Cliffs’ US Iron Ore Segment Reports Lower Realized 2Q15 Revenues

Cliffs Natural Resources’ (CLF) US Iron Ore, or USIO, segment mainly sells iron ore to integrated steel companies in the US and Canada, such as U.S. Steel (X), AK Steel (AKS), and ArcelorMittal (MT). The segment is less sensitive to seaborne prices because most of its contracts are long term.

USIO pellet volumes were 4.2 million for 2Q15, which is a 2% decrease year-over-year (or YoY). The decrease was mainly due to lower export volumes and lower demand by steelmakers in the US.

Cliffs’ results were a miss primarily on lower-than-expected realized revenues for its USIO segment. US (SPY) iron ore’s realized revenues were $78.30 per ton in 2Q15, compared with $106.80 per ton in 2Q14. This also came in lower than Cliffs’ previous guidance.

The decline in realized revenues is due to a significant adjustment to the hot band steel price estimate for one of Cliffs’ major contracts. Cliffs’ pellet supply agreements with steelmakers include the hot band steel price as one of the variables, among others. A $60 per ton drop in the hot band steel price estimate from 1Q15 resulted in a cash margin and EBITDA impact of about $20 million.

The company’s management also mentioned during the call that if this forecast change had not occurred by the customer, Cliffs would have achieved its guided realized revenue of $83 per ton.

The cash production cost per ton was $56.10—down 9% from $61.40 in the same period last year. The decrease was primarily driven by a reduction in headcount and overall employment costs. Reduced energy costs, including natural gas and diesel fuel, also helped the costs.

Cliffs forms 3% of the SPDR S&P Metals and Mining ETF (XME). U.S. Steel forms 4.4% of XME.

In the next part of this series, we’ll talk about why Cliffs downgraded its volume guidance for the USIO division.