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Cliffs Expects Some Cost Inflation in US Iron Ore Division

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Cost progression in APIO

The cash cost of goods sold for Cleveland-Cliffs’ (CLF) APIO division was $44.56 per ton in 4Q17, 22% higher YoY (year-over-year) and 10% higher sequentially. The company attributed these increased costs to increased mining costs due to a higher strip ratio. Increased logistics and unfavorable exchange rate variations also led to the cost increase.

It is due to higher discounts and higher costs incurred in APIO that CLF is planning to accelerate the closing of its APIO mining operations. The company expected slightly negative EBITDA (earnings before interest, tax, depreciation, and amortization) on a full-year basis due to discounts, foreign exchange, and the iron ore price environment.

Although Cleveland-Cliffs’ costs for APIO have increased, its seaborne iron ore peers Rio Tinto (RIO), BHP (BHP), and Vale (VALE) have reduced their unit costs significantly in the past few years. These players also produce large quantities of high-grade ore, benefiting from the economies of scale.

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Unit cost progression in USIO

Cleveland-Cliffs’ (CLF) cash cost of goods sold for its US (SPY) (SPX) Iron Ore division was $59 per ton for 4Q17. This is close to its best performance of the year. CLF’s full-year cash cost came in at $60 per ton. The company was able to remain within its guidance range despite higher employee-related expenses, higher energy rates, and new product implementation.

The company expects its cash cost to be at a similar level as it was in 2017 with the guidance range of $58 to $63 per long ton. Investors should note that flat cash cost expectation for USIO in 2018 is despite higher volumes, which should lead to economies of scale. The company mentioned that this is because of its expectations of higher energy rates and transportation costs.

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