CLIFFS NATURAL RESOURCES INC., 10-K filed on 2/16/2012
Annual Report
Document And Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Feb. 13, 2012
Jun. 30, 2011
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2011 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
clf 
 
 
Entity Registrant Name
CLIFFS NATURAL RESOURCES INC. 
 
 
Entity Central Index Key
0000764065 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
142,013,534 
 
Entity Public Float
 
 
$ 13,430,571,403 
Statements Of Consolidated Financial Position (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 521.6 
$ 1,566.7 
Accounts receivable
304.2 
359.1 
Inventories
475.7 
269.2 
Supplies and other inventories
216.9 
148.1 
Deferred and refundable taxes
21.9 
43.2 
Derivative assets
82.1 
82.6 
Other current assets
168.3 
114.8 
TOTAL CURRENT ASSETS
1,790.7 
2,583.7 
PROPERTY, PLANT AND EQUIPMENT, NET
10,524.6 
3,979.2 
OTHER ASSETS
 
 
Investments in ventures
526.6 
514.8 
Goodwill
1,152.1 
196.5 
Intangible assets, net
147.0 
175.8 
Deferred income taxes
209.5 
140.3 
Other non-current assets
191.2 
187.9 
TOTAL OTHER ASSETS
2,226.4 
1,215.3 
TOTAL ASSETS
14,541.7 
7,778.2 
CURRENT LIABILITIES
 
 
Accounts payable
380.3 
266.5 
Accrued employment costs
144.2 
129.9 
Income taxes payable
265.4 
103.4 
State and local taxes payable
59.1 
38.9 
Below-market sales contracts - current
52.7 
57.1 
Current portion of term loan
74.8 
 
Accrued expenses
165.0 
56.5 
Accrued royalties
77.1 
80.2 
Deferred revenue
126.6 
215.6 
Other current liabilities
148.1 
80.6 
TOTAL CURRENT LIABILITIES
1,493.3 
1,028.7 
POSTEMPLOYMENT BENEFIT LIABILITIES
 
 
Pensions
394.7 
284.9 
Other postretirement benefits
271.1 
243.1 
TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES
665.8 
528.0 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
222.0 
184.9 
DEFERRED INCOME TAXES
1,062.4 
63.7 
LONG-TERM DEBT
3,608.7 
1,713.1 
BELOW-MARKET SALES CONTRACTS
111.8 
164.4 
OTHER LIABILITIES
338.0 
256.7 
TOTAL LIABILITIES
7,502.0 
3,939.5 
CLIFFS SHAREHOLDERS' EQUITY
 
 
Common Shares - par value $0.125 per share Authorized - 400,000,000 shares (2010 - 224,000,000); Issued - 149,195,469 shares (2010 - 138,845,469 shares); Outstanding - 142,021,718 shares (2010 - 135,456,999 shares)
18.5 
17.3 
Capital in excess of par value of shares
1,770.8 
896.3 
Retained earnings
4,424.3 
2,924.1 
Cost of 7,173,751 common shares in treasury (2010 - 3,388,470 shares)
(336.0)
(37.7)
Accumulated other comprehensive income (loss)
(92.6)
45.9 
TOTAL CLIFFS SHAREHOLDERS' EQUITY
5,785.0 
3,845.9 
NONCONTROLLING INTEREST
1,254.7 
(7.2)
TOTAL EQUITY
7,039.7 
3,838.7 
TOTAL LIABILITIES AND EQUITY
$ 14,541.7 
$ 7,778.2 
Statements Of Consolidated Financial Position (Parenthetical) (USD $)
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2011
Preferred Class A [Member]
Dec. 31, 2010
Preferred Class A [Member]
Dec. 31, 2011
Preferred Class B [Member]
Dec. 31, 2010
Preferred Class B [Member]
Preferred stock, no par value
$ 0 
$ 0 
 
 
 
 
Preferred stock - no par value
 
 
3,000,000 
3,000,000 
4,000,000 
4,000,000 
Preferred stock, shares unissued
 
 
3,000,000 
3,000,000 
4,000,000 
4,000,000 
Common shares, par value
$ 0.125 
$ 0.125 
 
 
 
 
Common shares, authorized
400,000,000 
224,000,000 
 
 
 
 
Common shares, issued
149,195,469 
138,845,469 
 
 
 
 
Common shares, outstanding
142,021,718 
135,456,999 
 
 
 
 
Common shares in treasury
7,173,751 
3,388,470 
 
 
 
 
Statements Of Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
Product
$ 6,551.7 
$ 4,416.8 
$ 2,216.2 
Freight and venture partners' cost reimbursements
242.6 
265.3 
125.8 
TOTAL REVENUES
6,794.3 
4,682.1 
2,342.0 
COST OF GOODS SOLD AND OPERATING EXPENSES
(4,105.7)
(3,155.6)
(2,030.3)
SALES MARGIN
2,688.6 
1,526.5 
311.7 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
Selling, general and administrative expenses
(274.4)
(202.1)
(117.6)
Exploration costs
(80.5)
(33.7)
 
Impairment of goodwill
(27.8)
 
 
Consolidated Thompson acquisition costs
(25.4)
 
 
Miscellaneous - net
68.1 
(20.5)
42.0 
TOTAL OTHER OPERATING INCOME (EXPENSE)
(340.0)
(256.3)
(75.6)
OPERATING INCOME
2,348.6 
1,270.2 
236.1 
OTHER INCOME (EXPENSE)
 
 
 
Gain on acquisition of controlling interests
 
40.7 
 
Changes in fair value of foreign currency contracts, net
101.9 
39.8 
85.7 
Interest income
9.5 
9.9 
10.8 
Interest expense
(216.5)
(70.1)
(39.0)
Other non-operating income (expense)
(2.0)
12.5 
2.9 
TOTAL OTHER INCOME (EXPENSE)
(107.1)
32.8 
60.4 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) FROM VENTURES
2,241.5 
1,303.0 
296.5 
INCOME TAX EXPENSE
(420.1)
(293.5)
(22.5)
EQUITY INCOME (LOSS) FROM VENTURES
9.7 
13.5 
(65.5)
INCOME FROM CONTINUING OPERATIONS
1,831.1 
1,023.0 
208.5 
LOSS FROM DISCONTINUED OPERATIONS, net of tax
(18.5)
(3.1)
(3.4)
NET INCOME
1,812.6 
1,019.9 
205.1 
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
193.5 
 
 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 1,619.1 
$ 1,019.9 
$ 205.1 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
Continuing operations
$ 11.68 
$ 7.56 
$ 1.67 
Discontinued operations
$ (0.13)
$ (0.02)
$ (0.03)
Earnings per common share attributable to Cliffs shareholders - Basic
$ 11.55 
$ 7.54 
$ 1.64 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
Continuing operations
$ 11.61 
$ 7.51 
$ 1.66 
Discontinued operations
$ (0.13)
$ (0.02)
$ (0.03)
Earnings per common share attributable to Cliffs shareholders - Diluted
$ 11.48 
$ 7.49 
$ 1.63 
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
Basic
140,234 
135,301 
124,998 
Diluted
141,012 
136,138 
125,751 
CASH DIVIDENDS DECLARED PER SHARE
$ 0.84 
$ 0.51 
$ 0.26 
Statements Of Consolidated Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Statement of Income and Comprehensive Income [Abstract]
 
 
 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 1,619.1 
$ 1,019.9 
$ 205.1 
OTHER COMPREHENSIVE INCOME, NET OF TAX
 
 
 
Pension and OPEB liability
(121.4)
14.8 
21.8 
Unrealized net gain (loss) on marketable securities
(31.0)
4.2 
29.5 
Unrealized net gain (loss) on foreign currency translation
(2.2)
151.6 
231.7 
Unrealized net loss on derivative financial instruments
(1.5)
(1.3)
(15.1)
Unrealized gain on interest rate swap
 
 
1.7 
OTHER COMPREHENSIVE INCOME (LOSS)
(156.1)
169.3 
269.6 
LESS: COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
17.6 
(0.8)
2.4 
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 1,480.6 
$ 1,188.4 
$ 477.1 
Statements Of Consolidated Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
OPERATING ACTIVITIES
 
 
 
Net income
$ 1,812.6 
$ 1,019.9 
$ 205.1 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
Depreciation, depletion and amortization
426.9 
322.3 
236.6 
Goodwill impairment
27.8 
 
 
Derivatives and currency hedges
(69.0)
(39.0)
(204.5)
Foreign exchange loss (gains)
(6.2)
39.1 
(28.1)
Share-based compensation
13.9 
12.5 
10.1 
Equity (income) loss in ventures (net of tax)
(9.7)
(13.5)
65.5 
Pensions and other postretirement benefits
(26.3)
8.7 
27.3 
Deferred income taxes
(66.6)
15.2 
60.8 
Changes in deferred revenue and below-market sales contracts
(146.0)
39.3 
(33.4)
Gain on acquisition of controlling interests
 
(40.7)
 
Other
(0.1)
9.9 
3.8 
Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
81.4 
(204.6)
(24.2)
Product inventories
(74.5)
61.2 
7.7 
Payables and accrued expenses
324.6 
89.7 
(141.0)
Net cash from operating activities
2,288.8 
1,320.0 
185.7 
INVESTING ACTIVITIES
 
 
 
Acquisition of controlling interests, net of cash acquired
 
(994.5)
 
Net settlements in Canadian dollar foreign exchange contracts
93.1 
 
 
Purchase of property, plant and equipment
(880.7)
(266.9)
(116.3)
Investments in ventures
(5.2)
(191.3)
(81.8)
Investment in marketable securities
 
(6.6)
(14.9)
Redemption of marketable securities
 
32.5 
5.4 
Proceeds from sale of assets
22.4 
59.1 
28.3 
Other investing activities
14.5 
 
 
Net cash used by investing activities
(5,304.4)
(1,367.7)
(179.3)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of common shares
853.7 
 
347.3 
Net proceeds from issuance of senior notes
998.1 
1,388.1 
 
Borrowings on term loan
1,250.0 
 
 
Repayment of term loan
(278.0)
 
 
Borrowings on bridge credit facility
750.0 
 
 
Repayment of bridge credit facility
(750.0)
 
 
Borrowings under revolving credit facility
250.0 
450.0 
279.7 
Repayment under revolving credit facility
(250.0)
(450.0)
(276.4)
Debt issuance costs
(54.8)
 
 
Repayment of 200 million term loan
 
(200.0)
 
Payments under share buyback program
(289.8)
 
 
Common stock dividends
(118.9)
(68.9)
(31.9)
Repayment of other borrowings
(1.0)
(16.7)
(9.7)
Other financing activities
(47.0)
(14.9)
(4.7)
Net cash from financing activities
1,975.1 
1,087.6 
304.3 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(4.6)
24.1 
13.0 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,045.1)
1,064.0 
323.7 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
1,566.7 
502.7 
179.0 
CASH AND CASH EQUIVALENTS AT END OF YEAR
521.6 
1,566.7 
502.7 
Consolidated Thompson [Member]
 
 
 
INVESTING ACTIVITIES
 
 
 
Acquisition of controlling interests, net of cash acquired
(4,423.5)
 
 
Investment in Consolidated Thompson senior notes
(125.0)
 
 
FINANCING ACTIVITIES
 
 
 
Repayment of Consolidated Thompson convertible debentures
$ (337.2)
 
 
Statements Of Consolidated Changes In Equity (USD $)
In Millions, except Share data, unless otherwise specified
Common Shares [Member]
Capital In Excess of Par Value of Shares [Member]
Retained Earnings [Member]
Common Shares in Treasury [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Non- Controlling Interest [Member]
Total
Beginning Balance at Dec. 31, 2008
$ 16.8 
$ 442.2 
$ 1,799.9 
$ (113.8)
$ (394.6)
$ 3.3 
$ 1,753.8 
Beginning Balance (in shares) at Dec. 31, 2008
113,500,000 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
205.1 
 
 
 
205.1 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
24.2 
(2.4)
21.8 
Unrealized net gain on marketable securities
 
 
 
 
29.5 
 
29.5 
Unrealized net gain on foreign currency translation
 
 
 
 
231.7 
 
231.7 
Unrealized gain on interest rate swap
 
 
 
 
1.7 
 
1.7 
Reclassification of net gains on derivative financial instruments into net income
 
 
 
 
(15.1)
 
(15.1)
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
 
 
 
 
 
(2.4)
474.7 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
0.1 
0.1 
Undistributed losses to noncontrolling interest
 
 
 
 
 
(7.5)
(7.5)
Capital contribution by noncontrolling interest to subsidiary
 
 
 
 
 
0.7 
0.7 
Equity Offering (in shares)
17,300,000 
 
 
 
 
 
 
Equity Offering (value)
 
254.5 
 
92.8 
 
 
347.3 
Purchase of additional noncontrolling interest
 
(5.4)
 
 
 
 
(5.4)
Stock and other incentive plans (in shares)
200,000 
 
 
 
 
 
 
Stock and other incentive plans
 
4.1 
 
0.9 
 
 
5.0 
Conversion of preferred stock
 
 
 
0.2 
 
 
0.2 
Common stock dividends
 
 
(31.9)
 
 
 
(31.9)
Ending Balance at Dec. 31, 2009
16.8 
695.4 
1,973.1 
(19.9)
(122.6)
(5.8)
2,537.0 
Ending Balance (in shares) at Dec. 31, 2009
131,000,000 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
1,019.9 
 
 
 
1,019.9 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
14.0 
0.8 
14.8 
Unrealized net gain on marketable securities
 
 
 
 
4.2 
 
4.2 
Unrealized net gain on foreign currency translation
 
 
 
 
151.6 
 
151.6 
Reclassification of net gains on derivative financial instruments into net income
 
 
 
 
(3.2)
 
(3.2)
Unrealized gain on derivative instruments
 
 
 
 
1.9 
 
1.9 
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
 
 
 
 
 
0.8 
1,189.2 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
(0.5)
(0.5)
Undistributed losses to noncontrolling interest
 
 
 
 
 
(4.7)
(4.7)
Capital contribution by noncontrolling interest to subsidiary
 
 
 
 
 
3.0 
3.0 
Purchase of additional noncontrolling interest
 
(1.6)
 
 
 
 
(1.6)
Acquisition of controlling interest (in shares)
4,200,000 
 
 
 
 
 
 
Acquisition of controlling interest
0.5 
172.6 
 
 
 
 
173.1 
Stock and other incentive plans (in shares)
300,000 
 
 
 
 
 
 
Stock and other incentive plans
 
19.4 
 
(7.3)
 
 
12.1 
Common stock dividends
 
 
(68.9)
 
 
 
(68.9)
Other
 
10.5 
 
(10.5)
 
 
 
Ending Balance at Dec. 31, 2010
17.3 
896.3 
2,924.1 
(37.7)
45.9 
(7.2)
3,838.7 
Ending Balance (in shares) at Dec. 31, 2010
135,500,000 
 
 
 
 
 
135,456,999 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
1,619.1 
 
 
193.5 
1,812.6 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
(103.8)
(17.6)
(121.4)
Unrealized net gain on marketable securities
 
 
 
 
(31.0)
 
(31.0)
Unrealized net gain on foreign currency translation
 
 
 
 
(2.2)
 
(2.2)
Reclassification of net gains on derivative financial instruments into net income
 
 
 
 
(3.3)
 
(3.3)
Unrealized gain on derivative instruments
 
 
 
 
1.8 
 
1.8 
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
 
 
 
 
 
175.9 
1,656.5 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
4.5 
4.5 
Capital contribution by noncontrolling interest to subsidiary
 
0.2 
 
 
 
6.1 
6.3 
Share buyback (in shares)
(4,000,000)
 
 
 
 
 
 
Share buyback
 
 
 
(289.8)
 
 
(289.8)
Equity Offering (in shares)
10,300,000 
 
 
 
 
 
 
Equity Offering (value)
1.2 
852.5 
 
 
 
 
853.7 
Acquisition of controlling interest
 
 
 
 
 
1,075.4 
1,075.4 
Stock and other incentive plans (in shares)
200,000 
 
 
 
 
 
 
Stock and other incentive plans
 
21.8 
 
(8.5)
 
 
13.3 
Common stock dividends
 
 
(118.9)
 
 
 
(118.9)
Ending Balance at Dec. 31, 2011
$ 18.5 
$ 1,770.8 
$ 4,424.3 
$ (336.0)
$ (92.6)
$ 1,254.7 
$ 7,039.7 
Ending Balance (in shares) at Dec. 31, 2011
142,000,000 
 
 
 
 
 
142,021,718 
Statements Of Consolidated Changes In Equity (Parenthetical)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
CASH DIVIDENDS DECLARED PER SHARE
$ 0.84 
$ 0.51 
$ 0.26 
Common Shares [Member]
 
 
 
CASH DIVIDENDS DECLARED PER SHARE
$ 0.84 
$ 0.51 
$ 0.26 
Business Summary And Significant Accounting Policies
Business Summary And Significant Accounting Policies

NOTE 1 — BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES

Business Summary

We are an international mining and natural resources company, a major global iron ore producer and a significant producer of high and low-volatile metallurgical coal. In the U.S., we operate five iron ore mines in Michigan and Minnesota, five metallurgical coal mines located in West Virginia and Alabama and one thermal coal mine located in West Virginia. We also operate two iron ore mines in Eastern Canada that primarily provide iron ore to the seaborne market for Asian steel producers. Our Asia Pacific operations are comprised of two iron ore mining complexes in Western Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore, and a 45 percent economic interest in Sonoma, a coking and thermal coal mine located in Queensland, Australia. In Latin America, we have a 30 percent interest in Amapá, a Brazilian iron ore project, and in Ontario, Canada we have a major chromite project in the pre-feasibility stage of exploration. In addition, our Global Exploration Group is focused on early involvement in exploration activities to identify new world-class projects for future development or projects that add significant value to existing operations. Our Company's operations are organized according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Ferroalloys, and our Global Exploration Group.

Accounting Policies

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

Use of Estimates

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

Basis of Consolidation

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

 

Name

  

Location

   Ownership Interest     Operation  

Northshore

   Minnesota      100.0     Iron Ore   

United Taconite

   Minnesota      100.0     Iron Ore   

Wabush

   Labrador/ Quebec, Canada      100.0     Iron Ore   

Bloom Lake

   Quebec, Canada      75.0     Iron Ore   

Tilden

   Michigan      85.0     Iron Ore   

Empire

   Michigan      79.0     Iron Ore   

Koolyanobbing

   Western Australia      100.0     Iron Ore   

Pinnacle

   West Virginia      100.0     Coal   

Oak Grove

   Alabama      100.0     Coal   

CLCC

   West Virginia      100.0     Coal   

Freewest

   Ontario, Canada      100.0     Chromite   

Spider

   Ontario, Canada      100.0     Chromite   

Intercompany transactions and balances are eliminated upon consolidation.

 

On May 12, 2011, we acquired all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt. The consolidated financial statements as of and for the year ended December 31, 2011 reflect our 100 percent interest in Consolidated Thompson since that date. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for further information.

Inventories

The following table presents the detail of our Inventories in the Statements of Consolidated Financial Position at December 31, 2011 and 2010:

 

     (In Millions)  
     2011      2010  

Segment

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

U.S. Iron Ore

   $ 100.2       $ 8.5       $ 108.7       $ 101.1       $ 9.7       $ 110.8   

Eastern Canadian Iron Ore

     96.2         43.0         139.2         43.5         21.2         64.7   

North American Coal

     19.7         110.5         130.2         16.1         19.8         35.9   

Asia Pacific Iron Ore

     57.2         21.6         78.8         34.7         20.4         55.1   

Other

     18.0         0.8         18.8         2.6         0.1         2.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 291.3       $ 184.4       $ 475.7       $ 198.0       $ 71.2       $ 269.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

U.S. Iron Ore

U.S. Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method. The excess of current cost over LIFO cost of iron ore inventories was $117.1 million and $112.4 million at December 31, 2011 and 2010, respectively. As of December 31, 2011, the product inventory balance for U.S. Iron Ore declined, resulting in liquidation of LIFO layers in 2011. The effect of the inventory reduction was a decrease in Cost of goods sold and operating expenses of $15.2 million in the Statements of Consolidated Operations for the year ended December 31, 2011. As of December 31, 2010, the product inventory balance for U.S. Iron Ore declined, resulting in liquidation of LIFO layers in 2010. The effect of the inventory reduction was a decrease in Cost of goods sold and operating expenses of $4.6 in the Statements of Consolidated Operations for the year ended December 31, 2010.

We had approximately 1.2 million tons and 0.8 million tons of finished goods stored at ports and customer facilities on the lower Great Lakes to service customers at December 31, 2011 and 2010, respectively. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is made. Maintaining ownership of the iron ore products at ports on the lower Great Lakes reduces risk of non-payment by customers, as we retain title to the product until payment is received from the customer. We track the movement of the inventory and verify the quantities on hand.

Eastern Canadian Iron Ore

Iron ore pellet inventories are stated at the lower of cost or market. Similar to U.S. Iron Ore product inventories, the cost is determined using the LIFO method. The excess of current cost over LIFO cost of iron ore inventories was $21.9 million and $2.5 million at December 31, 2011 and 2010, respectively. As of December 31, 2011, the iron ore pellet inventory balance for Eastern Canadian Iron Ore increased to $47.1 million, resulting in an additional LIFO layer being added. As of December 31, 2010, the product inventory balance for Eastern Canadian Iron Ore increased to $43.5 million, resulting in an additional LIFO layer being added during the year. We primarily maintain ownership of these inventories until loading of the product at the port.

Iron ore concentrate inventories are stated at the lower of cost or market. The cost of iron ore concentrate inventories is determined using weighted average cost. As of December 31, 2011, the iron ore concentrate inventory balance for Eastern Canadian Iron Ore was $49.1 million as a result of the Consolidated Thompson acquisition. For the majority of the iron ore concentrate inventories, we maintain ownership of the inventories until title passes on the bill of lading date, which is upon the loading of the product at the port.

North American Coal

North American Coal product inventories are stated at the lower of cost or market. Cost of coal inventories includes labor, supplies and operating overhead and related costs and is calculated using the average production cost. We maintain ownership until coal is loaded into rail cars at the mine for domestic sales and until loaded in the vessels at the terminal for export sales. We recorded lower-of-cost-or-market inventory charges of $6.6 million and $26.1 million in Cost of goods sold and operating expenses in the Statements of Consolidated Operations for the years ended December 31, 2011 and 2010, respectively. These charges were a result of operational and geological issues at our Pinnacle and Oak Grove mines during the periods.

Asia Pacific Iron Ore

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

 

 

Capitalized Stripping Costs

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

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

 

Environmental Remediation Costs

We have a formal policy for environmental protection and restoration. Our mining and exploration activities are subject to various laws and regulations governing protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities, including obligations for known environmental remediation exposures at active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost only can be estimated as a range of possible amounts with no specific amount being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements reasonably can be estimated. It is possible that additional environmental obligations could be incurred, the extent of which cannot be assessed. Potential insurance recoveries have not been reflected in the determination of the liabilities. See NOTE 9 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.

 

Segment Reporting
Segment Reporting

NOTE 2 — SEGMENT REPORTING

Our company's primary operations are organized and managed according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Ferroalloys and our Global Exploration Group. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that primarily provide iron ore to the seaborne market for Asian steel producers. The 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 Ferroalloys operating segment is comprised of our interests in chromite deposits held by Freewest and Spider in Northern Ontario, Canada and the Global Exploration Group is focused on early involvement in exploration activities to identify new world-class projects for future development or projects that add significant value to existing operations. The Asia Pacific Coal, Latin American Iron Ore, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and therefore are not separately reported.

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

 

The following table presents a summary of our reportable segments for the years ended December 31, 2011, 2010 and 2009, including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures:

 

 

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

 

     (In Millions)  
     2011      2010      2009  

Revenue (1)

        

United States

   $ 2,774.1       $ 1,966.3       $ 1,049.5   

China

     2,123.4         1,262.0         711.5   

Canada

     914.3         696.5         236.6   

Japan

     460.4         311.1         157.4   

Other countries

     522.1         446.2         187.0   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 6,794.3       $ 4,682.1       $ 2,342.0   
  

 

 

    

 

 

    

 

 

 

Property, Plant and Equipment, Net

        

United States

   $ 2,684.9       $ 2,498.8      

Australia

     1,138.3         973.7      

Canada

     6,701.4         506.7      
  

 

 

    

 

 

    

Total Property, Plant and Equipment, Net

   $ 10,524.6       $ 3,979.2      
  

 

 

    

 

 

    

(1) Revenue is attributed to countries based on the location of the customer and includes both Product sales and services.

Concentrations in Revenue

In 2011, we had one customer that individually accounted for more than 10 percent of our consolidated product revenue. In 2010 and 2009, we had two and one additional customers that individually accounted for more than 10 percent of our consolidated product revenue, respectively. Total revenue from those customers that accounted for more than 10 percent of our consolidated product revenues represents approximately $1.4 billion, $1.8 billion and $0.8 billion of our total consolidated product revenue in 2011, 2010 and 2009, respectively, and is attributable to our U.S. Iron Ore, Eastern Canadian Iron Ore and North American Coal business segments.

The following table represents the percentage of our total revenue contributed by each category of products and services in 2011, 2010 and 2009:

 

     2011     2010     2009  

Revenue Category

      

Iron ore

     85     81     81

Coal

     11        13        14   

Freight and venture partners' cost reimbursements

     4        6        5   
  

 

 

   

 

 

   

 

 

 

Total revenue

     100     100     100
  

 

 

   

 

 

   

 

 

 

 

Derivative Instruments And Hedging Activities
Derivative Instruments And Hedging Activities

NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Consolidated Financial Position as of December 31, 2011 and 2010:

 

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

Derivative Instrument

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

Derivatives designated as hedging instruments under ASC 815:

               

Foreign Exchange Contracts

  Derivative assets

(current)

  $ 5.2      Derivative assets
(current)
  $ 2.8      Other current
liabilities
  $ 3.5        $ —     
   

 

 

     

 

 

     

 

 

     

 

 

 

Total derivatives designated as hedging instruments under ASC 815

    $ 5.2        $ 2.8        $ 3.5        $ —     
   

 

 

     

 

 

     

 

 

     

 

 

 

Derivatives not designated as hedging instruments under ASC 815:

               

Foreign Exchange Contracts

  Derivative assets
(current)
  $ 2.8      Derivative assets
(current)
  $ 34.2        $ —          $ —     
  Other non-
current assets
    —        Other non-
current assets
    2.0          —            —     

Customer Supply Agreements

  Derivative assets
(current)
    72.9      Derivative assets
(current)
    45.6          —            —     

Provisional Pricing Arrangements

  Derivative assets
(current)
    1.2          Other current
liabilities
    19.5          —     
  Accounts
receivable
    83.8          —            —         
   

 

 

     

 

 

     

 

 

     

 

 

 

Total derivatives not designated as hedging instruments under ASC 815

    $ 160.7        $ 81.8        $ 19.5        $ —     
   

 

 

     

 

 

     

 

 

     

 

 

 

Total derivatives

    $ 165.9        $ 84.6        $ 23.0        $ —     
   

 

 

     

 

 

     

 

 

     

 

 

 

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

Australian 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 Australian dollar sales receipts. U.S. currency is converted to Australian dollars at the currency exchange rate in effect at the time of the transaction. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and to protect against undue adverse movement in these exchange rates. Effective October 1, 2010, we elected hedge accounting for certain types of our foreign exchange contracts entered into subsequent to September 30, 2010. These instruments are subject to formal documentation, intended to achieve qualifying hedge treatment, and are tested for effectiveness at inception and at least once each reporting period. During the third quarter of 2011, we implemented a global foreign exchange hedging policy to apply to all of our operating segments and our consolidated subsidiaries that engage in foreign exchange risk mitigation. The policy allows for not more than 75 percent, but not less than 40 percent for up to 12 months and not less than 10 percent for up to 15 months, of forecasted net currency exposures that are probable to occur. For our Asia Pacific operations, the forecasted net currency exposures are in relation to anticipated operating costs designated as cash flow hedges on future sales. Prior to the implementation of this policy, our Asia Pacific operations had a policy in place that was specific to local operations and allowed 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 any of our hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.

As of December 31, 2011, we had outstanding foreign currency exchange contracts with a notional amount of $400.0 million in the form of forward contracts with varying maturity dates ranging from January 2012 to December 2012. This compares with outstanding foreign currency exchange contracts with a notional amount of $70.0 million as of December 31, 2010.

Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive income (loss) in the Statements of Consolidated Financial Position. Unrealized gains of $1.8 million were recorded as of December 31, 2011 related to these hedge contracts, based on the Australian to U.S. dollar spot rate of 1.02 as of December 31, 2011. Unrealized gains of $1.9 million were recorded as of December 31, 2010 related to the Australian dollar hedge contracts, based on the Australian to U.S. dollar spot rate of 1.02 at December 31, 2010. Any ineffectiveness is recognized immediately in income and as of December 31, 2011 and 2010, there was no ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive income (loss) are reclassified into earnings in the same period the forecasted transaction affects earnings and are recorded as Product revenues in the Statements of Consolidated Operations. For the year ended December 31, 2011, we recorded realized gains of $6.5 million. Of the amounts remaining in Accumulated other comprehensive income (loss), we estimate that net gains of $1.2 million will be reclassified into earnings within the next 12 months.

The following summarizes the effect of our derivatives designated as hedging instruments on Accumulated other comprehensive income (loss) and the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009:

 

      (In Millions)  

Derivatives in Cash Flow Hedging Relationships

   Amount of
Gain
Recognized in
OCI on
Derivative
(Effective Portion)
     Location of Gain
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
   Amount of
Gain
Reclassified from
Accumulated

OCI into Income
(Effective Portion)
 
     Year ended
December 31,
          Year ended
December 31,
 
     2011      2010      2009           2011      2010      2009  

Australian Dollar Foreign Exchange Contracts
(hedge designation)

   $ 1.8       $ 1.9       $ —         Product revenue    $ 2.6       $ —         $ —     

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

     —           —           —         Product revenue      0.7         3.2         15.1   
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 

Total

   $ 1.8       $ 1.9       $ —            $ 3.3       $ 3.2       $ 15.1   
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 

Derivatives Not Designated as Hedging Instruments

Australian Dollar Foreign Exchange Contracts

Effective July 1, 2008, we discontinued hedge accounting for foreign exchange contracts entered into for all outstanding contracts at the time and continued to hold such instruments as economic hedges to manage currency risk as described above. The notional amount of the outstanding non-designated foreign exchange contracts was $15.0 million as of December 31, 2011. The contracts are in the form of collar options with maturity dates in January 2012. This compares with outstanding non-designated foreign exchange contracts with a notional amount of $230.0 million as of December 31, 2010.

As a result of discontinuing hedge accounting, the instruments prospectively are marked to fair value each reporting period through Changes in fair value of foreign currency contracts, net in the Statements of Consolidated Operations. For the year ended December 31, 2011, the change in fair value of our foreign currency contracts resulted in net gains of $8.8 million, based on the Australian to U.S. dollar spot rate of 1.02 at December 31, 2011. This compares with net gains of $39.8 million for the year ended December 31, 2010, based on the Australian to U.S. dollar spot rate of 1.02 at December 31, 2010. For the year ended December 31, 2009, the change in fair value of our foreign currency contracts resulted in net gains of $85.7 million, based on the Australian to U.S. dollar spot rate of 0.90 at December 31, 2009. The amounts that previously were recorded as a component of Accumulated other comprehensive income (loss) are reclassified to earnings with a corresponding realized gain or loss recognized in the same period the forecasted transaction affected earnings. The amounts that previously were recorded as a component of Accumulated other comprehensive income (loss) were all reclassified to earnings during the first half of 2011, with a corresponding realized gain or loss recognized in the same period the forecasted transactions affected earnings.

Canadian Dollar Foreign Exchange Contracts and Options

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

During the first half of 2011, swaps were executed in order to extend the maturity dates of certain of the forward contracts through the consummation of the Consolidated Thompson acquisition and the repayment of the Consolidated Thompson convertible debentures. These swaps and the maturity of the forward contracts resulted in net realized gains of $93.1 million recognized through Changes in fair value of foreign currency contracts, net in the Statements of Consolidated Operations for the year ended December 31, 2011.

Customer Supply Agreements

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

Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds based on the customer's average annual steel pricing at the time the product is consumed in the customer's blast furnace. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. We recognized $178.0 million, $120.2 million and $22.2 million as Product revenues in the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009, respectively, related to the supplemental payments. Derivative assets, representing the fair value of the pricing factors, were $72.9 million and $45.6 million, respectively, on the December 31, 2011 and 2010 Statements of Consolidated Financial Position.

Provisional Pricing Arrangements

During 2010, the world's largest iron ore producers began to move away from the annual international benchmark pricing mechanism referenced in certain of our customer supply agreements, resulting in a shift in the industry toward shorter-term pricing arrangements linked to the spot market. This change has impacted certain of our U.S. Iron Ore and Eastern Canadian Iron Ore customer supply agreements for the 2011 contract year. We reached final pricing settlement with a majority of our U.S. Iron Ore customers for the 2011 contract year. However, in some cases we are still working to revise components of the pricing calculations referenced within our supply agreements to incorporate new pricing mechanisms as a result of the changes to historical benchmark pricing. As a result, we have recorded certain shipments made to our U.S. Iron Ore and Eastern Canadian Iron Ore customers in 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 actually are settled. We recognized $809.1 million as an increase in Product revenues in the Statements of Consolidated Operations for the year ended December 31, 2011 under these pricing provisions for certain shipments to our U.S. Iron Ore and Eastern Canadian Iron Ore customers. For the year ended December 31, 2011, $309.4 million of the revenues were realized due to the pricing settlements that primarily occurred with our U.S. Iron Ore customers during 2011. This compares with an increase in Product revenues of $960.7 million and a reduction to Product revenues of $28.2 million, respectively, for the years ended December 31, 2010 and 2009 related to estimated forward price settlements for shipments to our Asia Pacific Iron Ore, U.S. Iron Ore and Eastern Canadian Iron Ore customers until prices actually settled.

As of December 31, 2011, we have recorded approximately $1.2 million as current Derivative assets and $19.5 million Other current liabilities, respectively, in the Statements of Consolidated Financial Position related to our estimate of final pricing in 2011 with our U.S. Iron Ore and Eastern Canadian Iron Ore customers. This amount represents the difference between the provisional price agreed upon with our customers and our estimate of the ultimate price settlement in 2012. As of December 31, 2011, we also have derivatives of $83.8 million classified as Accounts receivable in the Statements of Consolidated Financial Position to reflect the amount we provisionally have agreed upon with certain of our U.S. Iron Ore and Eastern Canadian Iron Ore customers until a final price settlement is reached. It also represents the amount we have invoiced for shipments made to such customers and expect to collect in cash in the short term to fund operations. In 2010, the derivative instrument was settled in the fourth quarter upon the settlement of pricing provisions with some of our U.S. Iron Ore customers and therefore is not reflected in the Statements of Consolidated Financial Position at December 31, 2010.

The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009:

 

(In Millions)

 

Derivative Not Designated as Hedging
Instruments

   Location of Gain/(Loss)
Recognized in Income on
Derivative
   Amount of Gain/(Loss)
Recognized in Income on
Derivative
 
          Year ended December 31,  
          2011      2010      2009  

Foreign Exchange Contracts

   Product Revenues    $ 1.0       $ 11.1       $ 5.4   

Foreign Exchange Contracts

   Other Income (Expense)      101.9         39.8         85.7   

Customer Supply Agreements

   Product Revenues      178.0         120.2         22.2   

Provisional Pricing Arrangements

   Product Revenues      809.1         960.7         (28.2

United Taconite Purchase Provision

   Product Revenues      —           —           106.5   
     

 

 

    

 

 

    

 

 

 

Total

      $ 1,090.0       $ 1,131.8       $ 191.6   
     

 

 

    

 

 

    

 

 

 

Refer to NOTE 6 — FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information

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

 

Acquisitions And Other Investments
Acquisitions And Other Investments

NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS

Acquisitions

We allocate the cost of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. Any excess of cost over the fair value of the net assets acquired is recorded as goodwill.

Consolidated Thompson

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

The acquisition of Consolidated Thompson reflects our strategy to build scale by owning expandable and exportable steelmaking raw material assets serving international markets. Through our acquisition of Consolidated Thompson, we now own and operate an iron ore mine and processing facility near Bloom Lake in Quebec, Canada that produces iron ore concentrate of high quality. WISCO is a 25 percent partner in the Bloom Lake mine. Bloom Lake is designed to achieve an initial production rate of 8.0 million metric tons of iron ore concentrate per year. During the second quarter of 2011 and in January 2012, additional capital investments were approved in order to increase the initial production rate to 16.0 million metric tons of iron ore concentrate per year. We also own two additional development properties, Lamêlée and Peppler Lake, in Quebec. All three of these properties are in proximity to our existing Canadian operations and will allow us to leverage our port facilities and supply this iron ore to the seaborne market. The acquisition also is expected to further diversify our existing customer base.

 

The following table summarizes the consideration paid for Consolidated Thompson and the estimated fair values of the assets and liabilities assumed at the acquisition date. We are in the process of finalizing the valuation of the assets acquired and liabilities assumed related to the acquisition, most notably, mineral rights, deferred taxes, required liabilities to minority parties and goodwill, and the final allocation will be made when completed. We expect to finalize the purchase price allocation for the acquisition of Consolidated Thompson early in 2012. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.

 

     (In Millions)  
     Initial
Allocation
    Revised
Allocation
    Change  

Consideration

      

Cash

   $ 4,554.0      $ 4,554.0      $ —     
  

 

 

   

 

 

   

 

 

 

Fair value of total consideration transferred

   $ 4,554.0      $ 4,554.0      $ —     
  

 

 

   

 

 

   

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

      

ASSETS:

      

Cash

   $ 130.6      $ 130.6      $ —     

Accounts receivable

     102.8        102.4        (0.4

Product inventories

     134.2        134.2        —     

Other current assets

     35.1        35.1        —     

Mineral rights

     4,450.0        4,825.6        375.6   

Property, plant and equipment

     1,193.4        1,193.4        —     

Intangible assets

     2.1        2.1        —     
  

 

 

   

 

 

   

 

 

 

Total identifiable assets acquired

     6,048.2        6,423.4        375.2   

LIABILITIES:

      

Accounts payable

     (13.6     (13.6     —     

Accrued liabilities

     (130.0     (123.8     6.2   

Convertible debentures

     (335.7     (335.7     —     

Other current liabilities

     (41.8     (41.8     —     

Long-term deferred tax liabilities

     (831.5     (1,041.8     (210.3

Senior secured notes

     (125.0     (125.0     —     

Capital lease obligations

     (70.7     (70.7     —     

Other long-term liabilities

     (25.1     (25.1     —     
  

 

 

   

 

 

   

 

 

 

Total identifiable liabilities assumed

     (1,573.4     (1,777.5     (204.1
  

 

 

   

 

 

   

 

 

 

Total identifiable net assets acquired

     4,474.8        4,645.9        171.1   

Noncontrolling interest in Bloom Lake

     (947.6     (1,075.4     (127.8

Preliminary goodwill

     1,026.8        983.5        (43.3
  

 

 

   

 

 

   

 

 

 

Total net assets acquired

   $ 4,554.0      $ 4,554.0      $ —     
  

 

 

   

 

 

   

 

 

 

In the months subsequent to the initial purchase price allocation for Consolidated Thompson, we further refined the fair values of the assets acquired and liabilities assumed. Based on this process, the acquisition date fair value of the Consolidated Thompson mineral rights, deferred tax liability and noncontrolling interest in Bloom Lake were adjusted to $4,825.6 million, $1,041.8 million and $1,075.4 million, respectively, in the revised purchase price allocation during the fourth quarter of 2011. The change in mineral rights was caused by further refinements to the valuation model, most specifically as it related to potential tax structures that have value from a market participant standpoint and the risk premium used in determining the discount rate. The change in the deferred tax liability primarily was a result of the movement in the mineral rights value and obtaining additional detail of the acquired tax basis in the acquired assets and liabilities. Finally, the change in the noncontrolling interest in Bloom Lake was due to the change in mineral rights and a downward adjustment to the discount for lack of control being used in the valuation. These adjustments resulted in additional depletion expense of $4.9 million and a gain of $10.8 million of remeasurement on foreign deferred tax liabilities recorded as Cost of goods sold and operating expenses and Income tax expense, respectively, in the Statements of Consolidated Operations for the year ended December 31, 2011. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting adjustments to Goodwill and Noncontrolling Interest back to the date of acquisition. Accordingly, such amounts are reflected in the Statements of Consolidated Operations for the year ended December 31, 2011, but have been excluded from the three months ended December 31, 2011 in the unaudited Quarterly Results of Operations in Note 20. A complete comparison of the initial and revised purchase price allocation has been provided in the table above.

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

The $983.5 million of preliminary goodwill resulting from the acquisition has been assigned to our Eastern Canadian Iron Ore business segment through the Bloom Lake reporting unit. The preliminary goodwill recognized primarily is attributable to the proximity to our existing Canadian operations, which will allow us to leverage our port facilities and supply iron ore to the seaborne market. None of the preliminary goodwill is expected to be deductible for income tax purposes. Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.

Acquisition-related costs in the amount of $25.4 million have been charged directly to operations and are included within Consolidated Thompson acquisition costs in the Statements of Consolidated Operations for the year ended December 31, 2011. In addition, we recognized $15.7 million of deferred debt issuance costs, net of accumulated amortization of $1.9 million, associated with issuing and registering the debt required to fund the acquisition as of December 31, 2011. Of these costs, $1.7 million and $14.0 million, respectively, have been recorded in Other current assets and Other non-current assets in the Statements of Consolidated Financial Position at December 31, 2011. Upon the termination of the bridge credit facility that we entered into to provide a portion of the financing for Consolidated Thompson, $38.3 million of related debt issuance costs were recognized in Interest expense in the Statements of Consolidated Operations for the year ended December 31, 2011.

The Statements of Consolidated Operations for the year ended December 31, 2011 include incremental revenue of $571.0 million and income of $143.7 million related to the acquisition of Consolidated Thompson since the date of acquisition. Income during the period includes the impact of expensing an additional $59.8 million of costs due to stepping up the value of inventory in purchase accounting through Cost of goods sold and operating expenses for the year ended December 31, 2011.

The following unaudited consolidated pro forma information summarizes the results of operations for the years ended December 31, 2011 and 2010, as if the Consolidated Thompson acquisition and the related financing had been completed as of January 1, 2010. The pro forma information gives effect to actual operating results prior to the acquisition. The unaudited consolidated pro forma information does not purport to be indicative of the results that actually would have been obtained if the acquisition of Consolidated Thompson had occurred as of the beginning of the periods presented or that may be obtained in the future.

 

     (In Millions, Except
Per Common Share)
 
     2011      2010  

REVENUES FROM PRODUCT SALES AND SERVICES

   $ 7,002.7       $ 4,982.9   

NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS

   $ 1,612.3       $ 912.5   

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS — BASIC

   $ 11.50       $ 6.74   

EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS — DILUTED

   $ 11.43       $ 6.70   

 

The 2011 pro forma Net Income Attributable to Cliffs Shareholders was adjusted to exclude $69.6 million of Cliffs and Consolidated Thompson acquisition-related costs and $59.8 million of non-recurring inventory purchase accounting adjustments incurred during the year ended December 31, 2011. The 2010 pro forma Net Income Attributable to Cliffs Shareholders was adjusted to include the $59.8 million of non-recurring inventory purchase accounting adjustments.

Wabush

On February 1, 2010, we acquired entities from our former partners that held their respective interests in Wabush, 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 $103.0 million, which consisted of a cash purchase price of $88.0 million and a working capital adjustment of $15.0 million. With Wabush's 5.5 million tons of production capacity, acquisition of the remaining interest has increased our Eastern Canadian Iron Ore equity production capacity by approximately 4.0 million tons and has added more than 50 million tons of additional reserves. Furthermore, acquisition of the remaining interest has provided us additional access to the seaborne iron ore markets serving steelmakers in Europe and Asia.

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

In the months subsequent to the initial purchase price allocation, we further refined the fair values of the assets acquired and liabilities assumed. Additionally, we also continued to ensure our existing interest in Wabush was incorporating all of the book basis, including amounts recorded in Accumulated other comprehensive income (loss). Based on this process, the acquisition date fair value of the previous equity interest was adjusted to $38.0 million. The changes required to finalize the U.S. and Canadian deferred tax valuations and to incorporate additional information on assumed asset retirement obligations offset to a net decrease of $1.7 million in the fair value of the equity interest from the initial purchase price allocation. Thus, the gain resulting from the remeasurement of our prior equity interest, net of amounts previously recorded in Accumulated other comprehensive income (loss) of $20.3 million, was adjusted to $25.1 million for the period ended December 31, 2010.

 

Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we retrospectively have recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill and Gain on acquisition of controlling interests, made during the second half of 2010, back to the date of acquisition. Accordingly, such amounts are reflected in the Statements of Consolidated Operations for the year ended December 31, 2010, and have been excluded from the three months ended September 30, 2010 and December 31, 2010, respectively, in the unaudited Quarterly Results of Operations in Note 20. 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 primarily were due to the allocation of deferred taxes between the existing equity interest in Wabush and the acquired portion, and additional asset retirement obligations noted related to the Wabush operations.

Of the $66.4 million of acquired intangible assets, $54.7 million was assigned to the value of a utility contract that provides favorable rates compared with prevailing market rates and is being 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 is being amortized over a 30-year period.

The $3.1 million of goodwill resulting from the acquisition was assigned to our Eastern Canadian Iron Ore business segment. The goodwill recognized primarily is 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 5 — 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 remaining interest in Freewest was approximately $185.9 million, comprised of the issuance of 0.0201 of our common shares for each Freewest share, representing a total of 4.2 million common shares or $173.1 million, and $12.8 million in cash. The acquisition date fair value of the consideration transferred was determined based upon the closing market price of our common shares on the acquisition date.

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

 

The following table summarizes the consideration paid for Freewest and the fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation in the fourth quarter of 2010. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we retrospectively have 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 primarily were 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 operating segment. The goodwill recognized primarily is attributable to obtaining a controlling interest in Freewest. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.

Spider

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

Prior to the July 6, 2010 acquisition date, we accounted for our four percent interest in Spider as an available-for-sale equity security. The acquisition date fair value of the previous equity interest was $4.9 million, which was determined based upon the closing market price of the 27.4 million previously owned shares on the acquisition date. The acquisition date fair value of the 48 percent noncontrolling interest in Spider was estimated to be $51.9 million, which was determined based upon the closing market price of the 290.5 million shares of noncontrolling interest on the acquisition date.

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

 

     (In Millions)  
     Initial
Allocation
    Final
Allocation
    Change  

Consideration

      

Cash

   $ 56.9      $ 56.9      $ —     
  

 

 

   

 

 

   

 

 

 

Fair value of total consideration transferred

     56.9        56.9        —     

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

     4.9        4.9        —     
  

 

 

   

 

 

   

 

 

 
   $ 61.8      $ 61.8      $ —     
  

 

 

   

 

 

   

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

      

ASSETS:

      

Cash

   $ 9.0      $ 9.0      $ —     

Other current assets

     4.5        4.5        —     

Mineral rights

     31.0        35.3        4.3   
  

 

 

   

 

 

   

 

 

 

Total identifiable assets acquired

     44.5        48.8