a former Bloom Lake customer. The claim related to the August 2011 termination of an iron ore sales agreement. The case was decided in favor of the former customer. Damages were awarded equalling $71 million as well as attorneys’ fees and accrued interest from the termination of the offtake agreement in August 2011.

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