Cleveland-Cliffs Inc (NYSE:CLF) Q2 2019 Earnings Conference Call - Final Transcript

Jul 19, 2019 • 09:00 am ET


Cleveland-Cliffs Inc (NYSE:CLF) Q2 2019 Earnings Conference Call - Final Transcript


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Keith A. Koci

in the seaborne market, were enough reasons for us to allow and maintain our forecast. Lourenco will discuss that in more detail later in this call.

The remainder of our expected 2019 shipping volumes will be more back-loaded to the fourth quarter when the mills usually stock up before the annual winter freeze. During the second quarter, we had a six-year high on pellet price realization with an average net back selling price of $113 per long ton. That was driven by the rapid increase of iron ore prices we have seen this year, which was good enough to more than offset the negative effect of falling domestic hot-rolled coil prices throughout the quarter, with HRC index pricing reaching a low of $510 per short ton. During the second quarter, we had to make a sizable negative true up adjustment to revalue pellets sold in prior periods.

Conversely, because our sales contracts utilize full year averages as indices and some contracts have quarter lag provisions, we have not fully benefited from the latest levels of iron ore pricing and our price realizations just yet. As iron ore prices continue to average up and assuming the recent recovery in steel prices continues on its current upward trajectory, we would no longer be subject to negative true ups and can expect even higher selling prices for our pellets in the future.

Our cash costs for the quarter was $67 per long ton, consistent with the guidance we gave last quarter where we expected to be at the high end of our outlook range due primarily to higher royalties and higher profit sharing. As a whole, all other major cost components, including labor, energy, stripping, recoveries and materials have remained consistent with our original forecast. We expect cash costs to remain steady at the Q2 level during the back half of the year. Another positive item for the second quarter was that due to the completion of our Northshore plant upgrade ahead of schedule, we were able to record a small volume of intercompany DR-grade pellets to our Metallics segment. Because of the early completion of the NorthShore project, and coupled with the anticipated ahead of schedule startup of the Toledo plant, we now plan on transferring more pellets to our facility this year than previously budgeted. We are increasing our DR-grade pellet intercompany sale expectation from 500,000 long tons to 800,000 long tons, all of which to take place in the third quarter. Because these pellets are for intercompany use. Unlike our third party commercial arrangements, these sales are recognized immediately after they are produced instead of when delivered, explaining why all 800,000 long tons will be recognized the sales in the third quarter.

Accounting wise, you can begin to see how the intercompany DR-grade sales are being treated in our financials. The margin we will generate by selling DR-grade pellets to ourselves should be roughly comparable to the industry-high average margin of the rest of our merchant pellets. We record the