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Why CLF’s Asia-Pacific Division Sees a Discounted Price for Iron Ore

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Oct. 27 2017, Updated 8:01 a.m. ET

CLF’s Asia-Pacific Iron Ore division

Cleveland-Cliffs (CLF) has direct exposure to the seaborne iron ore trade through its APIO (Asia-Pacific Iron Ore) unit. The remaining life for the company’s APIO operation is less than three years, which the company is not keen on expanding.

Cleveland-Cliffs’ CEO, Lourenco Goncalves, has repeatedly made it clear that the company would like to exit this business as quickly as possible. He has noted that due to the strategies followed by seaborne iron ore miners (XME) such as BHP Billiton (BHP), Vale (VALE), Rio Tinto (RIO), Fortescue Metals Group (FSUGY), and Roy Hill, the iron ore market is in rough shape.

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APIO volumes

APIO’s 3Q17 sales volumes came in at 2.2 million tons, reflecting a 20.0% decline year-over-year (or YoY) and a 10% sequential decline. This decline is due to its lower production volumes, due to Cleveland-Cliffs’ operational decisions reflecting current market conditions and the quality of ore available. 

The company also reduced its full-year volume guidance from 11.0 million tons to 10.5 million tons for 2017. For 2018, however, the company still expects the volumes to remain at 11.0 million tons.

Realized prices

APIO’s realized revenue per ton was $43.40 in 3Q17, an improvement of 1.1% year-over-year and 13.4% on a sequential basis. Although the benchmark iron ore prices were higher during the quarter, the company’s heavily discounted realizations and reduced volumes impacted this segment’s performance negatively. 

These lower realizations occurred on the back of an increased discount for low-grade iron ore. While benchmark prices denote prices for 62% Fe[1. iron ore] content ore, China’s recent attempts at reducing pollution have substantially increased the discounts for lower-grade material. CLF’s APIO produces 58% iron ore fines and lump.

Cleveland-Cliffs (CLF) expects to continue producing at APIO until it reached the end of the mine life, as long as it can achieve break-even EBITDA[2. earnings before interest, tax, depreciation, and amortization] or above.

In the next part of this series, we’ll look at Cleveland-Cliffs’ progression on the cost front in both divisions.

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