Coal tanks Cliffs' 3Q bottom line

AS PROJECTED by its executives, it was iron ore rather than coal that helped send Cliffs Natural Resources’ profits soaring in the third quarter, resulting in a reduction to its whole-year 2011 coal volume expectations for the North American coal segment.
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Image courtesy of Cliffs Natural Resources.

Donna Schmidt

For the period ended September 30, the Ohio-based producer reported record consolidated revenues of $2.1 billion, a 59% jump from $1.3 billion during the same quarter of 2010 on higher prices and volumes primarily from iron ore. Operating income was $820 million, a 110% year-on-year spike from 2010.

Looking solely at the North American coal arm, sales volumes fell 34% to 646,000 tons from 977,000t in last year’s same quarter. The decrease was driven by the absence of sales volume from the Oak Grove mine in Alabama following severe weather that damaged infrastructure, as well as a lower sales volume from the Pinnacle mine in West Virginia, idled with gas issues.

Operations are being restored at Oak Grove, officials confirmed, though underground operations were able to continue during the quarter despite the surface damage. Raw coal is now stockpiled in anticipation of a preparation plant restart in December.

Longwall operations resumed at Pinnacle in early October. During the third quarter, as a result of previously disclosed detection of carbon monoxide in a section of the mine, Cliffs had suspended underground longwall operations and flooded the impacted area.

Revenue per ton for the segment also dropped in the third quarter, down 16% to $99.38. Cliffs cited a product sales mix that included a higher proportion year-on-year of sales volume from high-volatile metallurgical and thermal coal products for the change.

Cash cost per ton was also up 25%, going from $107.61 to $134.98. It was primarily attributed to lower fixed-cost leverage resulting from the production issues.

“The execution of our growth and diversification strategy is on track and continues to gain momentum, despite the recent volatility in equity markets,” chairman and president Joseph Carrabba said.

“Relatively high seaborne iron ore pricing, increased year-over-year steel production in Asia and a stable market in North America all continue to support our strategically targeted expansion and growth initiatives."

Looking ahead, Cliffs said that it has decreased its sales volume expectations for the North American coal arm from 4.5 million tons to about 4Mt whole-year.

“The decrease is primarily related to sales from Oak Grove mine resuming in January 2012, rather than the company's previous estimate of December 2011,” officials said.

It expects its sales mix to be about 1.6Mt low-volatile metallurgical to 1.4Mt high-volatile metallurgical, with thermal coal making up the remainder of the anticipated volume. Full-year 2011 production is expected to be approximately 4.9Mt.

In the coming year, Cliffs projects it will sell approximately 7.2Mt from its North American coal business, made up of 4.3Mt low-vol met, 1.8Mt high-vol met, and 1.1Mt thermal. Whole-year 2010 production volumes should be about 6.6Mt.

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