CLIFFS NATURAL RESOURCES INC., 10-Q filed on 11/1/2011
Quarterly Report
Document And Entity Information
9 Months Ended
Sep. 30, 2011
Oct. 27, 2011
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
Sep. 30, 2011 
 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
clf 
 
Entity Registrant Name
CLIFFS NATURAL RESOURCES INC. 
 
Entity Central Index Key
0000764065 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
143,011,700 
Statements Of Unaudited Condensed Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
Product
$ 2,124.4 
$ 1,287.2 
$ 4,962.4 
$ 3,074.8 
Freight and venture partners' cost reimbursements
18.4 
58.8 
169.4 
183.1 
TOTAL REVENUES
2,142.8 
1,346.0 
5,131.8 
3,257.9 
COST OF GOODS SOLD AND OPERATING EXPENSES
(1,279.5)
(868.8)
(2,936.9)
(2,215.3)
SALES MARGIN
863.3 
477.2 
2,194.9 
1,042.6 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
 
Selling, general and administrative expenses
(78.3)
(57.3)
(193.4)
(143.0)
Consolidated Thompson acquisition costs
(2.1)
 
(25.0)
 
Exploration costs
(26.6)
(10.3)
(55.4)
(19.4)
Miscellaneous - net
64.0 
(19.2)
59.6 
(8.5)
TOTAL OTHER OPERATING EXPENSE
(43.0)
(86.8)
(214.2)
(170.9)
OPERATING INCOME
820.3 
390.4 
1,980.7 
871.7 
OTHER INCOME (EXPENSE)
 
 
 
 
Gain on acquisition of controlling interests
 
2.1 
 
40.7 
Changes in fair value of foreign currency contracts, net
(6.2)
32.5 
100.5 
24.8 
Interest income
2.7 
3.3 
7.6 
8.4 
Interest expense
(49.6)
(17.4)
(169.2)
(41.0)
Other non-operating income
(1.7)
(0.3)
(0.7)
6.9 
TOTAL OTHER INCOME
(54.8)
20.2 
(61.8)
39.8 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY INCOME FROM VENTURES
765.5 
410.6 
1,918.9 
911.5 
INCOME TAX EXPENSE
(17.8)
(116.1)
(312.3)
(282.5)
EQUITY INCOME FROM VENTURES
11.1 
3.6 
2.8 
8.4 
INCOME FROM CONTINUING OPERATIONS
758.8 
298.1 
1,609.4 
637.4 
LOSS FROM DISCONTINUED OPERATIONS, net of tax
(17.5)
(0.7)
(18.7)
(2.0)
NET INCOME
741.3 
297.4 
1,590.7 
635.4 
LESS: INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
151.8 
 
170.1 
 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 589.5 
$ 297.4 
$ 1,420.6 
$ 635.4 
Continuing operations
$ 4.21 
$ 2.20 
$ 10.31 
$ 4.71 
Discontinued operations
$ (0.12)
 
$ (0.13)
$ (0.01)
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
$ 4.09 
$ 2.20 
$ 10.18 
$ 4.70 
Discontinued operations
$ (0.12)
$ (0.01)
$ (0.13)
$ (0.01)
Continuing operations
$ 4.19 
$ 2.19 
$ 10.25 
$ 4.68 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
$ 4.07 
$ 2.18 
$ 10.12 
$ 4.67 
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
 
Basic
144,203 
135,345 
139,563 
135,280 
Diluted
144,989 
136,213 
140,321 
136,098 
CASH DIVIDENDS DECLARED PER SHARE
$ 0.28 
$ 0.14 
$ 0.56 
$ 0.3675 
Statements Of Unaudited Condensed Consolidated Financial Position (USD $)
In Millions
Sep. 30, 2011
Dec. 31, 2010
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 545.1 
$ 1,566.7 
Accounts receivable
364.8 
352.3 
Accounts receivable from associated companies
69.0 
6.8 
Inventories
528.2 
269.2 
Supplies and other inventories
175.9 
148.1 
Derivative assets
73.6 
82.6 
Deferred and refundable taxes
4.2 
43.2 
Other current assets
144.0 
114.8 
TOTAL CURRENT ASSETS
1,904.8 
2,583.7 
PROPERTY, PLANT AND EQUIPMENT, NET
9,835.3 
3,979.2 
OTHER ASSETS
 
 
Investments in ventures
515.8 
514.8 
Goodwill
1,237.7 
196.5 1
Intangible assets, net
149.3 
175.8 
Deferred income taxes
79.9 
140.3 
Other non-current assets
222.5 
187.9 
TOTAL OTHER ASSETS
2,205.2 
1,215.3 
TOTAL ASSETS
13,945.3 
7,778.2 
CURRENT LIABILITIES
 
 
Accounts payable
370.1 
266.5 
Accrued expenses
359.9 
266.6 
Deferred revenue
99.6 
215.6 
Taxes payable
221.8 
142.3 
Current portion of term loan
62.3 
 
Other current liabilities
185.7 
137.7 
TOTAL CURRENT LIABILITIES
1,299.4 
1,028.7 
POSTEMPLOYMENT BENEFIT LIABILITIES
462.4 
528.0 
LONG-TERM DEBT
3,883.5 
1,713.1 
BELOW-MARKET SALES CONTRACTS
128.4 
164.4 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
210.5 
184.9 
DEFERRED INCOME TAXES
835.7 
63.7 
OTHER LIABILITIES
273.6 
256.7 
TOTAL LIABILITIES
7,093.5 
3,939.5 
COMMITMENTS AND CONTINGENCIES
 
 
CLIFFS SHAREHOLDERS' EQUITY
 
 
Common Shares - par value $0.125 per share Authorized - 400,000,000 shares (2010 - 224,000,000 shares); Issued - 149,195,469 shares (2010 - 138,845,469 shares); Outstanding - 143,009,708 shares (2010 - 135,456,999 shares)
18.6 
17.3 
Capital in excess of par value of shares
1,766.1 
896.3 
Retained Earnings
4,266.2 
2,924.1 
Cost of 6,185,761 common shares in treasury (2010 - 3,388,470 shares)
(268.2)
(37.7)
Accumulated other comprehensive income (loss)
(59.3)
45.9 
TOTAL CLIFFS SHAREHOLDERS' EQUITY
5,723.4 
3,845.9 
NONCONTROLLING INTEREST
1,128.4 
(7.2)
TOTAL EQUITY
6,851.8 
3,838.7 
TOTAL LIABILITIES AND EQUITY
$ 13,945.3 
$ 7,778.2 
Statements Of Unaudited Condensed Consolidated Financial Position (Parenthetical) (USD $)
Sep. 30, 2011
Dec. 31, 2010
Statements Of Unaudited Condensed Consolidated Financial Position [Abstract]
 
 
Common Shares, Par Value
$ 0.125 
$ 0.125 
Common Shares, Authorized
400,000,000 
224,000,000 
Common Shares, Issued
149,195,469 
138,845,469 
Common Shares, Outstanding
143,009,708 
135,456,999 
Common Shares in Treasury
6,185,761 
3,388,470 
Statements Of Unaudited Condensed Consolidated Cash Flows (USD $)
In Millions
9 Months Ended
Sep. 30,
2011
2010
OPERATING ACTIVITIES
 
 
Net income
$ 1,590.7 
$ 635.4 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
Depreciation, depletion and amortization
302.9 
239.5 
Changes in deferred revenue
(156.3)
(73.0)
Pensions and other postretirement benefits
(43.3)
1.6 
Deferred income taxes
(14.1)
71.8 
Equity (income) in ventures (net of tax)
(2.8)
(8.4)
Derivatives and currency hedges
(84.4)
(167.8)
Gain on acquisition of controlling interests
 
(40.7)
Other
3.7 
32.8 
Changes in operating assets and liabilities:
 
 
Receivables and other assets
(62.5)
(81.8)
Product inventories
(128.5)
15.2 
Payables and accrued expenses
140.3 
6.4 
Net cash provided by operating activities
1,545.7 
631.0 
INVESTING ACTIVITIES
 
 
Acquisition of controlling interests, net of cash acquired
 
(971.5)
Purchase of property, plant and equipment
(478.9)
(150.1)
Net settlements in Canadian dollar foreign exchange contracts
93.1 
 
Investment in Consolidated Thompson senior secured notes
(125.0)
 
Investments in ventures
(3.6)
(182.2)
Other investing activities
19.3 
11.2 
Net cash used by investing activities
(4,918.6)
(1,292.6)
FINANCING ACTIVITIES
 
 
Net proceeds from issuance of common shares
853.7 
 
Net proceeds from issuance of senior notes
998.1 
1,388.0 
Borrowings on term loan
1,250.0 
 
Repayment of term loan
(265.4)
 
Borrowings on bridge credit facility
750.0 
 
Repayment of bridge credit facility
(750.0)
 
Borrowings under revolving credit facility
250.0 
450.0 
Repayment under revolving credit facility
 
(450.0)
Debt issuance costs
(54.8)
 
Repayment of $200 million term loan
 
(200.0)
Payments under share buyback program
(221.9)
 
Common stock dividends
(78.8)
(49.9)
Other financing activities
(27.1)
(25.5)
Net cash provided by financing activities
2,366.6 
1,112.6 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(15.3)
15.7 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,021.6)
466.7 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
1,566.7 
502.7 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
545.1 
969.4 
Consolidated Thompson [Member]
 
 
INVESTING ACTIVITIES
 
 
Acquisition of controlling interests, net of cash acquired
(4,423.5)
 
FINANCING ACTIVITIES
 
 
Repayment of $200 million term loan
$ (337.2)
 
Basis Of Presentation And Significant Accounting Policies
Basis Of Presentation And Significant Accounting Policies

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

On May 12, 2011, we acquired all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt. The unaudited condensed consolidated financial statements as of and for the period ended September 30, 2011 reflect our 100 percent interest in Consolidated Thompson since that date. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for further information.

During the second quarter of 2011, we recorded an impairment charge of $17.6 million related to the decline in the fair value of our 30 percent ownership interest in AusQuest, that was determined to be other than temporary. We evaluated the severity of the decline in the fair value of the investment as compared to our historical carrying amount, considering the broader macroeconomic conditions and the status of current exploration prospects, and could not reasonably assert that the impairment period would be temporary. As of June 30, 2011, our investment in AusQuest had a fair value of $7.3 million based upon the closing market price of the 68.3 million shares held as of June 30, 2011. As we account for this investment as an equity method investment, we recorded the impairment charge as a component of Equity Income (Loss) from Ventures on the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011. There were no additional impairment indicators during the third quarter of 2011.

In August 2011, we entered into a term sheet with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo to Pluton Resources Limited. As consideration for the acquisition, Pluton Resources Limited will be responsible for the environmental rehabilitation of Cockatoo when it concludes its mining. As of September 30, 2011, our portion of the current estimated cost of the rehabilitation is approximately $20 million. The potential transaction is expected to occur at the end of the current stage of mining, Stage III, which is anticipated to be complete in late 2012. The consummation of the transaction is subject to completion of due diligence and definitive agreements between all parties, and will be conditional on regulatory and third-party consents and other customary closing conditions.

Immaterial Errors

The accounting for our 79 percent interest in the Empire mine was previously based upon the assessment that the mining venture functions as a captive cost company, supplying product only to the venture partners effectively on a cost basis. Upon the execution of the partnership arrangement in 2002, the underlying notion of the arrangement was for the partnership to provide pellets to the venture partners at an agreed upon rate to cover operating and capital costs. Furthermore, any gains or losses generated by the mining venture throughout the life of the partnership were expected to be minimal and the mine has historically been in a net loss position. The partnership arrangement provides that the venture partners share profits and losses on an ownership percentage basis of 79 percent and 21 percent, with the noncontrolling interest partner limited on the losses produced by the mining venture to its equity interest. Therefore, the noncontrolling interest partner cannot have a negative ownership interest in the mining venture. Under our captive cost company arrangements, the noncontrolling interests' revenue amounts are stated at an amount that is offset entirely by an equal amount included in cost of goods sold and operating expenses, resulting in no sales margin attributable to noncontrolling interest participants. In addition, under the Empire partnership arrangement, the noncontrolling interest net losses were historically recorded on the Statements of Unaudited Condensed Consolidated Operations through cost of goods sold and operating expenses. This was based on the assumption that the partnership would operate in a net liability position, and as mentioned, the noncontrolling partner is limited on the partnership losses that can be allocated to its ownership interest. Due to a change in the partnership pricing arrangement to align with the industry's shift towards shorter-term pricing arrangements linked to the spot market, the partnership began to generate profits. The change in partnership pricing was a result of the negotiated settlement with ArcelorMittal effective beginning for the three months ended March 31, 2011. The modification of the pricing mechanism

changed the nature of our cost sharing arrangement and we determined that we should have been recording a noncontrolling interest adjustment in accordance with ASC 810 on the Statements of Unaudited Condensed Consolidated Operations and on the Statements of Unaudited Condensed Consolidated Financial Position to the extent that the partnership was in a net asset position, beginning in the first quarter of 2011.

In accordance with applicable GAAP, management has quantitatively and qualitatively evaluated the materiality of the error and has determined the error to be immaterial to the quarterly reports previously filed for the periods ended March 31, 2011 and June 30, 2011, and also immaterial for this quarterly report for the period ended September 30, 2011. Accordingly, all of the resulting adjustments have been recorded prospectively on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011. The adjustment to record the noncontrolling interest related to the Empire mining venture of $84.0 million, resulted in an increase to Income From Continuing Operations of $16.1 million, as a result of reductions in income tax expenses, and a decrease to Net Income Attributable To Cliffs Shareholders of $67.9 million on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. The adjustments resulted in a decrease to basic and diluted earnings per common share of $0.47 per common share and $0.49 and $0.48 per common share for the three and nine months ended September 30, 2011, respectively. In addition, Retained Earnings was decreased by $67.9 million and Noncontrolling Interest was increased by $84.0 million on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011.

In addition to the noncontrolling interest adjustment, the application of consolidation accounting for the Empire partnership arrangement also resulted in several financial statement line item reclassifications on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. Under the captive cost company accounting, we historically recorded the reimbursements for our venture partners' cost through Freight and venture partners' cost reimbursements, with a corresponding offset in Cost of Goods Sold and Operating Expenses on the Statements of Unaudited Condensed Consolidated Operations. Accordingly, we have reclassified $46.0 million of revenues from Freight and venture partners' cost reimbursements to Product Revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. We also reclassified $54.1 million related to the ArcelorMittal price re-opener settlement recorded during the first quarter of 2011 from Cost of Goods Sold and Operating Expenses to Product Revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011.

The impact of the prospective adjustments on the Statements of Unaudited Condensed Consolidated Operations for each of the prior interim periods of 2011 have been included within the table below. The prior period amounts included within the accompanying Condensed Consolidated Financial Statements have not been retrospectively adjusted for these impacts due to management's materiality assessment as discussed above.

 

     (In Millions, Except Per Share Amounts)  
     Three Months Ended      Six Months Ended  
     March 31,      June 30,      June 30,  
     2011      2011      2011  

Revenues from Product Sales and Services

        

Product

     $ 54.1           $ 46.0           $ 100.1     

Freight and venture partners' cost reimbursements

     -           (46.0)          (46.0)    
  

 

 

    

 

 

    

 

 

 
     54.1           -             54.1     

Cost of Goods Sold and Operating Expenses

     (54.1)          -             (54.1)   

Income from Continuing Operations

     8.4           7.7           16.1     

LESS: Income Attributable to Noncontrolling Interest

     45.9           38.1           84.0     
  

 

 

    

 

 

    

 

 

 

Net Income Attributable to Cliffs Shareholders

     $ (37.5)          $ (30.4)          $ (67.9)    

Earnings per Common Share Attributable to Cliffs Shareholders - Basic and Diluted

     $ (0.28)          $ (0.22)          $ (0.49)    
Segment Reporting
Segment Reporting

NOTE 2 – SEGMENT REPORTING

Our company's primary operations are organized and managed according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and our Global Exploration Group. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that provide iron ore primarily to the seaborne market to Asian steel producers. The North American Coal segment is comprised of our five metallurgical coal mines and one thermal coal mine that provide metallurgical coal primarily to the integrated steel industry and thermal coal primarily to the energy industry. The Asia Pacific Iron Ore segment is comprised of two iron ore mining complexes 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 primarily of our 95 percent interest in renewaFUEL located in Michigan. As previously discussed, the results of operations of the renewaFUEL operations are reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented due to our plans to dispose of the operations. The Ferroalloys operating segment is comprised of our interests in chromite deposits held by Freewest and Spider in Northern Ontario, Canada, and the Global Exploration Group 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 three and nine months ended September 30, 2011 and 2010:

 

A summary of assets by segment is as follows:

 

     (In Millions)  
     September 30,
2011
     December 31,
2010
 

Segment Assets:

     

U.S. Iron Ore

     $ 1,772.2           $     1,537.1     

Eastern Canadian Iron Ore

     7,712.6           629.6     

North American Coal

     1,718.9           1,623.8     

Asia Pacific Iron Ore

     1,343.1           1,195.3     

Other

     1,165.6           1,257.8     
  

 

 

    

 

 

 

Total segment assets

     13,712.4           6,243.6     

Corporate

     232.9           1,534.6     
  

 

 

    

 

 

 

Total assets

     $         13,945.3           $   7,778.2     
  

 

 

    

 

 

 
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 Unaudited Condensed Consolidated Financial Position as of September 30, 2011 and December 31, 2010:

 

     (In Millions)  
     Derivative Assets      Derivative Liabilities  
     September 30, 2011      December 31, 2010      September 30, 2011      December 31, 2010  

Derivative

Instrument

   Balance Sheet
Location
  Fair
Value
     Balance Sheet
Location
  Fair
Value
     Balance Sheet
Location
   Fair
Value
     Balance Sheet
Location
   Fair
Value
 

Derivatives designated as hedging instruments under ASC 815:

                     

Foreign Exchange Contracts

   Derivative
assets
(current)
    $ 1.2         Derivative
assets
(current)
    $ 2.8         Other
current
liabilities
     $ 15.9              $   -       
    

 

 

      

 

 

       

 

 

       

 

 

 

Total derivatives designated as hedging instruments under ASC 815

       $ 1.2             $ 2.8              $ 15.9              $ -       
    

 

 

      

 

 

       

 

 

       

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

                     

Foreign Exchange Contracts

   Derivative
assets
(current)
    $ 4.6         Derivative
assets
(current)
    $ 34.2              $ -                $ -       
   Deposits and
miscellaneous
    -           Deposits and
miscellaneous
    2.0              -                -       

Customer Supply Agreements

   Derivative
assets
(current)
    67.8         Derivative
assets
(current)
    45.6              -                -       

Provisional Pricing Arrangements

   Accounts
Receivable
    49.0             -                -                -       
    

 

 

      

 

 

       

 

 

       

 

 

 

Total derivatives not designated as hedging instruments under ASC 815

       $   121.4             $ 81.8              $ -                $ -       
    

 

 

      

 

 

       

 

 

       

 

 

 

Total derivatives

       $ 122.6             $   84.6              $   15.9              $   -       
    

 

 

      

 

 

       

 

 

       

 

 

 

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

 

Derivatives Designated as Hedging Instruments

Cash Flow Hedge

Australian Dollar 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 the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore and coal sales. We use foreign currency exchange forward 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 for effectiveness at inception and at least once each reporting period. During the third quarter of 2011, we implemented a global foreign exchange hedging policy to apply to all of our operating segments and our wholly-owned subsidiaries that engage in foreign exchange risk mitigation. The policy allows for no more than 75 percent, but not less than 40 percent for up to 12 months and not less than 10 percent for up to 15 months, of forecasted net currency exposures that are probable to occur. For our Asia Pacific operations, the forecasted net currency exposures are in relation to anticipated operating costs designated as cash flow hedges on future sales. Previously, our Asia Pacific operations had a policy in place that was specific to local operations and allowed for 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 to be designated as cash flow hedges of future sales. 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.

sAs of September 30, 2011, we had outstanding foreign currency exchange contracts with a notional amount of $315 million in the form of forward contracts with varying maturity dates ranging from October 2011 to September 2012. This compares with outstanding foreign currency exchange contracts with a notional amount of $70 million as of December 31, 2010.

Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive income (loss) on the Statements of Unaudited Condensed Consolidated Financial Position. Unrealized losses of $15.2 million and $10.3 million, respectively, were recorded for the three and nine months ended September 30, 2011 related to these hedge contracts, based on the Australian to U.S. dollar spot rate of 0.97 as of September 30, 2011. Any ineffectiveness is recognized immediately in income and as of September 30, 2011, there was no ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive income (loss) are reclassified into earnings in the same period the forecasted transaction affects earnings and are recorded as Product Revenues on the Statements of Unaudited Condensed Consolidated Operations. For the three and nine months ended September 30, 2011, we recorded realized gains of $1.8 million and $4.0 million, respectively. Of the amounts remaining in Accumulated other comprehensive income (loss), we estimate that net losses of $10.3 million will be reclassified into earnings within the next 12 months.

The following summarizes the effect of our derivatives designated as hedging instruments on Accumulated other comprehensive income (loss) and the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and 2010:

 

     (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)
 
     Three months ended
September 30,
          Three months ended
September 30,
 
     2011      2010           2011      2010  

Australian Dollar Foreign Exchange Contracts (hedge designation)

     $ (15.2)          $         -         Product Revenue      $         1.5           $     -     
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

     $ (15.2)          $ -              $         1.5           $     -     
  

 

 

    

 

 

       

 

 

    

 

 

 
     Nine months ended
September 30,
          Nine months ended
September 30,
 
     2011      2010           2011      2010  

Australian Dollar Foreign Exchange Contracts (hedge designation)

     $ (10.3)          $ -         Product Revenue      $ 2.5           $ -     

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

       -             -         Product Revenue      0.7               3.2     
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

     $ (10.3)          $ -              $         3.2           $         3.2     
  

 

 

    

 

 

       

 

 

    

 

 

 

Derivatives Not Designated as Hedging Instruments

Australian Dollar Foreign Exchange Contracts

Effective July 1, 2008, we discontinued hedge accounting for all outstanding foreign currency exchange contracts entered into at the time and continued to hold such instruments as economic hedges to manage currency risk as described above. The notional amount of the outstanding non-designated foreign exchange contracts was $45 million as of September 30, 2011. The contracts are in the form of collar options with varying maturity dates ranging from October 2011 to January 2012. This compares with outstanding non-designated foreign exchange contracts with a notional amount of $230 million as of December 31, 2010.

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 Unaudited Condensed Consolidated Operations. For the three and nine months ended September 30, 2011, the change in fair value of our foreign currency contracts resulted in net losses of $6.2 million and net gains of $7.4 million, respectively, based on the Australian to U.S. dollar spot rate of 0.97 at September 30, 2011. This compares with net gains of $32.5 million and $24.8 million for the three and nine months ended September 30, 2010, respectively, based on the Australian to U.S. dollar spot rate of 0.97 at September 30, 2010. The amounts that were previously recorded as a component of Accumulated other comprehensive income (loss) were all reclassified to earnings as of June 30, 2011, with a corresponding realized gain or loss recognized in the same period the forecasted transaction affected earnings.

Canadian Dollar Foreign Exchange Contracts and Options

On January 11, 2011, we entered into a definitive arrangement agreement with Consolidated Thompson to acquire all of its common shares in an all-cash transaction, including net debt. We hedged a portion of the purchase price on the open market by entering into foreign currency exchange forward contracts and an option contract with a combined notional amount of C$4.7 billion. The hedge contracts were considered economic hedges which do not qualify for hedge accounting. The forward contracts had various maturity dates and the option contract had a maturity date of April 14, 2011.

During the first half of 2011, swaps were executed in order to extend the maturity dates of certain of the forward contracts through the consummation of the Consolidated Thompson acquisition and the repayment of the Consolidated Thompson convertible debentures. These swaps and the maturity of the forward contracts resulted in net realized gains of $93.1 million recognized through Changes in fair value of foreign currency contracts, net on the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011.

Customer Supply Agreements

Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The price adjustment factors vary based on the agreement but typically include adjustments based upon changes in international pellet prices, 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 U.S. 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 a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. We recognized $53.8 million and $124.9 million, respectively, as Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011, related to the supplemental payments. This compares with Product revenues of $25.1 million and $93.4 million, respectively, for the comparable periods in 2010. Derivative assets, representing the fair value of the pricing factors, were $67.8 million and $45.6 million, respectively, on the September 30, 2011 and December 31, 2010 Statements of Unaudited Condensed Consolidated Financial Position.

Provisional Pricing Arrangements

During 2010, the world's largest iron ore producers began to move 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. This change has impacted certain of our U.S. Iron Ore and Eastern Canadian Iron Ore customer supply agreements for the 2011 contract year. We have reached final pricing settlement with a majority of our U.S. Iron Ore customers through the third quarter of 2011. However, in some cases we are still in the process of revising the terms of our customer supply agreements to incorporate changes to historical pricing mechanisms. As a result, we have recorded certain shipments made to our U.S. Iron Ore and Eastern Canadian Iron Ore customers in the first nine months of 2011 on a provisional basis until final settlement is reached. The pricing provisions are characterized as freestanding derivatives and are required to be accounted for separately once the product is shipped. The derivative instrument, which is settled and billed once final pricing settlement is reached, is marked to fair value as a revenue adjustment each reporting period based upon the estimated forward settlement until prices are actually settled. We recognized $193.0 million and $623.5 million, respectively, as an increase in Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 under these pricing provisions for certain shipments to our U.S. Iron Ore and Eastern Canadian Iron Ore customers. For the three and nine months ended September 30, 2011, $309.4 million of the revenues were realized due to the pricing settlements that occurred with the majority of our U.S. Iron Ore customers during the third quarter of 2011. This compares with an increase in Product revenues of $229.2 million and $960.7 million, respectively, for the three and nine months ended September 30, 2010 related to estimated forward price settlements for shipments to our Asia Pacific Iron Ore, U.S. Iron Ore and Eastern Canadian Iron Ore customers until prices actually settled. For the three and nine months ended September 30, 2010, $455.7 million of the revenues were realized due to pricing settlements.

As of September 30, 2011, we have derivatives of $49.0 million classified as Accounts receivable on the Statements of Unaudited Condensed Consolidated Financial Position to reflect the amount we have provisionally agreed upon with certain of our U.S. Iron Ore and Eastern Canadian Iron Ore customers until a final price settlement is reached. It also represents the amount we have invoiced for shipments made to such customers and expect to collect in cash in the short-term to fund operations. As the amounts provisionally agreed upon with such customers are in line with our estimated forward settlement of the provisional prices, no incremental amounts were recorded as current Derivative assets on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011. In 2010, the derivative instrument was settled in the fourth quarter upon the settlement of pricing provisions with some of our U.S. Iron Ore customers and therefore is not reflected in the Statements of Unaudited Condensed Consolidated Financial Position at December 31, 2010.

The following summarizes the effect of our derivatives that are not designated as hedging instruments, on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and 2010:

 

(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  
          Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
          2011      2010      2011      2010  

Foreign Exchange Contracts

   Product Revenues      $ -             $ 3.3           $ 1.0           $ 8.8     

Foreign Exchange Contracts

   Other Income (Expense)      (6.2)          32.5           100.5           24.8     

Customer Supply Agreements

   Product Revenues      53.8           25.1           124.9           93.4     

Provisional Pricing Arrangements

   Product Revenues      193.0           229.2           623.5           960.7     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

        $       240.6           $       290.1           $       849.9           $       1,087.7     
     

 

 

    

 

 

    

 

 

    

 

 

 

Refer to NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.

Inventories
Inventories

NOTE 4 – INVENTORIES

The following table presents the detail of our Inventories on the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011 and December 31, 2010:

 

     (In Millions)  
     September 30, 2011      December 31, 2010  

Segment

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

U.S. Iron Ore

     $ 235.4           $ 21.5           $ 256.9           $ 101.1           $ 9.7           $   110.8     

Eastern Canadian Iron Ore

     101.1           28.8           129.9           43.5           21.2           64.7     

North American Coal

     7.1           65.9           73.0           16.1           19.8           35.9     

Asia Pacific Iron Ore

     37.5           14.0           51.5           34.7           20.4           55.1     

Other

     14.6           2.3           16.9           2.6           0.1           2.7     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $   395.7           $   132.5           $   528.2           $   198.0           $   71.2           $ 269.2     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Acquisitions And Other Investments
Acquisitions And Other Investments

NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS

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 Eastern Canadian 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 $38.0 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 $25.0 million as of 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 Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2010 and have been excluded from the three months ended September 30, 2010. We finalized the purchase price allocation for the acquisition of Wabush during the fourth quarter of 2010.

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. Assuming favorable results from pre-feasibility and feasibility studies and receipt of all applicable approvals, the planned mine is expected to allow us to produce 600 thousand metric tons of ferrochrome and to produce one million metric tons of chromite concentrate annually. Total purchase consideration for the remaining interest in Freewest 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 nine months ended September 30, 2010.

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.

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 at the time of the closing of the acquisition.

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.

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.

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.

The following table summarizes the consideration paid for CLCC and the fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation in the second quarter of 2011. 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 back to the date of acquisition. We adjusted the initial purchase price allocation for the acquisition of CLCC as follows:

 

     (In Millions)  
     Initial
Allocation
     Final
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             639.3             (1.0)      

Plant and equipment

     111.1             112.3             1.2       

Deferred taxes

     16.5             15.9             (0.6)      

Intangible assets

     7.5             7.5             -       

Other non-current assets

     0.8             0.8             -       
  

 

 

    

 

 

    

 

 

 

Total identifiable assets acquired

     808.0             807.6             (0.4)      

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             748.1             (1.7)      

Goodwill

     24.7             27.8             3.1       
  

 

 

    

 

 

    

 

 

 

Total net assets acquired

     $     774.5             $     775.9             $      1.4       
  

 

 

    

 

 

    

 

 

 

As our fair value estimates remain materially unchanged from 2010, there were no significant changes to the purchase price allocation from the initial allocation reported during the third quarter of 2010.

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 on a straight-line basis over the corresponding mine life.

The $27.8 million of goodwill resulting from the acquisition was assigned to our North American Coal business segment. The goodwill recognized is primarily attributable to the addition of complementary high-quality coal products to our existing operations and operational flexibility. 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.

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

Consolidated Thompson

On May 12, 2011, we completed our acquisition of Consolidated Thompson by acquiring all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt, pursuant to the terms of the definitive arrangement agreement dated as of January 11, 2011. Upon the acquisition: (a) each outstanding Consolidated Thompson common share was acquired for a cash payment of C$17.25; (b) each outstanding option and warrant that was "in the money" was acquired for cancellation for a cash payment of C$17.25 less the exercise price per underlying Consolidated Thompson common share; (c) each outstanding performance share unit was acquired for cancellation for a cash payment of C$17.25; (d) all outstanding Quinto Mining Corporation rights to acquire common shares of Consolidated Thompson were acquired for cancellation for a cash payment of C$17.25 per underlying Consolidated Thompson common share; and (e) certain Consolidated Thompson management contracts were eliminated that contained certain change of control provisions for contingent payments upon termination. The acquisition date fair value of the consideration transferred totaled $4.6 billion. Our full ownership of Consolidated Thompson has been included in the consolidated financial statements since the acquisition date, and the subsidiary is reported as a component of our Eastern Canadian Iron Ore segment.

The acquisition of Consolidated Thompson reflects our strategy to build scale by owning expandable and exportable steelmaking raw material assets serving international markets. Through our acquisition of Consolidated Thompson, we now own and operate an iron ore mine and processing facility near Bloom Lake in Quebec, Canada that produces iron ore concentrate of high-quality. WISCO is a 25 percent partner in Bloom Lake. Bloom Lake is currently ramping up towards an initial production rate of 8.0 million metric tons of iron ore concentrate per year. During the second quarter of 2011, additional capital investments were approved in order to increase the initial production rate to 16.0 million metric tons of iron ore concentrate per year. We also own two additional development properties, Lamêlée and Peppler Lake, in Quebec. All three of these properties are in proximity to our existing Canadian operations and will allow us to leverage our port facilities and supply this iron ore to the seaborne market. The acquisition is also expected to further diversify our existing customer base.

The following table summarizes the consideration paid for Consolidated Thompson and the estimated fair values of the assets and liabilities assumed at the acquisition date. We are in the process of conducting a valuation 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. We expect to finalize the purchase price allocation for the acquisition of Consolidated Thompson early in 2012. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.

 

     (In Millions)  
     Initial
Allocation
     Revised
Allocation
     Change  

Consideration

        

Cash

     $ 4,554.0             $ 4,554.0             $ -       
  

 

 

    

 

 

    

 

 

 

Fair value of total consideration transferred

     $ 4,554.0             $ 4,554.0             $ -       
  

 

 

    

 

 

    

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

        

ASSETS:

        

Cash

     $ 130.6             $ 130.6             $ -       

Accounts receivable

     102.8             102.8             -       

Product inventories

     134.2             134.2             -       

Other current assets

     35.1             35.0             (0.1)      

Mineral rights

     4,450.0             4,450.0             -       

Property, plant and equipment

     1,193.4             1,193.4             -       

Intangible assets

     2.1             2.1             -       
  

 

 

    

 

 

    

 

 

 

Total identifiable assets acquired

     6,048.2             6,048.1             (0.1)      

LIABILITIES:

        

Accounts payable

     (13.6)            (13.6)            -       

Accrued liabilities

     (130.0)            (123.6)            6.4       

Convertible debentures

     (335.7)            (335.7)            -       

Other current liabilities

     (41.8)            (41.8)            -       

Long-term deferred tax liabilities

     (831.5)            (856.7)            (25.2)      

Wabush Easement

     (11.1)            (11.2)            (0.1)      

Senior secured notes

     (125.0)            (125.0)            -       

Capital lease obligations

     (70.7)            (70.7)            -       

Other long-term liabilities

     (14.0)            (14.0)            -       
  

 

 

    

 

 

    

 

 

 

Total identifiable liabilities assumed

     (1,573.4)            (1,592.3)            (18.9)      
  

 

 

    

 

 

    

 

 

 

Total identifiable net assets acquired

     4,474.8             4,455.8             (19.0)      

Noncontrolling interest in Bloom Lake

     (947.6)            (947.6)            -       

Preliminary goodwill

     1,026.8             1,045.8             19.0       
  

 

 

    

 

 

    

 

 

 

Total net assets acquired

     $     4,554.0             $     4,554.0             $     -       
  

 

 

    

 

 

    

 

 

 

Our fair value estimates were updated during the third quarter of 2011 from the initial allocation performed in the second quarter of 2011 in order to reflect adjustments made to the deferred tax liability recorded as of the acquisition date. These adjustments were due to updates to the tax basis of acquired inventories, mineral reserve step-up, and federal and provincial net operating loss carryforwards. There were no other material changes to our purchase allocation during the third quarter of 2011.

The fair value of the noncontrolling interest in the assets acquired and liabilities assumed of Bloom Lake has been proportionately allocated, based upon WISCO's 25 percent interest in Bloom Lake. We then reduced the allocated fair value of WISCO's ownership interest in Bloom Lake to reflect the noncontrolling interest discount.

The $1.0 billion of preliminary goodwill resulting from the acquisition has been assigned to our Eastern Canadian Iron Ore business segment. The preliminary goodwill recognized is primarily attributable to the proximity to our existing Canadian operations, which will allow us to leverage our port facilities and supply iron ore to the seaborne market. 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.

Acquisition related costs in the amount of $2.1 million and $25.0 million, respectively, have been charged directly to operations and are included within Consolidated Thompson acquisition costs on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. In addition, we recognized $16.3 million of deferred debt issuance costs, net of accumulated amortization of $0.7 million, associated with issuing and registering the debt required to fund the acquisition as of September 30, 2011. Of these costs, $1.7 million and $14.6 million, respectively, have been recorded in Other current assets and Other non-current assets on the September 30, 2011 Statements of Unaudited Condensed Consolidated Financial Position. Upon the termination of the bridge credit facility that we entered into to provide a portion of the financing for Consolidated Thompson, $38.3 million of related debt issuance costs were recognized in Interest expense on the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2011.

The Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 include incremental revenue of $285.2 million and $431.0 million, respectively, and operating income of $167.8 million and $160.6 million, respectively, related to the acquisition of Consolidated Thompson since the date of acquisition. Operating income during the period includes the impact of expensing an additional $11.2 million and $59.8 million, respectively, of stepped-up value of inventory and reserves due to purchase accounting through Cost of goods sold and operating expenses for the three and nine months ended September 30, 2011.

The following unaudited consolidated pro forma information summarizes the results of operations for the three and nine months ended September 30, 2011 and 2010, as if the Consolidated Thompson acquisition and the related financing had been completed as of January 1, 2010. The pro forma information gives effect to actual operating results prior to the acquisition. The unaudited consolidated pro forma information does not purport to be indicative of the results that would have actually been obtained if the acquisition of Consolidated Thompson had occurred as of the beginning of the periods presented or that may be obtained in the future.

 

     (In Millions, Except
Per Common Share)
 
     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
     2011      2010      2011      2010  

Revenues from product sales and services

     $     2,142.8           $     1,487.5           $     5,340.2           $     3,435.2     

Net income attributable to Cliffs shareholders

     $ 595.6           $ 315.2           $ 1,426.2           $ 515.5     

Earnings per common share attributable to Cliffs shareholders - Basic

     $ 4.13           $ 2.33           $ 10.22           $ 3.81     

Earnings per common share attributable to Cliffs shareholders - Diluted

     $ 4.11           $ 2.31           $ 10.16           $ 3.79     

The pro forma net income attributable to Cliffs shareholders was adjusted to exclude $2.1 million and $69.2 million, respectively, of Cliffs and Consolidated Thompson acquisition related costs and $11.2 million and $59.8 million, respectively, of non-recurring inventory purchase accounting adjustments incurred during the three and nine months ended September 30, 2011. The pro forma net income attributable to Cliffs shareholders for the nine months ended September 30, 2010 was adjusted to include the $59.8 million of non-recurring inventory purchase accounting adjustments.

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 for the nine months ended September 30, 2011 and the year ended December 31, 2010:

 

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 as of September 30, 2011 and December 31, 2010:

 

 

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

Amortization expense relating to intangible assets was $3.3 million and $12.5 million, respectively, for the three and nine months ended September 30, 2011, and is recognized in Cost of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations. Amortization expense relating to intangible assets was $5.6 million and $13.5 million, respectively, for the comparable periods in 2010. The estimated amortization expense relating to intangible assets for the remainder of 2011 and each of the five succeeding fiscal years is as follows:

 

     (In Millions)  
     Amount  

Year Ending December 31

  

2011 (remaining three months)

     $ 4.5     

2012

     18.0     

2013

     17.9     

2014

     17.9     

2015

     6.0     

2016

     6.0     
  

 

 

 

Total

     $       70.3     
  

 

 

 

The below-market sales contracts are classified as a liability and recognized over the remaining terms of the underlying contracts, which range from 3.5 to 8.5 years. For the three and nine months ended September 30, 2011, we recognized $16.7 million and $40.4 million, respectively, in Product revenues related to the below-market sales contracts, compared with $22.9 million and $34.7 million, respectively, for the three and nine months ended September 30, 2010. The following amounts will be recognized in earnings for the remainder of 2011 and each of the five succeeding fiscal years:

 

     (In Millions)  
     Amount  

Year Ending December 31

  

2011 (remaining three months)

     $ 17.9     

2012

     48.8     

2013

     45.3     

2014

     23.0     

2015

     23.0     

2016

     23.1     
  

 

 

 

Total

     $       181.1     
  

 

 

 

 

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 September 30, 2011 and December 31, 2010:

 

We had no financial instruments measured at fair value that were in a liability position at December 31, 2010.

Financial assets classified in Level 1 at September 30, 2011 and December 31, 2010 include money market funds and available-for-sale marketable securities. The valuation of these instruments is determined using a market approach, taking into account current interest rates, creditworthiness, and liquidity risks in relation to current market conditions, and is based upon unadjusted quoted prices for identical assets in active markets.

The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach 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. Level 2 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At September 30, 2011 and December 31, 2010, such derivative financial instruments included our existing foreign currency exchange contracts. The fair value of the foreign currency exchange contracts is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk, and liquidity risks associated with current market conditions.

 

The Level 2 derivative assets at September 30, 2011 also consist of freestanding derivatives related to certain supply agreements with our U.S. Iron Ore and Eastern Canadian Iron Ore customers. During the third quarter of 2011, we reached final pricing settlement with a majority of our U.S. Iron Ore customers. However, in some cases we are still in the process of revising the terms of our customer supply agreements to incorporate changes to historical pricing mechanisms and as a result, we have recorded certain shipments made during the first nine months of 2011 on a provisional basis until final settlement is reached. The pricing provisions are characterized as freestanding derivatives and are required to be accounted for separately once the product is shipped. The derivative instrument, which is settled and billed once final pricing settlement is reached, is marked to fair value as a revenue adjustment each reporting period. During the second quarter of 2011 and the third quarter of 2010, we revised the inputs used to determine the fair value of these derivatives to include 2011 published pricing indices and settlements realized by other companies in the industry. Prior to this change, the fair value was primarily determined based on significant unobservable inputs to develop the forward price expectation of the final price settlement for 2011. Based on these changes to the determination of the fair value, we transferred $20 million of derivative assets from a Level 3 classification to a Level 2 classification within the fair value hierarchy during the second quarter of 2011. A similar revision to the inputs used to determine the fair value of these derivatives was made during the third quarter of 2010, and based on the changes we transferred $161.8 million of derivative assets from a Level 3 classification to a Level 2 classification within the fair value hierarchy at that time. The derivative instrument was settled in the fourth quarter of 2010, upon settlement of the pricing provisions with some of our U.S. Iron Ore and Eastern Canadian Iron Ore customers, and is therefore not reflected in the Statement of Consolidated Financial Position at December 31, 2010. The fair value of our derivatives is determined using a market approach and takes into account current market conditions and other risks, including nonperformance risk.

The derivative financial assets classified within Level 3 at September 30, 2011 and December 31, 2010 include a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer's annual steel pricing at the time 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 mark this provision to fair value as a revenue adjustment each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the annual realized price of hot rolled steel at the steelmaker's facilities, and takes into consideration current market conditions and nonperformance risk.

Substantially all of the financial assets and liabilities are carried at fair value or contracted amounts that approximate fair value. We had no financial assets or liabilities measured at fair value on a non-recurring basis at September 30, 2011 or December 31, 2010.

We recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 of the fair value hierarchy as of September 30, 2011. As noted above, there was a transfer from Level 3 to Level 2 during the second quarter of 2011 and the third quarter of 2010, as reflected in the table below. The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010.

 

     (In Millions)  
     Derivative Assets  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Beginning balance

     $ 64.0           $ 238.9           $ 45.6           $ 63.2     

Total gains

           

Included in earnings

     53.8           25.1           144.9           824.9     

Included in other comprehensive income

     -             -             -             -       

Settlements

     (50.0)          (56.4)          (102.7)          (680.5)    

Transfers out of Level 3

     -             (161.8)          (20.0)          (161.8)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance - September 30

     $ 67.8           $ 45.8           $ 67.8           $ 45.8     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date

     $       53.8           $       25.1           $       144.9           $       93.4     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gains and losses included in earnings are reported in Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and 2010.

The carrying amount and fair value of our long-term receivables and long-term debt at September 30, 2011 and December 31, 2010 were as follows:

 

     (In Millions)  
     September 30, 2011      December 31, 2010  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term receivables:

           

Customer supplemental payments

     $ 22.3           $ 20.5           $ 22.3           $       19.5     

ArcelorMittal USA - Ispat receivable

     28.1           32.7           32.8           38.9     

Other

     8.8           8.8           8.1           8.1     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term receivables (1)

     $ 59.2           $ 62.0           $ 63.2           $ 66.5     
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt:

           

Term loan - $1.25 billion

     $ 922.1           $ 922.1           $ -             $ -       

Senior notes - $700 million

     699.3           705.7           -             -       

Senior notes - $1.3 billion

     1,289.1           1,382.8           990.3           972.5     

Senior notes - $400 million

     398.0           439.7           397.8           422.8     

Senior notes - $325 million

     325.0           351.7           325.0           355.6     

Revolving loan

     250.0           250.0           -             -       

Customer borrowings

     5.1           5.1           4.0           4.0     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

     $       3,888.6           $       4,057.1           $       1,717.1           $     1,754.9     
  

 

 

    

 

 

    

 

 

    

 

 

 

(1) Includes current portion.

           

The terms of one of our U.S. 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 up to $22.3 million in exchange for interest payments until the deferred amount is repaid in 2013. Interest is payable by the customer quarterly, and payments began in September 2009 at the higher of 9 percent or the prime rate plus 350 basis points. As of September 30, 2011, we have a receivable of $22.3 million recorded in Other non-current assets on the Statements of Unaudited Condensed Consolidated Financial Position reflecting the terms of this deferred payment arrangement. This compares with a receivable of $22.3 million recorded as of December 31, 2010. The fair value of the receivable of $20.5 million and $19.5 million at September 30, 2011 and December 31, 2010, respectively, is based on a discount rate of 4.7 percent, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.

In 2002, we entered into an agreement with Ispat that restructured the ownership of the Empire mine and increased our ownership from 46.7 percent to 79 percent in exchange for the assumption of all mine liabilities. Under the terms of the agreement, we indemnified Ispat from obligations of Empire in exchange for certain future payments to Empire and to us by Ispat of $120 million, recorded at a present value of $28.1 million and $32.8 million at September 30, 2011 and December 31, 2010, respectively. The fair value of the receivable of $32.7 million and $38.9 million at September 30, 2011 and December 31, 2010, respectively, is based on a discount rate of 3.1 percent, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.

 

The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The term loan and revolving loan are variable rate interest debt and approximate fair value. See NOTE 8 – DEBT AND CREDIT FACILITIES for further information.

Debt And Credit Facilities
Debt And Credit Facilities

NOTE 8 – DEBT AND CREDIT FACILITIES

The following represents a summary of our long-term debt as of September 30, 2011 and December 31, 2010:

 

The terms of the private placement senior notes and the credit facilities each contain customary covenants that require compliance with certain financial covenants based on: (1) debt to earnings ratio and (2) interest coverage ratio. As of September 30, 2011 and December 31, 2010, we were in compliance with the financial covenants related to both the private placement senior notes and the credit facilities. The terms of the senior notes due in 2020, 2021 and 2040 contain certain customary covenants; however, there are no financial covenants.

Credit Facility

On August 11, 2011, we entered into a five-year unsecured amended and restated multicurrency credit agreement with a syndicate of financial institutions in order to amend the terms of our existing $600 million multicurrency credit agreement. The credit agreement provides for, among other things, a $1.75 billion revolving credit facility and allows for the designation of certain foreign subsidiaries as borrowers under the agreement, if certain conditions are satisfied. Borrowings under the credit agreement bear interest at a floating rate based upon a base rate or the LIBOR rate plus a margin based upon our leverage ratio. Certain of our material domestic subsidiaries have guaranteed our obligations and the obligations of other borrowers under the credit agreement.

Proceeds from the credit agreement will be used to refinance existing indebtedness, to finance general working capital needs and for other general corporate purposes, including the funding of acquisitions. We have the ability to request an increase in available revolving credit borrowings under the credit agreement by an additional amount of up to $250 million by obtaining the agreement of the existing financial institutions to increase their lending commitments or by adding additional lenders.

As a condition of the credit agreement terms, $250 million was drawn against the revolving credit facility on August 11, 2011, in order to pay down a portion of the term loan. The $250 million payment was in addition to the scheduled August principal payment of $15.6 million, reducing the total outstanding amount to $984.4 million, of which $922.1 million is characterized as long-term debt as of September 30, 2011.

The credit agreement also provides for more flexible financial covenants and debt restrictions through the amendment of certain customary covenants, including the modification of the financial covenant that is based on our debt to earnings ratio. The amended debt to earnings ratio of Total Funded Debt to EBITDA, as those terms are defined in the agreement, as of the last day of each fiscal quarter cannot exceed (i) 3.5 to 1.0, if none of the $270 million private placement senior notes due 2013 remain outstanding, or otherwise (ii) the then applicable maximum multiple under the $270 million private placement senior notes due 2013.

$1 Billion Senior Notes Offering

On March 23, 2011 and April 1, 2011, respectively, we completed a $1 billion public offering of senior notes consisting of two tranches: a 10-year tranche of $700 million aggregate principal amount at 4.875 percent senior notes due April 1, 2021, and an additional issuance of $300 million aggregate principal amount of our 6.25 percent senior notes due October 1, 2040, of which $500 million aggregate principal amount was previously issued during September 2010. Interest is fixed and is payable on April 1 and October 1 of each year, beginning on October 1, 2011, for both series of senior notes until maturity. The senior notes are unsecured obligations and rank equally with all our other existing and future unsecured and unsubordinated indebtedness. The net proceeds from the senior notes offering were used to fund a portion of the acquisition of Consolidated Thompson and to pay the related fees and expenses.

The senior notes may be redeemed any time at our option at a redemption price equal to the greater of (1) 100 percent of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semi-annual basis at the treasury rate plus 25 basis points with respect to the 2021 senior notes and 40 basis points with respect to the 2040 senior notes, plus, in each case, accrued and unpaid interest to the date of redemption. However, if the 2021 senior notes are redeemed on or after the date that is three months prior to their maturity date, the 2021 senior notes will be redeemed at a redemption price equal to 100 percent of the principal amount of the notes to be redeemed plus accrued and unpaid interest to the date of redemption.

In addition, if a change of control triggering event occurs with respect to the senior notes, as defined in the agreement, we will be required to offer to purchase the notes of the applicable series at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

Bridge Credit Agreement

On March 4, 2011, we entered into an unsecured bridge credit agreement with a syndicate of banks in order to provide a portion of the financing for the acquisition of Consolidated Thompson. The bridge credit agreement, referred to as the bridge credit facility, had an original maturity date of May 10, 2012. On May 10, 2011, we borrowed $750 million under the bridge credit facility to fund a portion of the cash required upon the consummation of the acquisition of Consolidated Thompson. The borrowings under the bridge credit facility were repaid using a portion of the net proceeds obtained from the public offering of our common shares that was completed on June 13, 2011, and the bridge credit facility was terminated. The borrowings under the bridge credit facility bore interest at a floating rate based upon a base rate or the LIBOR rate plus a margin determined by our credit rating and the length of time the borrowings were outstanding. The weighted average annual interest rate under the bridge credit facility during the time the borrowings were outstanding was 2.56 percent. Refer to NOTE 14 – CAPITAL STOCK for additional information on the public offering of our common shares.

Term Loan

On March 4, 2011, we also entered into an unsecured term loan agreement with a syndicate of banks in order to provide a portion of the financing for the acquisition of Consolidated Thompson. The term loan agreement provided for a $1,250 million term loan. The term loan has a maturity date of five years from the date of funding and requires principal payments on each three-month anniversary of the date following the funding. On May 10, 2011, we borrowed $1,250 million under the term credit facility to fund a portion of the cash required upon the consummation of the acquisition of Consolidated Thompson. Effective August 11, 2011, we amended the unsecured term loan agreement to modify certain definitions, representations and warranties and covenants, including the financial covenants to conform to certain provisions under the amended and restated multicurrency credit agreement. In addition, a portion of the $1,750 million revolving credit facility, provided for under the amended and restated agreement, was used to repay $250 million of the outstanding term loan, as discussed above. Borrowings under the term loan bear interest at a floating rate based upon a base rate or the LIBOR rate plus a margin depending on the leverage ratio.

Short-term Facilities

On March 31, 2010, Asia Pacific Iron Ore entered into a A$40 million ($38.7 million) bank contingent instrument facility and cash advance facility to replace the then existing A$40 million multi-option facility, which was extended through June 30, 2011 and subsequently renewed until June 30, 2012. The facility, which is renewable annually at the bank's discretion, provides A$40 million in credit for contingent instruments, such as performance bonds and the ability to request a cash advance facility to be provided at the discretion of the bank. As of September 30, 2011, the outstanding bank guarantees under this facility totaled A$24.4 million ($23.6 million), thereby reducing borrowing capacity to A$15.6 million ($15.1 million). We have provided a guarantee of the facility, along with certain of our Australian subsidiaries. The facility agreement contains customary covenants that require compliance with certain financial covenants: (1) debt to earnings ratio and (2) interest coverage ratio, both based on the financial performance of the Company. As of September 30, 2011, we were in compliance with these financial covenants.

Consolidated Thompson Senior Secured Notes

The Consolidated Thompson senior secured notes were included among the liabilities assumed in the acquisition of Consolidated Thompson. On April 13, 2011, we purchased the outstanding Consolidated Thompson senior secured notes directly from the note holders for $125 million, including accrued and unpaid interest. The senior secured notes had a face amount of $100 million, a stated interest rate of 8.5 percent and were scheduled to mature in 2017. The transaction was initially recorded as an investment in Consolidated Thompson senior secured notes during the second quarter of 2011; however, upon the completion of the acquisition of Consolidated Thompson, and consolidation into our financial statements the Consolidated Thompson senior secured notes and our investment in the notes were eliminated as intercompany transactions. During August 2011, Consolidated Thompson, our wholly-owned subsidiary, provided for the redemption and release of the Consolidated Thompson senior secured notes, resulting in the cancellation of the notes. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for additional information.

 

Consolidated Thompson Convertible Debentures

Included among the liabilities assumed in the acquisition of Consolidated Thompson were the Consolidated Thompson convertible debentures that as a result of the acquisition were able to be converted by their holders into cash in accordance with the cash change of control provision of the convertible debenture indenture. The convertible debentures allowed the debenture holders to convert at a premium conversion ratio beginning on the 10th trading day prior to the closing of the acquisition and ending on the 30th day subsequent to the mailing of an offer to purchase the convertible debentures, which was the cash change of control conversion period as defined by the convertible debenture indenture. On May 12, 2011, following the closing of the acquisition, Consolidated Thompson commenced the offer to purchase all of the outstanding convertible debentures in accordance with its obligations under the convertible debenture indenture by mailing to the debenture holders such offer to purchase. Additionally, on May 13, 2011, Consolidated Thompson gave notice that it was exercising its right to redeem any convertible debentures that remained outstanding on June 13, 2011, after giving effect to any conversions that occurred during the cash change of control conversion period. As previously disclosed, Consolidated Thompson received sufficient consents from the debenture holders, pursuant to a consent solicitation, to amend the convertible debenture indenture to give Consolidated Thompson such a redemption right. As a result of these events, no convertible debentures remain outstanding. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for additional information.

Letters of Credit

In conjunction with our acquisition of Consolidated Thompson, we issued standby letters of credit with certain financial institutions in order to support Consolidated Thompson and Bloom Lake general business obligations. In addition, we issued standby letters of credit with certain financial institutions during the third quarter of 2011 in order to support Wabush obligations. As of September 30, 2011, these letter of credit obligations totaled $98.2 million. All of these standby letters of credit are outside of the letters of credit provided for under the revolving credit facility.

Debt Maturities

Maturities of debt instruments based on the principal amounts outstanding at September 30, 2011, total approximately $13 million in 2011, $75 million in 2012, $370 million in 2013, $125 million in 2014, $429 million in 2015, $549 million in 2016 and $2.4 billion thereafter.

Refer to NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.

Lease Obligations
Lease Obligations

NOTE 9 – LEASE OBLIGATIONS

We lease certain mining, production and other equipment under operating and capital leases. The leases are for varying lengths, generally at market interest rates and contain purchase and/or renewal options at the end of the terms. Our operating lease expense was $4.2 million and $17.9 million, respectively, for the three and nine months ended September 30, 2011, compared with $6.2 million and $18.1 million, respectively, for the same periods in 2010.

Future minimum payments under capital leases and non-cancellable operating leases at September 30, 2011 are as follows:

 

     (In Millions)  
     Capital
Leases
    Operating
Leases
 

2011 (October 1 - December 31)

     $     16.8          $     7.7     

2012

     62.6          21.2     

2013

     55.0          20.8     

2014

     50.0          16.0     

2015

     38.8          9.1     

2016 and thereafter

     99.0          25.0     
  

 

 

   

 

 

 

Total minimum lease payments

     322.2          $     99.8     
    

 

 

 

Amounts representing interest

     68.6       
  

 

 

   

Present value of net minimum lease payments

     $     253.6   (1)   
  

 

 

   

(1)    The total is comprised of $47.8 million and $205.8 million classified as Other current liabilities and Other liabilities, respectively, on the Statements of Unaudited Condensed Consolidated Financial Position at September 30, 2011.

 

Environmental And Mine Closure Obligations
Environmental And Mine Closure Obligations

NOTE 10 – ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS

We had environmental and mine closure liabilities of $225.2 million and $199.1 million at September 30, 2011 and December 31, 2010, respectively. The following is a summary of the obligations as of September 30, 2011 and December 31, 2010:

 

     (In Millions)  
     September 30,
2011
     December 31,
2010
 

Environmental

     $     15.0           $     13.7     

Mine closure

     

LTVSMC

     17.9           17.1     

Operating mines:

     

U.S. Iron Ore

     67.5           62.7     

Eastern Canadian Iron Ore

     67.8           49.3     

North American Coal

     35.6           34.7     

Asia Pacific Iron Ore

     15.2           15.4     

Other

     6.2           6.2     
  

 

 

    

 

 

 

Total mine closure

     210.2           185.4     
  

 

 

    

 

 

 

Total environmental and mine closure obligations

     225.2           199.1     

Less current portion

     14.7           14.2     
  

 

 

    

 

 

 

Long-term environmental and mine closure obligations

     $     210.5           $     184.9     
  

 

 

    

 

 

 

Mine Closure

Our mine closure obligations are for our four consolidated U.S. operating iron ore mines, our two Eastern Canadian operating iron ore mines, our six operating North American coal mines, our Asia Pacific operating iron ore mines, the coal mine at Sonoma and a closed operation formerly known as LTVSMC.

The accrued closure obligation for our active mining operations provides for contractual and legal obligations associated with the eventual closure of the mining operations. The accretion of the liability and amortization of the related asset is recognized over the estimated mine lives for each location. The following represents a rollforward of our asset retirement obligation liability related to our active mining locations for the nine months ended September 30, 2011 and the year ended December 31, 2010:

 

     (In Millions)  
     September 30,
2011
     December 31,
2010
(1)
 

Asset retirement obligation at beginning of period

     $ 168.3           $ 103.9     

Accretion expense

     11.8           13.1     

Exchange rate changes

     (1.1)          2.5     

Revision in estimated cash flows

     -             1.0     

Payments

     (0.7)          (8.4)    

Acquired through business combinations

     14.0           56.2     
  

 

 

    

 

 

 

Asset retirement obligation at end of period

     $     192.3           $     168.3     
  

 

 

    

 

 

 

(1)    Represents a 12-month rollforward of our asset retirement obligation at December 31, 2010.

 

Pensions And Other Postretirement Benefits
Pensions And Other Postretirement Benefits

NOTE 11 – PENSIONS AND OTHER POSTRETIREMENT BENEFITS

The following are the components of defined benefit pension and OPEB expense for the three and nine months ended September 30, 2011 and 2010:

Defined Benefit Pension Expense

 

     (In Millions)  
     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2011      2010      2011      2010  

Service cost

     $ 6.6           $ 3.5           $ 17.6           $ 12.5     

Interest cost

     12.5           12.7           38.3           38.3     

Expected return on plan assets

     (16.3)          (13.2)          (45.5)          (39.3)    

Amortization:

           

Prior service costs

     1.1           1.0           3.3           3.1     

Net actuarial losses

     4.7           5.1           14.7           17.0     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

     $     8.6           $     9.1           $     28.4           $     31.6     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Postretirement Benefits Expense

 

     (In Millions)  
     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2011       2010      2011      2010  

Service cost

     $ 3.6           $ 2.2           $ 8.3           $ 5.4     

Interest cost

     5.5           5.4           16.7           16.1     

Expected return on plan assets

     (4.1)          (3.2)          (12.1)          (9.7)    

Amortization:

           

Prior service costs

     2.0           0.4           2.8           1.3     

Net actuarial losses

     0.8           3.1           6.6           6.5     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

     $     7.8           $     7.9           $     22.3           $     19.6     
  

 

 

    

 

 

    

 

 

    

 

 

 

We made pension contributions of $55.4 million and $36.1 million for the nine months ended September 30, 2011 and 2010, respectively. OPEB contributions were $21.9 million and $17.4 million for the nine months ended September 30, 2011 and 2010, respectively.

Stock Compensation Plans
Stock Compensation Plans

NOTE 12 – STOCK COMPENSATION PLANS

Employees' Plans

On March 8, 2011, the Compensation and Organization Committee ("Committee") of the Board of Directors approved a grant under our shareholder approved ICE Plan for the 2011 to 2013 performance period. A total of 256,100 shares were granted under the award, consisting of 188,480 performance shares and 67,620 restricted share units.

For the outstanding ICE Plan year agreements, each performance share, if earned, entitles the holder to receive a number of common shares within the range between a threshold and maximum number of our common shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Committee. The performance share grants vest over a period of three years and are intended to be paid out in common shares. Performance is measured on the basis of two factors: 1) relative TSR for the period, as measured against a predetermined peer group of mining and metals companies, and 2) three-year cumulative free cash flow. The final payout for the 2011 to 2013 performance period varies from zero to 200 percent of the original grant compared to prior years where the maximum payout was 150 percent. The restricted share units are subject to continued employment, are retention based, will vest at the end of the performance period for the performance shares, and are payable in common shares at a time determined by the Committee at its discretion.

Upon the occurrence of a change in control, as defined in the agreement, all performance shares and restricted share units granted to a participant will vest and become nonforfeitable and will be paid out in cash.

Determination of Fair Value

The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.

The expected term of the grant represents the time from the grant date to the end of the service period. We estimated the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.

The following assumptions were utilized to estimate the fair value for the 2011 performance share grants:

 

Grant Date

 

Grant Date
Market Price

 

Average
Expected

Term (Years)

 

Expected
Volatility

 

Risk-Free
Interest Rate

 

Dividend Yield

 

Fair Value

 

Fair Value
(Percent of
Grant Date
Market Price)

March 8, 2011

  $96.70   2.81   94.4%   1.17%   0.58%   $77.90   80.60%

The fair value of the restricted share units is determined based on the closing price of the Company's common shares on the grant date. The restricted share units granted under the ICE Plan vest over a period of three years.

Income Taxes
Income Taxes

NOTE 13 – INCOME TAXES

Our tax provision for the three and nine months ended September 30, 2011 was $17.8 million and $312.3 million, respectively. Our tax provision for the same periods ended September 30, 2010 was $116.1 million and $282.5 million, respectively. The effective tax rate for the first nine months of 2011 is approximately 16.2 percent, while the effective tax rate for the first nine months of 2010 was 31 percent. The difference in the effective rate from the prior year is primarily due to the impact of the 2010 tax law change that occurred in 2010, the impact of higher pre-tax book income in 2011 over 2010 with similar book to tax differences, and the remeasurement of foreign deferred tax liabilities and assets for which the functional currency is the U.S. dollar. Additionally, the effective tax rate decreased as a result of the recognition of uncertain tax positions due to audit closures and statute expiration. Our 2011 estimated annual effective tax rate before discrete items is approximately 22.7 percent. This estimated annual effective tax rate differs from the U.S. statutory rate of 35 percent primarily due to deductions for percentage depletion in excess of cost depletion related to U.S. operations, income not subject to tax, non-taxable hedging income, non-taxable income related to noncontrolling interests in partnerships and benefits derived from operations outside the U.S., which are taxed at rates lower than the U.S. statutory rate of 35 percent.

As of September 30, 2011, our valuation allowance against certain deferred tax assets increased by $25.9 million from December 31, 2010. This increase primarily relates to ordinary losses of certain foreign operations for which future utilization is currently uncertain.

As of September 30, 2011, cumulative undistributed earnings of foreign subsidiaries included in consolidated retained earnings continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practical to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

As of January 1, 2011, we had $79.8 million of unrecognized tax benefits recorded in Other liabilities on the Statements of Consolidated Financial Position. During the third quarter of 2011, we recognized a tax benefit for the reduction in the amount of unrecognized tax benefits to reflect the closure of the U.S. federal audit for the years 2007 and 2008. Additionally, we recognized a tax benefit for previously recorded uncertain tax positions to reflect the expiration of the statute of limitations in a foreign jurisdiction. We do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.

Tax years that remain subject to examination are years 2009 and forward for the United States, 1993 and forward for Canada, and 2007 and forward for Australia.

Capital Stock
Capital Stock

NOTE 14 – CAPITAL STOCK

Share Repurchase Plan

On August 15, 2011, our Board of Directors approved a new share repurchase plan that authorizes us to purchase up to four million of our outstanding common shares. The new share repurchase plan replaces the previously existing share repurchase plan and allows for the purchase of common shares from time to time in open market purchases or privately negotiated transactions. During the third quarter, the number of common shares purchased was approximately three million shares at a cost of approximately $222 million, or an average price of approximately $74 per share. As of September 30, 2011, there were approximately one million shares yet to be repurchased. The new share repurchase plan expires on December 31, 2012.

 

Public Offering

On June 13, 2011, we completed a public offering of our common shares. The total number of shares sold was 10.35 million, comprised of the 9.0 million share offering and the exercise of an underwriters' over-allotment option to purchase an additional 1.35 million shares. The offering resulted in an increase in the number of our common shares issued and outstanding as of September 30, 2011. We received net proceeds of approximately $853.7 million at a closing price of $85.63 per share.

Dividends

On May 11, 2010, our Board of Directors increased our quarterly common share dividend from $0.0875 to $0.14 per share. The increased cash dividend was paid on June 1, 2010, September 1, 2010, and December 1, 2010 to shareholders on record as of May 14, 2010, August 13, 2010, and November 19, 2010, respectively. In addition, the increased cash dividend was paid on March 1, 2011 and June 1, 2011 to shareholders on record as of February 15, 2011 and April 29, 2011, respectively. On July 12, 2011, our Board of Directors increased the quarterly common share dividend by 100 percent to $0.28 per share. The increased cash dividend was paid on September 1, 2011 to shareholders on record as of the close of business on August 15, 2011.

Amendment to the Second Amended Articles of Incorporation

On May 25, 2011, our shareholders approved an amendment to our Second Amended Articles of Incorporation to increase the number of authorized Common Shares from 224,000,000 to 400,000,000, which resulted in an increase in the total number of authorized shares from 231,000,000 to 407,000,000. The total number of authorized shares includes 3,000,000 and 4,000,000 shares, respectively, of Class A and Class B preferred stock, none of which are issued and outstanding.

Shareholders' Equity And Comprehensive Income
Shareholders' Equity And Comprehensive Income

NOTE 15 – SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

The following table reflects the changes in shareholders' equity attributable to both Cliffs and the noncontrolling interests primarily related to Bloom Lake, Tilden, Empire and renewaFUEL, of which Cliffs owns 75 percent, 85 percent, 79 percent and 95 percent, respectively, for the nine months ended September 30, 2011.

 

     (In Millions)  
     Cliffs
    Shareholders'    
Equity
     Non-
      Controlling      
Interest
     Total
Equity
 

December 31, 2010

     $ 3,845.9           $ (7.2)          $     3,838.7     

Comprehensive income

        

Net income

     1,420.6           170.1           1,590.7     

Other comprehensive income

     (105.2)          0.5           (104.7)    
  

 

 

    

 

 

    

 

 

 

Total comprehensive income

     1,315.4           170.6           1,486.0     

Share buyback

     (221.9)          -             (221.9)    

Equity offering

     853.7           -             853.7     

Purchase of additional noncontrolling interest

     0.3           -             0.3     

Stock and other incentive plans

     8.8           -             8.8     

Common stock dividends

     (78.8)          -             (78.8)    

Purchase of subsidiary shares from noncontrolling interest

     -             4.5           4.5     

Undistributed gains to noncontrolling interest

     -             12.6           12.6     

Capital contribution by noncontrolling interest to subsidiary

     -             0.3           0.3     

Acquisition of controlling interest

     -             947.6           947.6     
  

 

 

    

 

 

    

 

 

 

September 30, 2011

     $ 5,723.4           $ 1,128.4           $ 6,851.8     
  

 

 

    

 

 

    

 

 

 

 

The following are the components of comprehensive income for the three and nine months ended September 30, 2011 and 2010:

 

     (In Millions)  
     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
     2011      2010      2011      2010  

Net income attributable to Cliffs shareholders

     $     589.5           $     297.4           $     1,420.6           $     635.4     

Other comprehensive income (loss):

           

Unrealized net loss on marketable securities - net of tax

     (11.6)          14.5           (30.8)          0.3     

Foreign currency translation

     (132.2)          145.8           (74.8)          101.5     

Amortization of net periodic benefit cost - net of tax

     5.3           (0.5)          13.9           42.5     

Reclassification of net gains on derivative financial instruments into net income

     (1.5)          -             (3.2)          (3.2)    

Unrealized loss on derivative financial instruments

     (15.2)          -             (10.3)          -