CLIFFS NATURAL RESOURCES INC., 10-Q filed on 4/29/2011
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2011
Apr. 26, 2011
Document and Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
2011-03-31 
 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q1 
 
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
 
135,649,021 
Statements of Unaudited Condensed Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended
Mar. 31,
2011
2010
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
Product
$ 1,133 
$ 672 
Freight and venture partners' cost reimbursements
50 
56 
TOTAL REVENUES
1,183 
728 
COST OF GOODS SOLD AND OPERATING EXPENSES
(585)
(578)
SALES MARGIN
599 
150 
OTHER OPERATING INCOME (EXPENSE)
 
 
Selling, general and administrative expenses
(51)
(44)
Exploration costs
(11)
(2)
Miscellaneous - net
TOTAL OTHER OPERATING EXPENSE
(58)
(37)
OPERATING INCOME
541 
113 
OTHER INCOME (EXPENSE)
 
 
Gain on acquisition of controlling interests
 
39 
Changes in fair value of foreign currency contracts, net
56 
Interest income
Interest expense
(38)
(10)
Other non-operating income
TOTAL OTHER INCOME
21 
34 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) FROM VENTURE
562 
147 
INCOME TAX EXPENSE
(142)
(66)
EQUITY INCOME (LOSS) FROM VENTURES
(3)
NET INCOME
423 
77 
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(0)
 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
423 
77 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
3.12 
0.57 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
3.11 
0.57 
AVERAGE NUMBER OF SHARES
 
 
Basic
135,486 
135,174 
Diluted
136,191 
135,954 
CASH DIVIDENDS DECLARED PER SHARE
$ 0.14 
$ 0.0875 
Statements of Unaudited Condensed Consolidated Financial Position (USD $)
In Millions
3 Months Ended
Mar. 31, 2011
Year Ended
Dec. 31, 2010
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 2,268 
$ 1,567 
Accounts receivable
507 
359 
Inventories
496 
269 
Supplies and other inventories
136 
148 
Derivative assets
133 
83 
Deferred and refundable taxes
37 
43 
Other current assets
138 
115 
TOTAL CURRENT ASSETS
3,714 
2,584 
PROPERTY, PLANT AND EQUIPMENT, NET
4,022 
3,979 
OTHER ASSETS
 
 
Investments in ventures
525 
515 
Goodwill
197 
197 
Intangible assets, net
172 
176 
Deferred income taxes
126 
140 
Other non-current assets
196 
188 
TOTAL OTHER ASSETS
1,217 
1,215 
TOTAL ASSETS
8,952 
7,778 
CURRENT LIABILITIES
 
 
Accounts payable
267 
267 
Accrued expenses
257 
267 
Deferred revenue
239 
216 
Taxes payable
213 
142 
Other current liabilities
132 
138 
TOTAL CURRENT LIABILITIES
1,107 
1,029 
POSTEMPLOYMENT BENEFIT LIABILITIES
494 
528 
LONG-TERM DEBT
2,413 
1,713 
BELOW-MARKET SALES CONTRACTS
162 
164 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
189 
185 
DEFERRED INCOME TAXES
66 
64 
OTHER LIABILITIES
248 
257 
TOTAL LIABILITIES
4,678 
3,940 
COMMITMENTS AND CONTINGENCIES
 
 
CLIFFS SHAREHOLDERS' EQUITY
 
 
Common Shares - par value $0.125 per share Authorized - 224,000,000 shares; Issued - 138,845,469 shares (2010 - 138,845,469 shares); Outstanding - 135,644,830 shares (2010 - 135,456,999 shares)
17 
17 
Capital in excess of par value of shares
903 
896 
Retained Earnings
3,329 
2,924 
Cost of 3,200,639 common shares in treasury (2010 - 3,388,470 shares)
(46)
(38)
Accumulated other comprehensive income
70 
46 
TOTAL CLIFFS SHAREHOLDERS' EQUITY
4,273 
3,846 
NONCONTROLLING INTEREST
(7)
TOTAL EQUITY
4,274 
3,839 
TOTAL LIABILITIES AND EQUITY
$ 8,952 
$ 7,778 
Statements of Unaudited Condensed Consolidated Financial Position (Parenthetical) (USD $)
Mar. 31, 2011
Dec. 31, 2010
Statements of Unaudited Condensed Consolidated Financial Position
 
 
Common Shares, par value
$ 0.125 
$ 0.125 
Common Shares, Authorized
224,000,000 
224,000,000 
Common Shares, Issued
138,845,469 
138,845,469 
Common Shares, Outstanding
135,644,830 
135,456,999 
Common shares in treasury
3,200,639 
3,388,470 
Statements of Unaudited Condensed Consolidated Cash Flows (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
OPERATING ACTIVITIES:
 
 
Net income
$ 423 
$ 77 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation, depletion and amortization
80 
67 
Changes in deferred revenue and below-market sales contracts
16 
60 
Deferred income taxes
14 
32 
Equity (income) loss in ventures (net of tax)
(3)
Derivatives and currency hedges
(43)
(82)
Gain on acquisition of controlling interests
 
(39)
Other
(23)
(5)
Changes in operating assets and liabilities:
 
 
Receivables and other assets
(167)
49 
Product inventories
(230)
(70)
Payables and accrued expenses
38 
(20)
Net cash provided by operating activities
107 
74 
INVESTING ACTIVITIES
 
 
Acquisition of controlling interests, net of cash acquired
 
(107)
Purchase of property, plant and equipment
(66)
(19)
Settlements on Canadian dollar foreign exchange contracts
28 
 
Investments in ventures
(0)
(76)
Proceeds from sale of assets
Net cash used by investing activities
(37)
(202)
FINANCING ACTIVITIES
 
 
Net proceeds from issuance of senior notes
699 
395 
Issuance costs of bridge credit facility
(32)
 
Repayment of term loan
 
(200)
Cost of Canadian dollar foreign exchange option
(22)
 
Common stock dividends
(19)
(12)
Other financing activities
(9)
Net cash provided by financing activities
627 
174 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
INCREASE IN CASH AND CASH EQUIVALENTS
701 
48 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
1,567 
503 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 2,268 
$ 550 
Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

 

 

 

 

Segment Reporting
Segment Reporting

NOTE 2 – SEGMENT REPORTING

Our company's primary operations are organized and managed according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and our Global Exploration Group. The North American Iron Ore segment is comprised of our interests in six North American mines that provide iron ore to the integrated steel industry. The North American Coal segment is comprised of our five metallurgical coal mines and one thermal coal mine that provide metallurgical coal primarily to the integrated steel industry and thermal coal primarily to the energy industry. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to steel producers in China and Japan. There are no intersegment revenues.

 

The Asia Pacific Coal operating segment is comprised of our 45 percent economic interest in Sonoma, located in Queensland, Australia. The Latin American Iron Ore operating segment is comprised of our 30 percent Amapá interest in Brazil. The Alternative Energies operating segment is comprised of our 95 percent interest in renewaFUEL located in Michigan. The Ferroalloys operating segment is comprised of our interests in chromite deposits held by Freewest and Spider, in Northern Ontario, Canada. Our Global Exploration Group was established in 2009 and is focused on early involvement in exploration activities to identify new world-class projects for future development or projects that add significant value to existing operations. The Asia Pacific Coal, Latin American Iron Ore, Alternative Energies, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and therefore are not separately reported.

We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.

The following table presents a summary of our reportable segments for the three months ended March 31, 2011 and 2010:

 

     (In Millions)  
      Three Months Ended
March  31,
 
      2011      2010  

Revenues from product sales and services:

           

North American Iron Ore

     $   637.5           54%         $   457.3           63%   

North American Coal

     165.0           14%         81.1           11%   

Asia Pacific Iron Ore

     345.4           29%         159.5           22%   

Other

     35.3           3%         29.8           4%   
                       

Total revenues from product sales and services for reportable segments

     $   1,183.2           100%         $   727.7           100%   
                       

Sales margin:

           

North American Iron Ore

     $   395.8              $   109.5        

North American Coal

     (2.9)             (10.6)       

Asia Pacific Iron Ore

     195.8              43.7        

Other

     10.0              7.4        
                       

Sales margin

     598.7              150.0        

Other operating expense

     (57.5)             (36.6)       

Other income (expense)

     21.1              33.8        
                       

Income from continuing operations before income taxes and equity income (loss) from ventures

     $   562.3              $   147.2        
                       

Depreciation, depletion and amortization:

           

North American Iron Ore

     $   27.1              $   23.0        

North American Coal

     21.6              11.7        

Asia Pacific Iron Ore

     24.0              25.9        

Other

     7.1              6.0        
                       

Total depreciation, depletion and amortization

     $   79.8              $   66.6        
                       

Capital additions (1):

           

North American Iron Ore

     $   35.1              $   9.4        

North American Coal

     27.5              4.1        

Asia Pacific Iron Ore

     25.3              7.7        

Other

     3.1              2.6        
                       

Total capital additions

     $   91.0              $   23.8        
                       

(1) Includes capital lease additions and non-cash accruals.

 

A summary of assets by segment is as follows:

 

     (In Millions)  
       March 31,  
2011
       December 31,  
2010
 

Segment Assets:

     

North American Iron Ore

     $ 2,588.5           $ 2,166.7     

North American Coal

     1,641.9           1,623.8     

Asia Pacific Iron Ore

     1,340.8           1,195.3     

Other

     1,337.0           1,257.8     
                 

Total segment assets

     6,908.2           6,243.6     

Corporate

     2,044.1           1,534.6     
                 

Total assets

     $         8,952.3           $   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 March 31, 2011 and December 31, 2010:

 

                         
    

(In Millions)

 
    

Derivative Assets

 
    

March 31, 2011

    

December 31, 2010

 

Derivative

Instrument

  

        Balance Sheet        

Location

   Fair
    Value    
    

        Balance Sheet        

Location

   Fair
    Value    
 

Derivatives designated as hedging instruments under ASC 815:

                           

Foreign Exchange Contracts

   Derivative assets
(current)
     $ 5.3         Derivative assets
(current)
     $ 2.8     
                             

Total derivatives designated as hedging instruments under ASC 815

          $ 5.3                $ 2.8     
                             

Derivatives not designated as hedging instruments under ASC 815:

                           

Foreign Exchange Contracts

   Derivative assets (current)      $ 76.1         Derivative assets (current)      $ 34.2     
     Deposits and miscellaneous      -           Deposits and miscellaneous      2.0     

Customer Supply Agreements

   Derivative assets (current)      48.1         Derivative assets (current)      45.6     

Provisional Pricing Arrangements

   Derivative assets (current)      3.4                -       
     Accounts Receivable      16.6                -       
                             

Total derivatives not designated as hedging instruments under ASC 815

          $ 144.2                $   81.8     
                             

Total derivatives

          $   149.5                $   84.6     
                             

There were no derivative instruments classified as a liability as of March 31, 2011 or December 31, 2010.

 

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

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 each reporting period. Our hedging policy allows no more than 75 percent of anticipated operating costs for up to 12 months and no more than 50 percent of operating costs for up to 24 months 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.

As of March 31, 2011, we had outstanding foreign currency exchange contracts with a notional amount of $85 million in the form of forward contracts with varying maturity dates ranging from May 2011 to February 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 on the Statements of Unaudited Condensed Consolidated Financial Position. Unrealized gains of $1.9 million were recorded as of March 31, 2011 related to these hedge contracts, based on the Australian to U.S. dollar spot rate of 1.03 as of March 31, 2011. Any ineffectiveness is recognized immediately in income and as of March 31, 2011, there was no ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive income 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 months ended March 31, 2011, we recorded realized gains of $0.3 million. Of the amounts remaining in Accumulated other comprehensive income, we estimate that $3.6 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 and the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 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
March 31,
          Three months ended
March 31,
 
     2011      2010           2011      2010  

Australian Dollar Foreign Exchange Contracts (hedge designation)

     $   1.9           $         -         Product revenue      $         0.2           $ -     

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

     -           -         Product revenue      0.2           1.6     
                                          

Total

     $     1.9           $ -                $ 0.4           $         1.6     
                                          

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 $170 million as of March 31, 2011. The contracts are in the form of collar options and forward contracts with varying maturity dates ranging from April 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 months ended March 31, 2011, the change in fair value of our foreign currency contracts resulted in a net gain of $4.4 million based on the Australian to U.S. dollar spot rate of 1.03 at March 31, 2011. This compares with a net gain of $2.3 million for the three months ended March 31, 2010, based on the Australian to U.S. dollar spot rate of 0.92 at March 31, 2010. The amounts that were previously recorded as a component of Accumulated other comprehensive income are reclassified to earnings and a corresponding realized gain or loss is recognized in the same period the forecasted transaction affects earnings.

Canadian Dollar Foreign Exchange Contracts and Option

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, valued at approximately C$4.9 billion. We have 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 notional amount of $4.0 billion as of March 31, 2011. The hedge contracts are considered economic hedges which do not qualify for hedge accounting. The forward contracts had maturity dates of March 30, 2011 and the option contract had a maturity date of April 14, 2011. During March 2011, a swap was executed in order to roll the maturity dates of certain of the forward contracts from March 30, 2011 to April 7, 2011. The swap resulted in net realized gains of $28.1 million recognized through Changes in fair value of foreign currency contracts, net on the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2011. These 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 months ended March 31, 2011, the change in fair value of these forward contracts and option resulted in net unrealized gains of $23.5 million based on the Canadian dollar to U.S. dollar spot rate of 1.03 at March 31, 2011. Current Derivative assets of $45.8 million, representing the fair value of the contracts and option, were recorded on the March 31, 2011 Statements of Unaudited Condensed Consolidated Financial Position.

 

In April, additional swaps were executed in order to further extend the maturity dates of the forward contracts. These swaps have resulted in net realized gains or losses that will be recognized through Changes in fair value of foreign currency contracts, net on the Statements of Unaudited Condensed Consolidated Operations during the second quarter of 2011.

 

Customer Supply Agreements

Most of our North American Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The price adjustment factors vary based on the agreement but typically include adjustments based upon changes in international pellet prices, changes in specified Producers Price Indices including those for all commodities, industrial commodities, energy and steel. The adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.

Certain supply agreements with one North American Iron Ore customer provide for supplemental revenue or refunds based on the customer's average annual steel pricing at the time the product is consumed in the customer's blast furnace. The supplemental pricing is characterized as 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 $24.6 million and $19.9 million, respectively, as Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2011 and 2010, related to the supplemental payments. Derivative assets, representing the fair value of the pricing factors, were $48.1 million and $45.6 million, respectively, on the March 31, 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 historically 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 North American Iron Ore customer supply agreements for the 2011 contract year and in some cases we have revised the terms of such agreements to incorporate changes to historical pricing mechanisms. As a result, we have recorded certain shipments made to our North American Iron Ore customers in the first quarter 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 $20.0 million as an increase in Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2011 under these pricing provisions for certain shipments to our North American Iron Ore customers. This compares with an increase in Product revenues of $85.0 million for the three months ended March 31, 2010 related to estimated forward price settlement for shipments to our Asia Pacific Iron Ore and North American Iron Ore customers until prices actually settled.

As of March 31, 2011, we have recorded approximately $3.4 million as current Derivative assets on the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of final pricing in 2011 with our North American Iron Ore customers. This amount represents the incremental difference between the provisional price agreed upon with our customers and our estimate of the ultimate price settlement in 2011. As of March 31, 2011, we also have derivatives of $16.6 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 North American 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. In 2010, the derivative instrument was settled in the fourth quarter upon the settlement of pricing provisions with some of our North American 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 months ended March 31, 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
March 31,
 
          2011      2010  

Foreign Exchange Contracts

   Product Revenues      $ 0.3           $ 2.8     

Foreign Exchange Contracts

   Other Income (Expense)      56.0           2.3     

Customer Supply Agreements

   Product Revenues      24.6           19.9     

Provisional Pricing Arrangements

   Product Revenues      20.0           85.0     
                        

Total

          $       100.9         $       110.0   
                        

 

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 March 31, 2011 and December 31, 2010:

 

     (In Millions)  
     March 31, 2011      December 31, 2010  

Segment

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

North American Iron Ore

     $ 352.4           $ 43.7           $ 396.1           $ 144.6           $ 30.9           $ 175.5     

North American Coal

     21.4           16.1           37.5           16.1           19.8           35.9     

Asia Pacific Iron Ore

     33.0           19.1           52.1           34.7           20.4           55.1     

Other

     9.4           1.3           10.7           2.6           0.1           2.7     
                                                     

Total

     $ 416.2           $ 80.2           $ 496.4           $ 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 North American Iron Ore equity production capacity by approximately 4.0 million tons and has added more than 50 million tons of additional reserves. Furthermore, acquisition of the remaining interest has provided us additional access to the seaborne iron ore markets serving steelmakers in Europe and Asia.

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

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

 

 

 

 

(In Millions)

 

 

 

Initial
Allocation

 

 

Final
Allocation

 

 

Change

 

Consideration

 

 

 

Cash

 

  $

88.0   

 

 

  $

88.0   

 

 

  $

-   

 

Working capital adjustments

 

 

15.0   

 

 

 

15.0   

 

 

 

-   

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of total consideration transferred

 

 

103.0   

 

 

 

103.0   

 

 

 

-   

 

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

 

 

39.7   

 

 

 

38.0   

 

 

 

(1.7)   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  $

142.7   

 

 

  $

141.0   

 

 

  $

(1.7)   

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

 

 

 

ASSETS:

 

 

 

In-process inventories

 

  $

21.8   

 

 

  $

21.8   

 

 

  $

-    

 

Supplies and other inventories

 

 

43.6   

 

 

 

43.6   

 

 

 

-    

 

Other current assets

 

 

13.2   

 

 

 

13.2   

 

 

 

-    

 

Mineral rights

 

 

85.1   

 

 

 

84.4   

 

 

 

(0.7)   

 

Plant and equipment

 

 

146.3   

 

 

 

147.8   

 

 

 

1.5    

 

Intangible assets

 

 

66.4   

 

 

 

66.4   

 

 

 

-    

 

Other assets

 

 

16.3   

 

 

 

19.3   

 

 

 

3.0    

 

 

 

 

 

 

 

 

 

 

 

 

 

Total identifiable assets acquired

 

 

392.7   

 

 

 

396.5   

 

 

 

3.8    

 

LIABILITIES:

 

 

 

Current liabilities

 

 

(48.1)   

 

 

 

(48.1)   

 

 

 

-    

 

Pension and OPEB obligations

 

 

(80.6)   

 

 

 

(80.6)   

 

 

 

-    

 

Mine closure obligations

 

 

(39.6)   

 

 

 

(53.4)   

 

 

 

(13.8)   

 

Below-market sales contracts

 

 

(67.7)   

 

 

 

(67.7)   

 

 

 

-    

 

Deferred taxes

 

 

(20.5)   

 

 

 

-    

 

 

 

20.5   

 

Other liabilities

 

 

(8.9)   

 

 

 

(8.8)   

 

 

 

0.1    

 

 

 

 

 

 

 

 

 

 

 

 

 

Total identifiable liabilities assumed

 

 

(265.4)   

 

 

 

(258.6)   

 

 

 

6.8    

 

 

 

 

 

 

 

 

 

 

 

 

 

Total identifiable net assets acquired

 

 

127.3   

 

 

 

137.9   

 

 

 

10.6   

 

Goodwill

 

 

15.4   

 

 

 

3.1   

 

 

 

(12.3)   

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net assets acquired

 

  $

    142.7   

 

 

  $

    141.0   

 

 

  $

    (1.7)   

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

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

 

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

Freewest

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

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

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

 

 

 

(In Millions)

 

 

 

Initial
Allocation

 

 

Final
Allocation

 

 

Change

 

Consideration

 

 

 

Equity instruments (4.2 million Cliffs common shares)

 

  $

173.1    

 

 

  $

173.1    

 

 

  $

-    

 

Cash

 

 

12.8    

 

 

 

12.8    

 

 

 

-    

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of total consideration transferred

 

 

185.9    

 

 

 

185.9    

 

 

 

-    

 

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

 

 

27.4    

 

 

 

27.4    

 

 

 

-    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  $

213.3    

 

 

  $

213.3    

 

 

  $

-    

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

 

 

 

ASSETS:

 

 

 

Cash

 

  $

7.7    

 

 

  $

7.7    

 

 

  $

-    

 

Other current assets

 

 

1.4    

 

 

 

1.4    

 

 

 

-    

 

Mineral rights

 

 

252.8    

 

 

 

244.0    

 

 

 

(8.8)   

 

Marketable securities

 

 

12.1    

 

 

 

12.1    

 

 

 

-    

 

 

 

 

 

 

 

 

 

 

 

 

 

Total identifiable assets acquired

 

 

274.0    

 

 

 

265.2    

 

 

 

(8.8)   

 

LIABILITIES:

 

 

 

Accounts payable

 

 

(3.3)   

 

 

 

(3.3)   

 

 

 

-    

 

Long-term deferred tax liabilities

 

 

(57.4)   

 

 

 

(54.3)   

 

 

 

3.1    

 

 

 

 

 

 

 

 

 

 

 

 

 

Total identifiable liabilities assumed

 

 

(60.7)   

 

 

 

(57.6)   

 

 

 

3.1    

 

 

 

 

 

 

 

 

 

 

 

 

 

Total identifiable net assets acquired

 

 

213.3    

 

 

 

207.6    

 

 

 

(5.7)   

 

Goodwill

 

 

-    

 

 

 

5.7    

 

 

 

5.7    

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net assets acquired

 

  $

  213.3    

 

 

  $

  213.3    

 

 

  $

    -    

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

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 estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We are in the process of finalizing the net worth component of the purchase consideration as defined in the purchase agreement. A change in our purchase consideration could have an impact on our deferred taxes and goodwill, and the final allocation will be made when completed. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.

 

 

 

(In Millions)

 

 

 

Initial
Allocation

 

 

Revised
Allocation

 

 

Change

 

Consideration

 

 

 

Cash

 

  $

757.0    

 

 

  $

757.0    

 

 

  $

-    

 

Working capital adjustments

 

 

17.5    

 

 

 

18.9    

 

 

 

(1.4)   

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of total consideration transferred

 

  $

774.5    

 

 

  $

775.9    

 

 

  $

(1.4)   

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

 

 

 

ASSETS:

 

 

 

Product inventories

 

  $

20.0    

 

 

  $

20.0    

 

 

  $

-    

 

Other current assets

 

 

11.8    

 

 

 

11.8    

 

 

 

-    

 

Land and mineral rights

 

 

640.3    

 

 

 

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    

 

Preliminary goodwill

 

 

24.7    

 

 

 

27.8    

 

 

 

(3.1)   

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net assets acquired

 

  $

    774.5   

 

 

  $

    775.9    

 

 

  $

    (1.4)   

 

 

 

 

 

 

 

 

 

 

 

 

 

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

The $27.8 million of preliminary goodwill resulting from the acquisition was assigned to our North American Coal business segment. The preliminary goodwill recognized is primarily attributable to the addition of complementary high-quality coal products to our existing operations and operational flexibility. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.

As our fair value estimates remain materially unchanged from 2010, there were no significant changes to the purchase price allocation from the initial allocation reported for the period ended December 31, 2010. We expect to finalize the purchase price allocation for the acquisition of CLCC during the third quarter of 2011.

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.

 

Pending Transactions

Consolidated Thompson

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, valued at approximately C$4.9 billion, or C$17.25 per share. On February 25, 2011, the shareholders of Consolidated Thompson approved the plan of arrangement pursuant to which the proposed acquisition would be completed. Completion of the pending acquisition is subject to additional customary closing conditions, including regulatory approval.

The pending acquisition reflects our strategy to build scale by owning expandable and exportable steelmaking raw material assets serving international markets. Consolidated Thompson is a Canadian exploration and development mining company producing iron ore of high-quality concentrate. Consolidated Thompson operates an iron ore mine and processing facility near Bloom Lake in Quebec, Canada. Wuhan is a twenty-five percent partner in the Bloom Lake property. The Bloom Lake property is currently ramping up towards an initial production rate of 8.0 million metric tons of iron ore concentrate per year. Consolidated Thompson also owns 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 pending acquisition is also expected to further diversify our existing customer base.

In order to provide a portion of the financing for the pending acquisition of Consolidated Thompson, we entered into an unsecured bridge credit agreement and an unsecured term loan agreement with a syndicate of banks in March 2011. The bridge credit agreement provides for up to a $960 million bridge credit facility and the term loan agreement provides for a $1,250 million term loan. The commitments under the bridge credit agreement may continue to be further reduced prior to the closing date of the Consolidated Thompson acquisition as we continue to obtain permanent financing. The bridge credit facility has a maturity date of one year from the date of the funding. Borrowings under the bridge credit facility bear interest at a floating rate based upon a negotiated base rate or the LIBOR rate plus a margin depending on our credit rating and the length of time the borrowings remain outstanding. 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 of funding. Borrowings under the term loan bear interest at a floating rate based upon a negotiated base rate or the LIBOR rate plus a margin depending on our leverage ratio. The date of funding under the bridge credit agreement and the term loan agreement is expected to occur not more than three business days prior to the date of the consummation of our pending acquisition of Consolidated Thompson. In addition, we completed a $1 billion public offering of senior notes consisting of a $700 million 10-year tranche and a $300 million 30-year tranche in March and April 2011, respectively, the net proceeds of which will also be used to provide a portion of the financing for the pending acquisition of Consolidated Thompson. Refer to Note 8 – DEBT AND CREDIT FACILITIES for further information.

 

On March 22, 2011, we received sufficient consents from the holders of Consolidated Thompson convertible debentures, pursuant to the consent solicitation that was announced on March 9, 2011, necessary to amend the convertible debenture indenture to give Consolidated Thompson a redemption right.

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 three months ended March 31, 2011 and the year ended December 31, 2010:

 

    (In Millions)  
    March 31, 2011     December 31, 2010 (1)  
    North
American
Iron Ore
    North
American
Coal
    Asia
Pacific
Iron Ore
    Other     Total     North
American
Iron Ore
    North
American
Coal
    Asia
Pacific
Iron Ore
    Other     Total  

Beginning Balance

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

Arising in business combinations

    -            -            -            -            -            3.1          27.9          -            80.9          111.9     

Impact of foreign currency translation

    -            -            1.3          -            1.3          -            -            10.0          -            10.0     

Other

    (0.4)         (0.1)         -            -            (0.5)         -            -            -            -            -       
                                                                               

Ending Balance

      $      4.7            $      27.8            $      83.9            $      80.9            $      197.3            $      5.1            $      27.9            $      82.6            $      80.9            $      196.5     
                                                                               

(1) Represents a 12-month rollforward of our goodwill by reportable unit at December 31, 2010.

The balance of $197.3 million and $196.5 million at March 31, 2011 and December 31, 2010, respectively, is presented as Goodwill on the Statements of Unaudited Condensed Consolidated Financial Position. Refer to NOTE 5 – ACQUISITIONS AND OTHER INVESTMENTS for additional information.

 

Goodwill is not subject to amortization and is tested for impairment annually or when events or circumstances indicate that impairment may have occurred.

Other Intangible Assets and Liabilities

Following is a summary of intangible assets and liabilities as of March 31, 2011 and December 31, 2010:

 

          (In Millions)  
          March 31, 2011      December 31, 2010  
    

Classification

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Definite lived intangible assets:

                    

Permits

   Intangible assets, net      $ 133.2           $ (18.1)          $ 115.1           $ 132.4           $ (16.3)          $ 116.1     

Utility contracts

   Intangible assets, net      54.7           (13.0)          41.7           54.7           (10.2)          44.5     

Easements

   Intangible assets, net      11.7           (0.5)          11.2           11.7           (0.4)          11.3     

Leases

   Intangible assets, net      5.2           (2.9)          2.3           5.2           (2.9)          2.3     

Unpatented technology

   Intangible assets, net      4.0           (2.6)          1.4           4.0           (2.4)          1.6     
                                                        

Total intangible assets

        $ 208.8           $ (37.1)          $ 171.7           $ 208.0           $ (32.2)          $ 175.8     
                                                        

Below-market sales contracts

   Other current liabilities      $ (77.0)          $ 24.3           $ (52.7)          $ (77.0)          $ 19.9           $ (57.1)    

Below-market sales contracts

   Below-Market Sales Contracts      (252.3)          90.6           (161.7)          (252.3)          87.9           (164.4)    
                                                        

Total below-market sales contracts

        $     (329.3)          $   114.9           $   (214.4)          $   (329.3)          $ 107.8           $   (221.5)    
                                                        

The intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives as follows:

 

Intangible Asset

   Useful Life (years)

Permits

   15 - 28

Utility contracts

   5

Easements

   30

Leases

   1.5 - 4.5

Unpatented technology

   5

Amortization expense relating to intangible assets was $4.9 million and $4.0 million, respectively, for the three months ended March 31, 2011 and 2010, and is recognized in Cost of goods sold and operating expenses on the Statements of Unaudited Condensed Consolidated Operations. 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 nine months)

     $       13.3     

2012

     18.2     

2013

     17.3     

2014

     17.3     

2015

     6.2     

2016

     6.2     
        

Total

     $ 78.5     
        

 

The below-market sales contracts are classified as a liability and recognized over the terms of the underlying contracts, which range from 3.5 to 8.5 years. For the three months ended March 31, 2011, we recognized $7.1 million in Product revenues related to the below-market sales contracts. No amounts were recognized in the comparable prior year period. 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 nine months)

     $ 51.2     

2012

     48.8     

2013

     45.3     

2014

     23.0     

2015

     23.0     

2016

     23.1     
        

Total

     $       214.4     
        
Fair Value of Financial Instruments
Fair Value of Financial Instruments

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following represents the assets of the Company measured at fair value at March 31, 2011 and December 31, 2010:

 

     (In Millions)  
     March 31, 2011  

Description

   Quoted Prices in Active
Markets for Identical

Assets/Liabilities
(Level 1)
     Significant Other
Observable

Inputs
(Level 2)
     Significant
Unobservable

Inputs
(Level 3)
     Total  

Assets:

           

Cash equivalents

     $   1,889.3           $   -             $ -             $ 1,889.3     

Derivative assets

     -               -             68.1           68.1     

U.S. marketable securities

     18.2             -             -             18.2     

International marketable securities

     61.8             -             -             61.8     

Foreign exchange contracts

     -             81.4           -             81.4     
                                   

Total

     $ 1,969.3           $                     81.4           $                 68.1           $         2,118.8     
                                   

 

     (In Millions)  
     December 31, 2010  

Description

   Quoted Prices in Active
Markets for Identical
Assets/Liabilities

(Level 1)
     Significant Other
Observable

Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  

Assets:

           

Cash equivalents

     $ 1,307.2           $   -             $   -             $ 1,307.2     

Derivative assets

     -               -             45.6         45.6     

U.S. marketable securities

     22.0             -               -             22.0     

International marketable securities

     63.9             -               -             63.9     

Foreign exchange contracts

     -             39.0           -             39.0     
                                   

Total

     $                     1,393.1           $ 39.0         $ 45.6         $         1,477.7     
                                   

We had no financial instruments measured at fair value that were in a liability position at March 31, 2011 or December 31, 2010.

 

Financial assets classified in Level 1 at March 31, 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 classified in Level 2 is determined using a market approach based upon quoted prices for similar assets 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 March 31, 2011, such derivative financial instruments include substantially all of our foreign currency exchange contracts and option, including those entered into in order to hedge a portion of the Consolidated Thompson purchase price. At December 31, 2010, such derivative financial instruments included our existing foreign currency exchange contracts at that time. The fair value of the foreign currency exchange contracts and option 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 derivative financial assets classified within Level 3 at March 31, 2011 and December 31, 2010 include a freestanding derivative instrument related to certain supply agreements with one of our North American 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.

The Level 3 derivative assets at March 31, 2011 also consist of freestanding derivatives related to certain supply agreements with our North American Iron Ore customers. As a result of the shift in the industry toward shorter-term pricing arrangements that are linked to the spot market and elimination of the annual benchmark system that occurred in 2010, we have revised the terms of certain of our 2011 customer supply agreements and have recorded certain shipments made during the first three 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 settlements are reached, is marked to fair value as a revenue adjustment each reporting period. The fair value was primarily determined based on significant unobservable inputs to develop the forward price expectation of the final price settlements. The fair value of these derivatives is determined using a market approach and takes into account current market conditions and other risks, including nonperformance risk.

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

 

     (In Millions)  
     Derivative Assets  
     March 31,  
     2011      2010  

Beginning balance - January 1

     $ 45.6           $ 63.2     

Total gains (losses)

     

Included in earnings

     44.6           104.9     

Included in other comprehensive income

     -             -       

Settlements

     (22.1)           (42.2)     

Transfers in to Level 3

     -             -       
                 

Ending balance - March 31

     $ 68.1           $ 125.9     
                 

Total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses on assets and liabilities still held at the reporting date

     $       44.6           $       104.9     
                 

Gains and losses included in earnings are reported in Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2011 and 2010.

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

 

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

Long-term receivables:

           

Customer supplemental payments

     $ 22.3           $ 19.9           $ 22.3           $ 19.5     

ArcelorMittal USA - Ispat receivable

     31.2           36.9           32.8           38.9     

Other

     8.8           8.8           8.1           8.1     
                                   

Total long-term receivables (1)

     $ 62.3           $ 65.6           $ 63.2           $ 66.5     
                                   

Long-term debt:

           

Senior notes - $700 million

     $ 699.3           $ 671.1           $ -             $ -       

Senior notes - $1 billion

     990.3           973.0           990.3           972.5     

Senior notes - $400 million

     397.9           420.1           397.8           422.8     

Senior notes - $325 million

     325.0           356.5           325.0           355.6     

Customer borrowings

     5.0           5.0           4.0           4.0     
                                   

Total long-term debt

     $       2,417.5           $       2,425.7           $       1,717.1           $       1,754.9     
                                   

(1) Includes current portion.

           

The terms of one of our North American Iron Ore pellet supply agreements require supplemental payments to be paid by the customer during the period 2009 through 2013, with the option to defer a portion of the 2009 monthly amount 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 began in September 2009 at the higher of 9 percent or the prime rate plus 350 basis points. As of March 31, 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 $19.9 million and $19.5 million at March 31, 2011 and December 31, 2010, respectively, is based on a discount rate of 3.8 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 $31.2 million and $32.8 million at March 31, 2011 and December 31, 2010, respectively. The fair value of the receivable of $36.9 million and $38.9 million at March 31, 2011 and December 31, 2010, respectively, is based on a discount rate of 3.5 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 revolving loan is variable rate interest debt and approximates 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 March 31, 2011 and December 31, 2010:

 

($ in Millions)

 

March 31, 2011

 

Debt Instrument

  Type     Average
Annual
Interest Rate
    Final
Maturity
    Total
Face
Amount
    Total
Long-term
Debt
 

$700 Million 4.875% 2021 Senior Notes

    Fixed        4.875 %          2021        $ 700.0        $ 699.3  (5) 

$1 Billion Senior Notes:

         

$500 Million 4.80% 2020 Senior Notes

    Fixed        4.80 %          2020        500.0          499.0  (4) 

$500 Million 6.25% 2040 Senior Notes

    Fixed        6.25 %          2040        500.0          491.3  (3) 

$400 Million Senior Notes

    Fixed        5.90 %          2020        400.0          397.9  (2) 

$325 Million Private Placement Senior Notes:

         

Series 2008A - Tranche A

    Fixed        6.31 %          2013        270.0          270.0    

Series 2008A - Tranche B

    Fixed        6.59 %          2015        55.0          55.0    

$600 Million Credit Facility:

         

Revolving Loan

    Variable        -   %          2012        600.0          -     (1) 
                     

Total

          $     3,025.0          $     2,412.5     
                     

 

December 31, 2010

 

Debt Instrument

  Type     Average
Annual
Interest Rate
    Final
Maturity
    Total
Face
Amount
    Total
Long-term
Debt
 

$1 Billion Senior Notes:

         

$500 Million 4.80% 2020 Senior Notes

    Fixed        4.80  %        2020        $ 500.0        $ 499.0  (4) 

$500 Million 6.25% 2040 Senior Notes

    Fixed        6.25  %        2040        500.0          491.3  (3) 

$400 Million Senior Notes

    Fixed        5.90  %        2020        400.0          397.8  (2) 

$325 Million Private Placement Senior Notes:

         

Series 2008A - Tranche A

    Fixed        6.31  %        2013        270.0          270.0    

Series 2008A - Tranche B

    Fixed        6.59  %        2015        55.0          55.0   

$600 Million Credit Facility:

         

Revolving Loan

    Variable        -    %        2012        600.0          -     (1) 
                     

Total

          $     2,325.0          $     1,713.1     
                     

(1) As of March 31, 2011 and December 31, 2010, no revolving loans were drawn under the credit facility; however, the principal amount of letter of credit obligations totaled $67.1 million and $64.7 million, respectively, reducing available borrowing capacity to $532.9 million and $535.3 million, respectively.

 

(2) As of March 31, 2011 and December 31, 2010, the $400 million senior notes were recorded at a par value of $400 million less unamortized discounts of $2.1 million and $2.2 million, respectively, based on an imputed interest rate of 5.98 percent.

(3) As of March 31, 2011 and December 31, 2010, the $500 million 6.25 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $8.7 million, based on an imputed interest rate of 6.38 percent.

(4) As of March 31, 2011 and December 31, 2010, the $500 million 4.80 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $1.0 million, based on an imputed interest rate of 4.83 percent.

(5) As of March 31, 2011, the $700 million senior notes were recorded at par value of $700 million less unamortized discounts of $0.7 million, based on an imputed interest rate of 4.89 percent.

The terms of the private placement senior notes and the credit facility 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 March 31, 2011 and December 31, 2010, we were in compliance with the financial covenants related to both the private placement senior notes and the credit facility. The terms of the $1 billion senior notes and $400 million senior notes issued in 2010 contain certain customary covenants; however, there are no financial covenants.

$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. There are no subsidiary guarantees of the interest and principal amounts. Refer to NOTE 19 – SUBSEQUENT EVENTS for further information.

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; provided however that 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, 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.

 

The 2021 senior notes will be subject to a special mandatory redemption in the event our pending acquisition of Consolidated Thompson is not consummated on or prior to July 29, 2011, or if prior to July 29, 2011, the definitive arrangement agreement with Consolidated Thompson is terminated other than in connection with the consummation of the pending acquisition of Consolidated Thompson and is not otherwise amended or replaced. In such an event, the 2021 senior notes will be redeemed at a price equal to 101 percent of the principal amount thereof plus accrued and unpaid interest from the date of initial issuance, or the most recent date to which interest has been paid or provided for, whichever is later than, but excluding, the special mandatory redemption date.

We intend to use the net proceeds from the senior notes offering to fund a portion of the pending acquisition of Consolidated Thompson and to pay the related fees and expenses. Pending final use, we may invest the net proceeds from this offering in short-term marketable securities. As discussed above, if the acquisition of Consolidated Thompson is not consummated we will be required to redeem the 2021 senior notes in a special mandatory redemption and we would use the net proceeds from the 2040 senior notes for general corporate purposes, including the funding of capital expenditures and other strategic acquisitions.

The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.

 

 

Short-term Facilities

On March 31, 2010, Asia Pacific Iron Ore entered into a A$40 million ($41.3 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, 2010 and subsequently renewed until June 30, 2011. 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 March 31, 2011, the outstanding bank guarantees under this facility totaled A$24.1 million ($24.9 million), thereby reducing borrowing capacity to A$15.9 million ($16.4 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 March 31, 2011, we were in compliance with these financial covenants.

Debt Maturities

Maturities of debt instruments based on the principal amounts outstanding at March 31, 2011, total $270 million in 2013, $55 million in 2015 and $2.1 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 $5.8 million for the three months ended March 31, 2011, compared with $5.9 million for the same period in 2010.

Future minimum payments under capital leases and non-cancellable operating leases at March 31, 2011 are as follows:

 

     (In Millions)  
     Capital
Leases
    Operating
Leases
 

2011 (April 1 - December 31)

     $ 33.8          $ 17.2     

2012

     44.8          18.8     

2013

     37.9          18.6     

2014

     37.5          14.1     

2015

     37.7          7.4     

2016 and thereafter

     52.8          8.8     
                

Total minimum lease payments

     244.5          $     84.9     
          

Amounts representing interest

     49.3       
          

Present value of net minimum lease payments

     $       195.2   (1)   
          

(1)    The total is comprised of $32.8 million and $162.4 million classified as Other current liabilities and Other liabilities, respectively, on the Statements of Unaudited Condensed Consolidated Financial Position at March 31, 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 $203.5 million and $199.1 million at March 31, 2011 and December 31, 2010, respectively. The following is a summary of the obligations as of March 31, 2011 and December 31, 2010:

 

     (In Millions)  
     March 31,
2011
     December 31,
2010
 

Environmental

     $ 13.7           $ 13.7     

Mine closure

     

LTVSMC

     17.3           17.1     

Operating mines:

     

North American Iron Ore

     115.0           112.0     

North American Coal

     35.2           34.7     

Asia Pacific Iron Ore

     15.8           15.4     

Other

     6.5           6.2     
                 

Total mine closure

     189.8           185.4     
                 

Total environmental and mine closure obligations

     203.5           199.1     

Less current portion

     14.3           14.2     
                 

Long-term environmental and mine closure obligations

     $     189.2           $     184.9     
                 

Mine Closure

Our mine closure obligations are for our five consolidated North American 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 three months ended March 31, 2011 and the year ended December 31, 2010:

 

     (In Millions)  
     March 31,
2011
     December 31,
2010
(1)
 

Asset retirement obligation at beginning of period

     $ 168.3           $ 103.9     

Accretion expense

     3.8           13.1     

Exchange rate changes

     0.4           2.5     

Revision in estimated cash flows

     -             1.0     

Payments

     -             (8.4)    

Acquired through business combinations

     -             56.2     
                 

Asset retirement obligation at end of period

     $     172.5           $     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 months ended March 31, 2011 and 2010:

 

     (In Millions)  
     Pension Benefits      Other Benefits  
     Three Months Ended
March 31,
     Three Months Ended
March 31,
 
     2011       2010      2011      2010  

Service cost

     $ 5.8           $ 4.4             $ 2.4           $ 1.6     

Interest cost

     13.6           12.5           5.9           5.2     

Expected return on plan assets

      (15.5)          (12.6)          (4.3)          (3.2)    

Amortization:

           

Prior service costs

     1.2           1.1           0.6           0.4     

Net actuarial losses

     5.2           5.9           2.9           1.7     
                                   

Net periodic benefit cost

     $     10.3           $     11.3             $     7.5           $     5.7     
                                   

We made quarterly pension contributions of $23.8 million and $8.5 million for the three months ended March 31, 2011 and 2010, respectively. Quarterly OPEB contributions were $21.9 million and $17.4 million for the three months ended March 31, 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 performance period 2011-2013. 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, 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 months ended March 31, 2011 was $142.0 million. The effective tax rate for the first three months of 2011 is approximately 25.3 percent. Our 2011 expected effective tax rate for the full year is approximately 27.0 percent before discrete items, which reflects benefits from deductions for percentage depletion in excess of cost depletion related to U.S. operations as well as 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 March 31, 2011, our valuation allowance against certain deferred tax assets increased by $4.2 million from December 31, 2010. This increase primarily relates to ordinary losses of certain foreign operations for which future utilization is currently uncertain and tax basis is greater than book basis on certain foreign assets, partially offset by the release of a valuation allowance on a deferred tax asset which was reduced because of a decrease in the difference between tax and book basis.

As of March 31, 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.

At January 1, 2011 we had $79.8 million of unrecognized tax benefits recorded in Other liabilities on the Statements of Consolidated Financial Position. If the $79.8 million were recognized, $79.1 million would impact the effective tax rate. It is reasonably possible that unrecognized tax benefits will decrease in the range of $40 million to $50 million within the next 12 months due to expected settlements with the taxing authorities or expiration of the statute of limitations. During the three months ended March 31, 2011, we accrued an additional $0.6 million of interest relating to the unrecognized tax benefits.

Tax years that remain subject to examination are years 2007 and forward for the United States, 1993 and forward for Canada, and 1994 and forward for Australia.

 

Capital Stock
Capital Stock

NOTE 14 – CAPITAL STOCK

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 to shareholders on record as of February 15, 2011.

Comprehensive Income
Comprehensive Income

NOTE 15 – COMPREHENSIVE INCOME

The following are the components of comprehensive income for the three months ended March 31, 2011 and 2010:

 

     (In Millions)  
     Three Months Ended
March 31,
 
     2011     2010  

Net income attributable to Cliffs shareholders

     $ 423.4          $ 77.4    

Other comprehensive income:

    

Unrealized net gain (loss) on marketable securities - net of tax

     (0.2 )       (9.9

Foreign currency translation

     14.6          29.1     

Amortization of net periodic benefit cost - net of tax

     8.2          38.6     

Reclassification of net gains on derivative financial instruments into net income

     (0.4 )       (1.6 )  

Unrealized gain on derivative financial instruments

     1.9          -       
                

Total other comprehensive income

     24.1          56.2     
                

Total comprehensive income

     $     447.5          $     133.6     
                
Earnings Per Share
Earnings Per Share

NOTE 16 – EARNINGS PER SHARE

A summary of the calculation of earnings per common share on a basic and diluted basis follows:

 

     (In Millions)  
     Three Months Ended
March 31,
 
     2011      2010  

Net income attributable to Cliffs shareholders

     $     423.4         $ 77.4     

Weighted average number of shares:

     

Basic

     135.5           135.2     

Employee stock plans

     0.7           0.8     
                 

Diluted

     136.2           136.0     
                 

Earnings per common share attributable to Cliffs shareholders - Basic

     $ 3.12           $ 0.57     
                 

Earnings per common share attributable to Cliffs shareholders - Diluted

     $ 3.11           $ 0.57     
                 
Commitments and Contingencies
Commitments and Contingencies

NOTE 17 – COMMITMENTS AND CONTINGENCIES

Purchase Commitments

In March 2011, we incurred capital commitments related to bringing Lower War Eagle, a high volatile metallurgical coal mine in West Virginia, into production. As of March 31, 2011, the project has been approved for capital investments of approximately $49 million, of which $16 million has been committed. As of March 31, 2011, capital expenditures related to this commitment were approximately $5 million. Of the committed capital, expenditures of approximately $11 million are scheduled to be made during the remainder of 2011.

 

In 2010, our Board of Directors approved a capital project at our Koolyanobbing Operation in Western Australia. The project is expected to increase the production capacity at the Koolyanobbing Operation to approximately 11 million metric tons annually. The improvements consist of enhancements to the existing rail infrastructure and upgrades to various other existing operational constraints. The expansion project requires a capital investment of approximately $266 million, of which approximately $200 million has been committed, that will be required to meet the timing of the proposed expansion. As of March 31, 2011, $43 million in capital expenditures had been expended related to this commitment. Of the committed capital, expenditures of $147 million and $10 million are scheduled to be made during the remainder of 2011 and in 2012, respectively.

We incurred capital commitments related to an expansion project at our Empire and Tilden mines in Michigan's Upper Peninsula in 2010. As of March 31, 2011, the project has been approved for capital investments on equipment of approximately $200 million, of which $136 million has been committed, and is expected to allow the Empire mine to produce at three million tons annually through 2014 and increase Tilden mine production by an additional two million tons annually. As of March 31, 2011, capital expenditures related to this commitment were approximately $31 million. Of the committed capital, expenditures of approximately $98 million and $7 million are scheduled to be made during the remainder of 2011 and in 2012, respectively.

In 2010, we incurred a capital commitment for the construction of a new portal closer to the coal face at our Oak Grove mine in Alabama. The portal requires a capital investment of approximately $29 million, of which $26 million has been committed, and will significantly decrease transit time to and from the coal face, which is expected to result in, among other things, improved safety, greater operational efficiency, increased productivity, lower employment costs and improved employee morale. As of March 31, 2011, capital expenditures related to this commitment were approximately $15 million. Expenditures of $11 million are scheduled to be made throughout the remainder of 2011.

In 2008, we incurred a capital commitment for the purchase of a new longwall plow system for our Pinnacle mine in West Virginia. The system, which requires a capital investment of approximately $90 million, will replace the current longwall plow system in an effort to reduce maintenance costs and increase production at the mine. As of March 31, 2011, capital expenditures related to this commitment were approximately $76 million. Expenditures of approximately $14 million are scheduled to be made throughout the remainder of 2011. In April 2011, we made a progress payment on the longwall of approximately $8 million. The remaining expenditures are related to the longwall plow system assets pending delivery.

Contingencies

Litigation

We are currently a party to various claims and legal proceedings incidental to our operations. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on our financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the financial position and results of operations of the period in which the ruling occurs, or future periods. However, we believe that any pending litigation will not result in a material liability in relation to our consolidated financial statements.

 

Cash Flow Information
Cash Flow Information

NOTE 18 – CASH FLOW INFORMATION

A reconciliation of capital additions to cash paid for capital expenditures for the three months ended March 31, 2011 and 2010 is as follows:

 

     (In Millions)  
     Three Months Ended March 31,  
     2011      2010  

Capital additions

     $ 91.0         $ 23.8     

Cash paid for capital expenditures

     65.7           18.9     
                 

Difference

     $ 25.3         $ 4.9     
                 

Non-cash accruals

     $ 25.3         $ 4.9     

Capital leases

     -             -       
                 

Total

     $ 25.3         $ 4.9     
                 

Non-cash investing activities for the three months ended March 31, 2010 include the issuance of 4.2 million of our common shares valued at $173.1 million as part of the purchase consideration for the acquisition of the remaining interest in Freewest. Non-cash items for the three months ended March 31, 2010 also include gains of $38.6 million related to the remeasurement of our previous ownership interest in Freewest and Wabush held prior to each business acquisition.

Subsequent Events
Subsequent Events

NOTE 19 – SUBSEQUENT EVENTS

$1 Billion Senior Notes Offering

On April 1, 2011, we completed the second tranche of the $1 billion public offering of senior notes consisting of 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. We received net proceeds of $296.1 million related to the completion of this tranche of the debt issuance.

Pricing Re-opener Arbitration Settlement

On April 8, 2011, we reached a negotiated settlement with ArcelorMittal with respect to our previously disclosed arbitrations and litigation regarding price re-opener entitlements for 2009 and 2010 and pellet nominations for 2010 and 2011. Under the terms of the settlement, specific pricing levels have been agreed upon for 2009 and 2010 pellet sales and related sale volumes. The settlement includes a pricing "true-up" for pellet volumes delivered to certain ArcelorMittal steelmaking facilities in North America during both 2009 and 2010 and resulted in a cash payment of approximately $275 million. The cash settlement payment was subsequently received from the customer on April 26, 2011. As a result of the settlement, we recognized an additional $139.8 million of revenue and a reduction of $54.1 million in costs as Revenue and Cost of Goods Sold and Operating Expenses, respectively, in the Statements of Unaudited Condensed Consolidated Operations as of March 31, 2011. In addition, the settlement resulted in the replacement of the previous pricing mechanism with a world market-based pricing mechanism beginning in 2011 for one of the iron ore supply agreements. The new pricing mechanism will continue through the remainder of the term of that supply agreement and as a result of this new pricing feature both parties have agreed to forgo future price re-openers.

 

Purchase of Consolidated Thompson Senior Secured Notes

On April 13, 2011, we purchased the outstanding Consolidated Thompson senior secured notes directly from the note holders for $122.5 million, plus accrued and unpaid interest. The senior secured notes have a face amount of $100 million, a stated interest rate of 8.5 percent and were scheduled to mature in 2017. The transaction will be initially recorded as an investment in Consolidated Thompson senior secured notes during the second quarter of 2011; however, upon the completion of the pending acquisition of Consolidated Thompson and consolidation into our financial statements the Consolidated Thompson senior secured notes and our investment in the notes will be eliminated as intercompany transactions.

Algoma Arbitration Settlement

On April 20, 2011, we reached a settlement agreement with Algoma. The settlement agreement includes Algoma's acceptance of the previously announced arbitration award on December 17, 2010. In addition to acknowledging the method to calculate the contract prices beginning in 2010 through the duration of the contract, the settlement agreement also finalized the 2011 contract price. This settlement had no impact on our March 31, 2011 results.

Natural Disaster in Alabama

During the evening of April 27, 2011, above ground operations at our Oak Grove mine in Alabama were struck by severe weather, including a tornado. All mine operations employees are accounted for and safe with no known injuries at this time. It appears that the severe weather did significant damage to the mine's preparation plant and overland conveyor system and this, along with overall infrastructure damage in Alabama, will impact future customer deliveries. Our operations team is currently in the early stages of conducting an assessment of the damages.

We have evaluated subsequent events through the date of financial statement issuance.

Basis of Presentation and Significant Accounting Policies (Policy)
Basis of Presentation and Significant Accounting Policies (Tables)

        Name        

  

    Location    

  

    Ownership Interest    

 

    Operation    

 Northshore

    Minnesota    100.0%   Iron Ore

 United Taconite

    Minnesota    100.0%   Iron Ore

 Wabush

    Labrador/Quebec, Canada    100.0%   Iron Ore

 Tilden

    Michigan    85.0%   Iron Ore

 Empire

    Michigan    79.0%   Iron Ore

 Asia Pacific Iron Ore

    Western Australia    100.0%   Iron Ore

 Pinnacle

    West Virginia    100.0%   Coal

 Oak Grove

    Alabama    100.0%   Coal

 CLCC

    West Virginia    100.0%   Coal

 renewaFUEL

    Michigan    95.0%   Biomass

 Freewest

    Ontario, Canada    100.0%   Chromite

 Spider

    Ontario, Canada    100.0%   Chromite
                (In Millions)  

Investment    

&nbs