CLIFFS NATURAL RESOURCES INC., 10-K filed on 2/17/2011
Annual Report
Document and Entity Information
Year Ended
Dec. 31, 2010
Feb. 14, 2011
Jun. 30, 2010
Document - Document and Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
FALSE 
 
 
Document Period End Date
2010-12-31 
 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
clf 
 
 
Entity Registrant Name
CLIFFS NATURAL RESOURCES INC. 
 
 
Entity Central Index Key
0000764065 
 
 
Current Fiscal Year End Date
12/31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
135,462,509 
 
Entity Public Float
 
 
6,354,612,868 
Statements of Consolidated Financial Position (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 1,567 
$ 503 
Accounts receivable
359 
104 
Inventories
269 
273 
Supplies and other inventories
148 
103 
Deferred and refundable taxes
43 
61 
Derivative assets
83 
52 
Other current assets
115 
67 
TOTAL CURRENT ASSETS
2,584 
1,161 
PROPERTY, PLANT AND EQUIPMENT, NET
3,979 
2,593 
OTHER ASSETS
 
 
Marketable securities
86 
88 
Investments in ventures
515 
315 
Goodwill
197 
75 
Intangible assets, net
176 
115 
Long-term receivables
56 
50 
Deferred income taxes
140 
151 
Deposits and miscellaneous
46 
92 
TOTAL OTHER ASSETS
1,215 
886 
TOTAL ASSETS
7,778 
4,639 
CURRENT LIABILITIES
 
 
Accounts payable
267 
179 
Accrued employment costs
130 
78 
Income taxes payable
103 
State and local taxes payable
39 
35 
Below-market sales contracts - current
57 
30 
Accrued expenses
137 
77 
Deferred revenue
216 
105 
Other current liabilities
81 
59 
TOTAL CURRENT LIABILITIES
1,029 
570 
POSTEMPLOYMENT BENEFIT LIABILITIES
 
 
Pensions
285 
267 
Other postretirement benefits
243 
179 
TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES
528 
446 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
185 
124 
DEFERRED INCOME TAXES
64 
71 
SENIOR NOTES
1,713 
325 
TERM LOAN
 
200 
BELOW-MARKET SALES CONTRACTS
164 
153 
OTHER LIABILITIES
257 
213 
TOTAL LIABILITIES
3,940 
2,102 
COMMITMENTS AND CONTINGENCIES
 
 
CLIFFS SHAREHOLDERS' EQUITY
 
 
Common Shares - par value $0.125 per share Authorized - 224,000,000 shares; Issued - 138,845,469 shares (2009 - 134,623,528 shares); Outstanding - 135,456,999 shares (2009 - 130,971,470 shares)
17 
17 
Capital in excess of par value of shares
896 
695 
Retained Earnings
2,924 
1,973 
Cost of 3,388,470 common shares in treasury (2009 - 3,652,058 shares)
(38)
(20)
Accumulated other comprehensive income (loss)
46 
(123)
TOTAL CLIFFS SHAREHOLDERS' EQUITY
3,846 
2,543 
NONCONTROLLING INTEREST
(7)
(6)
TOTAL EQUITY
3,839 
2,537 
TOTAL LIABILITIES AND EQUITY
7,778 
4,639 
Class A Preferred stock
 
 
CLIFFS SHAREHOLDERS' EQUITY
 
 
Preferred stock - no par value
 
 
Class B Preferred stock
 
 
CLIFFS SHAREHOLDERS' EQUITY
 
 
Preferred stock - no par value
 
 
Statements of Consolidated Financial Position (Parenthetical) (USD $)
Dec. 31, 2010
Dec. 31, 2009
Preferred stock, no par value
$ 0 
$ 0 
Common Shares, par value
$ 0.125 
$ 0.125 
Common Shares, Authorized
224,000,000 
224,000,000 
Common Shares, Issued
138,845,469 
134,623,528 
Common Shares, Outstanding
135,456,999 
130,971,470 
Common shares in treasury
3,388,470 
3,652,058 
Class A Preferred stock
 
 
Preferred stock, shares authorized
3,000,000 
3,000,000 
Preferred stock, shares unissued
3,000,000 
3,000,000 
Class B Preferred stock
 
 
Preferred stock, shares authorized
4,000,000 
4,000,000 
Preferred stock, shares unissued
4,000,000 
4,000,000 
Statements of Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
Year Ended
Dec. 31,
2010
2009
2008
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
Product
$ 4,417 
$ 2,216 
$ 3,295 
Freight and venture partners' cost reimbursements
265 
126 
314 
Revenues, Total
4,682 1
2,342 1
3,609 1
COST OF GOODS SOLD AND OPERATING EXPENSES
(3,159)
(2,033)
(2,449)
SALES MARGIN
1,524 
309 
1,160 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
Royalties and management fee revenue
12 
22 
Selling, general and administrative expenses
(238)
(121)
(189)
Terminated acquisition costs
 
 
(90)
Gain on sale of other assets - net
13 
23 
Casualty recoveries
 
11 
Miscellaneous - net
(39)
24 
Operating Expenses, Total
(259)
(79)
(221)
OPERATING INCOME
1,265 
230 
939 
OTHER INCOME (EXPENSE)
 
 
 
Gain on acquistion of controlling interests
41 
 
 
Changes in fair value of foreign currency contracts, net
40 
86 
(188)
Interest income
10 
11 
26 
Interest expense
(70)
(39)
(40)
Impairment of securities
(1)
 
(25)
Other non-operating income
14 
Nonoperating Income (Expense), Total
33 
60 
(223)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) FROM VENTURES
1,298 
291 
716 
INCOME TAX EXPENSE
(292)
(21)
(144)
EQUITY INCOME (LOSS) FROM VENTURES
14 
(66)
(35)
NET INCOME
1,020 
204 
537 
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST (net of tax of $0.1, $0.3, and $9.1 in 2010, 2009 and 2008)
(0)
(1)
21 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
1,020 
205 
516 
Preferred dividends
 
 
(1)
INCOME ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS
1,020 
205 
515 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
7.54 
1.64 
5.07 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
7.49 
1.63 
4.76 
AVERAGE NUMBER OF SHARE (IN THOUSANDS)
 
 
 
Basic
135,301 
124,998 
101,471 
Diluted
136,138 
125,751 
108,288 
CASH DIVIDENDS DECLARED PER SHARE
$ 0.51 
$ 0.26 
$ 0.35 
Statements of Consolidated Operations (Parenthetical) (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
2008
Income Statement [Abstract]
 
 
 
NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST, tax
$ 0 
$ 0 
$ 9 
Statements of Consolidated Cash Flows (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
2008
OPERATING ACTIVITIES
 
 
 
Net income
$ 1,020 
$ 204 
$ 537 
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
322 
237 
201 
Derivatives and currency hedges
(39)
(205)
58 
Foreign exchange loss (gains)
39 
(28)
 
Share-based compensation
13 
10 
21 
Equity (income) loss in ventures (net of tax)
(14)
66 
35 
Pensions and other postretirement benefits
27 
(33)
Deferred income taxes
15 
61 
(89)
Changes in deferred revenue and below-market sales contracts
39 
(33)
58 
Impairment of securities
 
25 
Gain on acquisition of controlling interests
(41)
 
 
Other
(4)
Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
(205)
(24)
(55)
Inventories
61 
(45)
Payables and accrued expenses
90 
(141)
142 
Net cash from operating activities
1,320 
186 
853 
INVESTING ACTIVITIES
 
 
 
Acquisition of controlling interests, net of cash acquired
(995)
 
 
Purchase of noncontrolling interests
 
 
(590)
Purchase of property, plant and equipment
(267)
(116)
(183)
Investments in ventures
(191)
(82)
(63)
Investment in marketable securities
(7)
(15)
(30)
Redemption of marketable securities
33 
18 
Proceeds from sale of assets
59 
28 
41 
Proceeds from property damage insurance recoveries
 
 
11 
Net cash used by investing activities
(1,368)
(179)
(796)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of common shares
 
347 
 
Borrowings under credit facility
450 
280 
540 
Repayments under credit facility
(450)
(276)
(780)
Net proceeds from issuance of senior notes
1,388 
 
325 
Repayment of term loan
(200)
 
 
Common stock dividends
(69)
(32)
(36)
Repayment of other borrowings
(17)
(10)
(8)
Contributions by (to) joint ventures, net
(1)
(8)
(11)
Other financing activities
(14)
Net cash from financing activities
1,088 
304 
32 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
24 
13 
(68)
INCREASE IN CASH AND CASH EQUIVALENTS
1,064 
324 
22 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
503 
179 
157 
CASH AND CASH EQUIVALENTS AT END OF YEAR
$ 1,567 
$ 503 
$ 179 
Statements of Consolidated Changes in Equity (USD $)
In Millions, except Share data
Common Shares
Capital In Excess of Par Value of Shares
Retained Earnings [Member]
Common Shares in Treasury
Accumulated Other Comprehensive Gain (Loss)
Non-Controlling Interest
Total
Beginning Balance (in shares) at Dec. 31, 2007
87,200,000 
 
 
 
 
 
 
Beginning Balance at Dec. 31, 2007
$ 17 
$ 117 
$ 1,316 
$ (256)
$ (30)
$ 118 
$ 1,282 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
516 
 
 
21 
537 
Other comprehensive income
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
(189)
(8)
(197)
Unrealized net loss on marketable securities
 
 
 
 
(10)
(1)
(12)
Unrealized net loss on foreign currency translation
 
 
 
 
(165)
(14)
(179)
Unrealized loss on interest rate swap
 
 
 
 
(1)
 
(1)
Unrealized loss on derivative instruments
 
 
 
 
Total comprehensive income
 
 
 
 
 
(1)
150 
Equity purchase of noncontrolling interest (in shares)
4,300,000 
 
 
 
 
 
 
Equity purchase of noncontrolling interest
 
142 
 
23 
 
 
165 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
(111)
(111)
Undistributed losses to noncontrolling interest
 
 
 
 
 
(3)
(3)
Capital contribution by noncontrolling interest to subsidiary
 
 
 
 
 
Pinn Oak settlement (in shares)
4,000,000 
 
 
 
 
 
 
Pinn Oak settlement
 
132 
 
22 
 
 
153 
Stock and other incentive plans
 
19 
 
 
 
20 
Conversion of preferred stock (in shares)
18,000,000 
 
 
 
 
 
 
Conversion of preferred stock
 
33 
96 
 
 
135 
Preferred stock dividends
 
 
(1)
 
 
 
(1)
Common stock dividends
 
 
(36)
 
 
 
(36)
Ending Balance (in shares) at Dec. 31, 2008
113,500,000 
 
 
 
 
 
 
Ending Balance at Dec. 31, 2008
17 
442 
1,800 
(114)
(395)
1,754 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
205 
 
 
(1)
204 
Other comprehensive income
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
24 
(2)
22 
Unrealized net loss on marketable securities
 
 
 
 
30 
 
30 
Unrealized net loss on foreign currency translation
 
 
 
 
232 
 
232 
Unrealized loss on interest rate swap
 
 
 
 
 
Reclassification of net gains on derivative financial instruments into net income
 
 
 
 
(15)
 
(15)
Total comprehensive income
 
 
 
 
 
(3)
474 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
Undistributed losses to noncontrolling interest
 
 
 
 
 
(7)
(7)
Capital contribution by noncontrolling interest to subsidiary
 
 
 
 
 
Issuance of common shares (in shares)
17,300,000 
 
 
 
 
 
 
Issuance of common shares
 
255 
 
93 
 
 
347 
Purchase of additional noncontrolling interest
 
(5)
 
 
 
 
(5)
Stock and other incentive plans (in shares)
200,000 
 
 
 
 
 
 
Stock and other incentive plans
 
 
 
 
Conversion of preferred stock
 
 
 
 
 
Common stock dividends
 
 
(32)
 
 
 
(32)
Ending Balance (in shares) at Dec. 31, 2009
131,000,000 
 
 
 
 
 
130,971,470 
Ending Balance at Dec. 31, 2009
17 
695 
1,973 
(20)
(123)
(6)
2,537 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
1,020 
 
 
(0)
1,020 
Other comprehensive income
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
14 
15 
Unrealized net loss on marketable securities
 
 
 
 
 
Unrealized net loss on foreign currency translation
 
 
 
 
152 
 
152 
Reclassification of net gains on derivative financial instruments into net income
 
 
 
 
(3)
 
(3)
Unrealized loss on derivative instruments
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
1,189 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
(1)
(1)
Undistributed losses to noncontrolling interest
 
 
 
 
 
(5)
(5)
Capital contribution by noncontrolling interest to subsidiary
 
 
 
 
 
Purchase of additional noncontrolling interest
 
(2)
 
 
 
 
(2)
Acquisition of controlling interest (in shares)
4,200,000 
 
 
 
 
 
 
Acquisition of controlling interest
173 
 
 
 
 
173 
Stock and other incentive plans (in shares)
300,000 
 
 
 
 
 
 
Stock and other incentive plans
 
19 
 
(7)
 
 
12 
Common stock dividends
 
 
(69)
 
 
 
(69)
Other
 
11 
 
(11)
 
 
 
Ending Balance (in shares) at Dec. 31, 2010
135,500,000 
 
 
 
 
 
135,456,999 
Ending Balance at Dec. 31, 2010
$ 17 
$ 896 
$ 2,924 
$ (38)
$ 46 
$ (7)
$ 3,839 
Business Summary and Significant Accounting Policies
Business Summary and Significant Accounting Policies

NOTE 1 — BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES

Business Summary

We are an international mining and natural resources company, the largest producer of iron ore pellets in North America, a major supplier of direct-shipping lump and fines iron ore out of Australia, and a significant producer of metallurgical coal. In North America, we operate six iron ore mines in Michigan, Minnesota and Eastern Canada, five metallurgical coal mines located in West Virginia and Alabama and one thermal coal mine located in West Virginia. Our Asia Pacific operations are comprised of two iron ore mining complexes in Western Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore, and a 45 percent economic interest in Sonoma, a coking and thermal coal mine located in Queensland, Australia. In Latin America, we have a 30 percent interest in Amapá, a Brazilian iron ore project, and in Ontario, Canada, we have recently acquired Ring of Fire properties. Our operations also include our 95 percent controlling interest in renewaFUEL located in Michigan. Our company's operations are organized and managed according to product category and geographic location: North American Iron Ore; North American Coal; Asia Pacific Iron Ore; Asia Pacific Coal; Latin American Iron Ore; Alternative Energies; Ferroalloys; and our Global Exploration Group.

Accounting Policies

We consider the following policies to be beneficial in understanding the judgments that are involved in the preparation of our consolidated financial statements and the uncertainties that could impact our financial condition, results of operations and cash flows.

Use of Estimates

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. On an ongoing basis, management reviews estimates. Changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.

Basis of Consolidation

The consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries, including the following subsidiaries:

 

                     

Name

  

Location

   Ownership Interest     Operation  

Northshore

   Minnesota      100.0     Iron Ore   

United Taconite

   Minnesota      100.0     Iron Ore   

Wabush

   Canada      100.0     Iron Ore   

Tilden

   Michigan      85.0     Iron Ore   

Empire

   Michigan      79.0     Iron Ore   

Asia Pacific Iron Ore

   Western Australia      100.0     Iron Ore   

Pinnacle

   West Virginia      100.0 %     Coal   

Oak Grove

   Alabama      100.0     Coal   

CLCC

   West Virginia      100.0 %     Coal   

renewaFUEL

   Michigan      95.0     Biomass   

Freewest

   Canada      100.0     Chromite   

Spider

   Canada      100.0     Chromite   

Intercompany transactions and balances are eliminated upon consolidation.

 

On January 27, 2010, we acquired all of the outstanding shares of Freewest, a Canadian-based mineral exploration company, for C$1.00 per share, thereby increasing our ownership interest in Freewest to 100 percent. The consolidated financial statements as of and for the period ended December 31, 2010 reflect the acquisition of the remaining interest in Freewest since that date. At December 31, 2009, our ownership in Freewest represented approximately 12.4 percent of its outstanding shares; we did not exercise significant influence, and the investment was classified as an available-for-sale security. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.

On February 1, 2010, we acquired the remaining 73.2 percent interest in Wabush, thereby increasing our ownership interest to 100 percent. The consolidated financial statements as of and for the period ended December 31, 2010 reflect the acquisition of the remaining interest in Wabush since that date. At December 31, 2009, our 26.8 percent ownership interest in Wabush was accounted for as an equity method investment. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.

During the second quarter of 2010, we commenced a formal cash offer to acquire all of the outstanding common shares of Spider, a Canadian-based mineral exploration company, for C$0.19 per share. On July 6, 2010, all of the conditions to acquire the remaining common shares of Spider had been satisfied or waived and we increased our ownership percentage to 52 percent, representing a majority of the common shares outstanding on a fully-diluted basis. Subsequently, we extended the cash offer to permit additional shares to be tendered and taken up, thereby increasing our ownership percentage in Spider to 85 percent as of July 26, 2010. Effective October 6, 2010, we completed the acquisition of all of the remaining shares of Spider through an amalgamation. Consequently, we own 100 percent of Spider as of December 31, 2010 and have obtained majority ownership of the "Big Daddy" chromite deposit located in Northern Ontario. The consolidated financial statements as of and for the period ended December 31, 2010 reflect our 100 percent ownership interest in Spider. Prior to the acquisition date, our ownership in Spider represented approximately four percent of its issued and outstanding shares; we did not exercise significant influence, and the investment was classified as an available-for-sale security. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.

On July 30, 2010, we acquired all of the coal operations of privately-owned INR, and since that date, the operations acquired from INR have been conducted through our wholly-owned subsidiary known as CLCC. CLCC is a producer of high-volatile metallurgical and thermal coal located in southern West Virginia. The consolidated financial statements as of and for the period ended December 31, 2010 reflect our 100 percent ownership interest in CLCC since the date of acquisition. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.

In January 2009, we adopted the amended provisions of FASB ASC 810 related to noncontrolling interests in consolidated financial statements, which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The amendment clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Our noncontrolling interests primarily relate to majority-owned subsidiaries within our North American Iron Ore business segment. The mining ventures function as captive cost companies, as they supply products only to their owners effectively on a cost basis. Accordingly, the noncontrolling interests' revenue amounts are stated at cost of production and are offset entirely by an equal amount included in cost of goods sold and operating expenses, resulting in no sales margin reflected in noncontrolling interest participants. As a result, the adoption of the amendments to FASB ASC 810 did not have a material impact on our consolidated results of operations with respect to these subsidiaries.

Cash Equivalents

Cash and cash equivalents include cash on hand and in the bank as well as all short-term securities held for the primary purpose of general liquidity. We consider investments in highly liquid debt instruments with an original maturity of three months or less from the date of acquisition to be cash equivalents. We routinely monitor and evaluate counterparty credit risk related to the financial institutions by which our short-term investment securities are held.

Inventories

The following table presents the detail of our Inventories on the Statements of Consolidated Financial Position at December 31, 2010 and 2009:

 

                                                 
     (In Millions)  
     2010      2009  

Segment

   Finished
Goods
     Work-in
Process
     Total
Inventory
     Finished
Goods
     Work-In
Process
     Total
Inventory
 

North American Iron Ore

   $ 144.6       $ 30.9       $ 175.5       $ 172.7       $ 18.4       $ 191.1   

North American Coal

     16.1         19.8         35.9         14.9         1.4         16.3   

Asia Pacific Iron Ore

     34.7         20.4         55.1         28.6         31.7         60.3   

Other

     2.6         0.1         2.7         1.6         3.2         4.8   
                                                       

Total

   $ 198.0       $ 71.2       $ 269.2       $ 217.8       $ 54.7       $ 272.5   
                                                       

North American Iron Ore

North American Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method. The excess of current cost over LIFO cost of iron ore inventories was $112.4 million and $81.4 million at December 31, 2010 and 2009, respectively. As of December 31, 2010, the product inventory balance for North American Iron Ore declined to $144.6 million, resulting in liquidation of LIFO layers in 2010. The effect of the inventory reduction was a decrease in Cost of good sold and operating expenses of $4.6 million in the Statements of Consolidated Operations for the year ended December 31, 2010. As of December 31, 2009, the product inventory balance for North American Iron Ore increased to $172.7 million, resulting in an additional LIFO layer being added during the year.

We had approximately 0.8 million tons and 1.2 million tons of finished goods stored at ports and customer facilities on the lower Great Lakes to service customers at December 31, 2010 and 2009, respectively. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is made. Maintaining ownership of the iron ore products at ports on the lower Great Lakes reduces risk of non-payment by customers, as we retain title to the product until payment is received from the customer. We track the movement of the inventory and verify the quantities on hand.

North American Coal

North American Coal product inventories are stated at the lower of cost or market. Cost of coal inventories includes labor, supplies and operating overhead and related costs and is calculated using the average production cost. We maintain ownership until coal is loaded into rail cars at the mine for domestic sales and until loaded in the vessels at the terminal for export sales. We recorded lower-of-cost-or-market inventory charges of $26.1 million in Cost of good sold and operating expenses on the Statements of Consolidated Operations for the year ended December 31, 2010. These charges were a result of operational and geological issues at our Pinnacle and Oak Grove mines during the year.

Asia Pacific Iron Ore

Asia Pacific Iron Ore product inventories are stated at the lower of cost or market. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to the inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on a weighted average basis. We maintain ownership of the inventories until title has transferred to the customer at the F.O.B. point, which is generally when the product is loaded into the vessel.

 

Derivative Financial Instruments

We are exposed to certain risks related to the ongoing operations of our business, including those caused by changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and procedures, including the use of certain derivative instruments, to manage such risks. Refer to NOTE 3 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.

Property, Plant and Equipment

North American Iron Ore

North American Iron Ore properties are stated at cost. Depreciation of plant and equipment is computed principally by the straight-line method based on estimated useful lives, not to exceed the estimated economic iron ore reserves. Northshore, United Taconite and our mines in Michigan use the double declining balance method of depreciation for certain mining equipment. Depreciation is provided over the following estimated useful lives:

 

         

Asset Class

  

Basis

  

Life

Buildings

   Straight line    45 Years

Mining equipment

   Straight line    10 to 20 Years

Processing equipment

   Straight line    15 to 45 Years

Information technology

   Straight line    2 to 7 Years

Depreciation is not curtailed when operations are temporarily idled.

North American Coal

North American Coal properties are stated at cost. Depreciation is provided over the estimated useful lives, not to exceed the mine lives and is calculated by the straight-line method. Depreciation is provided over the following estimated useful lives:

 

         

Asset Class

  

Basis

  

Life

Buildings

   Straight line    30 Years

Mining equipment

   Straight line    2 to 22 Years

Processing equipment

   Straight line    2 to 30 Years

Information technology

   Straight line    2 to 3 Years

Asia Pacific Iron Ore

Our Asia Pacific Iron Ore properties are stated at cost. Depreciation is calculated by the straight-line method or production output basis provided over the following estimated useful lives:

 

         

Asset Class

  

Basis

  

Life

Plant and equipment

   Straight line    5 -10 Years

Plant and equipment and mine assets

   Production output    10 Years

Motor vehicles, furniture & equipment

   Straight line    3 5 Years

 

The following table indicates the value of each of the major classes of our consolidated depreciable assets as of December 31, 2010 and 2009:

 

                 
     (In Millions)  
     December 31,  
     2010     2009  

Land rights and mineral rights

   $ 3,019.9      $ 1,877.3   

Office and information technology

     60.4        53.7   

Buildings

     107.6        77.3   

Mining equipment

     628.5        381.0   

Processing equipment

     658.8        499.5   

Railroad equipment

     122.9        92.2   

Electric power facilities

     54.4        60.0   

Port facilities

     64.0        52.5   

Interest capitalized during construction

     19.4        18.9   

Land improvements

     25.0        22.4   

Other

     36.0        41.6   

Construction in progress

     140.0        81.7   
                  
       4,936.9        3,258.1   

Allowance for depreciation and depletion

     (957.7     (665.5
                  
     $ 3,979.2      $ 2,592.6   
                  

We recorded depreciation expense of $165.4 million, $120.6 million, and $113.5 million on the Statements of Consolidated Operations for the years ended December 31, 2010, 2009, and 2008, respectively.

The costs capitalized and classified as Land rights and mineral rights represent lands where we own the surface and/or mineral rights. The value of the land rights is split between surface only, surface and minerals, and minerals only.

Our North American Coal operation leases coal mining rights from third parties through lease agreements. The lease agreements are for varying terms and extend through the earlier of their lease termination date or until all merchantable and mineable coal has been extracted. Our interest in coal reserves and resources was valued using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from coal operations over the life of the reserves.

Our Asia Pacific Iron Ore, Wabush, and United Taconite operation's interest in iron ore reserves and resources was valued using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from iron ore operations over the economic lives of the mines.

The net book value of the land rights and mineral rights as of December 31, 2010 and 2009 is as follows:

 

                 
     (In Millions)  
     December 31,  
     2010      2009  

Land rights

   $ 36.8       $ 29.0   
                   

Mineral rights:

                 

Cost

   $ 2,983.1       $ 1,848.3   

Less depletion

     376.4         243.8   
                   

Net mineral rights

   $ 2,606.7       $ 1,604.5   
                   

 

Accumulated depletion relating to mineral rights, which was recorded using the unit-of-production method, is included in Allowances for depreciation and depletion. We recorded depletion expense of $95.5 million, $68.1 million and $66.6 million on the Statements of Consolidated Operations for the years ended December 31, 2010, 2009 and 2008, respectively.

We review iron ore and coal reserves based on current expectations of revenues and costs, which are subject to change. Iron ore and coal reserves include only proven and probable quantities which can be economically and legally mined and processed utilizing existing technology.

Capitalized Stripping Costs

Stripping costs during the development of a mine, before production begins, are capitalized as a part of the depreciable cost of building, developing and constructing a mine. These capitalized costs are amortized over the productive life of the mine using the units of production method. The productive phase of a mine is deemed to have begun when saleable minerals are extracted (produced) from an ore body, regardless of the level of production. The production phase does not commence with the removal of de minimis saleable mineral material that occurs in conjunction with the removal of overburden or waste material for purposes of obtaining access to an ore body. The stripping costs incurred in the production phase of a mine are variable production costs included in the costs of the inventory produced (extracted) during the period that the stripping costs are incurred.

Stripping costs related to expansion of a mining asset of proven and probable reserves are variable production costs that are included in the costs of the inventory produced during the period that the stripping costs are incurred.

 

 

Long-Lived Assets and Intangible Assets

We monitor conditions that may affect the carrying value of our long-lived and intangible assets when events and circumstances indicate that the carrying value of the asset groups may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available. An impairment loss exists when projected undiscounted cash flows are less than the carrying value of the assets. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the assets. Fair value can be determined using a market approach, income approach or cost approach. We did not record any such impairment charges in 2010, 2009 or 2008.

Equity Investments

We evaluate the loss in value of our equity method investments each reporting period to determine whether the loss is other than temporary. The primary factors that we consider in evaluating the impairment include the extent and time the fair value of each investment has been below cost, the financial condition and near-term prospects of the investment, and our intent and ability to hold the investment to recovery. If a decline in fair value is judged other than temporary, the basis of the investment is written down to fair value as a new cost basis, and the amount of the write-down is included as a realized loss.

Our investment in Amapá resulted in equity income of $17.2 million in 2010 compared with an equity loss of $62.2 million in 2009. The investment's equity income in 2010 was a result of nearly break-even operating results during the year combined with the reversal of the debt guarantee, upon repayment of total project debt outstanding, and the reversal of certain accruals. The equity losses in 2009 resulted from start-up costs and production delays resulting in the determination that indicators of impairment may exist relative to our investment in Amapá. Although Amapá's results improved throughout 2010, we continued to perform a quarterly assessment of the potential impairment of our investment, most recently in the fourth quarter of 2010, using a discounted cash flow model to determine the fair value of our investment in relation to its carrying value at each reporting period. Based upon the analyses performed, we have determined that our investment is not impaired as of December 31, 2010. In assessing the recoverability of our investment in Amapá, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the investment must be made, including among other things, estimates related to pricing, volume and resources. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for our investment in the period such determination is made. We will continue to evaluate the results of our investment on a quarterly basis.

 

Fair Value Measurements

Valuation Hierarchy

ASC 820 establishes a three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below:

 

   

Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. Valuation methodologies used for assets and liabilities measured at fair value are as follows:

Cash Equivalents

Where quoted prices are available in an active market, cash equivalents are classified within Level 1 of the valuation hierarchy. Cash equivalents classified in Level 1 at December 31, 2010 and 2009 include money market funds. The valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. In these instances, the valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for substantially the full term of the financial instrument, and the related financial instrument is therefore classified within Level 2 of the valuation hierarchy. Level 2 securities include short-term investments for which the value of each investment is a function of the purchase price, purchase yield, and maturity date.

Marketable Securities

Where quoted prices are available in an active market, marketable securities are classified within Level 1 of the valuation hierarchy. Marketable securities classified in Level 1 at December 31, 2010 and 2009 include available-for-sale securities. The valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets.

Derivative Financial Instruments

Derivative financial instruments valued using financial models that use as their basis readily observable market parameters are classified within Level 2 of the valuation hierarchy. Such derivative financial instruments include substantially all of our foreign currency exchange contracts and derivative financial instruments that are valued based upon published pricing settlements realized by other companies in the industry. Derivative financial instruments that are valued based upon models with significant unobservable market parameters, and that are normally traded less actively, are classified within Level 3 of the valuation hierarchy.

Non-Financial Assets and Liabilities

We adopted the provisions of ASC 820 effective January 1, 2009 with respect to our non-financial assets and liabilities. The initial measurement provisions of ASC 820 have been applied to our asset retirement obligations, guarantees, assets and liabilities acquired through business combinations, and certain other items, and are reflected as such in our consolidated financial statements. Effective January 1, 2009, we also adopted the fair value provision with respect to our pension and other postretirement benefit plan assets. No transition adjustment was necessary upon adoption.

In January 2010, we adopted the amended guidance on fair value to add new disclosures about transfers into and out of Levels 1 and 2. Our policy is to recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels.

Refer to NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS and NOTE 11 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.

Pensions and Other Postretirement Benefits

We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total compensation and benefits program. This includes employees of PinnOak and CLCC, who became employees of the Company through the July 2007 and July 2010 acquisitions, respectively. Upon the acquisition of the remaining 73.2 percent interest in Wabush in February 2010, we fully consolidated the related Canadian plans into our pension and OPEB obligations. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations.

We recognize the funded status of our postretirement benefit obligations on our December 31, 2010 and 2009 Statements of Consolidated Financial Position based on the market value of plan assets and the actuarial present value of our retirement obligations on that date. For each plan, we determine if the plan assets exceed the benefit obligations or vice-versa. If the plan assets exceed the retirement obligations, the amount of the surplus is recorded as an asset; if the retirement obligations exceed the plan assets, the amount of the underfunded obligations are recorded as a liability. Year-end balance sheet adjustments to postretirement assets and obligations are charged to Accumulated other comprehensive income (loss).

The market value of plan assets is measured at the year-end balance sheet date. The PBO is determined based upon an actuarial estimate of the present value of pension benefits to be paid to current employees and retirees. The APBO represents an actuarial estimate of the present value of OPEB benefits to be paid to current employees and retirees.

The actuarial estimates of the PBO and APBO retirement obligations incorporate various assumptions including the discount rates, the rates of increases in compensation, healthcare cost trend rates, mortality, retirement timing and employee turnover. For the U.S. plans, the discount rate is determined based on the prevailing year-end rates for high-grade corporate bonds with a duration matching the expected cash flow timing of the benefit payments from the various plans. For the Canadian plans, the discount rate is determined by calculating the single level discount rate that, when applied to a particular cash flow pattern, produces the same present value as discounting the cash flow pattern using spot rates generated from a high-quality corporate bond yield curve. The remaining assumptions are based on our estimates of future events incorporating historical trends and future expectations. The amount of net periodic cost that is recorded in the Consolidated Statements of Operations consists of several components including service cost, interest cost, expected return on plan assets, and amortization of previously unrecognized amounts. Service cost represents the value of the benefits earned in the current year by the participants. Interest cost represents the cost associated with the passage of time. In addition, the net periodic cost is affected by the anticipated income from the return on invested assets, as well as the income or expense resulting from the recognition of previously deferred items. Certain items, such as plan amendments, gains and/or losses resulting from differences between actual and assumed results for demographic and economic factors affecting the obligations and assets of the plans, and changes in plan assumptions are subject to deferred recognition for income and expense purposes. The expected return on plan assets is determined utilizing the weighted average of expected returns for plan asset investments in various asset categories based on historical performance, adjusted for current trends. See NOTE 11 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.

Asset Retirement Obligations

Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The fair value of the liability is determined as the discounted value of the expected future cash flow. The asset retirement obligation is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset's carrying value and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. We review, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site in accordance with the provisions of ASC 410. We perform an in-depth evaluation of the liability every three years in addition to routine annual assessments.

Future remediation costs for inactive mines are accrued based on management's best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. See NOTE 10 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.

Environmental Remediation Costs

We have a formal policy for environmental protection and restoration. Our mining and exploration activities are subject to various laws and regulations governing protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities, including obligations for known environmental remediation exposures at active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost can only be estimated as a range of possible amounts with no specific amount being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements can be reasonably estimated. It is possible that additional environmental obligations could be incurred, the extent of which cannot be assessed. Potential insurance recoveries have not been reflected in the determination of the liabilities. See NOTE 10 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.

Revenue Recognition and Cost of Goods Sold and Operating Expenses

North American Iron Ore

Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our North American Iron Ore term supply agreements provide that title and risk of loss transfer to the customer when payment is received.

We recognize revenue based on the gross amount billed to a customer as we earn revenue from the sale of the goods or services. 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 revenue.

Costs 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 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 partners. The mining ventures function as captive cost companies; they supply product only to their owners effectively on a cost basis. Accordingly, the noncontrolling interests' revenue amounts are stated at cost of production and are offset in entirety by an equal amount included in cost of goods sold and operating expenses resulting in no sales margin reflected in noncontrolling interest participants. As we are responsible for product fulfillment, we retain the risks and rewards of a principal in the transaction and accordingly record revenue under these arrangements on a gross basis.

The following table is a summary of reimbursements in our North American Iron Ore operations for the years ended December 31, 2010, 2009 and 2008:

 

                         
     (In Millions)  
     Year Ended December 31,  
     2010      2009      2008  

Reimbursements for:

                          

Freight

   $ 83.6       $ 22.4       $ 98.5   

Venture partners' cost

     139.8         71.3         170.8   
                            

Total reimbursements

   $ 223.4       $ 93.7       $ 269.3   
                            

Under certain term supply agreements, we ship the product to ports on the lower Great Lakes or to the customer's 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. 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.

 

Where we are joint venture participants in the ownership of a mine, our contracts entitle us to receive royalties and/or management fees, which we earn as the pellets are produced. Revenue is recognized on the sale of services when the services are performed.

North American Coal

We recognize revenue when title passes to the customer. For domestic coal sales, this generally occurs when coal is loaded into rail cars at the mine. For export coal sales, this generally occurs when coal is loaded into the vessels at the terminal. Revenue from product sales in 2010, 2009 and 2008 included reimbursement for freight charges paid on behalf of customers of $42.0 million, $32.1 million and $45.0 million, respectively.

Asia Pacific Iron Ore

 

Sales revenue is recognized at the F.O.B. point, which is generally when the product is loaded into the vessel.

Deferred Revenue

The terms of one of our North American Iron Ore pellet supply agreements require supplemental payments to be paid by the customer during the period 2009 through 2013, with the option to defer a portion of the 2009 monthly amount in exchange for interest payments until the deferred amount is repaid in 2013. Installment amounts received under this arrangement in excess of sales are classified as Deferred revenue on the Statement of Consolidated Financial Position upon receipt of payment. Revenue is recognized over the life of the supply agreement upon shipment of the pellets. As of December 31, 2010 and 2009, installment amounts received in excess of sales totaled $58.1 million and $23.2 million, respectively, which were recorded as Deferred revenue on the Statement of Consolidated Financial Position.

In 2010 and 2009, certain customers purchased and paid for 2.4 million tons and 0.9 million tons of pellets, respectively, in order to meet minimum contractual purchase requirements for each year under the terms of take-or-pay contracts. The inventory was stored at our facilities in upper lakes stockpiles. At the request of the customers, the ore was not shipped. We considered whether revenue should be recognized on these sales under the "bill and hold" guidance provided by the SEC Staff; however, based upon the assessment performed, revenue recognition on these transactions totaling $155.3 million and $81.9 million, respectively, was deferred on the December 31, 2010 and 2009 Statements of Consolidated Financial Position. As of December 31, 2010, all of the 0.9 million tons that were deferred at the end of 2009 were delivered, resulting in the related revenue being recognized in 2010 upon shipment.

.
 
 
 

Recent Accounting Pronouncements

Effective January 1, 2010, we adopted the consolidation guidance for VIE, amended in June of 2009. The amendment was issued in response to perceived shortcomings in the consolidation model that were highlighted by recent market events, including concerns about the ability to structure transactions under the current guidance to avoid consolidation, balanced with the need for more relevant, timely, and reliable information about an enterprise's involvement in a VIE. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a VIE, (3) changes to when it is necessary to reassess who should consolidate a VIE, and (4) additional disclosures of information related to a company's interest in a VIE. The new guidance was effective January 1, 2010 for calendar year-end companies. The adoption of this amendment did not have a material impact on our consolidated financial statements.

In January 2010, the FASB amended the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The revised guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The amendment also revises the guidance on employers' disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance was effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the provisions of the guidance required for the period beginning January 1, 2010; however, adoption of this amendment did not have a material impact on our consolidated financial statements. We will adopt the provisions of the guidance required for the period beginning January 1, 2011, beginning with the interim period ended March 31, 2011.

In February 2010, the FASB issued amended guidance on subsequent events to remove the requirement to disclose the date through which an SEC filer has evaluated subsequent events. The amended guidance was effective upon issuance. We adopted this amendment as of the interim period ended March 31, 2010.

Segment Reporting
Segment Reporting

NOTE 2 — SEGMENT REPORTING

Our company's primary operations are organized and managed according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and our Global Exploration Group. The North American Iron Ore segment is comprised of our interests in six North American mines that provide iron ore to the integrated steel industry. 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. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to steel producers in China and Japan. 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. The Latin American Iron Ore operating segment is comprised of our 30 percent Amapá interest in Brazil. The Alternative Energies operating segment is comprised of our 95 percent interest in renewaFUEL located in Michigan. The Ferroalloys operating segment is comprised of our recently acquired interests in chromite deposits in Northern Ontario, Canada. Our Global Exploration Group was established in 2009 and is focused on early involvement in exploration activities to identify new world-class projects for future development or projects that add significant value to existing operations. The Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and therefore are not separately reported.

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 years ended December 31, 2010, 2009 and 2008, including a reconciliation of segment sales margin to income from continuing operations before income taxes and equity income (loss) from ventures:

 

 

Included in the consolidated financial statements are the following amounts relating to geographic locations:

 

Concentrations in Revenue

We have three customers which individually account for more than 10 percent of our consolidated product revenue in 2010. Total revenue from these customers represents approximately $1.8 billion, $1.0 billion and $1.6 billion of our total consolidated product revenue in 2010, 2009 and 2008, respectively, and is attributable to our North American Iron Ore and North American Coal business segments.

The following table represents the percentage of our total revenue contributed by each category of products and services in 2010, 2009 and 2008:

 

     2010     2009     2008  

Revenue Category

      

Iron ore

     81     81     79

Coal

     13        14        12   

Freight and venture partners' cost reimbursements

     6        5        9   
                        

Total revenue

     100     100     100
                        

 

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 on the Statements of Consolidated Financial Position as of December 31, 2010 and 2009:

 

    (In Millions)  
    Derivative Assets  
    December 31, 2010     December 31, 2009  

Derivative Instrument

  Balance Sheet
Location
    Fair
  Value  
    Balance Sheet
Location
    Fair
  Value  
 

Derivatives designated as hedging instruments under ASC 815:

       

Foreign Exchange Contracts

   

 

Derivative assets

(current)

  

 

  $ 2.8        $ —     
                   

Total derivatives designated as hedging instruments under ASC 815

    $ 2.8        $ —     
                   

Derivatives not designated as hedging instruments under ASC 815:

       

Foreign Exchange Contracts

   

 

Derivative assets

(current)

  

 

  $ 34.2       

 

Derivative assets

(current)

  

 

  $ 4.2   
   
 
Deposits and
miscellaneous
  
  
    2.0       
 
Deposits and
miscellaneous
  
  
    —     

Customer Supply Agreements

   

 

Derivative assets

(current)

  

 

    45.6       

 

Derivative assets

(current)

  

 

    47.3   
   
 
Deposits and
miscellaneous
  
  
    —         
 
Deposits and
miscellaneous
  
  
    15.9   
                   

Total derivatives not designated as hedging instruments under ASC 815

      81.8        $ 67.4   
                   

Total derivatives

    $ 84.6        $ 67.4   
                   

There were no derivative instruments classified as a liability as of December 31, 2010 and 2009.

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

Foreign Exchange Contracts

We are subject to changes in foreign currency exchange rates as a result of our operations in Australia. Foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because our reporting currency is the U.S. dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore and coal sales. We use forward exchange contracts, call options and collar options to hedge our foreign currency exposure for a portion of our sales receipts. U.S. currency is converted to Australian dollars at the currency exchange rate in effect at the time of the transaction. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and to protect against undue adverse movement in these exchange rates. Effective October 1, 2010, we elected hedge accounting for certain types of our foreign exchange contracts entered into subsequent to September 30, 2010. These instruments are subject to formal documentation, intended to achieve qualifying hedge treatment, and are tested at inception and at each reporting period as to effectiveness. Our hedging policy allows no more than 75 percent of anticipated operating costs for up to 12 months and no more than 50 percent of operating costs for up to 24 months. If and when these 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 December 31, 2010, we had outstanding exchange rate contracts with a notional amount of $70 million in the form of forward exchange contracts with varying maturity dates ranging from February 2011 to December 2011.

Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive income (loss) on the Statements of Consolidated Financial Position. Unrealized gains of $1.9 million were recorded as of December 31, 2010 related to these hedge contracts. Any ineffectiveness is recognized immediately in income and as of December 31, 2010, there was no ineffectiveness recorded for these foreign exchange contracts. Of the amounts recorded in Accumulated other comprehensive income (loss), we estimate that $1.9 million will be reclassified to Changes in fair value of foreign currency contracts, net in the next 12 months upon maturity of the related contracts.

The following summarizes the effect of our derivatives designated as hedging instruments on Accumulated other comprehensive income (loss) and the Statements of Consolidated Operations for the years ended December 31, 2010, 2009 and 2008:

 

     (In Millions)  

Derivatives in Cash Flow
Hedging Relationships

  Amount  of
Gain/(Loss)

Recognized in
OCI on
Derivative

(Effective Portion)
    Location of
Gain/(Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)
  Amount of
Gain/(Loss)
Reclassified from
Accumulated
OCI into Income

(Effective Portion)
    Location of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective Portion)
  Amount  of
Gain/(Loss)
Recognized in
Income on
Derivative

(Ineffective Portion)
 
    Year ended
December 31,
        Year ended
December 31,
        Year ended
December 31,
 
    2010     2009     2008         2010     2009     2008         2010     2009     2008  

Foreign Exchange Contracts (hedge designation)

  $ 1.9      $ —        $ —        Product Revenue   $ —        $ —        $ —        Miscellaneous -net   $ —        $ —        $ —     

Foreign Exchange Contracts (prior to de-designation)

    —          —          32.1      Product Revenue     3.2        15.1        35.5      Miscellaneous -net     —          —          (8.6
                                                                           

Total

  $ 1.9      $ —        $ 32.1        $ 3.2      $ 15.1      $ 35.5        $ —        $ —        $ (8.6
                                                                           

Derivatives Not Designated as Hedging Instruments

Foreign Exchange Contracts

Effective July 1, 2008, we discontinued hedge accounting for foreign exchange contracts entered into for all outstanding contracts at the time and continued to hold such instruments as economic hedges to manage currency risk as described above. We entered into additional foreign exchange contracts during the first nine months of 2010. We did not designate hedge accounting for any of these foreign exchange contracts. As of December 31, 2010, we had outstanding exchange rate contracts with a notional amount of $230 million in the form of call options, collar options, and forward exchange contracts with varying maturity dates ranging from January 2011 to January 2012. This compares with outstanding exchange rate contracts with a notional amount of $108.5 million as of December 31, 2009. Effective October 1, 2010, we re-elected hedge accounting for certain types of our foreign exchange contracts entered into subsequent to September 30, 2010 as discussed above.

As a result of discontinuing hedge accounting, the instruments are prospectively marked to fair value each reporting period through Changes in fair value of foreign currency contracts, net on the Statements of Consolidated Operations. For the year ended December 31, 2010, the change in fair value of our foreign currency contracts resulted in net gains of $39.8 million, based on the Australian to U.S. dollar spot rate of 1.02 at December 31, 2010. For the year ended December 31, 2009, the change in fair value of our foreign currency contracts resulted in net gains of $85.7 million, based on the Australian to U.S. dollar spot rate of 0.90 at December 31, 2009. The amounts that were previously recorded as a component of Accumulated other comprehensive income (loss) are reclassified to earnings and a corresponding realized gain or loss is recognized upon maturity of the related contracts. For the year ended December 31, 2010, we reclassified gains of $3.2 million from Accumulated other comprehensive income (loss) related to contracts that matured during the year, and recorded the amounts as Product revenues on the Statements of Consolidated Operations. In 2009, gains of $15.1 million were reclassified to earnings. As of December 31, 2010, approximately $0.7 million of gains remains in Accumulated other comprehensive income (loss) related to the effective cash flow hedge contracts prior to de-designation. We estimate the remaining $0.7 million will be reclassified to Product revenues in the next 12 months upon maturity of the related contracts.

Customer Supply Agreements

Most of our North American 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, changes in specified Producers 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 North American Iron Ore customer provide for supplemental revenue or refunds 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 an embedded derivative and is required to be accounted for separately from the base contract price. The embedded derivative instrument, which is finalized based on a future price, is marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. We recognized $120.2 million, $22.2 million and $225.5 million as Product revenues on the Statements of Consolidated Operations for the years ended December 31, 2010, 2009 and 2008, respectively, related to the supplemental payments. Derivative assets, representing the fair value of the pricing factors, were $45.6 million and $63.2 million, respectively, on the December 31, 2010 and 2009 Statements of Consolidated Financial Position.

Provisional Pricing Arrangements

In 2010, the world's largest iron ore producers moved away from the annual international benchmark pricing mechanism referenced in certain of our customer supply agreements, resulting in a shift in the industry toward shorter-term pricing arrangements linked to the spot market. As a result, we renegotiated the terms of our supply agreements with our Asia Pacific Iron Ore customers. Based on timing of these changes, pricing settlements were finalized with customers during each of the 2010 quarters with the exception of the first quarter of 2010. The provisional pricing arrangements related to first quarter shipments were subsequently settled during the second quarter of 2010. In addition, we reached final pricing settlement with some of our North American Iron Ore customers for the 2010 contract year. Prior to final pricing settlements, we recorded certain shipments made during 2010 on a provisional basis until final settlement was reached. The pricing provisions for both our Asia Pacific and North American customers were characterized as freestanding derivatives and were required to be accounted for separately once the products were shipped. The derivative instruments, which were settled and billed once final pricing settlement for the 2010 contract year was reached, were marked to fair value as revenue adjustments each reporting period based upon the estimated forward settlement until prices were actually settled. We recognized $960.7 million as Product revenues in the Statement of Consolidated Operations for the year ended December 31, 2010 under these pricing provisions. As of December 31, 2010, all of these revenues have been realized due to the pricing settlements that occurred with our Asia Pacific customers during the second quarter and North American customers through the fourth quarter of 2010. For the year ended December 31, 2009, we recognized a reduction in Product revenues of $28.2 million under provisional pricing arrangements.

Upon the settlement of pricing provisions with some of our North American Iron Ore customers in the fourth quarter of 2010, the derivative instrument was settled and therefore is not reflected on the Statement of Consolidated Financial Position at December 31, 2010. With respect to the North American Iron Ore customers for which final pricing for the 2010 contract year has not yet been settled as of December 31, 2010, we did not record shipments on a provisional basis due to pending arbitrations. In 2009, the derivative instrument was settled in the fourth quarter upon settlement of the pricing provisions with each of our customers, and is therefore not reflected on the Statements of Consolidated Financial Position at December 31, 2009.

The following summarizes the effect of our derivatives that are not designated as hedging instruments, on the Statements of Consolidated Operations for the years ended December 31, 2010, 2009 and 2008:

 

(In Millions)

 

Derivative Not Designated as Hedging

Instruments

   Location of Gain/(Loss)
Recognized in Income on
Derivative
     Amount of  Gain/(Loss)
Recognized in Income on
Derivative
 
            Year ended December 31,  
            2010      2009     2008  

Foreign Exchange Contracts

     Product Revenues       $ 11.1       $ 5.4      $ 32.6   

Foreign Exchange Contracts

    

 

Changes in fair value of foreign

currency contracts, net

  

 

     39.8         85.7        (188.2

Foreign Exchange Contracts

     Miscellaneous - net         —           —          (8.6

Customer Supply Agreements

     Product Revenues         120.2         22.2        225.5   

Provisional Pricing Arrangements

     Product Revenues         960.7         (28.2     (7.7

United Taconite Purchase Provision

     Product Revenues         —           106.5        74.8   
                            

Total

      $ 1,131.8       $ 191.6      $ 128.4   
                            

In the normal course of business, we enter into forward contracts designated as normal purchases, for the purchase of commodities, primarily natural gas and diesel fuel, which are used in our North American Iron Ore operations. Such contracts are in quantities expected to be delivered and used in the production process and are not intended for resale or speculative purposes.

Marketable Securities
Marketable Securities

NOTE 4 — MARKETABLE SECURITIES

In July 2010, we sold substantially all of our held-to-maturity portfolio for approximately $15.6 million, resulting in a realized loss of $0.1 million. The majority of our held-to-maturity securities were due to mature by the end of 2010 and the decision to sell was made in order to increase the availability of cash for the funding of certain strategic transactions, including the acquisitions of Spider and CLCC.

 

At December 31, 2010 and 2009, we had $85.9 million and $81.0 million, respectively, of marketable securities classified as available for sale. Marketable securities classified as available-for-sale are stated at fair value, with unrealized holding gains and losses included in Accumulated other comprehensive income (loss). The cost, gross unrealized gains and losses and fair value of securities classified as available-for-sale at December 31, 2010 and 2009 are summarized as follows:

 

     (In Millions)  
     December 31, 2010  
     Cost      Gross
Unrealized
    Fair
Value
 
        Gains      Losses    

Equity securities

          

(without contractual maturity)

   $ 33.2       $ 52.7       $ —        $ 85.9   
     (In Millions)  
     December 31, 2009  
     Cost      Gross
Unrealized
    Fair
Value
 
        Gains      Losses    

Equity securities

          

(without contractual maturity)

   $ 35.6       $ 46.1       $ (0.7   $ 81.0   

KWG

We own 111.7 million shares of KWG common stock, representing 19.4 percent of its outstanding shares. KWG is an exploration stage company that participates in the discovery of chromite deposits in Northern Ontario. KWG holds a 26.5 percent interest in the "Big Daddy" chromite deposit, which we obtained majority ownership over during the second half of 2010. We do not exercise significant influence over KWG as of the reporting date, and the investment is classified as an available-for-sale security. Accordingly, we record unrealized mark-to-market changes in the fair value of the investment through Accumulated other comprehensive income (loss) each reporting period, unless the loss is deemed to be other than temporary.

Pluton Resources

In 2009, Asia Pacific Iron Ore completed the sale of its 50 percent interest in the Irvine Island iron ore project to its joint venture partner, Pluton Resources. The consideration received consisted of a cash payment of approximately $5 million and the issuance of 19.4 million shares of Pluton Resources, all of which resulted in recognition of a gain on sale amounting to $12.1 million. Our interest in Pluton Resources is approximately 10.9 percent at December 31, 2010. We do not exercise significant influence over Pluton as of the reporting date, and the investment is classified as an available-for-sale security. Accordingly, we record unrealized mark-to-market changes in the fair value of the investment through Accumulated other comprehensive income (loss) each reporting period, unless the loss is deemed to be other than temporary.

PolyMet

We own 9.2 million shares of PolyMet common stock, representing 6.0 percent of issued shares as a result of the sale of certain land, crushing and concentrating and other ancillary facilities located at our Cliffs Erie site (formerly owned by LTVSMC) to PolyMet. We have the right to participate in up to 6.0 percent of any future financing, and PolyMet has the first right to acquire or place our shares should we choose to sell. We classify the shares as available-for-sale and record unrealized mark-to-market changes in the fair value of the shares through Accumulated other comprehensive income (loss) each reporting period, unless the loss is deemed to be other than temporary.

 

Golden West

During 2008, we acquired 24.3 million shares of Golden West, a Western Australia iron ore exploration company. Golden West owns the Wiluna West exploration ore project in Western Australia, containing a resource of 126 million metric tons of ore. The investment provides Asia Pacific Iron Ore a strategic interest in Golden West and Wiluna West. Our ownership in Golden West represents approximately 14.8 percent of its outstanding shares at December 31, 2010. Acquisition of the shares represented an original investment of approximately $22 million. We do not exercise significant influence, and at December 31, 2010 and 2009, the investment is classified as an available-for-sale security. Accordingly, we record unrealized mark-to-market changes in the fair value of the investment through Accumulated other comprehensive income (loss) each reporting period, unless the loss is deemed to be other than temporary.

Quest

Through our acquisition of the remaining shares of Freewest in January 2010, we acquired 4.2 million shares of Quest, a Canadian-based exploration company focused on the discovery of rare earth deposit opportunities. We sold approximately 3.6 million of our acquired ownership interest in Quest during the second half of 2010 for proceeds of $17.2 million, resulting in a realized gain of $6.3 million recognized as Other non-operating income on the Statements of Consolidated Operations. Our remaining interest in Quest, consisting of 0.6 million shares as of December 31, 2010, is classified as an available-for-sale security and we record unrealized mark-to-market changes in the fair value of the investment through Accumulated other comprehensive income (loss) each reporting period, unless the loss is deemed to be other than temporary.

Acquisitions and Other Investments
Acquisitions and Other Investments

NOTE 5 — ACQUISITIONS AND OTHER INVESTMENTS

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.

Wabush

We acquired entities from our former partners that held their respective interests in Wabush on February 1, 2010, thereby increasing our ownership interest to 100 percent. Our full ownership of Wabush has been included in the consolidated financial statements since that date. The acquisition date fair value of the consideration transferred totaled $103 million, which consisted of a cash purchase price of $88 million and a working capital adjustment of $15 million. With Wabush's 5.5 million tons of production capacity, acquisition of the remaining interest has increased our North American Iron Ore equity production capacity by approximately 4.0 million tons and has added more than 50 million tons of additional reserves. Furthermore, acquisition of the remaining interest has provided us additional access to the seaborne iron ore markets serving steelmakers in Europe and Asia.

Prior to the acquisition date, we accounted for our 26.8 percent interest in Wabush as an equity-method investment. We initially recognized an acquisition date fair value of the previous equity interest of $39.7 million, and a gain of $47.0 million as a result of remeasuring our prior equity interest in Wabush held before the business combination. The gain was recognized in the first quarter of 2010 and was included in Gain on acquisition of controlling interests in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2010.

In the months subsequent to the initial purchase price allocation, we further refined the fair values of the assets acquired and liabilities assumed. Additionally, we also continued to ensure our existing interest in Wabush was incorporating all of the book basis, including amounts recorded in Accumulated other comprehensive income (loss). Based on this process the acquisition date fair value of the previous equity interest was adjusted to $38 million. The changes required to finalize the U.S. and Canadian deferred tax valuations and to incorporate additional information on assumed asset retirement obligations offset to a net decrease of $1.7 million in the fair value of the equity interest from the initial purchase price allocation. Thus, the gain resulting from the remeasurement of our prior equity interest, net of amounts previously recorded in Accumulated other comprehensive income (loss) of $20.3 million, was adjusted to $25 million for the period ended December 31, 2010.

Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we have retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill and Gain on acquisition of controlling interests, made during the second half of 2010, back to the date of acquisition. Accordingly, such amounts are reflected in the Statements of Consolidated Operations for the year ended December 31, 2010, but have been excluded from the three months ended September 30, 2010 and December 31, 2010, respectively. We finalized the purchase price allocation for the acquisition of Wabush during the fourth quarter of 2010. A comparison of the initial and final purchase price allocation has been provided in the following table.

 

     (In Millions)  
     Initial
Allocation
    Final
Allocation
    Change  

Consideration

      

Cash

   $ 88.0      $ 88.0      $ —     

Working capital adjustments

     15.0        15.0        —     
                        

Fair value of total consideration transferred

     103.0        103.0        —     

Fair value of Cliffs' equity interest in Wabush held prior to acquisition of remaining interest

     39.7        38.0        (1.7
                        
   $ 142.7      $ 141.0      $ (1.7
                        

Recognized amounts of identifiable assets acquired and liabilities assumed

      

ASSETS:

      

In-process inventories

   $ 21.8      $ 21.8      $ —     

Supplies and other inventories

     43.6        43.6        —     

Other current assets

     13.2        13.2        —     

Mineral rights

     85.1        84.4        (0.7

Plant and equipment

     146.3        147.8        1.5   

Intangible assets

     66.4        66.4        —     

Other assets

     16.3        19.3        3.0   
                        

Total identifiable assets acquired

     392.7        396.5        3.8   

LIABILITIES:

      

Current liabilities

     (48.1     (48.1     —     

Pension and OPEB obligations

     (80.6     (80.6     —     

Mine closure obligations

     (39.6     (53.4     (13.8

Below-market sales contracts

     (67.7     (67.7     —     

Deferred taxes

     (20.5     —          20.5   

Other liabilities

     (8.9     (8.8     0.1   
                        

Total identifiable liabilities assumed

     (265.4     (258.6     6.8   
                        

Total identifiable net assets acquired

     127.3        137.9        10.6   

Goodwill

     15.4        3.1        (12.3
                        

Total net assets acquired

   $ 142.7      $ 141.0      $ (1.7
                        

 

The significant changes to the final purchase price allocation from the initial allocation were due primarily to the allocation of deferred taxes between the existing equity interest in Wabush and the acquired portion, and additional asset retirement obligations noted related to the Wabush operations.

Of the $66.4 million of acquired intangible assets, $54.7 million was assigned to the value of a utility contract that provides favorable rates compared with prevailing market rates and will be amortized on a straight-line basis over the five-year remaining life of the contract. The remaining $11.7 million was assigned to the value of an easement agreement that is anticipated to provide a fee to Wabush for rail traffic moving over Wabush lands and will be amortized over a 30-year period.

The $3.1 million of goodwill resulting from the acquisition was assigned to our North American Iron Ore business segment. The goodwill recognized is primarily attributable to the mine's port access and proximity to the seaborne iron ore markets. None of the goodwill is expected to be deductible for income tax purposes.

Refer to NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.

Freewest

During 2009, we acquired 29 million shares, or 12.4 percent, of Freewest, a Canadian-based mineral exploration company focused on acquiring, exploring and developing high-quality chromite, gold and base-metal properties in Canada. On January 27, 2010, we acquired all of the remaining outstanding shares of Freewest for C$1.00 per share, including its interest in the Ring of Fire properties in Northern Ontario Canada, which comprise three premier chromite deposits. As a result of the transaction, our ownership interest in Freewest increased from 12.4 percent as of December 31, 2009 to 100 percent as of the acquisition date. Our full ownership of Freewest has been included in the consolidated financial statements since the acquisition date. The acquisition of Freewest is consistent with our strategy to broaden our geographic and mineral diversification and allows us to apply our expertise in open-pit mining and mineral processing to a chromite ore resource base that could form the foundation of North America's only ferrochrome production operation. The planned mine is expected to produce 1 million to 2 million tonnes of high-grade chromite ore annually, which would be further processed into 400 thousand to 800 thousand tonnes of ferrochrome. Total purchase consideration for the acquisition was approximately $185.9 million, comprised of the issuance of 0.0201 of our common shares for each Freewest share, representing a total of 4.2 million common shares or $173.1 million, and $12.8 million in cash. The acquisition date fair value of the consideration transferred was determined based upon the closing market price of our common shares on the acquisition date.

Prior to the acquisition date, we accounted for our 12.4 percent interest in Freewest as an available-for-sale equity security. The acquisition date fair value of the previous equity interest was $27.4 million, which was determined based upon the closing market price of the 29 million previously owned shares on the acquisition date. We recognized a gain of $13.6 million in the first quarter of 2010 as a result of remeasuring our ownership interest in Freewest held prior to the business acquisition. The gain is included in Gain on acquisition of controlling interests in the Statements of Consolidated Operations for the year ended December 31, 2010.

 

The following table summarizes the consideration paid for Freewest and the fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation in the fourth quarter of 2010. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we have retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill, made during the fourth quarter of 2010, back to the date of acquisition. We adjusted the initial purchase price allocation for the acquisition of Freewest in the fourth quarter of 2010 as follows:

 

     (In Millions)  
     Initial
Allocation
    Final
Allocation
    Change  

Consideration

      

Equity instruments (4.2 million Cliffs common shares)

   $ 173.1      $ 173.1      $ —     

Cash

     12.8        12.8        —     
                        

Fair value of total consideration transferred

     185.9        185.9        —     

Fair value of Cliffs' ownership interest in Freewest held prior to acquisition of remaining interest

     27.4        27.4        —     
                        
   $ 213.3      $ 213.3      $ —     
                        

Recognized amounts of identifiable assets acquired and liabilities assumed

      

ASSETS:

      

Cash

   $ 7.7      $ 7.7      $ —     

Other current assets

     1.4        1.4        —     

Mineral rights

     252.8        244.0        (8.8

Marketable securities

     12.1        12.1        —     
                        

Total identifiable assets acquired

     274.0        265.2        (8.8

LIABILITIES:

      

Accounts payable

     (3.3     (3.3     —     

Long-term deferred tax liabilities

     (57.4     (54.3     3.1   
                        

Total identifiable liabilities assumed

     (60.7     (57.6     3.1   
                        

Total identifiable net assets acquired

     213.3        207.6        (5.7

Goodwill

     —          5.7        5.7   
                        

Total net assets acquired

   $ 213.3      $ 213.3      $ —     
                        

The significant changes to the final purchase price allocation from the initial allocation were primarily due to changes to the fair value adjustment for mineral rights that resulted from the finalization of certain assumptions used in the valuation models utilized to determine the fair values.

The $5.7 million of goodwill resulting from the finalization of the purchase price allocation was assigned to our Ferroalloys business segment. The goodwill recognized is primarily attributable to obtaining a controlling interest in Freewest. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.

 

Spider

During the second quarter of 2010, we commenced a formal cash offer to acquire all of the outstanding common shares of Spider, a Canadian-based mineral exploration company, for C$0.19 per share. As of June 30, 2010, we held 27.4 million shares of Spider, representing approximately four percent of its issued and outstanding shares. On July 6, 2010, all of the conditions to acquire the remaining common shares of Spider had been satisfied or waived, and we consequently acquired all of the common shares that were validly tendered as of that date. When combined with our prior ownership interest, the additional shares acquired increased our ownership percentage to 52 percent on the date of acquisition, representing a majority of the common shares outstanding on a fully-diluted basis. Our 52 percent ownership of Spider was included in the consolidated financial statements since the July 6, 2010 acquisition date, and Spider was included as a component of our Ferroalloys operating segment. The acquisition date fair value of the consideration transferred totaled a cash purchase price of $56.9 million. Subsequent to the acquisition date, we extended the cash offer to permit additional shares to be tendered and taken up, thereby increasing our ownership percentage in Spider to 85 percent as of July 26, 2010. Effective October 6, 2010, we completed the acquisition of the remaining shares of Spider through an amalgamation, bringing our ownership percentage to 100 percent as of December 31, 2010. As noted above, through our acquisition of Freewest during the first quarter of 2010, we acquired an interest in the Ring of Fire properties in Northern Ontario, which comprise three premier chromite deposits. The Spider acquisition allowed us to obtain majority ownership of the "Big Daddy" chromite deposit, based on Spider's ownership percentage in this deposit of 26.5 percent.

Prior to the July 6, 2010 acquisition date, we accounted for our four percent interest in Spider as an available-for-sale equity security. The acquisition date fair value of the previous equity interest was $4.9 million, which was determined based upon the closing market price of the 27.4 million previously owned shares on the acquisition date.

The acquisition date fair value of the 48 percent noncontrolling interest in Spider was estimated to be $51.9 million, which was determined based upon the closing market price of the 290.5 million shares of noncontrolling interest on the acquisition date.

 

The following table summarizes the consideration paid for Spider and the fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation in the fourth quarter of 2010. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we have retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill, made during the fourth quarter of 2010, back to the date of acquisition. We adjusted the initial purchase price allocation for the acquisition of Spider in the fourth quarter of 2010 as follows:

 

     (In Millions)  
     Initial
Allocation
    Final
Allocation
    Change  

Consideration

      

Cash

   $ 56.9      $ 56.9      $ —     
                        

Fair value of total consideration transferred

     56.9        56.9        —     

Fair value of Cliffs' ownership interest in Spider held prior to acquisition of remaining interest

     4.9        4.9        —     
                        
   $ 61.8      $ 61.8      $ —     
                        

Recognized amounts of identifiable assets acquired and liabilities assumed

      

ASSETS:

      

Cash

   $ 9.0      $ 9.0      $ —     

Other current assets

     4.5        4.5        —     

Mineral rights

     31.0        35.3        4.3   
                        

Total identifiable assets acquired

     44.5        48.8        4.3   

LIABILITIES:

      

Other current liabilities

     (5.2     (5.2     —     

Long-term deferred tax liabilities

     (2.7     (5.1     (2.4
                        

Total identifiable liabilities assumed

     (7.9     (10.3     (2.4
                        

Total identifiable net assets acquired

     36.6        38.5        1.9   

Goodwill

     77.1        75.2        (1.9

Noncontrolling interest in Spider

     (51.9     (51.9     —     
                        

Total net assets acquired

   $ 61.8      $ 61.8      $ —     
                        

The significant changes to the final purchase price allocation from the initial allocation were primarily due to changes to the fair value adjustment for mineral rights that resulted from the finalization of certain assumptions used in the valuation models utilized to determine the fair values.

The $75.2 million of goodwill resulting from the acquisition was assigned to our Ferroalloys business segment. The goodwill recognized is primarily attributable to obtaining majority ownership of the "Big Daddy" chromite deposit. When combined with the interest we acquired in the Ring of Fire properties through our acquisition of Freewest, we now control three premier chromite deposits in Northern Ontario, Canada. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.

CLCC

On July 30, 2010, we acquired the coal operations of privately-owned INR, and since that date, the operations acquired from INR have been conducted through our wholly-owned subsidiary known as CLCC. Our full ownership of CLCC has been included in the consolidated financial statements since the acquisition date, and the subsidiary is reported as a component of our North American Coal segment. The acquisition date fair value of the consideration transferred totaled $775.9 million, which consisted of a cash purchase price of $757 million and a working capital adjustment of $18.9 million

CLCC is a producer of high-volatile metallurgical and thermal coal located in southern West Virginia. CLCC's operations include two underground continuous mining method metallurgical coal mines and one open surface thermal coal mine. The acquisition includes a metallurgical and thermal coal mining complex with a coal preparation and processing facility as well as a large, long-life reserve base with an estimated 59 million tons of metallurgical coal and 62 million tons of thermal coal. This reserve base increases our total global reserve base to over 166 million tons of metallurgical coal and over 67 million tons of thermal coal. This acquisition represents an opportunity for us to add complementary high-quality coal products and provides certain advantages, including among other things, long-life mine assets, operational flexibility, and new equipment. When combined with our current coal production in West Virginia, Alabama and Queensland, Australia, we estimate 2011 global equity production capacity of approximately 9 million tons at a split of approximately 7 million tons of metallurgical coal and 2 million tons of thermal coal.

.

The following table summarizes the consideration paid for CLCC and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We are in the process of completing certain valuations of the assets acquired and liabilities assumed related to the acquisition, most notably, tangible assets, deferred taxes and goodwill, and the final allocation will be made when completed. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.

 

     (In Millions)  
     Initial
Allocation
    Revised
Allocation
    Change  

Consideration

      

Cash

   $ 757.0      $ 757.0      $ —     

Working capital adjustments

     17.5        18.9        (1.4
                        

Fair value of total consideration transferred

   $ 774.5      $ 775.9      $ (1.4
                        

Recognized amounts of identifiable assets acquired and liabilities assumed

      

ASSETS:

      

Product inventories

   $ 20.0      $ 20.0      $ —     

Other current assets

     11.8        11.8        —     

Land and mineral rights

     640.3        640.3        —     

Plant and equipment

     111.1        111.1        —     

Deferred taxes

     16.5        16.0        0.5   

Intangible assets

     7.5        7.5        —     

Other non-current assets

     0.8        0.8        —     
                        

Total identifiable assets acquired

     808.0        807.5        0.5   

LIABILITIES:

      

Current liabilities

     (22.8     (24.1     1.3   

Mine closure obligations

     (2.8     (2.8     —     

Below-market sales contracts

     (32.6     (32.6     —     
                        

Total identifiable liabilities assumed

     (58.2     (59.5     1.3   
                        

Total identifiable net assets acquired

     749.8        748.0        1.8   

Preliminary goodwill

     24.7        27.9        (3.2
                        

Total net assets acquired

   $ 774.5      $ 775.9      $ (1.4
                        

 

Of the $7.5 million of acquired intangible assets, $5.4 million was assigned to the value of in-place permits and will be amortized on a straight-line basis over the life of the mine. The remaining $2.1 million was assigned to the value of favorable mineral leases and will be amortized over the corresponding mine life.

The $27.9 million of preliminary goodwill resulting from the acquisition was assigned to our North American Coal business segment. The preliminary goodwill recognized is primarily attributable to the addition of complementary high-quality coal products to our existing operations and operational flexibility. None of the preliminary goodwill is expected to be deductible for income tax purposes. Refer to NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.

As our fair value estimates remain materially unchanged from the third quarter of 2010, there were no significant changes to the purchase price allocation from the initial allocation reported for the period ended September 30, 2010. We expect to finalize the purchase price allocation for the acquisition of CLCC in the first half of 2011.

With regard to each of the acquisitions discussed above, pro forma results of operations have not been presented because the effects of these business combinations, individually and in the aggregate, were not material to our consolidated results of operations.

Goodwill and Other Intangible Assets and Liabilities
Goodwill and Other Intangible Assets and Liabilities

NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES

Goodwill

The following table summarizes changes in the carrying amount of goodwill allocated by reporting unit during 2010 and 2009:

 

     (In Millions)  
     December 31, 2010      December 31, 2009  
     North
American
Iron Ore
     North
American
Coal
     Asia
Pacific
Iron Ore
     Other      Total      North
American
Iron Ore
     Asia
Pacific
Iron Ore
     Total  

Beginning Balance

   $ 2.0       $ —         $ 72.6       $ —         $ 74.6       $ 2.0       $ —         $ 2.0   

Arising in business combinations

     3.1         27.9         —           80.9         111.9         —           68.3         68.3   

Impact of foreign currency translation

     —           —           10.0         —           10.0         —           4.3         4.3   
                                                                       

Ending Balance

   $ 5.1       $ 27.9       $ 82.6       $ 80.9       $ 196.5       $ 2.0       $ 72.6       $ 74.6   
                                                                       

The increase in the balance of goodwill as of December 31, 2010 includes the assignment to goodwill of $80.9 million related to the finalization of the purchase price allocation for the acquisition of a controlling interest in Freewest and Spider and the assignment to preliminary goodwill of $27.9 million related to the acquisition of CLCC. In addition, the goodwill balance as December 31, 2010 includes the assignment of $3.1 million to goodwill based on the finalization of the purchase price allocation for the acquisition of the remaining interest in Wabush. The balance of $196.5 million and $74.6 million as of December 31, 2010 and 2009, respectively, is presented as Goodwill on the Statements of Consolidated Financial Position. Refer to NOTE 5 — ACQUISITIONS AND OTHER INVESTMENTS for additional information.

Goodwill is not subject to amortization and is tested for impairment annually 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 at December 31, 2010 and 2009:

 

    (In Millions)  
  December 31, 2010     December 31, 2009  
    

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   $ 132.4      $ (16.3   $ 116.1      $ 120.3      $ (8.2   $ 112.1   

Utility contracts

   Intangible assets, net     54.7        (10.2     44.5        —          —          —     

Easements

   Intangible assets, net     11.7        (0.4     11.3        —          —          —     

Leases

   Intangible assets, net     5.2        (2.9     2.3        3.1        (2.8     0.3   

Unpatented technology

   Intangible assets, net     4.0        (2.4     1.6        4.0        (1.6     2.4   
                                                  

Total intangible assets

     $ 208.0      $ (32.2   $ 175.8      $ 127.4      $ (12.6   $ 114.8   
                                                  

Below-market sales contracts

   Below-market sales contracts - current   $ (77.0   $ 19.9      $ (57.1   $ (30.3   $ —        $ (30.3

Below-market sales contracts

   Below-Market Sales Contracts     (252.3     87.9        (164.4     (198.7     45.4        (153.3
                                                  

Total below-market sales contracts

     $ (329.3   $ 107.8      $ (221.5   $ (229.0   $ 45.4      $ (183.6
                                                  

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

Easements

   30

Leases

   1.5 - 4.5

Unpatented technology

   5

Amortization expense relating to intangible assets was $19.6 million, $9.8 million and $2.8 million, respectively, for the years ended December 31, 2010, 2009 and 2008, and is recognized in Cost of goods sold and operating expenses on the Statements of Consolidated Operations. The estimated amortization expense relating to intangible assets for each of the five succeeding fiscal years is as follows:

 

     (In Millions)  
     Amount  

Year Ending December 31

  

2011

   $ 18.2   

2012

     18.2   

2013

     17.3   

2014

     17.3   

2015

     6.2   
        

Total

   $ 77.2   
        

 

The below-market sales contracts are classified as a liability and recognized over the terms of the underlying contracts, which range from 3.5 to 8.5 years. For the years ended December 31, 2010, 2009 and 2008, we recognized $62.4 million, $30.3 million and $15.1 million, respectively, in Product revenues related to the below-market sales contracts. The following amounts will be recognized in Product revenues for each of the five succeeding fiscal years:

 

     (In Millions)  
     Amount  

Year Ending December 31

  

2011

   $ 58.3   

2012

     48.8   

2013

     45.3   

2014

     23.0   

2015

     23.0   
        

Total

   $ 198.4   
        
Fair Value of Financial Instruments
Fair Value of Financial Instruments

NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The following represents the assets and liabilities of the Company measured at fair value at December 31, 2010 and 2009: