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Tickers in this Article: CLF, CNX, ANR
Cliffs Natural Resources Inc. (CLF) posted earnings of $1.81 per share in the second quarter of 2012, down from $2.92 a year ago. The results, however, outshone the Zacks Consensus Estimate of $1.75. Lower prices and higher costs led to the decline in earnings. Moreover, the year-ago quarter's earnings were boosted by a sizable foreign currency hedging gain. Sales for the quarter came in at $1,626 million, down 10% from $1,805.8 million posted in the prior year quarter, missing the Zacks Consensus Estimate of $1,762 million. Higher labor, mining and maintenance costs and lower pricing led to the fall in revenues in the reported quarter.

Segment Performance

U.S. Iron Ore: U.S. Iron Ore pellet sales volume decreased to 5.4 million tons in the quarter from 5.8 million tons in the second quarter of 2011. The timing of vessel shipments led to the decrease.

Revenues per ton plunged 13% year over year to $119.51. The decline resulted from lower pricing of sea borne iron ore and changes in customer mix. Cash costs per ton rose 9% to $62.59 driven by additional costs recognized related to the full consolidation of Empire Mine.

Eastern Canadian Iron Ore: Sales spiked 41% to 2.4 million tons in the quarter, mainly due to increased iron ore concentrate sales volume from the Bloom Lake Mine. Revenues per ton for the segment declined 28% year over year to $128.39 due to lower pricing of iron ore.

Cash costs per ton went up 20% to $107.14 due to higher labor, maintenance, and logistics costs at the Bloom Lake Mine. Higher repairs, maintenance and mining costs at the Wabush Mine also led to increased cash costs.

Asia Pacific Iron Ore: Sales volumes in the segment increased 39% to 3.1 million tons as Koolyanobbing Complex expansion project was completed in the quarter. Revenues per ton were $117.73, a decrease from $173.38 in the prior-year quarter due to weaker year-over-year pricing for seaborne iron and low grade iron ore in the company's sales mix.

Cash cost per ton in the Asia-Pacific Iron Ore segment  declined 17% to $56.92 due to sales of low-grade ore, and accelerated mining costs, partially offset by lower royalty expenses and a favorable foreign exchange rate.

North American Coal: Sales Volumes increased 21% to 1.5 million tons, led by significantly higher sales and production volumes from Cliffs' low-volatile metallurgical coal mines. Revenues per ton inched up 1.4% to $120.32, driven by higher proportion of premium low-volatile metallurgical coal sales and partially offset by lower pricing of coal products. Cash cost per ton decreased 2.8% to $110.72 due to higher proportion of premium low-volatile metallurgical coal sales.

Sonoma Coal and Amapa: Cliffs has a 45% economic interest in Sonoma Coal. Sales volumes in the segment were 369,000 tons in the quarter. Revenues per ton at Sonoma were $126.42, with cash costs of $98.50 per ton. During the quarter, Cliffs entered into an agreement to sell its economic interest in Sonoma Coal for approximately AUD$141 million in cash. The sale is expected to close by the fourth quarter of 2012.

Cliffs has a 30% ownership interest in Amapa, an iron ore operation in Brazil. During the quarter, Amapa produced approximately 1.5 million tons and posted an equity income of $1 million for Cliffs' share of operation.

Financial Position

Cliffs had $159.2 million of cash and cash equivalents as of June 30, 2012, compared with $521.6 million as of December 31, 2011. Long-term debt stood at $3,614.1 million as of June 30, 2012, compared with $3,608.7 million as of December 31, 2011.

Outlook

Cliffs reduced its forecast for selling, general and administrative expenses for 2012 to $300 million from its previously stated outlook of $325 million. The company's focus on tightening its corporate expenses and the timing of spending for certain corporate projects led to the reduced guidance.

The company reiterated its full-year cash outflow forecast of approximately $165 million to support future growth. Cliffs anticipates an effective tax rate of approximately 2% for 2012. The company expects depreciation, depletion and amortization to be approximately $530 million for 2012.

The company lowered its expectation of cash flow from operations to roughly $1.3 billion from its previous expectation of $1.7 billion. Cliffs reiterated its earlier forecast for capital expenditures of approximately $1 billion for 2012.

U.S. Iron Ore Outlook

The company reaffirmed its U.S. Iron Ore revenues expectations of $115-$120 per ton. Cash cost is expected to be in the range of $60-$65 per ton.

Eastern Canadian Iron Ore Outlook

The company expects revenues per ton to be in the range of approximately $130-$135, down from its previous expectation of $140-$145 per ton. As a result of the downward revisions, cash cost per ton was also revised to $100-$105 from the previous range of $80-$85.

Asia Pacific Iron Ore Outlook

For 2012, the company lowered its revenues per ton guidance to the range of $120-$125 from its earlier expectation of $140-$145. Cash cost is expected to be in the range of $65-$70, down from the previous forecast of $70-$75 per ton.

North American Coal Outlook

For 2012, the company reiterated its guidance and expects revenues in the range of $130-$135 per ton. Cash cost is expected to be in the range of $110-$115, up from the previously announced outlook of $105-$110 per ton.

Sonoma Coal and Amapa Outlook

Cliffs expects the outlook for its interests in Amapa to be consistent with its previously reported full-year 2012 expectations.

Cliffs, which competes with CONSOL Energy Inc. (CNX) and Alpha Natural Resources, Inc. (ANR), currently retains a Zacks #4 Rank, reflecting a short-term (1 to 3 months) Sell rating. Currently, we have a long-term (more than 6 months) Neutral recommendation on the stock.

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