CLIFFS NATURAL RESOURCES INC., 10-Q filed on 10/25/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 22, 2012
Entity Information [Line Items]
 
 
Entity Registrant Name
CLIFFS NATURAL RESOURCES INC. 
 
Entity Central Index Key
0000764065 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
142,496,147 
Trading Symbol
clf 
 
Statements Of Condensed Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
Product
$ 1,447.9 
$ 2,070.7 
$ 4,096.6 
$ 4,790.8 
Freight and venture partners' cost reimbursements
97.0 
18.4 
240.2 
169.4 
TOTAL REVENUES
1,544.9 
2,089.1 
4,336.8 
4,960.2 
COST OF GOODS SOLD AND OPERATING EXPENSES
(1,346.6)
(1,246.0)
(3,403.2)
(2,829.4)
SALES MARGIN
198.3 
843.1 
933.6 
2,130.8 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
 
Selling, general and administrative expenses
(63.9)
(61.3)
(202.6)
(164.4)
Consolidated Thompson acquisition costs
(2.1)
(25.0)
Exploration costs
(45.6)
(26.6)
(95.2)
(55.4)
Miscellaneous - net
(12.5)
64.0 
25.5 
59.4 
TOTAL OTHER OPERATING INCOME (EXPENSE)
(122.0)
(26.0)
(272.3)
(185.4)
OPERATING INCOME
76.3 
817.1 
661.3 
1,945.4 
OTHER INCOME (EXPENSE)
 
 
 
 
Changes in fair value of foreign currency contracts, net
(6.2)
0.3 
100.5 
Interest expense
(47.2)
(49.4)
(141.2)
(168.2)
Other non-operating income (expense)
3.3 
0.9 
6.2 
6.7 
TOTAL OTHER INCOME (EXPENSE)
(43.9)
(54.7)
(134.7)
(61.0)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES
32.4 
762.4 
526.6 
1,884.4 
INCOME TAX (EXPENSE) BENEFIT
64.0 
(3.7)
235.2 
(287.2)
EQUITY INCOME (LOSS) FROM VENTURES
(15.3)
11.1 
(22.7)
2.8 
INCOME FROM CONTINUING OPERATIONS
81.1 
769.8 
739.1 
1,600.0 
LOSS FROM DISCONTINUED OPERATIONS, net of tax
(2.7)
(16.8)
5.1 
3.7 
NET INCOME
78.4 
753.0 
744.2 
1,603.7 
LESS: INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(6.7)
151.8 
25.2 
170.1 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 85.1 
$ 601.2 
$ 719.0 
$ 1,433.6 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
 
Continuing operations (in usd per share)
$ 0.62 
$ 4.29 
$ 5.02 
$ 10.24 
Discontinued operations (in usd per share)
$ (0.02)
$ (0.12)
$ 0.04 
$ 0.03 
Earnings per common share attributable to Cliffs shareholders - Basic (in usd per share)
$ 0.60 
$ 4.17 
$ 5.06 
$ 10.27 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
 
Continuing operations (in usd per share)
$ 0.61 
$ 4.27 
$ 5.00 
$ 10.19 
Discontinued operations (in usd per share)
$ (0.02)
$ (0.12)
$ 0.04 
$ 0.03 
Earnings per common share attributable to Cliffs shareholders - Diluted (in usd per share)
$ 0.59 
$ 4.15 
$ 5.04 
$ 10.22 
Basic (in shares)
142,396 
144,203 
142,332 
139,563 
Diluted (in shares)
142,895 
144,989 
142,780 
140,321 
CASH DIVIDENDS DECLARED PER SHARE (in usd per share)
$ 0.63 
$ 0.28 
$ 1.54 
$ 0.56 
Statements Of Condensed Consolidated Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 85.1 
$ 601.2 
$ 719.0 
$ 1,433.6 
OTHER COMPREHENSIVE INCOME, NET OF TAX
 
 
 
 
Pension and OPEB liability
7.6 
4.9 
20.9 
14.4 
Unrealized net loss on marketable securities
(0.1)
(11.6)
(0.6)
(30.8)
Unrealized net gain (loss) on foreign currency translation
18.6 
(132.2)
12.2 
(74.8)
Unrealized net gain (loss) on derivative financial instruments
14.2 
(16.7)
13.6 
(13.5)
OTHER COMPREHENSIVE INCOME (LOSS)
40.3 
(155.6)
46.1 
(104.7)
LESS: OTHER COMPREHENSIVE LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
1.5 
(0.4)
4.5 
0.5 
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 123.9 
$ 446.0 
$ 760.6 
$ 1,328.4 
Statements Of Condensed Consolidated Financial Position (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 36.3 
$ 519.3 
Accounts receivable
285.9 
287.9 
Inventories
526.7 
456.9 
Supplies and other inventories
259.5 
216.9 
Derivative assets
78.3 
82.1 
Assets held for sale
156.6 
159.9 
Other current assets
322.1 
188.2 
TOTAL CURRENT ASSETS
1,665.4 
1,911.2 
PROPERTY, PLANT AND EQUIPMENT, NET
11,030.7 
10,404.1 
OTHER ASSETS
 
 
Investments in ventures
517.0 
526.6 
Goodwill
1,167.2 
1,152.1 
Intangible assets, net
133.8 
147.0 
Deferred income taxes
612.3 
209.5 
Other non-current assets
170.4 
191.2 
TOTAL OTHER ASSETS
2,600.7 
2,226.4 
TOTAL ASSETS
15,296.8 
14,541.7 
CURRENT LIABILITIES
 
 
Accounts payable
422.1 
364.7 
Accrued expenses
485.2 
384.8 
Taxes payable
84.7 
324.5 
Current portion of debt
369.7 
74.8 
Deferred revenue
125.1 
126.6 
Liabilities held for sale
29.7 
25.9 
Other current liabilities
197.8 
200.8 
TOTAL CURRENT LIABILITIES
1,714.3 
1,502.1 
POSTEMPLOYMENT BENEFIT LIABILITIES
603.3 
665.8 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
226.3 
213.2 
DEFERRED INCOME TAXES
1,147.0 
1,062.4 
LONG-TERM DEBT
3,514.3 
3,608.7 
BELOW-MARKET SALES CONTRACTS, NET
83.8 
111.8 
OTHER LIABILITIES
318.6 
338.0 
TOTAL LIABILITIES
7,607.6 
7,502.0 
COMMITMENTS AND CONTINGENCIES
   
   
CLIFFS SHAREHOLDERS' EQUITY
 
 
Common Shares - par value $0.125 per share; Authorized - 400,000,000 shares (2011 - 400,000,000); Issued - 149,195,469 shares (2011 - 149,195,469 shares); Outstanding - 142,491,645 shares (2011 - 142,021,718 shares)
18.5 
18.5 
Capital in excess of par value of shares
1,766.2 
1,770.8 
Retained earnings
4,925.7 
4,424.3 
Cost of 6,703,824 common shares in treasury (2011 - 7,173,751 shares)
(322.6)
(336.0)
Accumulated other comprehensive loss
(51.0)
(92.6)
TOTAL CLIFFS SHAREHOLDERS' EQUITY
6,336.8 
5,785.0 
NONCONTROLLING INTEREST
1,352.4 
1,254.7 
TOTAL EQUITY
7,689.2 
7,039.7 
TOTAL LIABILITIES AND EQUITY
$ 15,296.8 
$ 14,541.7 
Statements Of Condensed Consolidated Financial Position (Parenthetical) (USD $)
Sep. 30, 2012
Dec. 31, 2011
Common shares, par value
$ 0.125 
$ 0.125 
Common shares, authorized (in shares)
400,000,000 
400,000,000 
Common shares, issued (in shares)
149,195,469 
149,195,469 
Common shares, outstanding
142,491,645 
142,021,718 
Common shares in treasury
6,703,824 
7,173,751 
Statements Of Condensed Consolidated Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
OPERATING ACTIVITIES
 
 
Net income
$ 744.2 
$ 1,603.7 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
Depreciation, depletion and amortization
382.3 
306.3 
Derivatives and currency hedges
12.0 
(84.4)
Equity income (loss) in ventures (net of tax)
22.7 
(2.8)
Deferred income taxes
(352.5)
(29.7)
Changes in deferred revenue and below-market sales contracts
(36.2)
(156.3)
Pensions and other postretirement benefits
(45.4)
(43.3)
Other
(10.3)
3.7 
Changes in operating assets and liabilities:
 
 
Receivables and other assets
(118.6)
(62.5)
Product inventories
(70.4)
(128.5)
Payables and accrued expenses
(252.3)
139.5 
Net cash provided (used) by operating activities
275.5 
1,545.7 
INVESTING ACTIVITIES
 
 
Acquisition of Consolidated Thompson, net of cash acquired
(4,423.5)
Purchase of property, plant and equipment
(793.6)
(478.9)
Settlements in Canadian dollar foreign exchange contracts
93.1 
Investment in Consolidated Thompson senior secured notes
(125.0)
Other investing activities
8.9 
15.7 
Net cash used by investing activities
(784.7)
(4,918.6)
FINANCING ACTIVITIES
 
 
Net proceeds from issuance of common shares
853.7 
Net proceeds from issuance of senior notes
998.1 
Borrowings on term loan
1,250.0 
Borrowings on bridge credit facility
750.0 
Repayment of bridge credit facility
(750.0)
Repayment of term loan
(49.9)
(265.4)
Debt issuance costs
(54.8)
Borrowings under revolving credit facility
670.0 
250.0 
Repayment under revolving credit facility
(420.0)
Repayment of Consolidated Thompson convertible debentures
(337.2)
Payments under share buyback program
(221.9)
Contributions by (to) joint ventures, net
68.8 
Common stock dividends
(217.8)
(78.8)
Other financing activities
(23.9)
(27.1)
Net cash provided by financing activities
27.2 
2,366.6 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(0.1)
(15.3)
DECREASE IN CASH AND CASH EQUIVALENTS
(482.1)
(1,021.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
521.6 
1,566.7 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 39.5 
$ 545.1 
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, the financial position, results of operations, comprehensive income and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of results to be expected for the year ended December 31, 2012 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly owned and majority-owned subsidiaries, including the following operations:
Name
 
Location
 
Ownership Interest
 
Operation
Northshore
 
Minnesota
 
100.0%
 
Iron Ore
United Taconite
 
Minnesota
 
100.0%
 
Iron Ore
Wabush
 
Labrador/Quebec, Canada
 
100.0%
 
Iron Ore
Bloom Lake
 
Quebec, Canada
 
75.0%
 
Iron Ore
Tilden
 
Michigan
 
85.0%
 
Iron Ore
Empire
 
Michigan
 
79.0%
 
Iron Ore
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
Pinnacle
 
West Virginia
 
100.0%
 
Coal
Oak Grove
 
Alabama
 
100.0%
 
Coal
CLCC
 
West Virginia
 
100.0%
 
Coal

Intercompany transactions and balances are eliminated upon consolidation.
Also included in our consolidated results are Cliffs Chromite Ontario Inc. and Cliffs Chromite Far North Inc., which have a 100 percent interest in the Black Label and Black Thor chromite deposits and a 70 percent interest in the Big Daddy chromite deposit, respectively, all located in Northern Ontario, Canada.
The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2012 and December 31, 2011. Parentheses indicate a net liability.
 
 
 
 
 
 
 
 
(In Millions)
Investment
 
Classification
 
Accounting
Method
 
Interest
Percentage
 
September 30, 2012
 
December 31, 2011
Amapá
 
Investments in ventures
 
Equity Method
 
30
 
$
479.2

 
$
498.6

Cockatoo
 
Other liabilities
 
Equity Method
 
50
 
(28.7
)
 
(15.0
)
Hibbing (1)
 
Investments in ventures
 
Equity Method
 
23
 
0.8

 
(6.8
)
Other
 
Investments in ventures
 
Equity Method
 
Various
 
37.0

 
28.0

 
 
 
 
 
 
 
 
$
488.3

 
$
504.8


(1)
Recorded as Other liabilities at December 31, 2011.
Cockatoo Island
In August 2011, we entered into a term sheet with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo Island to Pluton Resources. On July 31, 2012, the parties entered into a definitive asset sale agreement, which was amended on August 31, 2012. On September 7, 2012, the closing date, Pluton Resources paid as consideration under the asset sale agreement, a nominal sum of AUD $4.00 and assumed ownership of the assets and responsibility for the environmental rehabilitation obligations and other assumed liabilities not inherently attached to the tenements acquired. With respect to those rehabilitation obligations and assumed liabilities that are inherently attached to the tenements, those obligations and liabilities will automatically transfer to, and be assumed by, Pluton Resources upon registration of each of the tenements in Pluton Resources' name. Registration of the tenements in Pluton Resources' name cannot occur until the Office of State Revenue assesses the amount of stamp duty payable by Pluton Resources. The duty assessment process is expected to be completed during the fourth quarter of 2012. As of September 30, 2012, our portion of the current estimated cost of the rehabilitation is approximately $24 million and will be extinguished upon registration of the tenements in Pluton Resources' name. Cliffs and HWE Cockatoo Pty Ltd. completed the current stage of mining, Phase 3, at Cockatoo Island on September 30, 2012.
Immaterial Errors
In September 2011, we noted an error in the accounting for the 21 percent noncontrolling interest in the Empire mine. In accordance with applicable GAAP, management quantitatively and qualitatively evaluated the materiality of the error and determined the error to be immaterial to the quarterly reports previously filed for the periods ended March 31, 2011 and June 30, 2011 and also immaterial for the quarterly report for the period ended September 30, 2011. Accordingly, all of the resulting adjustments were recorded prospectively in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011. The adjustment to record the noncontrolling interest related to the Empire mining venture of $84.0 million resulted in an increase to Income from Continuing Operations of $16.1 million, as a result of reductions in income tax expenses and a decrease to Net Income Attributable to Cliffs Shareholders of $67.9 million in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. The adjustments resulted in a decrease to basic and diluted earnings per common share of $0.47 per common share and $0.49 and $0.48 per common share for the three and nine months ended September 30, 2011, respectively. In addition, Retained Earnings was decreased by $67.9 million and Noncontrolling Interest was increased by $84.0 million in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011.
In addition to the noncontrolling interest adjustment, the application of consolidation accounting for the Empire partnership arrangement also resulted in several financial statement line item reclassifications in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. Under the captive cost company accounting, we historically recorded the reimbursements for our venture partners' cost through Freight and venture partners' cost reimbursements, with a corresponding offset in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. Accordingly, we reclassified $46.0 million of revenues from Freight and venture partners' cost reimbursements to Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. We also reclassified $54.1 million related to the ArcelorMittal price re-opener settlement recorded during the first quarter of 2011 from Cost of goods sold and operating expenses to Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011.
Discontinued Operations
On July 10, 2012, we entered into a definitive share and asset sale agreement to sell our 45 percent economic interest in the Sonoma joint venture coal mine located in Queensland, Australia. The assets to be sold include our interests in the Sonoma mine along with our ownership of the affiliated washplant. Upon completion of the transaction, anticipated to close during the fourth quarter of 2012, we expect to collect approximately AUD $141.0 million in cash proceeds. As of September 30, 2012, we have reported the assets and related liabilities of the Sonoma operations as Assets held for sale and Liabilities held for sale in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2012 and December 31, 2011 and reflected the results of operations as discontinued operations in the Statements of Unaudited Condensed Consolidated Operations for all periods presented. The Sonoma operations historically were reported as the Asia Pacific Coal operating segment. Refer to NOTE 7 - DISCONTINUED OPERATIONS for additional information.
On September 27, 2011, we announced our plans to cease and dispose of the operations at the renewaFUEL biomass production facility in Michigan. On January 4, 2012, we entered into an agreement to sell the renewaFUEL assets to RNFL Acquisition, LLC. The results of operations of the renewaFUEL operations are reflected as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. We recorded a loss of $0.1 million as Income (Loss) from Discontinued Operations in the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2012. This compares to losses of $17.5 million and $18.7 million for the three and nine months ended September 30, 2011, which included a $16.7 million impairment charge, taken to write the renewaFUEL assets down to fair value.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC. There have been changes in our significant accounting policies from those disclosed therein. As disclosed in the March 31, 2012 Form 10-Q, the following significant accounting policies have been included within the disclosures below.
Revenue Recognition and Cost of Goods Sold and Operating Expenses
U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore
We sell our products pursuant to comprehensive supply agreements negotiated and executed with our customers. Revenue is recognized from a sale when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product is delivered in accordance with F.O.B. terms, title and risk of loss have transferred to the customer in accordance with the specified provisions of each supply agreement and collection of the sales price reasonably is assured. Our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore supply agreements provide that title and risk of loss transfer to the customer either upon loading of the vessel, shipment or, as is the case with some of our U.S. Iron Ore supply agreements, when payment is received. Under certain term supply agreements, we ship the product to ports on the lower Great Lakes or to the customers’ facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and retaining title until payment is received for these products is to minimize credit risk exposure.
Iron ore sales are recorded at a sales price specified in the relevant supply agreements resulting in revenue and a receivable at the time of sale. Upon revenue recognition for provisionally priced sales, a freestanding derivative is created for the difference between the sales price used and expected future settlement price. The derivative, which does not qualify for hedge accounting, is adjusted to fair value through Product revenues as a revenue adjustment each reporting period based upon current market data and forward-looking estimates determined by management until the final sales price is determined. The principal risks associated with recognition of sales on a provisional basis include iron ore price fluctuations between the date initially recorded and the date of final settlement. For revenue recognition, we estimate the future settlement rate; however, if significant changes in iron ore prices occur between the provisional pricing date and the final settlement date, we might be required to either return a portion of the sales proceeds received or bill for the additional sales proceeds due based on the provisional sales price. Refer to NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing for the year the product is consumed in the customer’s blast furnaces. We account for this provision as a derivative instrument at the time of sale and record this provision at fair value until the year the product is consumed and the amounts are settled as an adjustment to revenue. Refer to NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Revenue from product sales also includes reimbursement for freight charges paid on behalf of customers in Freight and venture partners' cost reimbursements separate from Product revenues. Revenue is recognized for the expected reimbursement of services when the services are performed.
Cost of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to the sales and revenues of our mining operations. Operating expenses within this line item primarily represent the portion of the Tilden mining venture costs for which we do not own; that is, the costs attributable to the share of the mine’s production owned by the other joint venture partner in the Tilden mine. The mining venture functions as a captive cost company; it supplies product only to its owners effectively on a cost basis. Accordingly, the noncontrolling interests’ revenue amounts are stated at cost of production and are offset by an equal amount included in Cost of goods sold and operating expenses resulting in no sales margin reflected in the noncontrolling partner participant. As we are responsible for product fulfillment, we act as a principal in the transaction and, accordingly, record revenue under these arrangements on a gross basis.
Where we have joint ownership of a mine, our contracts entitle us to receive royalties and/or management fees, which we earn as the pellets are produced.
Recent Accounting Pronouncements
In May 2011, the FASB amended the guidance on fair value as a result of the joint efforts by the FASB and the IASB to develop a single, converged fair value framework. The amended fair value framework provides guidance on how to measure fair value and on what disclosures to provide about fair value measurements. The significant amendments to the fair value measurement guidance and the new disclosure requirements include: (1) the highest and best use and valuation premise for non-financial assets; (2) the application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risks; (3) premiums or discounts in fair value measurement; (4) fair value of an instrument classified in a reporting entity’s shareholders’ equity; (5) for Level 3 measurements, a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place and a narrative description of the sensitivity of the fair value to changes in the unobservable inputs and interrelationships between those inputs; and (6) the level in the fair value hierarchy of items that are not measured at fair value in the Statement of Financial Position but whose fair value must be disclosed. The new guidance is effective for interim and annual periods beginning after December 15, 2011. We adopted the amended guidance as of January 1, 2012. Refer to NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
SEGMENT REPORTING
SEGMENT REPORTING
NOTE 2 - SEGMENT REPORTING
Our Company’s primary operations are organized and managed according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal, Asia Pacific Coal, Latin American Iron Ore, Ferroalloys and our Global Exploration Group. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that primarily provide iron ore to the seaborne market for Asian steel producers. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. The North American Coal segment is comprised of our five metallurgical coal mines and one thermal coal mine that provide metallurgical coal primarily to the integrated steel industry and thermal coal primarily to the energy industry. There are no intersegment revenues.
The Asia Pacific Coal operating segment is comprised of our 45 percent economic interest in Sonoma, located in Queensland, Australia, which is expected to be sold during the fourth quarter of 2012. The Latin American Iron Ore operating segment is comprised of our 30 percent Amapá interest in Brazil. The Ferroalloys operating segment is comprised of our interests in chromite deposits held in Northern Ontario, Canada and the Global Exploration Group is focused on early involvement in exploration activities to identify new projects for future development or projects that add significant value to existing operations. The Asia Pacific Coal, Latin American Iron Ore, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and therefore are not reported separately.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.
The following table presents a summary of our reportable segments for the three and nine months ended September 30, 2012 and 2011:
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues from product sales and services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
796.0

 
52
 %
 
$
1,106.7

 
52
%
 
$
1,942.7

 
45
%
 
$
2,502.0

 
49
%
Eastern Canadian Iron Ore
253.1

 
16
 %
 
517.3

 
24
%
 
777.8

 
18
%
 
942.2

 
18
%
Asia Pacific Iron Ore
254.2

 
16
 %
 
400.1

 
19
%
 
975.3

 
22
%
 
1,127.1

 
22
%
North American Coal
241.8

 
16
 %
 
64.0

 
3
%
 
640.9

 
15
%
 
388.7

 
8
%
Other
(0.2
)
 
 %
 
1.0

 
2
%
 
0.1

 
%
 
0.2

 
3
%
Total revenues from product sales and services
$
1,544.9

 
100
 %
 
$
2,089.1

 
100
%
 
$
4,336.8

 
100
%
 
$
4,960.2

 
100
%
Sales margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
255.9

 
 
 
$
481.3

 
 
 
$
708.9

 
 
 
$
1,283.7

 
 
Eastern Canadian Iron Ore
(40.5
)
 
 
 
191.0

 
 
 
(43.0
)
 
 
 
293.5

 
 
Asia Pacific Iron Ore
(15.8
)
 
 
 
214.6

 
 
 
256.1

 
 
 
615.4

 
 
North American Coal
(1.3
)
 
 
 
(42.7
)
 
 
 
3.8

 
 
 
(60.4
)
 
 
Other

 
 
 
(1.1
)
 
 
 
7.8

 
 
 
(1.4
)
 
 
Sales margin
198.3

 
 
 
843.1

 
 
 
933.6

 
 
 
2,130.8

 
 
Other operating expense
(122.0
)
 
 
 
(26.0
)
 
 
 
(272.3
)
 
 
 
(185.4
)
 
 
Other expense
(43.9
)
 
 
 
(54.7
)
 
 
 
(134.7
)
 
 
 
(61.0
)
 
 
Income from continuing operations before income taxes and equity income (loss) from ventures
$
32.4

 
 
 
$
762.4

 
 
 
$
526.6

 
 
 
$
1,884.4

 
 
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
24.9

 
 
 
$
23.0

 
 
 
$
71.9

 
 
 
$
62.5

 
 
Eastern Canadian Iron Ore
41.7

 
 
 
43.2

 
 
 
118.2

 
 
 
84.5

 
 
Asia Pacific Iron Ore
40.2

 
 
 
25.4

 
 
 
110.0

 
 
 
74.3

 
 
North American Coal
25.1

 
 
 
19.7

 
 
 
69.5

 
 
 
62.1

 
 
Other
1.0

 
 
 
8.4

 
 
 
12.7

 
 
 
22.9

 
 
Total depreciation, depletion and amortization
$
132.9

 
 
 
$
119.7

 
 
 
$
382.3

 
 
 
$
306.3

 
 
Capital additions (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
19.6

 
 
 
$
28.5

 
 
 
$
82.5

 
 
 
$
115.8

 
 
Eastern Canadian Iron Ore
285.5

 
 
 
103.3

 
 
 
593.4

 
 
 
167.5

 
 
Asia Pacific Iron Ore
5.8

 
 
 
57.3

 
 
 
132.0

 
 
 
140.6

 
 
North American Coal
33.3

 
 
 
60.3

 
 
 
105.1

 
 
 
116.3

 
 
Other
10.3

 
 
 
6.5

 
 
 
61.0

 
 
 
13.1

 
 
Total capital additions
$
354.5

 
 
 
$
255.9

 
 
 
$
974.0

 
 
 
$
553.3

 
 
(1)
Includes capital lease additions and non-cash accruals. Refer to NOTE 21 - CASH FLOW INFORMATION
A summary of assets by segment is as follows:

(In Millions)

September 30, 2012
 
December 31, 2011
Segment assets:
 
 
 
U.S. Iron Ore
$
1,841.4

 
$
1,691.8

Eastern Canadian Iron Ore
8,307.7

 
7,973.1

Asia Pacific Iron Ore
1,864.8

 
1,511.2

North American Coal
1,904.6

 
1,814.4

Other
960.2

 
1,017.6

Total segment assets
14,878.7

 
14,008.1

Corporate
418.1

 
533.6

Total assets
$
15,296.8

 
$
14,541.7

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2012 and December 31, 2011:
 
(In Millions)
 
Derivative Assets
 
Derivative Liabilities
 
September 30, 2012
 
December 31, 2011
 
September 30, 2012
 
December 31, 2011
Derivative
Instrument
Balance Sheet Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
Derivative assets
 
$
22.4

 
Derivative assets
 
$
5.2

 
Other current liabilities
 
$
1.3

 
Other current liabilities
 
$
3.5

Total derivatives designated as hedging instruments under ASC 815
 
 
$
22.4

 
 
 
$
5.2

 
 
 
$
1.3

 
 
 
$
3.5

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
 
 
$

 
Derivative assets
 
$
2.8

 
 
 
$

 
 
 
$

Foreign Exchange Contracts
Assets held for sale
 
1.1

 
 
 

 
 
 

 
 
 

Customer Supply Agreements
Derivative assets
 
54.5

 
Derivative assets
 
72.9

 
 
 

 
 
 

Provisional Pricing Arrangements
Derivative assets
 
1.4

 
Derivative assets
 
1.2

 
Other current liabilities
 
11.7

 
Other current liabilities
 
19.5

 
 
 

 
Accounts receivable
 
83.8

 
 
 

 
 
 

Total derivatives not designated as hedging instruments under ASC 815
 
 
$
57.0

 
 
 
$
160.7

 
 
 
$
11.7

 
 
 
$
19.5

Total derivatives
 
 
$
79.4

 
 
 
$
165.9

 
 
 
$
13.0

 
 
 
$
23.0


Derivatives Designated as Hedging Instruments
Cash Flow Hedges
Australian and Canadian Dollar Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia and Canada. With respect to Australia, foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore and coal sales. The functional currency of our Canadian operations is the U.S. dollar; however, the production costs for these operations primarily are incurred in the Canadian dollar.
We use foreign currency exchange contracts to hedge our foreign currency exposure for a portion of our U.S. dollar sales receipts in our Australian functional currency entities and our Canadian dollar operating costs. For our Australian operations, U.S. dollars are converted to Australian dollars at the currency exchange rate in effect during the period the transaction occurred. For our Canadian operations, U.S. dollars are converted to Canadian dollars at the exchange rate in effect for the period the operating costs are incurred. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and U.S. and Canadian currency exchange rates, respectively, and to protect against undue adverse movement in these exchange rates. These instruments qualify for hedge accounting treatment, and are tested for effectiveness at inception and at least once each reporting period. If and when any of our hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
As of September 30, 2012, we had outstanding Australian and Canadian foreign currency exchange contracts with notional amounts of $420.0 million and $645.7 million, respectively, in the form of forward contracts with varying maturity dates ranging from October 2012 to September 2013. This compares with outstanding Australian foreign currency exchange contracts with a notional amount of $400.0 million as of December 31, 2011. There were no outstanding Canadian foreign currency exchange contracts as of December 31, 2011, as we did not begin entering into Canadian foreign currency exchange contracts until January 2012.
Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Financial Position. Any ineffectiveness is recognized immediately in income and for the three and nine months ended September 30, 2012 and 2011, there was no material ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive loss are reclassified into earnings in the same period the forecasted transaction affects earnings. Of the amounts remaining in Accumulated other comprehensive loss related to Australian hedge contracts and Canadian hedge contracts, we estimate that gains of $8.7 million and $6.2 million (net of tax), respectively, will be reclassified into earnings within the next 12 months.
The following summarizes the effect of our derivatives designated as hedging instruments, net of tax in Accumulated other comprehensive loss and the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2012 and 2011:

(In Millions)
Derivatives in Cash Flow
Amount of Gain (Loss)
Recognized in OCI on Derivative
 
Location of Gain
(Loss) Reclassified
from Accumulated OCI into Income
 
Amount of Gain
Reclassified
from Accumulated
OCI into Income
Hedging Relationships
(Effective Portion)
 
(Effective Portion)
 
(Effective Portion)
 
Three Months Ended
September 30,
 
 
 
Three Months Ended
September 30,
 
2012
 
2011
 
 
 
2012
 
2011
Australian Dollar Foreign
Exchange Contracts
(hedge designation)
$
1.4

 
$
(15.2
)
 
Product revenues
 
$
5.1

 
$
1.5

Canadian Dollar Foreign Exchange Contracts (hedge designation)
11.3

 

 
Cost of goods sold and operating expenses
 
1.3

 

Total
$
12.7

 
$
(15.2
)
 
 
 
$
6.4

 
$
1.5

 
Nine Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
2012
 
2011
 
 
 
2012
 
2011
Australian Dollar Foreign
Exchange Contracts
(hedge designation)
$
7.5

 
$
(10.3
)
 
Product revenues
 
$
7.8

 
$
2.5

Canadian Dollar Foreign Exchange Contracts (hedge designation)
6.2

 

 
Cost of goods sold and operating expenses
 
1.6

 

Australian Dollar Foreign
Exchange Contracts
(prior to de-designation)

 

 
Product revenues
 

 
0.7

Total
$
13.7

 
$
(10.3
)
 
 
 
$
9.4

 
$
3.2


Interest Rate Risk Management
Interest rate risk is managed using a portfolio of variable- and fixed-rate debt composed of short- and long-term instruments, such as U.S. treasury lock agreements and interest rate swaps. From time to time these instruments, which are derivative instruments, are entered into to facilitate the maintenance of the desired ratio of variable- and fixed-rate debt. These derivative instruments are designated and qualify as cash flow hedges. These instruments did not have a material impact on our financial statements as of and for the three and nine months ended September 30, 2012.
Derivatives Not Designated as Hedging Instruments
Australian Dollar Foreign Exchange Contracts
On July 10, 2012, we entered into a definitive share and asset sale agreement to sell our 45 percent economic interest in the Sonoma joint venture coal mine located in Queensland, Australia. The assets to be sold include our interests in the Sonoma mine along with our ownership of the affiliated wash plant. We hedged the Sonoma sale price on the open market by entering into foreign currency exchange forward contracts with a notional amount of AUD $141.0 million. The hedge contracts were considered economic hedges, which do not qualify for hedge accounting. The forward contracts have a maturity date of November 13, 2012. These instruments are prospectively marked to fair value each reporting period through Income (Loss) from Discontinued Operations on the Statements of Unaudited Condensed Consolidated Operations. For the three and nine months ended September 30, 2012, the change in fair value of these forward contracts resulted in net unrealized gains of $1.1 million based on the Australian to U.S. dollar spot rate of 1.04 at September 30, 2012. Current Assets held for sale of $1.1 million, representing the fair value of the contracts was recorded on September 30, 2012 in the Statements of Unaudited Condensed Consolidated Financial Position.
Canadian Dollar Foreign Exchange Contracts and Options
On January 11, 2011, we entered into a definitive agreement with Consolidated Thompson to acquire all of its common shares in an all-cash transaction, including net debt. We hedged a portion of the purchase price on the open market by entering into foreign currency exchange forward contracts and an option contract with a combined notional amount of C$4.7 billion. The hedge contracts were considered economic hedges, which do not qualify for hedge accounting. The forward contracts had various maturity dates and the option contract had a maturity date of April 14, 2011.
During the first half of 2011, swaps were executed in order to extend the maturity dates of certain of the forward contracts through the consummation of the Consolidated Thompson acquisition and the repayment of the Consolidated Thompson convertible debentures. These swaps and the maturity of the forward contracts resulted in net realized gains of $93.1 million recognized through Changes in fair value of foreign currency contracts, net in the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011.
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The price adjustment factors vary based on the agreement but typically include adjustments based upon changes in international pellet prices and changes in specified Producer Price indices including those for all commodities, industrial commodities, energy and steel. The adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds to the customer based on the customer’s average annual steel pricing at the time the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. We recognized $49.8 million and $131.8 million, respectively, as Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2012, related to the supplemental payments. This compares with Product revenues of $53.8 million and $124.9 million, respectively, for the comparable periods in 2011. Derivative assets, representing the fair value of the pricing factors, were $54.5 million and $72.9 million, respectively, in the September 30, 2012 and December 31, 2011 Statements of Unaudited Condensed Consolidated Financial Position.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final sales price to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the provisionally agreed-upon price and the estimated final sales price is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final sales price is determined. We have recorded $1.4 million as Derivative assets and $11.7 million as derivative liabilities included in Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position at September 30, 2012 related to our estimate of final sales price with our U.S. Iron Ore and Eastern Canadian Iron Ore customers. These amounts represent the difference between the provisional price agreed upon with our customers based on the supply agreement terms and our estimate of the final sales price based on the price calculations established in the supply agreements. As a result, we recognized a net $10.3 million as a decrease in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2012 related to these arrangements. At December 31, 2011, we did not have any derivative assets or liabilities recorded due to these arrangements.
In instances when we were still working to revise components of the pricing calculations referenced within our supply agreements to incorporate new market inputs to the pricing mechanisms, we record certain shipments made to customers based on an agreed-upon provisional price. The shipments were recorded based on the provisional price until settlement of the market inputs to the pricing mechanisms are finalized. The lack of agreed-upon market inputs results in these provisional prices being characterized as derivatives. The derivative instrument, which is settled and billed or credited once the determinations of the market inputs to the pricing mechanisms are finalized, is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates determined by management. During the third quarter, we reached final pricing settlements on the customer supply agreements in which components of the pricing calculations were still being revised. As such, at September 30, 2012, no shipments were recorded based upon this type of provisional pricing. For the three and nine months ended September 30, 2011, we recognized $193.0 million and $623.5 million, respectively, as an increase in Product revenues in the Statements of Unaudited Condensed Consolidated Operations under the pricing provisions for certain shipments to U.S. Iron Ore and Eastern Canadian Iron Ore customers as we were still in the process of revising the terms of the related customer supply agreements. At December 31, 2011, we recorded $1.2 million Derivative assets, $19.5 million derivative liabilities included in Other current liabilities and $83.8 million Accounts receivable in the Statements of Unaudited Condensed Consolidated Financial Position related to these types of provisional pricing arrangements with various U.S. Iron Ore and Eastern Canadian Iron Ore customers.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2012 and 2011:
 
 
 
 
(In Millions)
Derivatives Not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss)
Recognized in
Income on Derivative
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
 
2012
 
2011
 
2012
 
2011
Foreign Exchange Contracts
 
Product revenues
 
$

 
$

 
$

 
$
1.0

Foreign Exchange Contracts
 
Other income (expense)
 

 
(6.2
)
 
0.3

 
100.5

Foreign Exchange Contracts
 
Income (Loss) from Discontinued Operations
 
1.1

 

 
1.1

 

Customer Supply Agreements
 
Product revenues
 
49.8

 
53.8

 
131.8

 
124.9

Provisional Pricing Arrangements
 
Product revenues
 
(10.3
)
 
193.0

 
(10.3
)
 
623.5

Total
 
 
 
$
40.6

 
$
240.6

 
$
122.9

 
$
849.9


Refer to NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.
Inventories
Inventories
NOTE 4 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2012 and December 31, 2011:

(In Millions)

September 30, 2012
 
December 31, 2011
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in
Process
 
Total
Inventory
U.S. Iron Ore
$
182.7

 
$
46.8

 
$
229.5

 
$
100.2

 
$
8.5

 
$
108.7

Eastern Canadian Iron Ore
77.7

 
37.6

 
115.3

 
96.2

 
43.0

 
139.2

Asia Pacific Iron Ore
21.7

 
41.8

 
63.5

 
57.2

 
21.6

 
78.8

North American Coal
57.7

 
60.7

 
118.4

 
19.7

 
110.5

 
130.2

Total
$
339.8

 
$
186.9

 
$
526.7

 
$
273.3

 
$
183.6

 
$
456.9


At our North American Coal operating segment, we recorded lower of cost or market inventory charges of $8.0 million and $17.9 million in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2012, respectively, due to market prices for coal. No lower of cost or market inventory adjustments were recorded for the three and nine months ended September 30, 2011.
PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the value of each of the major classes of our consolidated depreciable assets as of September 30, 2012 and December 31, 2011:
 
(In Millions)
 
September 30, 2012
 
December 31, 2011
Land rights and mineral rights
$
7,952.1

 
$
7,868.7

Office and information technology
83.3

 
66.8

Buildings
143.0

 
132.2

Mining equipment
1,318.9

 
1,323.8

Processing equipment
1,839.4

 
1,311.6

Railroad equipment
224.3

 
161.6

Electric power facilities
58.8

 
57.9

Port facilities
112.1

 
64.1

Interest capitalized during construction
32.2

 
22.5

Land improvements
43.3

 
30.4

Other
31.9

 
43.2

Construction in progress
844.4

 
612.8

 
12,683.7

 
11,695.6

Allowance for depreciation and depletion
(1,653.0
)
 
(1,291.5
)
 
$
11,030.7

 
$
10,404.1


We recorded depreciation and depletion expense of $127.7 million and $364.9 million in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2012, respectively. This compares with depreciation and depletion expense of $109.6 million and $279.7 million for the three and nine months ended September 30, 2011.
Acquisitions
Acquisitions
NOTE 6 - ACQUISITIONS
Acquisitions
We allocate the cost of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. Any excess of cost over the fair value of the net assets acquired is recorded as goodwill.
Consolidated Thompson
On May 12, 2011, we completed our acquisition of Consolidated Thompson by acquiring all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt, pursuant to the terms of an arrangement agreement dated as of January 11, 2011. Upon the acquisition: (a) each outstanding Consolidated Thompson common share was acquired for a cash payment of C$17.25; (b) each outstanding option and warrant that was “in the money” was acquired for cancellation for a cash payment of C$17.25 less the exercise price per underlying Consolidated Thompson common share; (c) each outstanding performance share unit was acquired for cancellation for a cash payment of C$17.25; (d) all outstanding Quinto Mining Corporation rights to acquire common shares of Consolidated Thompson were acquired for cancellation for a cash payment of C$17.25 per underlying Consolidated Thompson common share; and (e) certain Consolidated Thompson management contracts were eliminated that contained certain change of control provisions for contingent payments upon termination. The acquisition date fair value of the consideration transferred totaled $4.6 billion. Our full ownership of Consolidated Thompson has been included in the unaudited condensed consolidated financial statements since the acquisition date and the subsidiary CQIM is reported as a component of our Eastern Canadian Iron Ore segment.
The acquisition of Consolidated Thompson reflects our strategy to build scale by owning expandable and exportable steelmaking raw material assets serving international markets. Through our acquisition of Consolidated Thompson, we now own and operate an iron ore mine and processing facility near Bloom Lake in Quebec, Canada that produces iron ore concentrate of high quality. WISCO is a 25 percent partner in the Bloom Lake mine. We also own additional development properties, primarily Lamêlée and Peppler Lake, in Quebec. All of these properties are in proximity to our existing Canadian operations and will allow us to leverage our port facilities and supply this iron ore to the seaborne market. The acquisition also is expected to further diversify our existing customer base.
The following table summarizes the consideration paid for Consolidated Thompson and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation for the acquisition of Consolidated Thompson during the second quarter of 2012.
 
(In Millions)
 
Initial
Allocation
 
Final
Allocation
 
Change
Consideration
 
 
 
 
 
Cash
$
4,554.0

 
$
4,554.0

 
$

Fair value of total consideration transferred
$
4,554.0

 
$
4,554.0

 
$

Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
 
 
 
ASSETS:
 
 
 
 
 
Cash
$
130.6

 
$
130.6

 
$

Accounts receivable
102.8

 
102.4

 
(0.4
)
Product inventories
134.2

 
134.2

 

Other current assets
35.1

 
35.1

 

Mineral rights
4,450.0

 
4,825.6

 
375.6

Property, plant and equipment
1,193.4

 
1,193.4

 

Intangible assets
2.1

 
2.1

 

Total identifiable assets acquired
6,048.2

 
6,423.4

 
375.2

LIABILITIES:
 
 
 
 
 
Accounts payable
(13.6
)
 
(13.6
)
 

Accrued liabilities
(130.0
)
 
(123.8
)
 
6.2

Convertible debentures
(335.7
)
 
(335.7
)
 

Other current liabilities
(41.8
)
 
(47.9
)
 
(6.1
)
Long-term deferred tax liabilities
(831.5
)
 
(1,041.8
)
 
(210.3
)
Senior secured notes
(125.0
)
 
(125.0
)
 

Capital lease obligations
(70.7
)
 
(70.7
)
 

Other long-term liabilities
(25.1
)
 
(32.8
)
 
(7.7
)
Total identifiable liabilities assumed
(1,573.4
)
 
(1,791.3
)
 
(217.9
)
Total identifiable net assets acquired
4,474.8

 
4,632.1

 
157.3

Noncontrolling interest in Bloom Lake
(947.6
)
 
(1,075.4
)
 
(127.8
)
Goodwill
1,026.8

 
997.3

 
(29.5
)
Total net assets acquired
$
4,554.0

 
$
4,554.0

 
$


Included in the changes to the initial purchase price allocation for Consolidated Thompson, which was performed during the second quarter of 2011, are changes recorded in the first quarter of 2012, when we further refined the fair value of the assets acquired and liabilities assumed. The acquisition date fair value was adjusted to record a $16.4 million increase related to pre-acquisition date Quebec mining duties tax. We recorded $6.1 million and $10.3 million as increases to current and long-term liabilities, respectively. This resulted in a reduction of our calculated minimum distribution payable to the minority partner by $2.6 million. These adjustments resulted in a net $13.8 million increase to our goodwill during the period. As our fair value estimates remained materially unchanged from December 31, 2011, the immaterial adjustments made to the initial purchase price allocation during the first quarter of 2012 were recorded in that period. All other changes to the initial allocation were recorded retrospectively to the acquisition date. During the second quarter of 2012, no further adjustments were recorded when the allocation was finalized.
During 2011, subsequent to the initial purchase price allocation for Consolidated Thompson, we adjusted the fair values of the assets acquired and liabilities assumed. Based on this process, the acquisition date fair value of the Consolidated Thompson mineral rights, deferred tax liability and noncontrolling interest in Bloom Lake were adjusted to $4,825.6 million, $1,041.8 million and $1,075.4 million, respectively, in the revised purchase price allocation during the fourth quarter of 2011. The change in mineral rights was caused by further refinements to the valuation model, most specifically as it related to potential tax structures that have value from a market participant standpoint and the risk premium used in determining the discount rate. The change in the deferred tax liability primarily was a result of the movement in the mineral rights value and obtaining additional detail of the acquired tax basis in the acquired assets and liabilities. Finally, the change in the noncontrolling interest in Bloom Lake was due to the change in mineral rights and a downward adjustment to the discount for lack of control being used in the valuation. A complete comparison of the initial and final purchase price allocation has been provided in the table above.
The fair value of the noncontrolling interest in the assets acquired and liabilities assumed in Bloom Lake has been allocated proportionately, based upon WISCO’s 25 percent interest in Bloom Lake. We then reduced the allocated fair value of WISCO’s ownership interest in Bloom Lake to reflect the noncontrolling interest discount.
The $997.3 million of goodwill resulting from the acquisition has been assigned to our Eastern Canadian Iron Ore business segment through the CQIM reporting unit. Management believes the goodwill recognized primarily is attributable to the proximity to our existing Canadian operations and potential for future expansion in Eastern Canada, which will allow us to leverage our port facilities and supply iron ore to the seaborne market. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
The following unaudited consolidated pro forma information summarizes the results of operations for the three and nine months ended September 30, 2011 as if the Consolidated Thompson acquisition and the related financing had been completed as of January 1, 2010. The pro forma information gives effect to actual operating results prior to the acquisition. The unaudited consolidated pro forma information does not purport to be indicative of the results that actually would have been obtained if the acquisition of Consolidated Thompson had occurred as of the beginning of the periods presented or that may be obtained in the future.

(In Millions, Except
Per Common Share)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,

2011
 
2011
REVENUES FROM PRODUCT SALES AND SERVICES
$
2,089.1

 
$
5,168.6

NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
607.3

 
$
1,439.2

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
$
4.21

 
$
10.31

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
$
4.19

 
$
10.26

DISCONTINUED OPERATIONS
Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]
NOTE 7 - DISCONTINUED OPERATIONS
The tables below set forth selected financial information related to assets and liabilities held for sale and operating results of our business classified as discontinued operations. Assets and liabilities held for sale represent the assets that are expected to be sold and liabilities expected to be assumed. While the reclassification of revenues and expenses related to discontinued operations for prior periods have no impact upon previously reported net income, the Statements of Unaudited Condensed Consolidated Operations present the revenues and expenses that were reclassified from the specified line items to discontinued operations.
The following table presents Statements of Unaudited Condensed Consolidated Financial Position data of the Sonoma operations:
 
(In Millions)
 
September 30, 2012
 
December 31, 2011
ASSETS HELD FOR SALE
 
 
 
Cash and cash equivalents
$
3.2

 
$
2.3

Accounts receivable
10.1

 
16.3

Inventories
20.3

 
18.8

Other current assets
8.1

 
2.0

Property, plant and equipment, net
114.9

 
120.5

Assets held for sale
$
156.6

 
$
159.9

 
 
 
 
LIABILITIES HELD FOR SALE
 
 
 
Accounts payable
$
19.4

 
$
15.6

Accrued expenses
1.1

 
1.5

Environmental and mine closure obligations
9.2

 
8.8

Liabilities held for sale
$
29.7

 
$
25.9


The following table presents detail of our operations related to our Sonoma operations in the Statements of Unaudited Condensed Consolidated Operations:
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
 
 
 
Product
$
42.6

 
$
53.7

 
$
141.6

 
$
171.6

 
 
 
 
 
 
 
 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
$
(2.7
)
 
$
0.7

 
$
5.2

 
$
22.4

GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The following table summarizes changes in the carrying amount of goodwill allocated by operating segment for the nine months ended September 30, 2012 and the year ended December 31, 2011:
 
(In Millions)
 
September 30, 2012
 
December 31, 2011 (1)
 
 
U.S. Iron Ore
 
Eastern Canadian Iron Ore
 
Asia Pacific
Iron Ore
 
Other
 
Total
 
U.S. Iron Ore
 
Eastern
Canadian Iron Ore
 
Asia Pacific Iron Ore
 
North American Coal
 
Other
 
Total
Beginning Balance
$
2.0

 
$
986.2

 
$
83.0

 
$
80.9

 
$
1,152.1

 
$
2.0

 
$
3.1

 
$
82.6

 
$
27.9

 
$
80.9

 
$
196.5

Arising in business combinations

 
13.8

 

 

 
13.8

 

 
983.5

 

 
(0.1
)
 

 
983.4

Impairment

 

 

 

 

 

 

 

 
(27.8
)
 

 
(27.8
)
Impact of foreign currency translation

 

 
1.3

 

 
1.3

 

 

 
0.4

 

 

 
0.4

Other

 

 

 

 

 

 
(0.4
)
 

 

 

 
(0.4
)
Ending Balance
$
2.0

 
$
1,000.0

 
$
84.3

 
$
80.9

 
$
1,167.2

 
$
2.0

 
$
986.2

 
$
83.0

 
$

 
$
80.9

 
$
1,152.1

(1)
Represents a 12-Month rollforward of our goodwill by reportable segment at December 31, 2011.
Goodwill is not subject to amortization and is tested for impairment annually as of October 1st or when events or circumstances indicate that impairment may have occurred.
Other Intangible Assets and Liabilities
Following is a summary of intangible assets and liabilities as of September 30, 2012 and December 31, 2011:
 
 
 
(In Millions)
 
 
 
September 30, 2012
 
December 31, 2011
 
Classification
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permits
Intangible assets, net
 
$
135.3

 
$
(28.9
)
 
$
106.4

 
$
134.3

 
$
(23.2
)
 
$
111.1

Utility contracts
Intangible assets, net
 
54.7

 
(29.7
)
 
25.0

 
54.7

 
(21.3
)
 
33.4

Leases
Intangible assets, net
 
5.5

 
(3.1
)
 
2.4

 
5.5

 
(3.0
)
 
2.5

Total intangible assets
 
 
$
195.5

 
$
(61.7
)
 
$
133.8

 
$
194.5

 
$
(47.5
)
 
$
147.0

Below-market sales contracts
Other current liabilities
 
$
(46.0
)
 
$

 
$
(46.0
)
 
$
(77.0
)
 
$
24.3

 
$
(52.7
)
Below-market sales contracts
Below-market sales contracts, net
 
(250.7
)
 
166.9

 
(83.8
)
 
(252.3
)
 
140.5

 
(111.8
)
Total below-market sales contracts
 
 
$
(296.7
)
 
$
166.9

 
$
(129.8
)
 
$
(329.3
)
 
$
164.8

 
$
(164.5
)

The intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives as follows:
Intangible Asset
 
Useful Life (years)
Permits
 
15 - 28
Utility contracts
 
5
Leases
 
1.5 - 4.5

Amortization expense relating to intangible assets was $4.8 million and $14.1 million, respectively, for the three and nine months ended September 30, 2012, and is recognized in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. Amortization expense relating to intangible assets was $3.3 million and $12.5 million, respectively, for the comparable periods in 2011. The estimated amortization expense relating to intangible assets for the remainder of 2012 and each of the five succeeding years is as follows:

(In Millions)

Amount
Year Ending December 31

2012 (remaining three months)
$
4.5

2013
17.9

2014
17.9

2015
6.0

2016
6.0

2017
6.0

Total
$
58.3


The below-market sales contracts are classified as a liability and recognized over the terms of the underlying contracts, which have remaining lives ranging from two to five years. For the three and nine months ended September 30, 2012, we recognized $14.7 million and $31.3 million, respectively, in Product revenues related to the below-market sales contracts, compared with $16.7 million and $40.4 million, respectively, for the three and nine months ended September 30, 2011. The following amounts are estimated to be recognized in Product revenues for each of the five succeeding fiscal years:
 
(In Millions)
 
Amount
Year Ending December 31
 
2012 (remaining three months)
$
14.7

2013
46.0

2014
23.1

2015
23.0

2016
23.0

2017

Total
$
129.8

FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at September 30, 2012 and December 31, 2011:
 
(In Millions)
 
September 30, 2012
Description
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Derivative assets
$

 
$

 
$
55.9

 
$
55.9

International marketable securities
25.3

 

 

 
25.3

Foreign exchange contracts

 
23.5

 

 
23.5

Total
$
25.3

 
$
23.5

 
$
55.9

 
$
104.7

Liabilities:

 

 

 

Derivative liabilities
$

 
$

 
$
11.7

 
$
11.7

Foreign exchange contracts

 
1.3

 

 
1.3

Total
$

 
$
1.3

 
$
11.7

 
$
13.0

 
(In Millions)
 
December 31, 2011
Description
Quoted Prices in Active
Markets for Identical
Assets/Liabilities (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
351.2

 
$

 
$

 
$
351.2

Derivative assets

 

 
157.9

(1)
157.9

International marketable securities
27.1

 

 

 
27.1

Foreign exchange contracts

 
8.0

 

 
8.0

Total
$
378.3