Cliffs’ APIO segment: Aggressive cost cutting continues



APIO segment

For 4Q14, the Asia Pacific Iron Ore, or APIO, segment’s volumes decreased 2% to 2.9 million tons—from 3 million tons in 4Q13. The decrease was attributed to port maintenance timing.

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Serious cost-cutting efforts

In APIO, the cash production cost per ton was $42.90—down 25% from $57.52 in the fourth quarter last year. The decrease was mainly due to increased production tons. The decrease was due to realizing efficiencies in adjustments to the mine plan to reduce material movement. There were also favorable exchange rate variances of ~$4 per ton.

Management plans to cut costs by almost $20 per ton year-over-year, or YoY. A good chunk of the reduction is lower royalties. The royalties are linked to realized pricing. Realized price is expected to be negatively impacted by the declining seaborne iron ore price. Management plans to exit Australia after the five-year life of the mine, if not sooner.

Cost outlook positive

Cliffs Natural Resources’ (CLF) full-year 2015 APIO expected sales and production volume is ~11 million tons. The product mix is expected to be ~51% lump and 49% fines iron ore.

The intense depreciation of the Australian dollar against the US dollar helped lower the production and operating costs of all Australian iron ore producers including Rio Tinto (RIO), BHP Billiton (BHP), Fortescue Metals Group (FSUGY), and Cliffs’ Koolyanobbing Mine.

This will continue to positively impact its APIO results going forward. The Brazilian real is also depreciating against the US dollar. This is favorable for Vale SA (VALE). Cliffs forms 3.69% of the SPDR S&P Metals and Mining ETF (XME). XME invests in global metals and mining companies.

Based on an average exchange rate of $0.81 to the Australian dollar, full-year 2015 APIO cash production cost per ton is expected to be ~$40–$45. This expectation reflects operational improvements and a more favorable foreign exchange rate—compared to 2014.


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