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How Cliffs’ Asia-Pacific Iron Ore Division Drove Down Costs

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Reduction in per unit cost

Cliffs Natural Resources (CLF) has significantly reduced the cash production costs in its Asia-Pacific iron ore (or APIO) division. Cash production costs fell by 49% year-over-year to $26.9 per ton in 3Q15 compared to $52.6 per ton in 3Q14.

Even on a quarter-over-quarter basis, the reduction in costs is quite impressive at 24%. This reduction was mainly due to reduced mining and administrative costs. Favorable exchange rates, at $12 per ton year-over-year (or YoY), have also helped costs to a large extent.

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Cost guidance remains unchanged

Based on an exchange rate of $0.70 US dollars (UUP) to the Australian dollar, Cliffs maintained its full-year 2015 APIO cash production cost per ton expectation of $30–$35. The cash cost of goods sold guidance was also maintained at $35–$40 per ton.

Despite the challenging seaborne iron ore price environment, Cliffs generated positive EBITDA (earnings before interest, tax, depreciation, and amortization) of $10 million for 3Q15. Capital expenditure was just $0.2 million.

Cliffs’ management mentioned that continued cost reduction in the APIO division is essential and that its team is working on this. Management also said that the APIO division is benefiting from headcount reductions executed during the year.

As we discussed in our previous analysis How Low Can Iron Ore Prices Go from Here? based on current seaborne iron ore dynamics, iron ore prices have more downside. In such a scenario, it’s imperative for seaborne iron ore players including BHP Billiton (BHP) (BBL), Rio Tinto (RIO), and Vale (VALE) to continuously reduce their costs to maintain profitability.

In the next part of this series, we’ll see what Cliffs’ management has to say about the current situation in the seaborne iron ore market.

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