UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
from to |
Commission File Number: 1-8944
Cleveland-Cliffs Inc
(Exact name of registrant as specified in its charter)
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Ohio
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34-1464672 |
(State or other jurisdiction of
incorporation) |
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(I.R.S. Employer
Identification No.) |
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1100 Superior Avenue,
Cleveland, Ohio
(Address of principal executive offices) |
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44114-2589
(Zip Code) |
Registrants telephone number, including area code:
(216) 694-5700
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Shares, par value $.50 per share
Rights to Purchase Common Shares |
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New York Stock Exchange and Chicago Stock Exchange
New York Stock Exchange and Chicago Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of the Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
As of June 30, 2004, the aggregate market value of the
voting and non-voting stock held by non-affiliates of the
registrant, based on the closing price of $28.20 per share
(adjusted for the stock split of the registrants Common
Shares effective as of December 31, 2004) as reported on
the New York Stock Exchange Composite Index was
$577,616,980 (excluded from this figure is the voting stock
beneficially owned by the registrants officers and
directors).
The number of shares outstanding of the registrants Common
Shares, par value $.50 per share, was 21,641,999 as of
February 16, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrants Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on May 10,
2005 are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
Introduction
Founded in 1847, we are the largest producer of iron ore pellets
in North America and sell the majority of our pellets to
integrated steel companies in the United States and Canada. Our
headquarters are located at 1100 Superior Avenue, Cleveland,
Ohio 44114-2589, and our telephone number is
(216) 694-5700. Our website address is
www.cleveland-cliffs.com. We make available, free of charge
through our website, our annual report on Form 10-K,
quarterly reports on Form 10-Q and current reports on
Form 8-K, as well as amendments to those reports, as soon
as reasonably practicable after we file such reports with, or
furnish such reports to, the Securities and Exchange Commission
(the SEC). As used in this report,
Cleveland-Cliffs, we and our
refer to Cleveland-Cliffs Inc and its subsidiaries, except where
the context otherwise requires.
We manage and operate six iron ore mines located in Michigan,
Minnesota and Eastern Canada that currently have a rated
capacity of 37.7 million tons of iron ore pellet production
annually, representing approximately 46.1 percent of the
current total North American pellet production capacity. Based
on our percentage ownership of the mines we operate, our share
of the rated pellet production capacity is currently
23.1 million tons annually, representing approximately
28 percent of total North American annual pellet capacity.
The following chart summarizes the estimated annual production
capacity and percentage of total North American pellet
production capacity for each of the North American iron ore
pellet producers as of December 31, 2004:
North American Iron Ore Pellet
Annual Rated Capacity Tonnage
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Current Estimated Capacity | |
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(Gross tons of raw ore | |
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Percent of Total | |
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in thousands) | |
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North American Capacity | |
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All Cliffs Managed Mines
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37,700 |
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46.1 |
% |
Other U.S. Mines
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U.S. Steels Minnesota Ore Operations
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Minnesota Taconite
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14,600 |
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17.8 |
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Keewatin Taconite
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5,400 |
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6.6 |
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Total U.S. Steel
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20,000 |
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24.4 |
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Minorca Iron Ore Mine
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2,900 |
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3.6 |
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Total Other U.S. Mines
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22,900 |
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28.0 |
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Other Canadian Mines
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Iron Ore Company of Canada
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12,300 |
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15.0 |
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Quebec Cartier Mining Co.
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8,900 |
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10.9 |
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Total Other Canadian Mines
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21,200 |
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25.9 |
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Total North American Mines
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81,800 |
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100.0 |
% |
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We sell our share of iron ore production to integrated steel
producers, generally pursuant to term supply agreements with
various price adjustment provisions.
We manufacture 13 grades of iron ore pellets, including
standard, fluxed and high manganese, for use in our
customers blast furnaces as part of the steel making
process. The variation in grades results from the specific
chemical and metallurgical properties of the ores at each mine.
Although the grade or grades of pellets
1
currently delivered to each customer is based on that
customers preferences, which depend in part on the
characteristics of the customers blast furnace, in general
our iron ore pellets can be used interchangeably. Industry
demand for the various grades of iron ore pellets depends on
each customers demand and changes from time to time. In
the event that a given mine is operating at full capacity, the
terms of most of our pellet supply agreements allow some
flexibility to provide our customers iron ore pellets from
different mines.
Standard pellets generally require less processing, are normally
the least costly pellets to produce and are called
standard because no ground fluxstone (i.e.,
limestone, dolomite, etc.) is added to the iron ore concentrate
before turning the concentrates into pellets. In the case of
fluxed pellets, a fluxstone is added to the concentrate, which
produces a pellet that will perform at higher productivity
levels in the customers specific blast furnace and will
minimize the amount of fluxstone the customer may be required to
add to the blast furnace. High manganese pellets are
the pellets produced by Wabush Mines, where there is more
natural manganese in the crude ore compound than is found at our
other operations. The manganese contained in the iron ore mined
at Wabush cannot be entirely removed during the concentrating
process. Wabush Mines produces pellets with two levels of
manganese, with the lower manganese content being preferred by
our customers.
It is not possible to produce the pellets with identical
physical and chemical properties from each of our mining and
processing operations. The grade or grades of pellets purchased
by and delivered to each customer are based on that
customers preference.
For the year ended December 31, 2004, we produced a total
of 34.4 million tons of iron ore, including
21.7 million tons for our account and 12.7 million
tons on behalf of the steel company owners in the mines.
Strategy
The North American integrated steel industry has undergone and
continues to undergo a restructuring process. This process is,
in our view, producing a stronger, more productive industry
principally through consolidation and some rationalization of
less efficient capacity. The iron ore industry also has been
restructuring to meet the changing needs of its customers. It
has been our strategy to lead this consolidation process and to
continue to improve the competitiveness of our operations.
We have repositioned ourselves from a manager of iron ore mines
on behalf of steel company owners to primarily a merchant of
iron ore to steel company customers. For example, in December
2003, together with Laiwu Steel Group, Ltd. (Laiwu)
of China, we (through our newly formed joint venture, United
Taconite LLC (United Taconite)) purchased the assets
of Eveleth Mines LLC (Eveleth Mines) out of
bankruptcy, which had previously been owned by AK Steel
Corporation, Rouge Industries and Stelco Inc.
(Stelco). In 2004, we initiated expansion projects
at United Taconite and Northshore mines to expand annual
capacity by approximately 1.0 million and .8 million
tons, respectively. We continue to seek additional investment
opportunities in iron ore mines.
In addition to our own restructuring efforts, in 2003,
U.S. Steel Corporation (U.S. Steel)
acquired all of the assets of National Steel Pellet Company,
which was renamed Keewatin Taconite. Furthermore, since the
closure in 1998 of the Algoma Iron Ore Division near Wawa,
Ontario, nearly all of Canadas iron ore production has
been at three mining operations: Iron Ore Company of Canada,
Quebec Cartier Mining Co. and our Wabush Mines.
During the steel industry restructuring dating back to the early
1980s, there have been intermittent periods of excess production
capacity of iron ore and shrinking demand for iron ore from the
North American steel industry. During those periods, many steel
companies sought to limit their fixed capital commitments by
reducing their direct interests in iron ore mines or entering
into stand-alone long-term supply agreements for their iron ore
needs. The steel companies that filed for bankruptcy protection
were permitted to reject their ownership interests in their
mines and to negotiate long-term supply agreements with iron ore
producers to satisfy their iron ore requirements. As the North
American iron ore industry restructured and consolidated to meet
the raw material requirements of the consolidating steel
industry, we led this restructuring by focusing on our strategic
goal to be the pre-eminent supplier of iron ore to our
customers. As discussed in Customers,
2
we have worked with our steel company partners to increase our
ownership percentage in our mines in exchange for long-term
supply agreements.
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Our strategic objectives are to: |
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Expand Our Leadership Position in the North American Iron Ore
Market |
We have substantially restructured the ownership interest in our
mines largely by converting mine partners into customers with
term supply agreements. Under our new operating strategy,
royalty and management fee income has been replaced by profit
margin on pellet sales. It is our goal to continue to expand our
leadership position in the industry by focusing on high product
quality, technical excellence, superior relationships with our
customers and partners and improved operational efficiency
through year-over-year cost reduction. By developing creative
solutions for our customers during the recent industry
restructuring, we have been able to generate term supply
agreements with many of these companies, which have benefited
and are expected to continue to benefit our market position. Our
creative solutions include our acquisition of our partners
interests in the mines and the assumption of certain mine
liabilities, thereby allowing our partners to become our
customers by entering into term supply agreements with us.
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Increase Our Ownership of Mines in Which We Hold
Joint-Venture Interests |
In recent years, we have increased our ownership interest in a
number of mines. We believe that increasing our ownership
interests in several of our mines will improve our ability to
manage these mines to achieve sustainable, long-term efficient
production. With a larger ownership position in a given mine, we
are able to make operating and capital decisions faster and more
efficiently, and we aspire to leverage this ability throughout
the mines in which we have invested. As we increase our
ownership in our managed mines, we can more readily share best
practices through cross-mine teams, allowing us to increase
operating efficiencies and decrease costs. With total or
majority ownership of our mines, we can take advantage of
synergies among operations by sharing staff and functions
between operations. To this end, we have consolidated our Empire
and Tilden operations and management in Michigan.
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Seek Additional Iron Ore Mine Investment Opportunities |
We intend to continue to pursue investment and management
opportunities to broaden our scope as a supplier of iron ore
pellets to the integrated steel industry through the acquisition
of additional mining interests to strengthen our market
position. We are particularly focused on expanding our
international investments to leverage our expertise in mining
and processing iron ore so that we may capitalize on global
demand for steel and iron ore in areas such as China.
Much of the current increase in global demand for steel is due
to industrialization in countries such as China. China is
seeking foreign supplies of the raw materials it needs to
produce steel to build infrastructure, factories, hotels and
other buildings and to manufacture motor vehicles and
appliances. Chinas increased demand for those materials,
including iron ore pellets, has caused raw material prices
around the globe to increase. Currently, China is the
worlds largest steel producer, with approximately
30 percent of global steel production, and Chinas
steel production is expected to grow in 2005. Between 2000 and
2004, China increased its imports of iron ore by approximately
37 percent, according to industry reports. It has been
reported that China has overtaken the United States as the
largest consumer of iron ore, steel and copper, and currently
accounts for between one-fifth and one-third of the worlds
consumption of iron ore. We intend to capitalize on Chinas
industrial growth by acquiring well-located iron ore properties
and obtaining agreements to supply China with iron ore on terms
favorable to the Company.
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Strive to Continuously Improve Iron Ore Pellet Quality and
Develop Alternative Metallic Products |
We believe we have one of the best industrial research and
development groups in the iron ore industry. With the overall
goal of achieving cost reductions and quality improvements
through pioneering process development at the mines that we
manage, we operate a fully-equipped research and development
facility located in Ishpeming, Michigan. Our research and
development group is staffed with experienced engineers
3
and scientists and is organized to support the geological
interpretation, process mineralogy, mine engineering, mineral
processing, pyrometallurgy, advanced process control and
analytical service disciplines. Our research and development
group is also routinely employed by iron ore pellet customers
for laboratory testing and simulation of blast furnace
conditions.
Currently, almost all North American iron ore pellets are
consumed in blast furnaces, which is only the first step in the
steelmaking process. The blast furnaces produce iron in molten
form, which is further processed in basic oxygen furnaces where
carbon is removed and steel scrap and other alloys are added to
produce molten steel. The molten steel is then cast into steel
shapes.
As part of our efforts to develop alternative metallic products,
we participated in Phase II of the Mesabi Nugget Project to
construct a $16 million pilot plant, which was completed in
May 2003, at our Northshore mine to test and develop Kobe Steel,
Ltd.s (Kobe Steel) technology for converting
iron ore into nearly pure iron in nugget form. Other
participants in the project include Kobe Steel, Steel Dynamics,
Inc., Ferrometrics, Inc. and the State of Minnesota. The
high-iron-content material could be used to replace steel scrap
as a raw material for electric steel furnaces and blast furnaces
or basic oxygen furnaces of integrated steel producers or as
feed stock for the foundry industry.
A technology currently licensed to us, in partnership with
others, may make it possible to commercially produce a product
in granular form comparable to the molten iron product produced
by blast furnaces. The granular product, which we call iron
nuggets, can be handled and transported easily and is suitable
for delivering directly into a steelmaking furnace as a
substitute for molten iron or scrap. Iron nuggets have fewer
impurities than scrap metal. Most likely, the type of furnace
that would use this material would be the electric arc furnace
(EAF), which is the type of furnace used by the
mini-mill steel segment. EAFs now comprise approximately
50 percent of all steelmaking capacity in North America.
A third operating phase of the pilot plant test in 2004
confirmed the commercial viability of this technology. The pilot
plant ended operations August 3, 2004. The product has been
used by four electric furnace producers and one foundry with
favorable results. Our contribution to the project through the
pilot plant testing and development phase was $5.3 million,
primarily contributions of in-kind facilities and services.
Preliminary construction engineering and environmental
permitting activities have been initiated for two potential
commercial plant locations (one in Butler, Indiana near Steel
Dynamics steelmaking facilities and one at our Cliffs Erie
site in Hoyt Lakes, Minnesota) with earliest environmental
approval expected in the first half of 2005. A decision to
proceed on construction of a commercial plant could be made in
the first half of 2005. We would be the supplier of iron ore and
have a minority interest in the first commercial plant.
Our Investment in ISG
In 2002, we invested $17.4 million in common stock of
International Steel Group, Inc. (ISG), which at the
time represented approximately seven percent of ISGs
equity. In December 2003, after ISG completed an initial public
offering for its common stock, the value of our investment
increased to $196.7 million based on the December 31,
2003 closing price. The investment, which had trading
restrictions through June 8, 2004, was treated as an
available-for-sale security, and accordingly in 2003
the $179.3 million ($144.9 million after-tax) increase
in value was recorded in Other comprehensive income.
Prior to the public offering, the investment was accounted for
by the cost method. In the second half of 2004, we
sold our directly-held ISG common stock and recorded a gain of
$152.7 million ($99.3 million after-tax).
Customers
More than 95 percent of our product revenues are derived
from sales of iron ore to the North American integrated steel
industry, consisting of 14 current or potential customers.
Generally, we have multi-year supply agreements with our
customers. Sales volume under these agreements is largely
dependent on customer requirements, and in a number of cases, we
are the sole supplier of iron ore pellets to the customer. Each
agreement has a base price that is adjusted over the life of the
agreement using one or more adjustment factors. Factors that can
adjust price include measures of general industrial inflation,
steel prices and international pellet prices.
4
During 2004 and 2003, we sold 22.6 million tons and
19.2 million tons of iron ore, respectively, from our share
of the production of our iron ore mines and purchases from
others. Sales in 2004 were to eight North American, one European
and two Chinese steel producers.
The following seven customers together accounted for a total of
94 percent of Product sales and services
revenues for the years 2004 and 2003:
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Percent of | |
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Sales | |
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Revenues* | |
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Customer |
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2004 | |
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2003 | |
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ISG
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44 |
% |
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29 |
% |
Algoma Steel Inc. (Algoma)
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14 |
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17 |
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Severstal North America, Inc. (Severstal)
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13 |
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16 |
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Ispat Inland Inc. (Ispat Inland)
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10 |
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8 |
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WCI Steel Inc. (WCI)
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6 |
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7 |
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Stelco Inc.
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5 |
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1 |
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Weirton Steel Corporation (Weirton)
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2 |
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16 |
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Total
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94 |
% |
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94 |
% |
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* |
Excluding freight and minority interest cost reimbursements. |
Our term supply agreements expire between 2007 and 2018. The
weighted average duration is nine years:
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We currently have a term supply agreement with Ispat Inland
under which we are its sole outside supplier of iron ore pellets
through 2014. |
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We have a 15-year supply agreement under which we are ISGs
sole supplier of iron ore pellets through 2016 for its Cleveland
and Indiana Harbor Works. In December 2004, ISG and the Company
amended the agreement. ISG is the combination of the assets of
steel companies acquired out of bankruptcy: LTV Steel
Corporation (LTV Steel), Bethlehem Steel Corporation
(Bethlehem Steel), Acme Steel Corporation
(Acme Steel), Weirton and Georgetown Steel Company. |
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On May 19, 2003, Weirton filed for protection under
chapter 11 of the U.S. Bankruptcy Code and on
May 18, 2004, ISG acquired substantially all of the assets,
including the power-related leased assets (discussed below), of
Weirton. As part of the acquisition, ISG assumed our pellet
sales contract with Weirton with some modifications. The
contract term is for 15 years and we supply the majority of
pellets required for the ISG-Weirton facility in 2004 and 2005
and all of ISG-Weirtons pellet requirements thereafter
through 2018. |
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We are a 40.5 percent participant in a joint venture that
acquired certain power-related assets from FW Holdings, Inc.
(FW Holdings), a subsidiary of Weirton, in 2001, in
a purchase-leaseback arrangement. On February 26, 2004, FW
Holdings filed a petition for chapter 11 bankruptcy
protection. In connection with its bankruptcy filing, FW
Holdings filed an adversary complaint against the joint venture
members for declaratory relief and the return of assets acquired
in the purchase-leaseback transaction. In that complaint, FW
Holdings asserted that the lease transaction should be
recharacterized as a secured loan. As a result, FW Holdings did
not make its quarterly lease payment due on March 31, 2004,
of which our share was $.5 million. In conjunction with
ISGs purchase of the Weirton assets, a settlement
agreement was reached between Weirton, ISG and the joint
venture. As a result of the settlement agreement, we wrote down
our investment to $6.1 million as of March 31, 2004 |
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from $10.3 million. An additional $1.6 million charge
was included in the Provision for customer bankruptcy
exposures in the first quarter 2004; we had previously
recorded a $2.6 million reserve for Weirton bankruptcy
exposures in May 2003. The sale of Weirtons assets to ISG
resulted in a $10 million payment to the joint venture on
closing (our share $4.0 million), which was made on
May 18, 2004, and annual payments of $.5 million (our
share $.2 million) including interest at the rate of five
percent over the next 15 years. The joint venture members
also received a release from Weirton and FW Holdings of
bankruptcy claims, such as preference actions, upon the closing
of the sale to ISG. |
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On October 25, 2004, the acquisition of LNM Holdings N.V.
and ISG by Ispat International, N.V., the parent of Ispat
Inland, was announced. On December 17, 2004, Ispat
International, N.V. completed its acquisition of LNM Holdings
N.V. to form Mittal Steel Company N.V.
(Mittal). The merger with ISG, subject to
shareholder approvals, is expected to be completed by the end of
the first quarter of 2005, resulting in the worlds largest
steel company. ISG is currently our largest customer with total
pellet sales in 2004 of 8.9 million tons. In December 2004,
ISG and the Company amended their sales agreement, which runs
through 2016, to increase the base price and moderate the
supplemental steel price sharing provisions. Additionally, ISG
is a 62.3 percent equity participant in Hibbing Taconite
Company Joint Venture (Hibbing). Our
pellet sales to Ispat Inland in 2004 totaled 2.6 million
tons. Ispat Inland is a 21 percent equity partner in Empire
Iron Mining Partnership (Empire). Our sales to ISG
and Ispat Inland are under agreements that are not scheduled to
expire for at least ten years. For 2004, the combined sales to
ISG and Ispat Inland accounted for 51 percent of our sales
volume and, including their equity share of Empire and Hibbing
production, accounted for 52 percent of our managed
production. We do not expect the merger to affect our
relationships with ISG and Ispat Inland for the foreseeable
future. |
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We have a 15-year term supply agreement under which we are
Algomas sole supplier of iron ore pellets through 2016. |
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We have a term supply agreement with Severstal under which we
are the sole supplier of iron ore pellets to Severstal through
2012. On January 30, 2004 Severstal acquired substantially
all of the assets of Rouge Industries, Inc., and assumed our
term supply agreement with minor modifications. Severstal is the
U.S. affiliate of OAO Severstal, Russias second
largest steel producer. |
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On September 16, 2003, WCI petitioned for protection under
chapter 11 of the U.S. Bankruptcy Code. At the time of
the filing, we had a trade receivable exposure of
$4.9 million, which was reserved in the third quarter 2003.
On October 14, 2004, we and the current owners of WCI
reached tentative agreement that we would supply
1.4 million tons of iron ore pellets in 2005 and, in 2006
and thereafter, would supply 100 percent of WCIs
annual requirements up to a maximum of two million tons of iron
ore pellets. The new agreement, which is for a 10-year term
beginning in 2005 and provides for the recovery of our
$4.9 million pre-petition receivable plus $.9 million
of pricing adjustment over time was approved by the Bankruptcy
Court on November 16, 2004. The agreement provides the
Company with a right to terminate the agreement after 2005 if a
plan of reorganization is not confirmed before June 30,
2005 and consummated by July 31, 2005; in that event, the
$5.8 million receivable would be due at the end of 2005. |
Our sales are influenced by seasonal factors in the first
quarter of the year as shipments and sales are restricted by
weather conditions on the Great Lakes. During the first quarter,
we continue to produce our products, but we cannot ship those
products via lake freighter until the Great Lakes are passable,
which causes our first quarter inventory levels to rise. Our
practice of delivering product to ports on the lower Great Lakes
6
and/or to customers facilities prior to the transfer of
title has somewhat mitigated the seasonal effect on first
quarter inventories and sales.
In 2004, 80 percent of our product revenues
(79 percent in 2003) were derived from sales to our
U.S. customers.
Information regarding Operations, Competition, Environment,
Energy, Research and Development and Employees is presented
under the captions Operations,
Competition, Environment,
Energy, Research and Development and
Employees, respectively, all of which are included
in Item 2 and are incorporated by reference and made a part
hereof.
The following map shows the locations of our mines:
We directly or indirectly own and operate interests in the
following six North American iron ore mines:
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Ownership Interest as of | |
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December 31, | |
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Location and Name |
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2004 | |
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2003 | |
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2002 | |
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Michigan (Marquette Range)
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Empire Iron Mining Partnership
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79.0 |
% |
|
|
79.0 |
% |
|
|
79.0 |
% |
|
Tilden Mining Company L.C. (Tilden)
|
|
|
85.0 |
|
|
|
85.0 |
|
|
|
85.0 |
|
Minnesota (Mesabi Range)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hibbing Taconite Company Joint Venture
|
|
|
23.0 |
|
|
|
23.0 |
|
|
|
23.0 |
|
|
Northshore Mining Company
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
United Taconite
|
|
|
70.0 |
|
|
|
70.0 |
|
|
|
|
|
Canada (Newfoundland and Quebec)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wabush Mines Joint Venture
|
|
|
26.8 |
|
|
|
26.8 |
|
|
|
26.8 |
|
We increased our ownership in these mines (other than Northshore
and United Taconite) in 2002 through assumption of the
liabilities associated with the mine interests from their steel
company owners.
Empire Mine. The Empire Mine is located on the Marquette
Iron Range in Michigans Upper Peninsula approximately
15 miles west-southwest of Marquette, Michigan and is
accessed via a paved road off State Highway 35. The mine has
been in operation since 1963. We entered into an agreement with
Ispat Inland effective December 31, 2002 that restructured
the ownership of the Empire Mine. Under the agreement, we
acquired the 25 percent interest rejected by LTV
Corporation in its chapter 11 bankruptcy proceedings and a
19 percent interest from Ispat Inland. Currently, we manage
the mine and have a 79 percent interest; Ispat Inland has a
21 percent interest in the mine and has the right to
require us to purchase all of its interest under certain
circumstances after 2007. We and Ispat Inland take our
respective share of production
7
pro rata; however, provisions in the partnership agreement allow
additional or reduced production to be delivered under certain
circumstances. We own directly approximately one-half of the
remaining ore reserves at the Empire Mine and lease them to
Empire. The Empire Mine leases the balance of its reserves from
the other owners of such reserves. Over the past eight years,
the Empire Mine has produced between 3.6 million tons and
8.4 million tons of iron ore pellets annually.
Tilden Mine. The Tilden mine is located on the Marquette
Iron Range in Michigans Upper Peninsula approximately five
miles south of Ishpeming, Michigan. The main entrance to the
Tilden mine is accessed by means of a paved road off of County
Road 476. The Tilden mine has been in operation since 1974. On
January 31, 2002, we increased our ownership of the Tilden
mine to 85 percent by acquiring Algomas
45 percent interest in the mine and executing a term supply
agreement under which we are Algomas sole supplier of iron
ore pellets for 15 years. Currently, we manage the mine and
have a 85 percent interest, and Stelco has a
15 percent interest in the mine. Each partner takes its
share of production pro rata; however, provisions in the
partnership agreement allow additional or reduced production to
be delivered under certain circumstances. We own all of the ore
reserves at the Tilden mine and lease them to Tilden. Over the
past eight years, the Tilden mine has produced between
6.0 million tons and 7.9 million tons of iron ore
pellets annually.
On January 29, 2004, Stelco applied for and obtained
Bankruptcy Court protection from creditors in Ontario Superior
Court under the Companies Creditors Arrangement Act. At
the time of the filing, we had no trade receivable exposure to
Stelco. Additionally, Stelco has continued to operate and has
met its cash call requirements at the Tilden, Hibbing and Wabush
mining ventures to date. The Bankruptcy Court has extended the
deadline for the submittal of bids to purchase Stelco until
February 14, 2005. Stelco has received an extension of the
stay period from February 11, 2005 to April 29, 2005.
The Empire and Tilden mines are located adjacent to each other.
Our recent increase in ownership of our Michigan mines has
facilitated consolidation of operations and management, which
will offer operational and cost benefits that were not
achievable under the previous ownership structure. These
benefits include a consolidated transportation system, more
efficient employee and equipment operating schedules, reduction
in redundant facilities and workforce and best practices sharing.
Hibbing Mine. The Hibbing mine is located in the center
of Minnesotas Mesabi Iron Range and is approximately ten
miles north of Hibbing, Minnesota and five miles west of
Chisholm, Minnesota. The main entrance to the Hibbing mine is
accessed by means of a paved road and is located off County Road
5. The Hibbing mine has been in operation since 1976. In 2002,
we acquired from Bethlehem Steel an eight percent interest in
the Hibbing mine, which increased our ownership to
23 percent. Currently, we manage the mine and have a
23 percent interest. ISG has a 62.3 percent interest
and Stelco has a 14.7 percent interest in the mine. Each
partner takes its share of production pro rata; however,
provisions in the joint venture agreement allow additional or
reduced production to be delivered under certain circumstances.
Over the past eight years, the Hibbing mine has produced between
6.1 million tons and 8.3 million tons of iron ore
pellets annually.
Northshore Mine. The Northshore mine is located in
northeastern Minnesota, approximately two miles south of
Babbitt, Minnesota on the northeastern end of the Mesabi iron
formation. Northshores processing facilities are located
in Silver Bay, Minnesota, near Lake Superior, on
U.S. Highway 61. The main entrance to the Northshore mine
is accessed by means of a gravel road and is located off County
Road 20. The Northshore mine has been in continuous operation
since 1990. The Northshore mine began production under our
management and ownership on October 1, 1994. Currently, we
own 100 percent of the mine. Over the past eight years, the
Northshore mine has produced between 2.8 million tons and
5.0 million tons of iron ore pellets annually.
The Northshore mine has a long history. It was first discovered
in 1871 and operated in the 1920s as the Mesabi Iron
Company, one of the first commercial attempts at mining
taconite. The property was operated for over 30 years by
Reserve Mining Co. (Reserve), one of the two
pioneering large scale pellet operations in Minnesota. Poor
economic conditions in the steel industry forced the shutdown
and bankruptcy of Reserve in 1986. The Reserve assets were
purchased by Cyprus Minerals in 1989, and the property restarted
operation in 1990. We purchased the property from Cyprus
Minerals in 1994.
8
United Taconite. The United Taconite mine is located on
Minnesotas Mesabi Iron Range in and around the city of
Eveleth, Minnesota, west of U.S. Highway 53. The main
entrance to the United Taconite mine is accessed by means of a
paved road and is located off Route 37. The mine has been
operating since 1965. On November 26, 2003, the
U.S. Bankruptcy Court for the District of Minnesota
approved the purchase of the assets of Eveleth Mines by United
Taconite. Eveleth Mines ceased mining operations earlier in 2003
and was acquired by United Taconite effective as of
December 1, 2003. Currently, we manage the mine and hold a
70 percent interest; Laiwu holds a 30 percent
interest. Over the past six years, the United Taconite mine has
produced between 1.6 million tons and 4.4 million tons
of iron ore pellets annually.
Wabush Mines. The Wabush mine and concentrator is located
in Wabush, Labrador, Canada, and the pellet plant is located in
Pointe Noire, Quebec, Canada. The main entrance to the Wabush
mine is accessed by means of a paved road and is located on
Highway 530, about three miles west of the town of Wabush. The
pellet plant is accessed by a paved road off Highway 138, about
ten miles west of the town of Sept-Iles, Quebec. The Wabush mine
has been in operation since 1965. In 1997, we acquired Ispat
Inlands interest in the Wabush mine. In August 2002, we
acquired our proportionate share (approximately
4.05 percent) of the 15.09 percent interest rejected
by Acme Metals Incorporated in its bankruptcy proceedings. As a
result of these two events, we increased our ownership in the
mine from 7.7 percent to 26.8 percent. We also manage
the mine. Stelco has a 44.6 percent interest and Dofasco
Inc. (Dofasco) has a 28.6 percent interest in
the mine.
Railroads, one of which is wholly owned by us, link the Empire
and Tilden mines with Lake Michigan at the loading port of
Escanaba, Michigan and with the Lake Superior loading port of
Marquette, Michigan. From the Mesabi Range, Hibbing pellets are
transported by rail to a shiploading port at Superior,
Wisconsin. United Taconite pellets are shipped by railroad to
the port of Duluth, Minnesota. At Northshore, crude ore is
shipped by a wholly-owned railroad from the mine to processing
facilities at Silver Bay, Minnesota. In Canada, there is an open
pit mine and concentrator at Wabush, Labrador, Newfoundland and
a pellet plant and dock facility at Pointe Noire, Quebec. At the
Wabush mine, concentrates are shipped by rail from the Scully
mine at Wabush to Pointe Noire where they are pelletized for
shipment via vessel to Canada, the United States and other
international destinations or shipped as concentrates for sinter
feed to Europe.
We have a corporate policy relating to internal control and
procedures with respect to auditing and estimating ore reserves.
The procedures include the calculation of ore reserves at each
mine by mining engineers and geologists under the direction of
our Chief Mining Engineer. Our Chief Geologist and Manager of
Mine Technology then compile and review the calculations and
submit them to our Assistant Controller of Corporate Accounting.
Our Assistant Controller of Corporate Accounting prepares the
disclosures for our annual and quarterly reports based on those
calculations and submits the draft disclosures to our Chief
Geologist and Manager of Mine Technology for further review and
approval. The draft disclosures are then reviewed and approved
by our Chief Financial Officer and Chief Executive Officer
before inclusion in our annual and quarterly reports.
Additionally, the long-range mine planning and ore reserve
estimates are reviewed annually by our Audit Committee.
Furthermore, all changes to ore reserve estimates, other than
those due to changes in production levels, are documented by our
Chief Geologist and Manager of Mine Technology and are submitted
to our Vice President of Operations for review and approval.
Finally, we perform periodic reviews of long-range mine plans
and ore reserve estimates at mine staff meetings and senior
management meetings.
9
Operations
During 2004 and 2003, we produced 21.7 million tons and
18.1 million tons, respectively, for our account and
12.7 million tons and 12.2 million tons, respectively,
on behalf of the steel company owners of the mines. The
7.0 million ton increase in our share of tons produced in
2004 compared to 2002 principally reflected the acquisition in
December 2003 and full year production in 2004 of United
Taconite and increased customer demand. The following is a
summary of total production and our share of that production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Production Tons | |
|
|
in Millions(1) | |
|
|
| |
Location and Name |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Michigan (Marquette Range)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Empire Iron Mining Partnership
|
|
|
5.4 |
|
|
|
5.2 |
|
|
|
3.6 |
|
|
Tilden Mining Company L.C.
|
|
|
7.8 |
|
|
|
7.0 |
|
|
|
7.9 |
|
Minnesota (Mesabi Range)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hibbing Taconite Company Joint Venture
|
|
|
8.3 |
|
|
|
8.0 |
|
|
|
7.7 |
|
|
Northshore Mining Company
|
|
|
5.0 |
|
|
|
4.8 |
|
|
|
4.2 |
|
|
United Taconite(2)
|
|
|
4.1 |
|
|
|
1.6 |
|
|
|
4.2 |
|
Canada (Newfoundland & Quebec)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wabush Mines Joint Venture
|
|
|
3.8 |
|
|
|
5.2 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
|
34.4 |
|
|
|
30.3 |
|
|
|
27.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Tons are long tons of pellets of 2,240 pounds. |
|
(2) |
Total production at United Taconite in 2003 and 2002 includes
production of Eveleth Mines before it was acquired by United
Taconite in the fourth quarter of 2003. |
|
(3) |
Excludes 4.2 million tons in 2002 and 1.5 million tons
in 2003 produced by Eveleth Mines prior to its acquisition by
United Taconite in the fourth quarter of 2003. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Share of | |
|
|
Production Tons in | |
|
|
Millions(1) | |
|
|
| |
Location and Name |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Michigan (Marquette Range)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Empire Iron Mining Partnership
|
|
|
4.2 |
|
|
|
4.0 |
|
|
|
1.1 |
|
|
Tilden Mining Company L.C.
|
|
|
6.7 |
|
|
|
6.0 |
|
|
|
6.7 |
|
Minnesota (Mesabi Range)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hibbing Taconite Company Joint Venture
|
|
|
1.9 |
|
|
|
1.8 |
|
|
|
1.5 |
|
|
Northshore Mining Company
|
|
|
5.0 |
|
|
|
4.8 |
|
|
|
4.2 |
|
|
United Taconite
|
|
|
2.9 |
|
|
|
.1 |
|
|
|
|
|
Canada (Newfoundland & Quebec)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wabush Mines Joint Venture
|
|
|
1.0 |
|
|
|
1.4 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21.7 |
|
|
|
18.1 |
|
|
|
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Tons are long tons of pellets of 2,240 pounds. |
Our business is subject to a number of operational factors that
can affect our future profitability. Significant mining
challenges include the following:
|
|
|
a) the uncertainties regarding mine life and estimates of
ore reserves; |
|
|
b) uncertainties relating to iron ore pricing and
fluctuations in currency exchange rates; |
10
|
|
|
c) unanticipated geological conditions, natural disasters,
interruptions in electrical or other power sources, equipment
failures, unanticipated capital requirements and maintenance
costs, or other unexpected events that could cause shutdowns or
production curtailments for us or for our steel industry
customers; |
|
|
d) uncertainties relating to production costs, including
increases in our costs of electrical power, fuel or other energy
sources; |
|
|
e) uncertainties relating to governmental regulation of our
mines and processing facilities, including under environmental
laws; and |
|
|
f) uncertainties relating to labor relations. |
A more detailed description of these risks is contained in
Managements Discussion and Analysis of Financial
Conditions and Results of Operations Risks Relating
to the Company.
Mine Capacity and Iron Ore Reserves. The following is a
table that reflects expected current annual capacity and
economic ore reserves for our iron ore mines as of
December 31, 2004. The estimated ore reserves and full
production rates could be affected by, among other things,
future industry conditions, geological conditions, and ongoing
mine planning. Maintenance of effective production capacity of
the ore reserves could require increases in capital and
development expenditures. Alternatively, changes in economic
conditions or in the expected quality of ore reserves could
decrease capacity or mineral reserves. Technological progress
could alleviate such factors or increase capacity or ore
reserves. Our 2005 ore reserve estimates for our iron ore mines
as of December 31, 2004 were estimated from fully-designed
pits developed using three-dimensional modeling techniques. The
fully-designed pit incorporates design slopes, practical mining
shapes and access ramps to assure the accuracy of our reserve
estimates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons in Millions(1) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mineral | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves(2)(3) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Mineral | |
|
|
|
|
|
|
|
|
|
|
Current | |
|
|
|
Rights | |
|
Method of | |
|
|
|
|
|
|
Iron Ore | |
|
Annual | |
|
Current | |
|
Previous | |
|
| |
|
Reserve | |
|
Operating | |
|
|
Mine |
|
Mineralization | |
|
Capacity | |
|
Year | |
|
Year | |
|
Owned | |
|
Leased | |
|
Estimation | |
|
Since | |
|
Infrastructure | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Empire
|
|
Negaunee Iron Formation (Magnetite) |
|
|
5.5 |
|
|
|
23 |
|
|
|
29 |
|
|
|
57 |
% |
|
|
43 |
% |
|
Geologic Block Model |
|
|
1963 |
|
|
Mine, Concentrator, Pelletizer |
Tilden
|
|
Negaunee Iron Formation (Hematite/Magnetite) |
|
|
8.0 |
|
|
|
273 |
|
|
|
280 |
|
|
|
100 |
% |
|
|
0 |
% |
|
Geologic Block Model |
|
|
1974 |
|
|
Mine, Concentrator, Pelletizer |
Hibbing Taconite
|
|
Biwabik Iron Formation (Magnetite) |
|
|
8.2 |
|
|
|
166 |
|
|
|
174 |
|
|
|
3 |
% |
|
|
97 |
% |
|
Geologic Block Model |
|
|
1976 |
|
|
Mine, Concentrator, Pelletizer |
Northshore(4)
|
|
Biwabik Iron Formation (Magnetite) |
|
|
4.8 |
|
|
|
315 |
|
|
|
320 |
|
|
|
0 |
% |
|
|
100 |
% |
|
Geologic Block Model |
|
|
1990 |
|
|
Mine, Concentrator, Pelletizer, Railroad |
United Taconite(5)
|
|
Biwabik Iron Formation (Magnetite) |
|
|
5.2 |
|
|
|
130 |
|
|
|
112 |
|
|
|
0 |
% |
|
|
100 |
% |
|
Geologic Block Model |
|
|
1965 |
|
|
Mine, Concentrator, Pelletizer |
Wabush
|
|
Wabush Iron Formation (Hematite) |
|
|
6.0 |
|
|
|
57 |
|
|
|
61 |
|
|
|
0 |
% |
|
|
100 |
% |
|
Geologic Block Model |
|
|
1965 |
|
|
Mine, Concentrator, Pelletizer, Railroad |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
37.7 |
|
|
|
964 |
|
|
|
976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Tons are long tons of pellets of 2,240 pounds. |
|
(2) |
Estimated standard equivalent pellets, including both proven and
probable reserves. |
|
(3) |
We regularly evaluate our ore reserve estimates and update them
as required in accordance with the SEC Industry Guide 7. |
|
(4) |
An expansion project has been initiated that is expected to
increase annual production capacity by .8 million tons. |
11
|
|
(5) |
United Taconite purchased the mine assets out of bankruptcy on
December 1, 2003 and resumed operations in late December.
United Taconites ore reserves had been based on an
estimate generated by the former owners dated June 2000,
adjusted for production since that time. The 2005 ore reserves,
which increased by 23 million tons, were based on and fully
comply with our ore reserve estimation policy. Annual capacity
includes the full year effect of the 2004 expansion projects. |
General Information about the Mines
Leases. Mining is conducted on multiple mineral leases
having varying expiration dates. Mining leases are routinely
renegotiated and renewed as they approach their respective
expiration dates.
Exploration and Development. The Empire, Tilden, Hibbing,
Northshore, United Taconite and Wabush mines are all open pit
mines that are well past the exploration stage and are in
production. Additional pit development is underway at each mine
as required by long-range mine plans. Drilling programs are
conducted periodically for the purpose of refining guidance
related to ongoing operations.
The Biwabik, Negaunee, and Wabush Iron Formations are classified
as Lake Superior type iron-formations that formed under similar
sedimentary conditions in shallow marine basins approximately
two billion years ago. Magnetite and/or hematite are the
predominant iron oxide ore minerals present, with lesser amounts
of goethite and limonite. Chert is the predominant waste mineral
present, with lesser amounts of silicate and carbonate minerals.
The ore minerals readily liberate from the waste minerals upon
fine grinding.
Geologic models are developed for all mines to define the major
ore and waste rock types. Computerized block models are then
constructed that include all relevant geologic and metallurgical
data. These are used to generate grade and tonnage estimates,
followed by detailed mine designs.
Mine Facilities and Equipment. Each of the mines has
crushing, concentrating, and pelletizing facilities. The
facilities at each site are in satisfactory condition, although
they require routine capital and maintenance expenditures on an
ongoing basis. Certain mine equipment generally is powered by
diesel or gasoline. The total cost of the property, plant and
equipment, net of applicable accumulated amortization and
depreciation as of December 31, 2004, for each of the mines
is set forth in the chart below.
|
|
|
|
|
|
|
|
|
Total Historical Cost of Mine |
|
|
Property, Plant and Equipment |
|
|
(Excluding Real Estate and |
|
|
Construction in Progress), Net of |
|
|
Applicable Accumulated |
Location and Name |
|
Amortization and
Depreciation |
|
|
|
|
|
(In millions) |
Michigan (Marquette Range)
|
|
|
|
|
|
Empire Iron Mining Partnership
|
|
$ |
129.0 |
(1) |
|
Tilden Mining Company L.C.
|
|
|
220.5 |
(2) |
Minnesota (Mesabi Range)
|
|
|
|
|
|
Hibbing Taconite Company Joint Venture
|
|
|
439.6 |
(3) |
|
Northshore Mining Company
|
|
|
78.2 |
(4) |
|
United Taconite
|
|
|
6.4 |
(5) |
Canada (Newfoundland & Quebec)
|
|
|
|
|
|
Wabush Mines Joint Venture
|
|
|
355.4 |
(3) |
|
|
|
|
|
|
|
Total
|
|
$ |
1,229.1 |
|
|
|
|
|
|
|
|
(1) |
Includes capitalized financing costs of $13.2 million, net
of accumulated amortization. |
|
(2) |
Includes capitalized financing costs of $25.1 million, net
of accumulated amortization. |
|
(3) |
Does not reflect depreciation, which is recorded by the
individual venturers. |
|
(4) |
As noted above, the assets of the Northshore mine were purchased
out of bankruptcy by Cyprus Minerals in 1989. |
12
|
|
(5) |
As noted above, the assets of Eveleth Mines were purchased out
of bankruptcy by United Taconite in 2003. |
We directly own approximately one-half of the remaining ore
reserves at the Empire mine and approximately three percent of
the reserves at the Hibbing mine, and lease or sublease the
balance of the reserves from their owners. We own all of the ore
reserves at the Tilden mine. The ore reserves at Northshore
mine, United Taconite mine and Wabush Mines are owned by others
and leased or subleased directly to those mines.
The reduction in our ore reserve estimates for the Empire mine
is due to the inability to develop effective mine plans that
produce cost-justified combinations of production volume, ore
quality and stripping requirements with our 2003 reserve base. A
more detailed description of the reduction in ore reserve
estimates for the Empire mine is contained in
Managements Discussion and Analysis of Financial
Conditions and Results of Operations Risks Relating
to the Company. The reduction in our ore reserve estimates
for Wabush Mines is largely a reflection of increased operating
costs, the impact of currency exchange rates and a reduction in
maximum mining depth due to dewatering capabilities based on a
hydroanalysis evaluation. Partially offsetting these impacts
were higher Eastern Canadian pellet pricing and an increase in
Wabush production to its capacity of six million tons per year.
A more detailed description of the reduction in ore reserve
estimates for Wabush Mines is contained in
Managements Discussion and Analysis of Financial
Conditions and Results of Operations Risks Relating
to the Company.
Competition
We compete with several iron ore producers in North America,
including Iron Ore Company of Canada, Quebec Cartier Mining Co.
and U.S. Steel, as well as other steel companies that own
interests in iron ore mines that may have excess iron ore
inventories. In addition, significant amounts of iron ore have,
since the early 1980s, been shipped to the United States from
Brazil and Venezuela in competition with iron ore produced by us.
As the North American steel industry continues to consolidate, a
major focus of the consolidation is on the continued life of the
integrated steel industrys raw steel making operations,
i.e., blast furnaces and basic oxygen furnaces that
produce raw steel. Some steelmakers are importing semi-finished
steel slabs as an alternative to using blast furnaces and basic
oxygen furnaces to produce steel because of the costs associated
with relining blast furnaces and maintaining coke ovens. These
imported steel slabs can be converted and finished in the
steelmakers downstream finishing facilities. If the trend
continues, and more slabs are imported, the demand for pellets
that are used primarily in blast furnaces would diminish. In
addition, other competitive forces have become a large factor in
the iron ore business. Electric furnaces built by
mini-mills, which are steel recyclers, generally
produce steel by using scrap steel, not iron ore pellets, in
their electric furnaces.
Competition among the sellers of iron ore pellets is predicated
upon the usual competitive factors of price, availability of
supply, product performance, service and transportation cost to
the consumer.
Environment
In the construction of our facilities and in their operation,
substantial costs have been incurred and will be incurred to
avoid undue effects on the environment. Our North American
capital expenditures relating to environmental matters were
$7.3 million in 2004 and $2.7 million in 2003. It is
estimated that approximately $17.5 million will be spent in
2005 for capital investment in environmental control facilities.
Generally, various legislative bodies and federal and state
agencies are continually promulgating numerous new laws and
regulations affecting us, our customers, and our suppliers in
many areas, including waste discharge and disposal, hazardous
classification of materials and products, air and water
discharges, and many other environmental, health and safety
matters. Although we believe that our environmental policies and
practices are sound and do not expect that the application of
any current laws or regulations would be reasonably expected to
result in a material adverse effect on our business or financial
condition, we cannot predict the collective adverse impact of
this expanding body of laws and regulations.
13
The iron ore industry has been identified by the Environmental
Protection Agency (the EPA) as an industrial
category that emits pollutants established by the 1990 Clean Air
Act Amendments. These pollutants included over 200 substances
that are now classified as hazardous air pollutants
(HAP). The EPA is required to develop rules that
would require major sources of HAP to utilize Maximum Achievable
Control Technology (MACT) standards for their
emissions. Pursuant to this statutory requirement, the EPA
published a final rule on October 30, 2003 imposing
emission limitations and other requirements on taconite iron ore
processing operations. We must comply with the new requirements
by no later than October 30, 2006. Our projected capital
expenditures in 2005 and 2006 to meet the MACT standards are
approximately $20 million, including $4 million
related to the restart of Line 1 at United Taconite. In December
2003, we filed a Petition to Delist Taconite Iron Ore Processing
from MACT under Section 112 of the Clean Air Act based upon
extensive data analyses, human health and ecological risk
assessments that are believed to demonstrate that a MACT
regulation for taconite operations is not warranted. Typically,
the EPAs consideration of a petition is an iterative
process extending over several months, with a longer period for
controversial subjects. On January 23, 2004, the National
Wildlife Federation, Minnesota Conservation Federation, Lake
Superior Alliance and Save Lake Superior Association filed a
petition for review of the EPAs final MACT rule in the
United States Court of Appeals for the District of Columbia.
This petition challenged the EPAs decision not to impose
standards for mercury and asbestos and monitoring of
formaldehyde from taconite indurating furnaces. We filed a
petition to intervene in this case. Subsequently, the Court
remanded to EPA the asbestos and mercury rules; no determination
has yet been made regarding the monitoring of formaldehyde.
Our environmental liability includes our obligations related to
six sites which are independent of our iron mining operations,
seven former iron ore-related sites, eight leased land sites
where we are lessor and miscellaneous remediation obligations at
our operating units. Included in the obligation are federal and
state sites where we are named as a potentially responsible
party (PRP), such as the Milwaukee Solvay site
described in Item 3. Legal Proceedings, the Rio
Tinto mine site in Nevada, where significant site clean-up
activities have taken place, and the Kipling, Deer Lake and
Pellestar sites in Michigan.
Pellestar. In February 2003, we received a Notice of
Potential Liability from the EPA with respect to the Pellestar
site, located in Negaunee Township, Marquette County, Michigan
(the Site). The EPA advised us that we are
considered to be a PRP under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended
(CERCLA). We, through a subsidiary, owned the Site
from 1955 to 1986, at which time the Site was sold. During the
period that we owned the Site, we operated a pilot plant
facility for research and development activities on different
pelletizing processes. Subsequent owners and operators conducted
a variety of recycling activities on the Site. We are one of a
number of PRPs relating to the Site. In the third quarter 2003,
we, along with the other PRPs, entered into a proposed
Administrative Order by Consent (a Consent Order),
and the PRPs collectively retained a consultant to implement an
EPA-approved Removal Action Plan (RAP) at the Site.
Clean-up activities under the RAP have been completed. Our share
of the cost of the clean-up was $.2 million. Our only
outstanding obligation under the Consent Order is the payment of
our share of EPA oversight costs, which have yet to be
determined.
For additional information on our environmental matters, see
Item 3. Legal Proceedings and Note 5 in
the Notes to our Consolidated Financial Statements for the year
ended December 31, 2004.
Energy
Electricity. The Empire and Tilden mines each have
electric power supply contracts with Wisconsin Electric Power
Company that are effective through 2007 and include an energy
price cap and certain power curtailment features.
Electric power for the Hibbing mine and the United Taconite mine
is supplied by Minnesota Power, Inc., under agreements that
continue to December 2008 and October 2008, respectively.
Silver Bay Power Company, an indirect wholly-owned subsidiary of
ours, with a 115 megawatt power plant, provides the majority of
Northshores energy requirements, has an interconnection
agreement with
14
Minnesota Power, Inc. for backup power, and sells 40 megawatts
of excess power capacity to Northern States Power Company under
a contract that extends to 2011.
Wabush Mines owns a portion of the Twin Falls Hydro Generation
facility that provides power for Wabushs mining operations
in Newfoundland. We have a 20-year agreement with Newfoundland
Power, which continues until December 31, 2014. This
agreement allows an interchange of water rights in return for
the power needs for Wabushs mining operations. The Wabush
pelletizing operations in Quebec are served by Quebec Hydro on
an annual contract.
Process Fuel. We have contracts providing for the
transport of natural gas for our United States iron ore
operations. The Empire and Tilden mines have the capability of
burning natural gas, coal, or, to a lesser extent, oil. The
Hibbing and Northshore mines have the capability to burn natural
gas and oil. The United Taconite mine has the ability to burn
coal, natural gas and coke breeze. Although all of the
U.S. mines have the capability of burning natural gas, with
higher recent natural gas prices, the pelletizing operations for
the U.S. mines utilized alternate fuels when practicable.
Wabush Mines has the capability to burn oil and coke breeze.
Any substantial unmitigated interruption of either electric
power or process fuel supply could be materially adverse to us.
Research and Development
We have been a leader in iron ore mining technology for more
than 150 years. We operated some of the first mines on
Michigans Marquette Iron Range and pioneered early open
pit and underground mining methods. From the first application
of electrical power in Michigans underground mines to the
use today of sophisticated computers and global positioning
satellite systems, we and our managed mines have been leaders in
the application of new technology to the centuries-old business
of mineral extraction.
We maintain research facilities in Ishpeming, Michigan at our
Cliffs Technology Center. It was at these facilities that the
current concentrating and pelletizing process was developed in
the 1950s. This successful development allowed for what was once
considered millions of tons of useless rock to be turned into an
iron ore reserve that provides the basis for our operations
today. Today our engineering and technical staffs are engaged in
full-time technical support of our operations and improvement of
existing products.
As discussed above under Item 1. Business, in
2002, we agreed to participate in Phase II of the Mesabi
Nugget Project. Other participants include Kobe Steel, Steel
Dynamics, Inc., Ferrometrics, Inc. and the State of Minnesota.
Construction of a $16 million pilot plant at our Northshore
mine, to test and develop Kobe Steels technology for
converting iron ore into nearly pure iron in nugget form, was
completed in May 2003. The high-iron-content product could be
utilized to replace steel scrap as a raw material for electric
steel furnaces and blast furnaces or basic oxygen furnaces of
integrated steel producers or as feed stock for the foundry
industry.
The technology currently licensed to us, in partnership with
others, may make it possible to commercially produce a product
in granular form comparable to the molten iron product produced
by blast furnaces. The granular product, which we call iron
nuggets, can be handled and transported easily and is suitable
for delivery directly into a steelmaking furnace as a substitute
for molten iron or scrap. Iron nuggets have fewer impurities
than scrap metal. Most likely, the type of furnace that would
use this material would be the EAF, which is the type of furnace
used by the minimill steel segment. EAFs now comprise
approximately 50 percent of all steelmaking capacity in
North America.
A third operating phase of the pilot plant test in 2004
confirmed the commercial viability of this technology. The pilot
plant ended operations August 3, 2004. The product has been
used by four electric furnace producers and one foundry with
favorable results. Our contribution to the project through the
pilot plant testing and development phase was $5.3 million,
primarily contributions of in-kind facilities and services.
Preliminary construction engineering and environmental
permitting activities have been initiated for two potential
commercial plant locations (one in Butler, Indiana near Steel
Dynamics steelmaking facilities and one at our Cliffs Erie
site in Hoyt Lakes, Minnesota) with earliest environmental
approval expected in the first
15
half of 2005. A decision to proceed on construction of a
commercial plant could be made in the first half of 2005; we
would be the supplier of iron ore and have a minority interest
in the first commercial plant.
Employees
As of December 31, 2004, there were a total of 3,777
employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining Operations |
|
Salaried | |
|
Hourly | |
|
Total | |
|
|
| |
|
| |
|
| |
Empire/ Tilden(1)
|
|
|
157 |
|
|
|
998 |
|
|
|
1,155 |
|
Hibbing
|
|
|
127 |
|
|
|
582 |
|
|
|
709 |
|
Northshore
|
|
|
138 |
|
|
|
351 |
|
|
|
489 |
|
Wabush
|
|
|
156 |
|
|
|
576 |
|
|
|
732 |
|
United Taconite
|
|
|
66 |
|
|
|
365 |
|
|
|
431 |
|
LS&I Railroad
|
|
|
12 |
|
|
|
121 |
|
|
|
133 |
|
Corporate/ Support Services
|
|
|
126 |
|
|
|
2 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
Total(2)
|
|
|
782 |
|
|
|
2,995 |
|
|
|
3,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We combined the workforces of the Empire and Tilden mines for
administrative purposes in 2003. |
|
(2) |
Includes our employees and the employees of the joint ventures. |
Hourly employees at our mining operations (other than
Northshore) are represented by the United Steel Workers of
America (USWA) under collective bargaining
agreements. In August 2004, four-year labor agreements were
ratified between each of the Hibbing, Tilden, United Taconite
and Empire mines and the USWA covering the period to
August 1, 2008. Also, in October 2004, we entered into a
five-year agreement with the USWA covering the employees of the
Wabush mine, which expires on March 1, 2009. Hourly
employees of one of our wholly owned railroads are represented
by six unions with labor agreements expiring at various dates.
Our safety systems, which reflect the shared commitment of
management and employees to the prevention of incidents and
illnesses, continue to pay off in improved performance.
Demonstrating this commitment, we established a safe production
goal of a 25 percent reduction in the reportable incident
rate to 2.0 per 200,000 employee hours worked for 2004.
Although the target was not achieved, overall safety performance
was again the best in our history. The frequency rate as defined
by the Mine Safety and Health Administration (MSHA)
for total reportable incidents was 2.41 per 200,000
employee hours worked, an improvement of 11 percent from
2003 and 38 percent from 2002. According to MSHA, the
industry frequency rate for total reportable incidents for
U.S. mines, mills and shops (excluding coal) was
3.99 per 200,000 employee hours worked in 2004. Our
frequency rate for lost-time incidents was 1.4 per 200,000
employee hours worked, unchanged from 2003 and a 26 percent
improvement from 2002.
|
|
Item 3. |
Legal Proceedings. |
We and certain of our subsidiaries are involved in various
claims and ordinary routine litigation incidental to our
businesses, including claims relating to the exposure to
asbestos and silica. The full impact of these claims and
proceedings in the aggregate continues to be unknown. It is
possible that some of these claims and proceedings could be
decided unfavorably. Unfavorable outcomes or settlements or
adverse media coverage could encourage the commencement of
additional similar litigation. We continue to monitor our claims
and litigation expense but believe, based on currently known
information, that resolution of currently pending claims and
proceedings are unlikely in the aggregate to have a material
adverse effect on our consolidated financial statements.
Maritime Asbestos Litigation. The Cleveland-Cliffs Iron
Company (Iron) and/or The Cleveland-Cliffs Steamship
Company, or both, which are our subsidiaries, have been named
defendants in 479 actions brought from 1986 to date by former
seamen (or their administrators) in which the plaintiffs claim
damages
16
under federal law for illnesses allegedly suffered as the result
of exposure to airborne asbestos fibers while serving as crew
members aboard the vessels previously owned or managed by our
entities until the mid-1980s. In a significant majority of the
cases, our entities are co-defendants with a number of other
shipowners whose employees worked on our entities vessels
and the vessels of such other shipowners, as well as shipyards
and manufacturers of asbestos-containing products. The general
understanding among shipowners is that any liability in these
cases will be divided according to the proportion of time served
by such seamen on the respective owners vessels. There,
however, can be no guarantees that all of these co-defendants
are or will continue to be solvent. All these actions have been
consolidated into multidistrict proceedings in the Eastern
District of Pennsylvania, whose docket now includes a total of
over 30,000 maritime cases filed by seamen against shipowners
and other defendants. All of these cases have been
administratively dismissed without prejudice, but can be
reinstated upon application by plaintiffs counsel. The
claims against our entities are insured, subject to self-insured
retentions by the insured in amounts that vary by policy year;
however, the manner in which these retentions will be applied
remains uncertain. Our entities continue to vigorously contest
these claims and have made no settlements on these claims.
Milwaukee Solvay Coke. In September 2002, we received a
draft of a proposed Administrative Order by Consent from the
EPA, for clean-up and reimbursement of costs associated with the
Milwaukee Solvay coke plant site in Milwaukee, Wisconsin. The
plant was operated by a predecessor of ours from 1973 to 1983,
which predecessor we acquired in 1986. In January 2003, we
completed the sale of the plant site and property to a third
party. Following this sale, an Administrative Order by Consent
(Solvay Consent Order) was entered into with the EPA
by us, the new owner and another third party who had operated on
the site. In connection with the Solvay Consent Order, the new
owner agreed to take responsibility for the removal action and
agreed to indemnify us for all costs and expenses in connection
with the removal action. In the third quarter 2003, the new
owner, after completing a portion of the removal, experienced
financial difficulties. In an effort to continue progress on the
removal action, we expended approximately $.9 million in
the second half of 2003 and $2.1 million in 2004. At this
time, we believe the requirements of the removal action have
been substantially completed.
On August 26, 2004, we received a Request for Information
pursuant to Section 104(e) of CERCLA relative to the
investigation of additional contamination below the ground
surface at the Milwaukee Solvay site. The Request for
Information was also sent to 13 other PRPs. At this time, the
nature and extent of the contamination, the required
remediation, the total cost of the clean-up and the cost-sharing
responsibilities of the PRPs cannot be determined. We increased
our environmental reserve for Milwaukee Solvay by
$.8 million in 2004 for potential additional exposure.
Mountain West Mines. On May 4, 2004, Iron, a
subsidiary of the Company, was sued along with two other
defendants in the United State District Court for the District
of Wyoming. The plaintiff, Mountain West Mines, Inc.
(Mountain West), asserts that Iron and the other
defendants are liable to it for a four percent overriding
royalty interest on all yellowcake uranium produced from the
Powder River Basin in Wyoming and sold by Iron or certain other
entities with which Iron had conducted business. Mountain West
is seeking a substantial but as yet uncertain amount from Iron.
We are defending the Civil Action vigorously and have filed an
answer denying any liability to Mountain West on any theory as
well as a counterclaim seeking a declaration that Iron has no
obligation to Mountain West. Discovery in the case is ongoing,
and the case is set for trial on June 20, 2005.
17
|
|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
|
|
|
|
|
|
|
Name |
|
Position with Cleveland-Cliffs Inc as of February 17, 2005 |
|
Age | |
|
|
|
|
| |
J. S. Brinzo
|
|
Chairman, President and Chief Executive Officer |
|
|
63 |
|
D. H. Gunning
|
|
Vice Chairman |
|
|
62 |
|
W. R. Calfee
|
|
Executive Vice President Commercial |
|
|
58 |
|
D. J. Gallagher
|
|
Senior Vice President, Chief Financial Officer and Treasurer |
|
|
52 |
|
R. L. Kummer
|
|
Senior Vice President Human Resources |
|
|
48 |
|
J. A. Trethewey
|
|
Senior Vice President Business Development |
|
|
60 |
|
There is no family relationship between any of our executive
officers, or between any of our executive officers and any of
our Directors. Officers are elected to serve until successors
have been elected. All of the above-named executive officers
were elected effective on the effective dates listed below for
each such officer.
The business experience of the persons named above for the last
five years is as follows:
|
|
|
|
|
|
|
|
J. S. Brinzo |
|
|
Chairman and Chief Executive Officer, Cleveland-Cliffs Inc, |
|
|
|
|
|
|
January 1, 2000 to June 30, 2003. |
|
|
|
|
Chairman, President and Chief Executive Officer,
Cleveland-Cliffs Inc, |
|
|
|
|
|
|
July 1, 2003 to date. |
|
D. H. Gunning |
|
|
Consultant and Private Investor, |
|
|
|
|
|
|
December 1997 to April 15, 2001. |
|
|
|
|
Vice Chairman, Cleveland-Cliffs Inc, |
|
|
|
|
|
|
April 16, 2001 to date. |
|
W. R. Calfee |
|
|
Executive Vice President Commercial,
Cleveland-Cliffs Inc, |
|
|
|
|
|
|
October 1, 1995 to date. |
|
D. J. Gallagher |
|
|
Vice President Sales, Cleveland-Cliffs Inc, |
|
|
|
|
|
|
August 1, 1998 to July 28, 2003. |
|
|
|
|
Senior Vice President, Chief Financial Officer and Treasurer, |
|
|
|
|
|
|
Cleveland-Cliffs Inc, |
|
|
|
|
|
|
July 29, 2003 to date. |
|
R. L. Kummer |
|
|
Vice President, Human Resources, Government and Public Affairs, |
|
|
|
|
|
|
Kennecott Energy Company, |
|
|
|
|
|
|
June 1, 1999 to August 31, 2000. |
|
|
|
|
Vice President Human Resources, Cleveland-Cliffs Inc, |
|
|
|
|
|
|
September 5, 2000 to December 31, 2002. |
|
|
|
|
Senior Vice President Human Resources,
Cleveland-Cliffs Inc, |
|
|
|
|
|
|
January 1, 2003 to date. |
|
J. A. Trethewey |
|
|
Senior Vice President Operations Services,
Cleveland-Cliffs Inc, |
|
|
|
|
|
|
June 1, 1999 to March 15, 2001. |
|
|
|
|
Senior Vice President Business Development,
Cleveland-Cliffs Inc, |
|
|
|
|
|
|
March 16, 2001 to April 23, 2003. |
|
|
|
|
Senior Vice President Operations Improvement,
Cleveland-Cliffs Inc, |
|
|
|
|
|
|
April 24, 2003 to May 31, 2004. |
|
|
|
|
Senior Vice President Business Development,
Cleveland-Cliffs Inc, |
|
|
|
|
|
|
June 1, 2004 to date. |
18
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities. |
Stock Exchange Information
Our Common Shares (ticker symbol CLF) are listed on the New York
Stock Exchange. The shares are also listed on the Chicago Stock
Exchange.
Common Share Price Performance and Dividends
All per share information has been adjusted retroactively to
reflect the two-for-one stock split effective December 31,
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Performance | |
|
|
|
|
| |
|
|
|
|
2004 | |
|
2003 | |
|
|
Dividends | |
|
| |
|
| |
|
|
2004 | |
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
First Quarter
|
|
$ |
|
|
|
$ |
34.04 |
|
|
$ |
21.28 |
|
|
$ |
10.81 |
|
|
$ |
9.28 |
|
Second Quarter
|
|
|
|
|
|
|
33.84 |
|
|
|
19.71 |
|
|
|
9.95 |
|
|
|
7.38 |
|
Third Quarter
|
|
|
|
|
|
|
40.25 |
|
|
|
25.03 |
|
|
|
13.65 |
|
|
|
8.68 |
|
Fourth Quarter
|
|
|
.10 |
|
|
|
53.56 |
|
|
|
33.35 |
|
|
|
27.20 |
|
|
|
12.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$ |
.10 |
|
|
|
53.56 |
|
|
|
19.71 |
|
|
|
27.20 |
|
|
|
7.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 16, 2005, we had 1,769 shareholders of
record. No dividends were paid in 2003.
Issuer Purchases Of Equity Securities
The share information has been adjusted retroactively to reflect
the two-for-one stock split effective December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) | |
|
(d) | |
|
|
|
|
|
|
Number of Shares | |
|
Maximum Number | |
|
|
|
|
|
|
Purchased as Part | |
|
of Shares that may | |
|
|
(a) | |
|
(b) | |
|
of Publicly | |
|
yet be Purchased | |
|
|
Total Number of | |
|
Average Price Paid | |
|
Announced Plans or | |
|
under the Plans or | |
Period |
|
Shares Purchased | |
|
per Share $ | |
|
Programs | |
|
Programs(1) | |
|
|
| |
|
| |
|
| |
|
| |
October 1-31, 2004
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
1,900,000 |
|
November 1-30, 2004
|
|
|
70,000 |
|
|
|
38.4408 |
|
|
|
70,000 |
|
|
|
1,830,000 |
|
December 1-31, 2004
|
|
|
778(2) |
|
|
|
52.12 |
|
|
|
-0- |
|
|
|
1,830,000 |
|
|
|
(1) |
On July 13, 2004, the Company received the approval from
the Board of Directors to repurchase up to an aggregate of two
million shares of the Companys outstanding Common Shares,
with such repurchases to include the Companys 3.25%
Redeemable Cumulative Convertible Perpetual Preferred Stock at
the redemption rate of 1 share of Preferred Stock
equivalent to 32.3354 Common Shares. During this reportable
quarter, only Common Shares have been repurchased at the then
current market rate. The repurchase program was suspended by the
Board of Directors on January 11, 2005. |
|
(2) |
All repurchases by the Company in December represent shares
repurchased from stock option recipients in lieu of cash payment
for the exercise price of non-employee stock options. |
19
|
|
Item 6. |
Selected Financial Data. |
Summary of Financial and Other Statistical Data
Cleveland-Cliffs Inc and Consolidated Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Financial Data (In Millions, Except Per Share Amounts and
Employees)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) From Continuing Operations (Pre-Tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues From Product Sales and Services
|
|
$ |
1,206.7 |
|
|
$ |
825.1 |
|
|
$ |
586.4 |
|
|
$ |
319.3 |
|
|
$ |
379.4 |
|
|
Cost of Goods Sold and Operating Expenses
|
|
|
(1,056.8 |
) |
|
|
(835.0 |
) |
|
|
(582.7 |
) |
|
|
(358.7 |
) |
|
|
(366.0 |
) |
|
Other Operating Income (Expense)
|
|
|
(31.9 |
) |
|
|
(38.4 |
) |
|
|
(65.4 |
) |
|
|
10.0 |
|
|
|
28.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
118.0 |
|
|
|
(48.3 |
) |
|
|
(61.7 |
) |
|
|
(29.4 |
) |
|
|
42.2 |
|
Income (Loss) From Continuing Operations
|
|
|
320.5 |
|
|
|
(34.9 |
) |
|
|
(66.4 |
) |
|
|
(19.5 |
) |
|
|
26.7 |
|
Income (Loss) From Discontinued Operation
|
|
|
3.1 |
|
|
|
|
|
|
|
(108.5 |
) |
|
|
(12.7 |
) |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Extraordinary Gain and Cumulative Effect of
Accounting Changes
|
|
|
323.6 |
|
|
|
(34.9 |
) |
|
|
(174.9 |
) |
|
|
(32.2 |
) |
|
|
18.1 |
|
Extraordinary Gain
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Effect of Accounting Changes Income (Loss)(a)
|
|
|
|
|
|
|
|
|
|
|
(13.4 |
) |
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
323.6 |
|
|
|
(32.7 |
) |
|
|
(188.3 |
) |
|
|
(22.9 |
) |
|
|
18.1 |
|
Preferred Stock Dividends
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Applicable to Common Shares
|
|
|
318.3 |
|
|
|
(32.7 |
) |
|
|
(188.3 |
) |
|
|
(22.9 |
) |
|
|
18.1 |
|
Earnings (Loss) Per Common Share Basic(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
14.79 |
|
|
|
(1.70 |
) |
|
|
(3.29 |
) |
|
|
(.97 |
) |
|
|
1.29 |
|
|
Discontinued Operation
|
|
|
.15 |
|
|
|
|
|
|
|
(5.36 |
) |
|
|
(.63 |
) |
|
|
(.42 |
) |
|
Cumulative Effect of Accounting Changes and Extraordinary Gain
|
|
|
|
|
|
|
.10 |
|
|
|
(.66 |
) |
|
|
.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Applicable to Common Shares
|
|
|
14.94 |
|
|
|
(1.60 |
) |
|
|
(9.31 |
) |
|
|
(1.14 |
)) |
|
|
.87 |
|
Earnings (Loss) Per Common Share Diluted(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
11.69 |
|
|
|
(1.70 |
) |
|
|
(3.29 |
) |
|
|
(.97 |
) |
|
|
1.28 |
|
|
Discontinued Operation
|
|
|
.11 |
|
|
|
|
|
|
|
(5.36 |
) |
|
|
(.63 |
) |
|
|
(.42 |
) |
|
Cumulative Effect of Accounting Changes and Extraordinary Gain
|
|
|
|
|
|
|
.10 |
|
|
|
(.66 |
) |
|
|
.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share(b)(c)
|
|
|
11.80 |
|
|
|
(1.60 |
) |
|
|
(9.31 |
) |
|
|
(1.14 |
) |
|
|
.86 |
|
Total Assets
|
|
|
1,161.1 |
|
|
|
881.6 |
|
|
|
718.1 |
|
|
|
818.5 |
|
|
|
723.5 |
|
Debt Obligations Effectively Serviced(d)
|
|
|
9.6 |
|
|
|
34.6 |
|
|
|
67.4 |
|
|
|
173.9 |
|
|
|
74.0 |
|
Net Cash From (Used By) Operating Activities
|
|
|
(141.1 |
) |
|
|
42.7 |
|
|
|
40.9 |
|
|
|
28.9 |
|
|
|
31.6 |
|
Redeemable Cumulative Convertible Perpetual Preferred Stock
|
|
|
172.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Preferred Shareholders Cash Dividends
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders Cash Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share(b)
|
|
|
.10 |
|
|
|
|
|
|
|
|
|
|
|
.20 |
|
|
|
.75 |
|
|
Total
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
|
|
15.7 |
|
|
Repurchases of Common Shares
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.6 |
|
Pro Forma Results Assuming Accounting Changes Made
Retroactively(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
(188.3 |
) |
|
|
(23.7 |
) |
|
|
19.1 |
|
|
Per Share(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
(9.31 |
) |
|
|
(1.18 |
) |
|
|
.92 |
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
(9.31 |
) |
|
|
(1.18 |
) |
|
|
.91 |
|
Iron Ore Production and Sales Statistics (Millions of Gross
Tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production From Iron Ore Mines Managed by the Company
|
|
|
34.4 |
|
|
|
30.3 |
|
|
|
27.9 |
|
|
|
25.4 |
|
|
|
41.0 |
|
Companys Share of Iron Ore Production
|
|
|
21.7 |
|
|
|
18.1 |
|
|
|
14.7 |
|
|
|
7.8 |
|
|
|
11.8 |
|
Companys Sales Tons
|
|
|
22.6 |
|
|
|
19.2 |
|
|
|
14.7 |
|
|
|
8.4 |
|
|
|
10.4 |
|
Common Shares Outstanding (Millions)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average for Year
|
|
|
21.3 |
|
|
|
20.5 |
|
|
|
20.2 |
|
|
|
20.2 |
|
|
|
20.8 |
|
|
At Year-End
|
|
|
21.6 |
|
|
|
21.0 |
|
|
|
20.2 |
|
|
|
20.2 |
|
|
|
20.2 |
|
Employees at Year-End(f)
|
|
|
3,777 |
|
|
|
3,956 |
|
|
|
3,858 |
|
|
|
4,302 |
|
|
|
5,645 |
|
20
|
|
(a) |
Effective January 1, 2002, the Company adopted
SFAS No. 143, Accounting for Asset Retirement
Obligations and effective January 1, 2001, the
Company changed its method of accounting for investment gains
and losses on pension assets for the recognition of pension
expense. |
|
|
|
(b) |
|
On November 9, 2004, the Board of Directors of
Cleveland-Cliffs Inc approved a two-for-one stock split of its
Common Shares. The record date for the stock split was
December 15, 2004, with a distribution date of
December 31, 2004. Accordingly, all Common Shares and per
share amounts have been adjusted retroactively to reflect the
stock split. Additionally, all diluted per share amounts reflect
the as-if-converted effect of the Companys
convertible preferred stock as required by Emerging Issues Task
Force Consensus 04-8. |
|
(c) |
|
In 2003, the Company recognized a $2.2 million
extraordinary gain in the acquisition of the assets of Eveleth
Mines; $3.3 million acquisition and startup costs for this
same mine, renamed United Taconite and $8.7 million of
restructuring charges related to a salaried employee reduction
program. Results for 2002 include $95.7 million and
$52.7 million for impairment charges relating to a
discontinued operation and impairment of mining assets,
respectively. Results for 2000 include an after-tax
$9.9 million recovery on an insurance claim,
$5.2 million federal income tax credit, and a
$7.1 million charge relating to a common stock investment
(combined $.39 per share). |
|
(d) |
|
Includes the Companys share of unconsolidated ventures and
equipment acquired on capital leases; includes short-term
portion. |
|
(e) |
|
The pro forma results include the effect on prior years for the
retroactive impact of changes in accounting methods related to:
(1) change in 2001 for the recognition of gains and losses
on pension assets (gain of $1.8 million, or $.08 per
share in 2000); and (2) adoption in 2002 of the asset
retirement obligation (expense of $.8 million or
$.04 per share in 2001, and $.8 million, or
$.04 per share in 2000). |
|
(f) |
|
Includes employees of mining ventures. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
Two-for-One Stock Split
On November 9, 2004, the Board of Directors of
Cleveland-Cliffs Inc approved a two-for-one stock split of its
Common Shares. The record date for the stock split was
December 15, 2004 with a distribution date of
December 31, 2004. Accordingly, all Common Shares, per
share amounts, stock compensation plans and preferred stock
conversion rates have been adjusted retroactively to reflect the
stock split. Additionally, all diluted per share amounts reflect
the as-if-converted effect of the Companys
convertible preferred stock as required by Emerging Issues Task
Force Consensus 04-8.
Overview
Cleveland-Cliffs Inc (including its consolidated subsidiaries,
the Company or Cliffs) is the largest
producer of iron ore pellets in North America and sells the
majority of its pellets to integrated steel companies in the
United States and Canada. The Company operates six iron ore
mines located in Michigan, Minnesota, and Eastern Canada that
currently have a rated capacity of 37.7 million tons of
iron ore pellet production annually. The other iron ore mines in
the U.S. and Canada have an aggregate rated capacity of
22.9 million tons and 21.2 million tons, respectively.
Based on its percentage ownership in the mines it operates,
Cliffs share of the rated pellet production capacity is
currently 23.1 million tons per annum, representing
approximately 28 percent of total North American pellet
capacity.
Prior to 2002, Cliffs principally held a minority interest in
the mines it managed, with the majority interest in each mine
held by various North American steel companies. Cliffs
earnings were principally comprised of royalties and management
fees paid by the partnerships, along with sales of its equity
share of the mine pellet production. Faced with marked
deterioration in the financial condition of many of its partners
and customers, the Company embarked on a strategy to reposition
itself from a manager of iron ore mines on behalf of steel
company partners to primarily a merchant of iron ore through
increasing its ownership interests in its mines.
21
The Companys increased mine ownerships combined with the
explosive growth of steel and iron ore demand created by an
expanding Chinese economy and consolidation of the North
American steel industry has resulted in a most remarkable year
in 2004. The Companys strategic redirection and acceptance
of additional risks of increased mine ownerships followed by
significant increases in iron ore demand and pricing culminated
in record profits in 2004, solid financial condition, and a
strong base for future growth.
The Companys successful navigation through numerous
customer and partner bankruptcies and corresponding
consolidation of the North American steel industry has resulted
in the Company emerging with new long-term supply agreements, at
more favorable pricing, with steel company partners and
customers that are financially stronger than their predecessors.
One premier example is International Steel Group, Inc.
(ISG), which acquired and consolidated several
bankrupt steel companies. In 2002, the Company invested
$13.0 million in ISG to support its acquisition of idled
LTV Corporation (LTV) steelmaking assets, receiving
a seven percent stake in return. The Company also entered into a
15-year term supply agreement to supply all of ISGs pellet
requirements for its Cleveland and Indiana Harbor plants. Later
in 2002, the Company invested another $4.4 million to
support ISGs acquisition of the steelmaking assets of Acme
Metals Incorporated (Acme) and invested another
$10.7 million of pension trust assets to support ISGs
acquisition of Bethlehem Steel Corporations
(Bethlehem Steel) assets in 2003. In conjunction
with the acquisition of Bethlehem Steel, ISG acquired
Bethlehems 62.3 percent equity interest in the
Company-managed Hibbing mine. Through its investments in ISG,
the Company received 5.9 million shares (5.1 million
shares directly-held and .8 million shares held in its
pension trust). In 2004, the Company realized a
$152.7 million pre-tax ($99.3 million after-tax) gain
on the sale of its 5.1 million shares of directly-held ISG
common stock. The Company continues to own .1 million
shares of ISG common stock in its pension trusts. Also in 2004,
ISG acquired the bankrupt assets of Weirton Steel Corporation
(Weirton) and Georgetown Steel Corporation. In
conjunction with its acquisition of Weirton, ISG assumed the
Companys term supply agreement with Weirton with some
modifications. ISG, currently the Companys largest
customer, recently agreed to merge with Mittal Steel, the parent
company of Ispat Inland Inc. (Ispat Inland), another
significant customer and 21 percent partner in the
Companys Empire mine. The merger is expected to close in
the first quarter of 2005, creating the largest steel company in
the world.
Also in 2004, the Company dramatically improved its liquidity,
initially through its January 2004 offering of
$172.5 million of redeemable cumulative convertible
perpetual preferred stock. The proceeds from the issuance were
utilized to repay the Companys $25 million balance of
its unsecured notes and to fund $76.1 million into its
underfunded salaried and hourly pension plans and retiree
healthcare accounts (VEBAs). Additionally, the
proceeds from the sale of ISG stock and cash flow from
operations provided the Company with the liquidity for required
capital expenditures to maintain and expand its production
capacity and to investigate opportunities to further its
strategic growth objectives. In January 2005, the Company
initiated an all-cash offer to purchase the outstanding shares
of Portman Limited, a Western Australia-based iron ore mining
and exploration company. If successful, the acquisition cost
will be approximately U.S. $500 million. See
Offer to Purchase Portman Limited. The Company also
continues to investigate opportunities in North America,
including Eastern Canadian and U.S. iron ore mines.
The Companys share of production in 2004 was a record
21.7 million tons. Mine operating costs on a per ton basis
in 2004 increased by about 3.5 percent versus 2003
primarily due to energy, supply and royalty escalation (much of
which was recovered in or was due to our sales contract
escalators) and cost related to the U.S. labor negotiations
and the fixed cost effect of the 14-week labor stoppage at
Wabush Mines in Canada where we have a 26.83 percent
ownership. From a safety standpoint, 2004 was the safest year on
record in the Companys 157-year history as measured by the
Mine Safety and Health Administration total reportable incident
frequency.
The Companys operating objectives are to maximize
production, efficiency and productivity at its existing North
American mines. All of the mines and processing facilities have
been in existence for several decades and are energy and labor
intensive operations. Energy comprises approximately
25 percent of our mine production costs. We continue to
strive for employment productivity improvements to offset rising
energy and employee medical and legacy costs. In that regard,
employees at the Empire and Tilden mines in Michigan and the
Hibbing Taconite and United Taconite mines in Minnesota,
represented by the United
22
Steelworkers of America (USWA), ratified new
four-year labor agreements that are comparable to other USWA
contracts in the industry. The new agreements provide for wage
increases and additional funding into employees pension plans
and VEBAs in exchange for employees and future retirees sharing
in healthcare insurance costs and certain other provisions that
will continue to improve productivity. (See Labor
Contracts.)
Key Operating and Financial Indicators
Following is a summary of the Companys key operating and
financial indicators for the years 2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Pellet Sales (Million Tons)
|
|
|
22.6 |
|
|
|
19.2 |
|
|
|
14.7 |
|
Revenues from Iron Ore Sales and Services (Millions)*
|
|
$ |
998.6 |
|
|
$ |
686.8 |
|
|
$ |
510.8 |
|
Pellet Production (Million Tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34.4 |
|
|
|
30.3 |
|
|
|
27.9 |
|
|
Companys Share
|
|
|
21.7 |
|
|
|
18.1 |
|
|
|
14.7 |
|
Sales Margin (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount (Millions)
|
|
$ |
149.9 |
|
|
$ |
(9.9 |
) |
|
$ |
3.7 |
|
|
Per Ton of Sales
|
|
$ |
6.63 |
|
|
$ |
(.53 |
) |
|
$ |
.25 |
|
Income (Loss) from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount (Millions)
|
|
$ |
320.5 |
|
|
$ |
(34.9 |
) |
|
$ |
(66.4 |
) |
|
Per Share (Diluted)
|
|
$ |
11.69 |
|
|
$ |
(1.70 |
) |
|
$ |
(3.29 |
) |
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount (Millions)
|
|
$ |
323.6 |
|
|
$ |
(32.7 |
) |
|
$ |
(188.3 |
) |
|
Per Share (Diluted)
|
|
$ |
11.80 |
|
|
$ |
(1.60 |
) |
|
$ |
(9.31 |
) |
|
|
* |
The Company also received revenues of $208.1 million,
$138.3 million and $75.6 million in 2004, 2003 and
2002, respectively, related to freight and minority interest. |
Iron ore pellet sales in 2004 were a record 22.6 million
tons, a 3.4 million ton or 18 percent, increase from
the previous record 19.2 million tons sold in 2003. The
sales increase primarily reflects the effect of new and revised
agreements initiated in 2002 and 2003 consistent with the
Companys increased mine ownerships. Iron ore pellet
production for Cliffs account was 21.7 million tons
in 2004 versus 18.1 million tons in 2003. The
3.6 million ton, or 20 percent, increase was largely
due to the full year production of United Taconite, which was
acquired in December 2003, and higher production at all mines
except Wabush.
The Companys increase in 2004 sales margin from 2003 was
principally due to an increase in sales prices and volume and
was partially offset by higher production costs. The increase in
sales prices reflects the effect on term supply agreement
escalators of higher steel prices and an approximate
20 percent increase in international pellet prices.
Production costs were adversely affected by higher energy and
supply pricing, costs associated with U.S. labor
negotiations and Wabush work stoppage, and a $3.4 million
unfavorable exchange rate effect reflecting the impact of a
weaker U.S. dollar on the Companys share of Wabush
costs. On a year-over-year basis, these factors were partly
offset by the fixed cost impact of the five-week production
curtailment in 2003 at the Empire and Tilden mines relating to
loss of electric power due to flooding in the Upper Peninsula of
Michigan.
The Companys business is affected by a number of factors,
which are described in detail below under Risks Relating
to the Company. As the Company has increased its role as a
merchant of iron ore to steel company customers, it has become
more dependent on the revenues from its term supply agreements.
Because its agreements are largely requirements contracts, those
revenues are heavily dependent on customer consumption of iron
ore. Customer requirements may be affected by increased use of
iron ore substitutes,
23
including imported semi-finished steel, customer rationalization
or financial failure, and decreased North American steel
production resulting from increased imports or lower steel
consumption.
Further, the Companys sales are concentrated with
relatively few customers. Unmitigated loss of sales would have a
significantly greater impact on operating results and cash flow
than revenue, due to the high level of fixed costs in the iron
ore mining business and the high cost to idle or close mines. In
the event of a venture participants failure to perform,
remaining solvent venturers, including the Company, may be
required to assume additional fixed costs and record additional
material obligations. The premature closure of a mine due to the
loss of a significant customer or the failure of a joint venture
participant would accelerate substantial employment and mine
shutdown costs.
Results of Operations
Net income in 2004 was $323.6 million, including a
$3.1 million after-tax gain from a discontinued operation,
compared with a net loss in 2003 of $32.7 million. Included
in the 2003 net loss was an extraordinary gain of
$2.2 million relating to the United Taconite acquisition of
the Eveleth mine assets in Minnesota in December 2003. Income in
2004 was $11.80 per diluted share compared with a net loss
of $1.60 per diluted share in 2003. Following is a summary
of results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Income (loss) from continuing operations*
|
|
$ |
320.5 |
|
|
$ |
(34.9 |
) |
|
$ |
(66.4 |
) |
Income (loss) from discontinued operation**
|
|
|
3.1 |
|
|
|
|
|
|
|
(108.5 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary gain and cumulative effect of
accounting changes**
|
|
|
323.6 |
|
|
|
(34.9 |
) |
|
|
(174.9 |
) |
Extraordinary gain**
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
Cumulative effect of accounting changes***
|
|
|
|
|
|
|
|
|
|
|
(13.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amount
|
|
$ |
323.6 |
|
|
$ |
(32.7 |
) |
|
$ |
(188.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
per share basic****
|
|
$ |
14.94 |
|
|
$ |
(1.60 |
) |
|
$ |
(9.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
per share diluted
|
|
$ |
11.80 |
|
|
$ |
(1.60 |
) |
|
$ |
(9.31 |
) |
|
|
|
|
|
|
|
|
|
|
Average number of shares (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
21,308 |
|
|
|
20,512 |
|
|
|
20,234 |
|
|
diluted*****
|
|
|
27,421 |
|
|
|
20,512 |
|
|
|
20,234 |
|
|
|
|
|
* |
Includes charges for impairments of mining assets of
$5.8 million in 2004, $2.6 million in 2003 and
$52.7 million in 2002, and an after-tax gain on sale of ISG
common stock, $99.3 million in 2004. |
|
|
|
|
** |
Net of tax and minority interest. |
|
|
**** |
Adjusted for preferred dividend effect of $5.3 million. |
|
|
***** |
Includes 5.566 million shares for the weighted average of
as-if-converted convertible preferred shares. |
2004 Versus 2003
Net income for the year 2004 was $323.6 million, or
$11.80 per diluted share, compared with a net loss of
$32.7 million, or $1.60 per diluted share, for the
year 2003. Excluding the after-tax gain from a discontinued
operation in 2004 of $3.1 million and the after-tax
extraordinary gain in 2003 of $2.2 million relating to the
United Taconite acquisition of the Eveleth mine assets in
December 2003 (See Extraordinary Gain). Income from continuing
operations in 2004 was $320.5 million, versus a loss of
$34.9 million in 2003.
24
The $355.4 million increase in income from continuing
operations reflected improved pre-tax results of
$320.8 million and lower income taxes of
$34.6 million. The lower taxes in 2004 reflected a
$113.8 million reversal of deferred tax valuation allowance
partly offset by the current years tax provision. Included
in the pre-tax increase of $320.8 million was
$152.7 million relating to a gain on sale of directly-held
ISG common stock and higher sales margins of
$159.8 million. Following is a summary of the sales margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
|
|
| |
|
|
|
|
|
|
Increase (Decrease) | |
|
|
|
|
| |
|
|
2004 | |
|
2003 | |
|
Amount | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
Iron ore pellet sales (tons)
|
|
|
22.6 |
|
|
|
19.2 |
|
|
|
3.4 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from iron ore sales and services*
|
|
$ |
998.6 |
|
|
$ |
686.8 |
|
|
$ |
311.8 |
|
|
|
45 |
% |
Cost of goods sold and operating expenses*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding production curtailments
|
|
|
843.5 |
|
|
|
685.6 |
|
|
|
157.9 |
|
|
|
23 |
|
|
Costs of production curtailments
|
|
|
5.2 |
|
|
|
11.1 |
|
|
|
(5.9 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs
|
|
|
848.7 |
|
|
|
696.7 |
|
|
|
152.0 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales margin (loss)
|
|
$ |
149.9 |
|
|
$ |
(9.9 |
) |
|
$ |
159.8 |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
The Company also received revenues and recognized expenses of
$208.1 million and $138.3 million in 2004 and 2003,
respectively, for freight charges paid on behalf of customers
and cost reimbursement from minority interest partners for their
share of mine costs. |
|
|
|
Revenues from Iron Ore Sales and Services |
Revenues from iron ore sales and services were
$998.6 million in 2004, an increase of $311.8 million,
or 45 percent, from revenues of $686.8 million in
2003. The increase was mainly due to higher sales prices and the
3.4 million ton, or 18 percent, increase in pellet
sales volume in 2004. The increase in pellet sales in 2004 was
due to higher demand by the integrated steel industry and
increased production. The 22.6 million tons sold in 2004
was a record, surpassing the previous record of
19.2 million tons sold in 2003. The increase in sales price
realization resulted from term supply agreement escalators,
primarily higher steel prices and an approximate 20 percent
increase in international pellet prices.
|
|
|
Cost of Goods Sold and Operating Expenses |
Cost of goods sold and operating expenses totaled
$848.7 million in 2004, an increase of $152.0 million,
or 22 percent, from $696.7 million in 2003,
principally due to higher sales and production volume of
$122.8 million, increased energy and supply pricing of
$19.9 million, the fixed-cost effect of a 14-week labor
stoppage at Wabush in third quarter 2004 of $5.2 million, a
$3.4 million exchange rate effect due to the impact of a
weaker U.S. dollar on the Companys share of Wabush
production costs, and $3.0 million related to 2004
U.S. labor negotiations. Operating costs in 2003 included
an $11.1 million fixed-cost impact caused by a five-week
production curtailment at the Empire and Tilden mines relating
to the loss of electric power due to flooding in the Upper
Peninsula of Michigan.
Sales margin in 2004 was $149.9 million versus a loss of
$9.9 million in 2003. The sales margin improvement of
$159.8 million in 2004 was principally due to an increase
in sales prices and volume, and was partially offset by higher
production costs.
|
|
|
Royalties and Management Fees |
Royalties and management fees from partners were
$11.3 million in 2004, an increase of $.7 million from
2003. The increase was principally attributed to management fees
from United Taconite production.
25
|
|
|
Impairment of Mining Assets |
In 2004 and 2003, the Company recorded additional Empire
impairment charges of $5.8 million and $2.6 million,
respectively, for current years fixed asset additions.
Empires long-lived assets were impaired in 2002.
Approximately $2.2 million of the 2004 Empire fixed asset
additions were related to an increase in the asset retirement
obligation reflecting a one year decrease in the estimated mine
life due to a change in annual production levels.
|
|
|
Administrative, Selling and General Expenses |
Administrative, selling and general expenses in 2004 were
$33.1 million, an increase of $8.0 million from 2003.
The increase primarily reflects higher stock-based and incentive
compensation of $8.5 million.
In third quarter 2003, the Company initiated a salaried
reduction program as part of its cost-reduction initiatives. The
action resulted in a reduction of 136 staff employees at its
corporate, central services and various mining operations, which
represented an approximate 20 percent decrease in salaried
workforce at the Companys U.S. operations (prior to
the acquisition of United Taconite). Accordingly, the Company
recorded a restructuring charge of $8.7 million in 2003,
which included non-cash pension and OPEB obligations of
$6.2 million and one-time severance benefits of
$2.5 million. Less than $1.6 million required cash
funding in 2003 leaving a remaining severance liability of
approximately $.9 million at December 31, 2003. In
2004, the Company expended $.7 million and recorded a
credit of $.2 million in satisfaction of the obligation.
|
|
|
Provision for Customer Bankruptcy Exposures |
The Company recorded $1.6 million in the first quarter 2004
for customer bankruptcy exposures compared with
$7.5 million in 2003 ($2.6 million and
$4.9 million in the second and third quarter, respectively)
relating to the Weirton and WCI Steel Inc. (WCI)
bankruptcies. (See Customers for further discussion.)
|
|
|
Miscellaneous Expense (Income) |
Miscellaneous expense was $2.9 million in 2004, a decrease
of $2.2 million from 2003 expenses of $5.1 million.
The decrease primarily reflected lower coal retiree expense of
$1.6 million, decreased business development costs of
$1.0 million, and debt restructuring fees in 2003 of
$.8 million partially offset by lower rental income of
$.9 million.
Interest expense was $.8 million in 2004, a decrease of
$3.8 million from 2003 interest expense of
$4.6 million. The decrease principally reflected the
repayment of the Companys senior unsecured notes in
January 2004.
Other income of $4.2 million in 2004 was $2.9 million
less than in 2003. The decrease primarily related to
non-strategic Michigan land sales in 2003.
Through 2003, the Company maintained a valuation allowance to
reduce its deferred tax asset in recognition of uncertainty
regarding full utilization. In the fourth quarter of 2004, the
Company determined, based on the existence of sufficient
evidence, that it no longer required a valuation allowance other
than $8.9 million, which may not be realized, related to
net operating loss carryforwards of $25.4 million that will
begin to expire in 2021, which are attributable to
pre-consolidation separate return years of one of its
subsidiaries. As a result, a $113.8 million adjustment to
reduce the valuation allowance was credited to income. Excluding
the $113.8 million valuation reversal, income tax expense
in 2004 of $78.9 million was $79.2 higher than 2003
principally reflecting higher pre-tax income.
26
Effective December 1, 2003, United Taconite, a newly formed
company owned 70 percent by a subsidiary of the Company and
30 percent by a subsidiary of Laiwu Steel Group Limited
(Laiwu) of China, purchased the assets of Eveleth
Mines LLC in Minnesota. The purchase price was $3.0 million
plus the assumption of certain liabilities, primarily mine
closure-related environmental obligations. As a result of this
transaction, the assets acquired exceeded the cost of the
acquisition, resulting in an extraordinary gain of
$2.2 million, net of $.5 million tax and
$1.2 million minority interest.
2003 Versus 2002
The net loss for the year 2003 was $32.7 million, or
$1.60 per share, including the extraordinary gain of
$2.2 million related to the United Taconite acquisition of
the Eveleth mine assets in Minnesota in December 2003. The net
loss in 2002 of $188.3 million, or $9.31 per share
included a loss of $108.5 million from a discontinued
operation, and a $13.4 million cumulative effect charge
related to a change in the Companys accounting method for
recognizing estimated future mine closure obligations.
The loss from continuing operations was $34.9 million in
2003 versus a loss of $66.4 million in 2002. The
$31.5 million lower loss reflected improved pre-tax results
of $22.1 million and lower income tax expense of
$9.4 million principally due to establishing a deferred tax
valuation allowance in 2002. The improvement in pre-tax results
was primarily due to the $52.7 million charge for the
impairment of mining assets in 2002; the impairment charge was
$2.6 million in 2003. Partially offsetting the lower
impairment charge was a $13.6 million decrease in sales
margin, summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
|
|
| |
|
|
|
|
|
|
Increase (Decrease) | |
|
|
|
|
| |
|
|
2003 | |
|
2002 | |
|
Amount | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
Iron ore pellet sales (tons)
|
|
|
19.2 |
|
|
|
14.7 |
|
|
|
4.5 |
|
|
|
31% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from iron ore sales and services*
|
|
$ |
686.8 |
|
|
$ |
510.8 |
|
|
$ |
176.0 |
|
|
|
34% |
|
Cost of goods sold and operating expenses*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding production curtailment
|
|
|
685.6 |
|
|
|
486.5 |
|
|
|
199.1 |
|
|
|
41 |
|
|
Costs of production curtailments
|
|
|
11.1 |
|
|
|
20.6 |
|
|
|
(9.5 |
) |
|
|
(46) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
|
696.7 |
|
|
|
507.1 |
|
|
|
189.6 |
|
|
|
37% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales margin (loss)
|
|
$ |
(9.9 |
) |
|
$ |
3.7 |
|
|
$ |
(13.6 |
) |
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
The Company also received revenues and recognized expenses of
$138.3 million and $75.6 million in 2003 and 2002,
respectively, for freight charges paid on behalf of customers
and cost reimbursement from minority interest partners for their
share of mine costs. |
|
|
|
Revenues from Iron Ore Sales and Services |
Revenues from iron ore sales and services were
$686.8 million in 2003, an increase of $176.0 million,
or 34 percent, from revenues of $510.8 million in
2002. The 4.5 million ton, or 31 percent, increase in
pellet sales volume in 2003 was due to the combined effect of
increased customer demand, new term supply agreements (including
the full-year effect of new agreements in 2002) and increased
ownership interest in existing joint-venture mines. The
19.2 million tons sold in 2003 was a record, surpassing the
previous record of 14.7 million tons sold in 2002. The
increase in revenue also reflected an increase in sales price
realization, which resulted from favorable term supply agreement
price provisions and the mix of agreements.
|
|
|
Cost of Goods Sold and Operating Expenses |
Cost of goods sold and operating expenses totaled
$696.7 million in 2003, an increase of $189.6 million,
or 37 percent, from $507.1 million in 2002. Excluding
fixed costs related to production curtailments, 2003 costs and
expenses were $199.1 million, or 41 percent, higher
than 2002, principally due to increased production and
27
sales volume and higher production costs. The production cost
increase reflected higher energy rates, increased pension and
medical costs, throughput difficulties at the Michigan mines, an
equipment outage at the Tilden operations in Michigan in
December 2003, and the impact of the decreased
U.S. exchange rate with Canada.
Increased energy rates resulted in an approximate
$17 million aggregate increase in costs in 2003 versus
2002. Similarly, increases in pension expense (excluding
restructuring charges) per ton of production accounted for a
cost increase in 2003 versus 2002 of more than $8 million,
and higher medical costs (including OPEB increases) per ton of
production contributed almost $5 million to the cost
increase. The pension and OPEB increases are net of
approximately $7 million of 2003 expense decreases related
to the salaried plan modifications for certain
U.S. salaried employees and retirees, which became
effective July 1, 2003.
On May 15, 2003, the failure of a dam in the Upper
Peninsula of Michigan resulted in flood conditions, which caused
production curtailments at the Empire and Tilden mines for
approximately five weeks. While the flooding did not directly
damage the mines, the mines were idled when Wisconsin Energy
Corporation, which supplies electricity to the mines, was forced
to shutdown its power plant in Marquette, Michigan. The mines
returned to full production by the end of June; however,
approximately 1.0 million tons of production was lost
(Companys share .8 million tons). The Companys
share of fixed costs related to the lost production was
$11.1 million. The Company is pursuing a business
interruption claim under its property insurance program.
Production curtailments in 2002, due to market conditions, had a
$20.6 million fixed cost effect.
On November 26, 2003, the Tilden mine experienced a crack
in a kiln riding ring that required the shutdown of its
Unit #2 furnace in the pelletizing plant. As a result of
the failure, Tildens production in 2003 decreased by
..3 million tons resulting in a 2003 loss of approximately
$6 million, including the cost of the repair and the cost
of accelerating planned 2004 maintenance into December 2003 to
coincide with the riding ring repair. Year 2004 production was
not significantly affected by the failure.
The decrease in 2003 sales margin of $13.6 million
reflected an increase in cost of goods sold and operating
expenses (net of freight and minority interest) of approximately
$73 million offset by the effect of higher production and
sales volume of approximately $40 million and higher
average sales revenue per ton of approximately $20 million.
Our sales volume increased by 4.5 million tons or
31 percent. Production increased by 3.4 million tons
or 23 percent.
|
|
|
Royalties and Management Fees |
Royalties and management fees from partners were
$10.6 million in 2003, a decrease of $1.6 million from
2002. The decrease was principally due to the whole-year effect
of the Companys increased ownership in mines in 2002,
partially offset by increased production.
|
|
|
Impairment of Mining Assets |
As a result of increasing production costs at Empire mine,
revised economic mine planning studies were completed in the
fourth quarter of 2002 and updated in the fourth quarter of
2003. Based on the outcome of these studies, the ore reserve
estimates at Empire were reduced from 116 million tons at
December 31, 2001 to 63 million tons at
December 31, 2002 and 29 million tons at
December 31, 2003. The Company concluded that the assets of
Empire were impaired as of December 31, 2002, based on an
undiscounted probability-weighted cash flow analysis. The
Company recorded an impairment charge of $52.7 million to
write-off the carrying value of the long-lived assets of Empire.
In 2003, the Company recorded an additional impairment charge of
$2.6 million for current-year fixed-asset additions.
|
|
|
Administrative, Selling and General Expenses |
Administrative, selling and general expenses in 2003 were
$25.1 million, an increase of $1.3 million from 2002.
The increase primarily reflects higher professional fees related
to financing and business development activities and higher
stock-based compensation partially offset by lower employment
costs and incentive
28
compensation. The increase in stock-based compensation of
$4.3 million principally reflected the increase in the
Companys common share price in 2003.
In the third quarter of 2003, the Company initiated a salaried
reduction program as part of its cost-reduction initiatives. The
action resulted in a reduction of 136 staff employees at its
corporate, central services and various mining operations, which
represented an approximate 20 percent decrease in salaried
workforce at the Companys U.S. operations (prior to
the acquisition of United Taconite). Accordingly, the Company
recorded a restructuring charge of $8.7 million in 2003.
The charge is principally related to severance, pension and
healthcare benefits with less than $1.6 million requiring
cash funding in 2003.
|
|
|
Provision for Customer Bankruptcy Exposures |
As noted in the Risks Relating to the Company, three
of the Companys significant customers petitioned for
protection under chapter 11 of the U.S. Bankruptcy
Code in 2003. As a result, the Company recorded reserves
totaling $7.5 million in the second and third quarters of
2003 related to its bankruptcy exposures.
|
|
|
Miscellaneous Expense (Income) |
Miscellaneous expense was $5.1 million in 2003, an increase
of $1.2 million from 2002. The increase primarily reflected
higher coal retiree expense of $2.0 million, an increase in
litigation reserves of $.5 million and higher state and
local taxes of $.4 million partially offset by lower
debt-restructuring fees of $1.9 million.
Interest income of $10.6 million in 2003 was
$5.8 million above 2002 interest income of
$4.8 million. The increase primarily reflected interest on
the long-term receivables from Ispat Inland and Rouge Industries
Inc. (Rouge).
Interest expense was $4.6 million in 2003, a decrease of
$2.0 million from 2002 interest expense of
$6.6 million. The decrease principally reflected lower
average borrowing due to the repayment and cancellation of the
Companys $100 million revolving credit facility in
October 2002 and repayment of a portion of the senior unsecured
notes. The Company made senior unsecured note repayments of
$15 million in December 2002, $5 million in June 2003,
$25 million in December 2003 and the $25 million
balance early in 2004.
Other income of $7.1 million in 2003 was $.9 million
higher than 2002. The increase primarily reflected higher sales
of non-strategic assets in 2003 of $.8 million.
In the third quarter of 2002, the Company recorded a valuation
allowance to fully reserve its net deferred tax assets in
recognition of uncertainty regarding their realization. In 2003,
the Company increased its deferred tax valuation allowance by
$2.1 million to $122.7 million to offset increases in
the deferred tax assets. The Company recorded an income tax
credit of $.3 million, which was attributable to qualifying
for a special refund of taxes paid in prior years, of
$.9 million, partially offset by foreign, state and local
taxes. The $9.1 million net tax expense in 2002 reflected
the recognition of the valuation allowance net of a
$4.4 million favorable adjustment of prior years tax
liabilities.
In the fourth quarter of 2002, Cliffs exited the ferrous
metallics business and abandoned its 82 percent investment
in Cliffs and Associates Limited (CAL), an HBI
facility located in Trinidad and Tobago. For the year 2002,
Cliffs reported a loss from discontinued operation of
$108.5 million, consisting of $97.4 million
29
($95.7 million in the third quarter) of impairment charges
and $11.1 million of idle expense. No expense was recorded
in 2003.
On July 23, 2004, Cliffs and Outokumpu Technology GmbH (the
18 percent co-owner of CAL) sold the assets of CALs
HBI facility to ISG. Terms of the sale include a purchase price
of $8.0 million plus assumption of liabilities. The Company
recorded after-tax income of approximately $3.1 million
related to this contract in 2004. The gain is classified under
Discontinued Operation in the Statement of
Consolidated Operations. CAL may receive up to $10 million
in future payments contingent on HBI production and shipments.
|
|
|
Cumulative Effect of Accounting Changes |
Effective January 1, 2002, the Company implemented
Statement of Financial Accounting Standards (SFAS)
No. 143, Asset Retirement Obligations. The
statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period
incurred. As a result of the change in accounting method, the
Company recorded a cumulative effect non-cash charge of
$13.4 million, recognized on January 1, 2002, to
provide for contractual and legal obligations associated with
the eventual closure of its mining operations.
Cash Flow and Liquidity
At December 31, 2004, the Company had cash and cash
equivalents of $216.9 million. Following is a summary of
2004 cash flow activity:
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
Proceeds from sale of ISG common stock
|
|
$ |
170.1 |
|
Proceeds from issuance of preferred stock-net
|
|
|
165.9 |
|
Net cash from operating activities before changes in operating
assets and liabilities
|
|
|
75.3 |
|
Higher payables and accrued expenses
|
|
|
20.4 |
|
Proceeds from stock options exercised
|
|
|
17.9 |
|
Proceeds from repayment of long-term note receivable
|
|
|
10.0 |
|
Contributions by minority interest
|
|
|
9.7 |
|
Investment in short-term marketable securities
|
|
|
(182.7 |
) |
Capital expenditures
|
|
|
(60.7 |
) |
Increased trade receivables
|
|
|
(44.6 |
) |
Repayment of long-term debt
|
|
|
(25.0 |
) |
Repurchases of common stock
|
|
|
(6.5 |
) |
Dividends common and preferred stock
|
|
|
(6.1 |
) |
Other
|
|
|
(1.3 |
) |
|
|
|
|
|
Increase in cash and cash equivalents from continuing operations
|
|
|
142.4 |
|
Cash from discontinued operation
|
|
|
6.7 |
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
$ |
149.1 |
|
|
|
|
|
30
Following is a summary of key liquidity measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31 | |
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
216.9 |
|
|
$ |
67.8 |
|
|
$ |
61.8 |
|
|
|
|
|
|
|
|
|
|
|
Marketable securities (short-term)
|
|
$ |
182.7 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$ |
|
|
|
$ |
(25.0 |
) |
|
$ |
(55.0 |
) |
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
476.7 |
|
|
$ |
97.2 |
|
|
$ |
106.8 |
|
|
|
|
|
|
|
|
|
|
|
Included in net cash from operating activities before changes in
operating assets and liabilities is $76.1 million of
contributions to pension plans and post-retirement benefits
trusts and $57.1 million of income tax payments. The
$182.7 million increase in marketable securities reflects
the Companys investment of surplus cash in highly-liquid
short-term securities with put options. The increase in trade
receivables of $44.6 million included supplemental term
sales contract revenue based on annual steel pricing, on which
payments are due in the first half of 2005.
At December 31, 2004, there were 3.3 million tons of
pellets in inventory, .7 million tons less than
December 31, 2003, at a cost of $108.2 million, or a
decrease of $21.5 million from December 31, 2003.
The Company repaid the remaining principal balance on its senior
unsecured notes of $25 million in January 2004. On
April 30, 2004, the Company entered into a $30 million
unsecured revolving credit agreement, which expires on
April 29, 2005. There have been no borrowings under
the facility.
The Company realized $17.9 million from the exercise of
stock options in 2004 and issued a total of 719,780 shares
from treasury stock. The Company also repurchased
170,000 shares at a cost of $6.5 million relating to
its two million share stock repurchase program; the repurchase
program was suspended in January 2005.
The Company anticipates that its share of capital expenditures
related to the iron ore business, which was $60.7 million
in 2004, will increase to approximately $135 million in
2005. The Company expects to fund its capital expenditures from
available cash and current operations. The anticipated increase
in capital expenditures is primarily due to capacity expansion
projects at its United Taconite and Northshore mines in
Minnesota. The United Taconite expansion project was brought on
line with the restart of its idle pellet furnace in the fourth
quarter of 2004 at a total cost of approximately
$35 million, with 2004 expenditure of $13.3 million.
The expansion will add approximately 1.0 million tons
(Company share .7 million tons) to United Taconites
annual production capacity. The Company also plans to re-start
an idled furnace at its wholly-owned Northshore mine in the
first quarter of 2005 at an estimated cost of approximately
$30 million. The expansion will increase Northshores
annual production capacity by approximately .8 million
tons. A further expansion at United Taconite is being evaluated.
In the third and fourth quarters of 2004, the Company sold
5.1 million shares of its directly-held ISG common stock in
market transactions totaling $170.1 million. The sales
resulted in a gain of $152.7 million pre-tax
($99.3 million after-tax). The Company continues to own
..1 million shares of ISG stock through pension fund
investments.
|
|
|
Issuance of Preferred Stock |
In January 2004, the Company completed an offering of
$172.5 million of redeemable cumulative convertible
perpetual preferred stock, without par value, issued at
$1,000 per share. The preferred stock pays quarterly cash
dividends at a rate of 3.25 percent per annum, has a
liquidation preference of $1,000 per share and is
convertible into the Companys common shares at an adjusted
rate of 32.3354 common shares per share of preferred stock,
which is equivalent to an adjusted conversion price of
$30.93 per share at December 31, 2004, subject to
further adjustment in certain circumstances. Each share of
preferred stock may be converted by the holder: (1) if
during any fiscal quarter ending after March 31, 2004 the
closing sale price of the
31
Companys common stock for at least 20 trading days in a
period of 30 consecutive trading days ending on the last trading
day of the preceding quarter exceeds 110 percent of the
applicable conversion price on such trading day ($34.02 at
December 31, 2004; this threshold was met as of
December 31, 2004); (2) if during the five business
day period after any five consecutive trading-day period in
which the trading price per share of preferred stock for each
day of that period was less than 98 percent of the product
of the closing sale price of the Companys common stock and
the applicable conversion rate on each such day; (3) upon
the occurrence of certain corporate transactions; or (4) if
the preferred stock has been called for redemption. On or after
January 20, 2009, the Company, at its option, may redeem
some or all of the preferred stock at a redemption price equal
to 100 percent of the liquidation preference, plus
accumulated but unpaid dividends, but only if the closing price
exceeds 135 percent of the conversion price, subject to
adjustment, for 20 trading days within a period of 30
consecutive trading days ending on the trading day before the
date the Company gives the redemption notice. The Company may
also exchange the preferred stock for convertible subordinated
debentures in certain circumstances. The Company has reserved
approximately 5.6 million common treasury shares for
possible future issuance for the conversion of the preferred
stock. The Companys shelf registration statement with
respect to the resale of the preferred stock, the convertible
subordinated debentures that we may issue in exchange for the
preferred stock and the common shares issuable upon conversion
of the preferred stock and the convertible subordinated
debentures was declared effective by the SEC on July 22,
2004. The preferred stock is classified for accounting purposes
as temporary equity reflecting certain provisions of
the agreement that could, under remote circumstances, require
the Company to redeem the preferred stock for cash. The net
proceeds after offering expenses were approximately
$166 million. A portion of the proceeds was utilized to
repay the remaining outstanding $25.0 million in principal
amount of the Companys senior unsecured notes in the first
quarter of 2004. The Company has also used approximately
$63.0 million to fund its underfunded pension plans and
contributed $13.1 million to its VEBAs in 2004.
Operations and Customers
The Companys pellet sales for the year 2004 were a record
22.6 million tons versus the previous record of
19.2 million tons sold in 2003. The increase in pellet
sales in 2004 was due to higher demand by the integrated steel
industry and increased production. The higher production
primarily reflects production from United Taconite which was
acquired in December 2003. The Company ended the year 2004 with
3.3 million tons of iron ore pellet inventory, a decrease
of .7 million tons from 2003, reflecting the Companys
increased sales. The Companys 2005 sales volume is
projected to be a record 24 million tons, a seven percent
increase from 2004. The Company is largely committed under term
supply agreements, which are subject to changes in customer
requirements. Revenue per ton from iron ore sales and services
is dependent upon several price adjustment factors included in
the Companys term supply agreements, primarily the
percentage change from 2004 to 2005 in the international pellet
price for blast furnace pellets and Producers Price Indices
(PPI), and one customers hot-rolled coil price
realizations from a number of its operations. Following is the
estimated impact to the Companys average revenue per ton
from iron ore sales and services (excluding freight and minority
interest cost reimbursements) based on 2004 sales realization of
$44.19 per ton:
|
|
|
|
|
|
|
|
|
|
|
|
2005 Revenue Effect | |
|
|
(Change from 2004) | |
|
|
| |
|
|
|
|
Price Per | |
|
|
Percent | |
|
Ton | |
|
|
| |
|
| |
Potential Increase (Decrease):
|
|
|
|
|
|
|
|
|
|
Each 10 Percent Change in International Pellet Price
|
|
|
2.1 |
% |
|
$ |
.93 |
|
|
Each 1 Percent Change in PPI All Commodities
|
|
|
.4 |
|
|
|
.18 |
|
|
Each $10 Per Ton Change from $470 Per Ton Average Hot Rolled
Coil Price Realization*
|
|
|
.6 |
|
|
|
.27 |
|
Known Year-Over-Year Increase**
|
|
|
3.6 |
|
|
|
1.59 |
|
|
|
|
|
* |
Valid for decreases through $400 per ton; decrease of
.1 percent per ton for each $10 from $400 to $380. No upper
limit. |
32
|
|
** |
Increase represents a combination of contractual base price
increase, lag year adjustments and capped pricing on one
contract. |
One of the Companys term supply agreements contains price
collars, which limits the percentage increase or decrease in
prices for our iron ore pellets during any one year to seven
percent of the previous years contract price.
On October 23, 2003, Rouge, a significant pellet sales
customer of the Company, filed for chapter 11 bankruptcy
protection. On January 30, 2004, Rouge sold substantially
all of its assets to Severstal North America, Inc.
(Severstal). Severstal, as part of the acquisition
of assets of Rouge, assumed the Companys term supply
agreement with Rouge with minimal modifications. The contract
provides that the Company will be the sole supplier of iron ore
pellets through 2012. The Company sold 3.3 million tons to
Severstal/Rouge in 2004 and 3.0 million tons in 2003.
Additionally, in the first quarter of 2004, Rouge repaid a
$10 million secured loan balance outstanding plus accrued
interest.
On September 16, 2003, WCI petitioned for protection under
chapter 11 of the U.S. Bankruptcy Code. At the time of
the filing, the Company had a trade receivable exposure of
$4.9 million, which was reserved in the third quarter of
2003. WCI purchased 1.7 million tons, or 8 percent of
total tons sold in 2004, and purchased 1.5 million tons, or
8 percent of total tons sold in 2003. WCI continues to
operate and purchase pellets from the Company. On
October 14, 2004, the Company and the current owners of WCI
reached tentative agreement that the Company would supply
1.4 million tons of iron ore pellets in 2005 and, in 2006
and thereafter, would supply one hundred percent of WCIs
annual requirements up to a maximum of two million tons of iron
ore pellets. The new agreement, which is for a 10-year term
beginning in 2005 and provides for the Companys recovery
of its $4.9 million pre-petition receivable plus
$.9 million of subsequent pricing adjustment over time, was
approved by the Bankruptcy Court on November 16, 2004. The
agreement provides the Company with a right to terminate the
agreement after 2005 if a plan of reorganization is not
confirmed before June 30, 2005 and consummated by
July 31, 2005; in that event, the $5.8 million
receivable would be due at the end of 2005.
On May 19, 2003, Weirton filed for protection under
chapter 11 of the U.S. Bankruptcy Code. Weirton, a
significant customer of the Company, purchased approximately
..5 million tons in 2004 through May 17, or
2 percent of all tons sold in 2004, and 2.8 million
tons, or 14 percent of tons sold in 2003. On April 22,
2004, the Bankruptcy Court issued an order approving the sale of
Weirtons assets to a subsidiary of ISG, and on
May 18, 2004, ISG completed the acquisition of
substantially all of the assets, including the power-related
leased assets (discussed below), of Weirton. As part of the
acquisition, ISG assumed the Companys term supply
agreement with Weirton with some modifications. The contract
term is for 15 years with the Company supplying the
majority of pellets required for the ISG-Weirton facility in
2004 and 2005 and all of ISG-Weirtons pellet requirements
thereafter. The Company sold 1.4 million tons to
ISG-Weirton in 2004 under the assumed contract.
The Company is a 40.5 percent participant in a joint
venture that acquired certain power-related assets from FW
Holdings, Inc. (FW Holdings), a subsidiary of
Weirton, in 2001, in a purchase-leaseback arrangement. On
February 26, 2004, FW Holdings filed a petition for
chapter 11 bankruptcy protection. In connection with its
bankruptcy filing, FW Holdings filed an adversary complaint
against the joint venture members for declaratory relief and the
return of assets acquired in the purchase-leaseback transaction.
In that complaint, FW Holdings asserted that the lease
transaction should be recharacterized as a secured loan. As a
result, FW Holdings did not make its quarterly lease payment due
on March 31, 2004, of which the Companys share was
$.5 million. In conjunction with ISGs purchase of the
Weirton assets, a settlement agreement was reached between
Weirton, ISG and the joint venture. As a result of the
settlement agreement, the Company wrote down its investment to
$6.1 million as of March 31, 2004 from
$10.3 million. An additional $1.6 million charge was
included in the Provision for customer bankruptcy
exposures in the first quarter 2004; the Company had
previously recorded a $2.6 million reserve for Weirton
bankruptcy exposures in May 2003. The sale of Weirtons
assets to ISG resulted in a $10 million payment to the
joint venture on
33
closing (Company share $4.0 million), which was made on
May 18, 2004, and annual payments of $.5 million
(Company share $.2 million) including interest at the rate
of five percent over the next 15 years. The joint venture
members also received a release from Weirton and FW Holdings of
bankruptcy claims, such as preference actions, upon the closing
of the sale to ISG.
On October 25, 2004, the acquisition of LNM Holdings N.V.
and ISG by Ispat International, N.V., the parent of Ispat
Inland, was announced. On December 17, 2004, Ispat
International, N.V. completed its acquisition of LNM Holdings
N.V. to form Mittal Steel Company N.V.
(Mittal). The merger with ISG, subject to
shareholder approvals, is expected to be completed by the end of
the first quarter of 2005, resulting in the worlds largest
steel company. In December 2004, ISG and the Company amended
their sales agreement, which runs through 2016, to increase the
base price and moderate the supplemental steel price sharing
provisions. ISG is currently the Companys largest customer
with total pellet purchases in 2004 of 8.9 million tons.
Additionally, ISG is a 62.3 percent equity participant in
Hibbing. The Companys pellet sales to Ispat Inland in 2004
totaled 2.6 million tons. Ispat Inland is a 21 percent
equity partner in Empire. The Companys sales to ISG and
Ispat Inland are under agreements which are not scheduled to
expire for at least ten years. For 2004, the combined sales to
ISG and Ispat Inland accounted for 51 percent of the
Companys sales volume and, including their equity share of
Empire and Hibbing production, accounted for 52 percent of
the Companys managed production. The Company currently
does not expect the merger to affect its relationships with ISG
and Ispat Inland for the foreseeable future.
On January 29, 2004, Stelco Inc. (Stelco)
applied and obtained Bankruptcy Court protection from creditors
in Ontario Superior Court under the Companies Creditors
Arrangement Act. Pellet sales to Stelco totaled 1.2 million
tons in 2004 and .1 million tons in 2003. Stelco is a
44.6 percent participant in Wabush, and
U.S. subsidiaries of Stelco (which have not filed for
bankruptcy protection) own 14.7 percent of Hibbing and
15 percent of Tilden. At the time of the filing, the
Company had no trade receivable exposure to Stelco.
Additionally, Stelco has continued to operate and has met its
cash call requirements at the mining ventures to date. The Court
has extended the deadline for the submittal of bids to purchase
Stelco until February 14, 2005. Stelco has received an
extension of the stay period under its Court-ordered
restructuring from February 11, 2005 to April 29, 2005.
Production
Following is a summary of 2004, 2003 and 2002 mine production
and Company ownership:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production | |
|
|
Companys Ownership | |
|
(Million Tons) | |
|
|
| |
|
| |
|
|
December 31 | |
|
Companys Share | |
|
Total Production | |
|
|
| |
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
Mine |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Empire
|
|
|
79.0 |
% |
|
|
79.0 |
% |
|
|
79.0 |
% |
|
|
4.3 |
|
|
|
4.0 |
|
|
|
1.1 |
|
|
|
5.4 |
|
|
|
5.2 |
|
|
|
3.6 |
|
Tilden
|
|
|
85.0 |
|
|
|
85.0 |
|
|
|
85.0 |
|
|
|
6.6 |
|
|
|
6.0 |
|
|
|
6.7 |
|
|
|
7.8 |
|
|
|
7.0 |
|
|
|
7.9 |
|
Hibbing
|
|
|
23.0 |
|
|
|
23.0 |
|
|
|
23.0 |
|
|
|
1.9 |
|
|
|
1.8 |
|
|
|
1.5 |
|
|
|
8.3 |
|
|
|
8.0 |
|
|
|
7.7 |
|
Northshore
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
5.0 |
|
|
|
4.8 |
|
|
|
4.2 |
|
|
|
5.0 |
|
|
|
4.8 |
|
|
|
4.2 |
|
United Taconite*
|
|
|
70.0 |
|
|
|
70.0 |
|
|
|
|
|
|
|
2.9 |
|
|
|
.1 |
|
|
|
|
|
|
|
4.1 |
|
|
|
1.6 |
|
|
|
4.2 |
|
Wabush
|
|
|
26.8 |
|
|
|
26.8 |
|
|
|
26.8 |
|
|
|
1.0 |
|
|
|
1.4 |
|
|
|
1.2 |
|
|
|
3.8 |
|
|
|
5.2 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Production**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.7 |
|
|
|
18.1 |
|
|
|
14.7 |
|
|
|
34.4 |
|
|
|
30.3 |
|
|
|
27.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Production in 2002 and 1.5 million tons produced during the
first five months of 2003 occurred under the management of the
previous mine owners and prior to the acquisition by United
Taconite in December 2003. |
|
|
** |
Excludes United Taconite production under previous mine
ownership. |
The Company preliminarily expects total mine production in 2005
to be approximately 37 million tons; the Companys
share of production is currently estimated to be approximately
23 million tons. The increase in 2005 estimated production
principally reflects higher production levels at all mines
including capacity
34
expansion projects at United Taconite and Northshore mines.
Production schedules are subject to change in pellet demand.
Production costs per ton are expected to increase between four
percent and five percent from the 2004 cost of goods sold and
operating expenses (excluding freight and minority interest) of
$37.56 per ton.
As discussed in Cash Flow and Liquidity, the Company
commenced a capacity expansion program in the fourth quarter of
2004 at United Taconite that is expected to add approximately
1.0 million tons (Companys share .7 million
tons) to United Taconites annual production capacity and
plans to re-start an idled furnace at its wholly-owned
Northshore mine in the third quarter of 2005, which will
increase Northshores annual production capacity by
approximately .8 million tons. A further expansion at
United Taconite is being evaluated.
Increased Mine Ownership
Effective December 1, 2003, United Taconite purchased the
ore mining and pelletizing assets of Eveleth Mines. Eveleth
Mines had ceased mining operations in May 2003 after filing for
chapter 11 bankruptcy protection on May 1, 2003.
Under the terms of the purchase agreement, United Taconite
purchased all of Eveleth Mines assets for $3 million
in cash and the assumption of certain liabilities, primarily
mine closure-related environmental obligations. As a result of
this transaction, the Company, after assigning appropriate
values to assets acquired and liabilities assumed, was required
to record an extraordinary gain of
$2.2 million, net of $.5 million tax and
$1.2 million minority interest. In conjunction with this
transaction, the Company and its Wabush Mines venture partners
entered into pellet sales and trade agreements with Laiwu to
optimize shipping efficiency. Sales to Laiwu under these
contracts totaled .2 million tons and .1 million tons
in 2004 and 2003, respectively.
Effective December 31, 2002, the Company increased its
ownership in Empire from 46.7 percent to 79 percent in
exchange for assumption of all mine liabilities. Under the terms
of the agreement, the Company indemnified Ispat Inland from
obligations of Empire in exchange for certain future payments to
Empire and to the Company by Ispat Inland of
$120.0 million, recorded at a present value of
$64.1 million at December 31, 2004 ($61.3 million
at December 31, 2003) with $52.1 million classified as
Long-term receivable with the balance current, over
the 12-year life of the supply agreement. A subsidiary of Ispat
Inland has retained a 21 percent ownership in Empire, which
it has a unilateral right to put to the Company in 2008. The
Company is the sole outside supplier of pellets purchased by
Ispat Inland for the term of the supply agreement. Sales to
Ispat Inland by the Company (over and above Ispat Inlands
equity share of Empire production) totaled 2.6 million tons
and 1.4 million tons in 2004 and 2003, respectively.
On January 31, 2002, the Company increased its ownership in
Tilden from 40 percent to 85 percent with the
acquisition of Algomas interest in Tilden for assumption
of mine liabilities associated with the interest. The
acquisition increased the Companys share of the annual
production capacity by 3.5 million tons. Concurrently, a
term supply agreement was executed that made the Company the
sole supplier of iron ore pellets purchased by Algoma for a
15-year period.
In July 2002, the Company acquired (effective retroactive to
January 1, 2002) an eight percent interest in Hibbing from
Bethlehem Steel for the assumption of mine liabilities
associated with the interest. The acquisition increased the
Companys ownership of Hibbing from 15 percent to
23 percent. This transaction reduced Bethlehem Steels
ownership interest in Hibbing to 62.3 percent. In October
2001, Bethlehem Steel filed for protection under chapter 11
of the U.S. Bankruptcy Code. At the time of the filing, the
Company had a trade receivable of approximately
$1.0 million, which has been written off. In May 2003, ISG
purchased the assets of Bethlehem Steel, including Bethlehem
Steels 62.3 percent interest in Hibbing.
35
In August 2002, Acme Steel Company, a wholly-owned subsidiary of
Acme Metals Incorporated, which had been under chapter 11
bankruptcy protection since 1998, rejected its 15.1 percent
interest in Wabush. As a result, the Companys interest
increased to 26.83 percent. Acme had discontinued funding
its Wabush obligations in August 2001.
Effect of Mine Ownership Increases
While none of the increases in mine ownerships during 2002
required cash payments, the ownership changes resulted in the
Company recognizing net obligations of approximately
$93 million at December 31, 2002. Additional
consolidated obligations assumed totaled approximately
$163 million at December 31, 2002, primarily related
to employment and legacy obligations at the Empire and Tilden
mines, partially offset by non-capital non-current assets,
principally the $58.8 million Ispat Inland long-term
receivable. United Taconites acquisition of the Eveleth
mine assets in December 2003 was for $3 million cash and
assumption of certain liabilities, primarily mine-closure
related environmental obligations.
Labor Contracts
In August 2004, employees at the Empire and Tilden mines in
Michigan and the Hibbing Taconite and United Taconite mines in
Minnesota, represented by the United Steelworkers of America
(USWA), ratified new four-year labor agreements that
are comparable to other USWA contracts in the industry. The new
agreements provide employees a nine percent wage increase over
the next four years and for the Company and its partners to fund
an estimated $220 million into pension plans and VEBAs
during the term of the contracts. Accelerated funding of these
plans will better secure employee post-employment benefits and
reduce the Companys future years employment legacy
costs. The agreements also provide that employees and future
retirees share in healthcare insurance cost, with the
Companys share of future retirees healthcare premiums
capped at 2008 levels for 2009 and beyond. In addition, the
union agreed to certain workforce flexibility provisions and
other work rule modifications that will improve productivity.
On October 10, 2004, a new five-year labor agreement was
ratified by the USWA, representing hourly employees at Wabush
Mines in Canada. The new agreement provides for increases in
wages and benefits that are expected to be partially offset by
improved productivity associated with increased worker
flexibility provisions. On July 5, 2004, the USWA initiated
a strike that idled Wabush mining and concentrating facilities
in Labrador, Newfoundland and pelletizing and shipping
facilities in Pointe Noire, Quebec. As a result of the work
stoppage, Wabush lost approximately 1.7 million tons of
production (Company share .5 million tons). Operations
resumed on October 11, 2004.
Other Related Items
The iron ore industry has been identified by the United States
Environmental Protection Agency (the EPA) as an
industrial category that emits pollutants established by the
1990 Clean Air Act Amendments. These pollutants included over
200 substances that are now classified as hazardous air
pollutants (HAP). The EPA is required to develop
rules that would require major sources of HAP to utilize Maximum
Achievable Control Technology (MACT) standards for
their emissions. Pursuant to this statutory requirement, the EPA
published a final rule on October 30, 2003 imposing
emission limitations and other requirements on taconite iron ore
processing operations. We must comply with the new requirements
by no later than October 30, 2006. Our projected capital
expenditures in 2005 and 2006 to meet the proposed MACT
standards are approximately $20 million, including
$4 million related to the restart of Line 1 at United
Taconite.
In 2002, the Company agreed to participate in Phase II of
the Mesabi Nugget Project. Other participants include Kobe
Steel, Ltd. (Kobe Steel), Steel Dynamics, Inc.,
Ferrometrics, Inc. and the State of Minnesota. Construction of a
$16 million pilot plant at the Companys Northshore
Mine, to test and develop
36
Kobe Steels technology for converting iron ore into nearly
pure iron in nugget form, was completed in May 2003. The
high-iron-content product could be utilized to replace steel
scrap as a raw material for electric steel furnaces and blast
furnaces or basic oxygen furnaces of integrated steel producers
or as feed stock for the foundry industry. A third operating
phase of the pilot plant test in 2004 confirmed the commercial
viability of this technology. The pilot plant ended operations
August 3, 2004. The product has been used by four electric
furnace producers and one foundry with favorable results. The
Companys contribution to the project through the pilot
plant testing and development phase was $5.3 million,
primarily contributions of in-kind facilities and services.
Preliminary construction engineering and environmental
permitting activities have been initiated for two potential
commercial plant locations (one in Butler, Indiana near Steel
Dynamics steelmaking facilities and one at the
Companys Cliffs Erie site in Hoyt Lakes, Minnesota) with
earliest environmental approval expected in the first half of
2005. A decision to proceed on construction of a commercial
plant could be made in the first half of 2005; the Company would
be the supplier of iron ore and have a minority interest in the
first commercial plant.
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Venezuela Technical Assistance |
In March 2004, a subsidiary of the Company entered into an
agreement to provide technical assistance to C.V.G. Ferrominera
Orinoco C.A. of Venezuela. Under the agreement, the Company is
assisting Ferrominera in achieving stable and sustainable
production at its iron ore pellet plant located in the State of
Bolivar, Venezuela.
Ferrominera Orinoco is a government-owned company responsible
for the development of Venezuelas iron ore industry.
Ferrominera Orinoco owns a 3.3 million metric ton pellet
plant located in Puerto Ordaz, Venezuela, where it processes
high-grade ores produced from its main iron ore deposits in
Ciudad Piar. Production from the mine and pellet plant is for
both domestic consumption and sale in the international markets.
Under terms of the agreement, the Company is providing technical
assistance from the U.S., including a team residing in Venezuela
and working at the pellet plant on a full-time basis. The
objective of the contract is to assist current management in
various operational functions including operations and process
control, maintenance, safety, environmental, training, and
quality control. The Company is receiving a fixed fee with
additional amounts based on the level of production achieved.
The agreement was effective April 1, 2004 and is for an
initial term of five years.
On February 16, 2004, the Company entered into an option
agreement with PolyMet Mining Inc., a U.S. subsidiary of
PolyMet Mining Corporation (collectively PolyMet),
that grants PolyMet the exclusive right to acquire certain land,
crushing, concentrating and other ancillary facilities located
at the Companys Cliffs Erie site in Minnesota.
Under the terms of the agreement, the Company received $500,000
and one million common shares of PolyMet for maintaining certain
identified components of the Cliffs Erie facility, while PolyMet
conducts a feasibility study on the development of its Northmet
PolyMetallic non-ferrous ore deposit located near the Cliffs
Erie site. PolyMet will have until June 30, 2006 to
exercise its option and acquire the assets covered under the
agreement for additional consideration.
PolyMet is a non-ferrous mining company located in Vancouver,
B.C. Canada. Its stock trades Over-The-Counter in the
U.S. under the symbol POMGF.OB. Its stock closed at
$.23 per share on February 13, 2004. The Company is
recognizing the $500,000 option payment and one million common
shares (valued at $230,000 on the agreement date) under the
deposit method. The shares are classified as available-for-sale
with mark-to-market changes recognized in equity as other
comprehensive income. At December 31, 2004, the market
value of the shares was $515,000.
37
Strategic Investments
The Company intends to continue to pursue investment and
management opportunities to broaden its scope as a supplier of
iron ore pellets to the integrated steel industry through the
acquisition of additional mining interests to strengthen its
market position. The Company is particularly focused on
expanding its international investments to leverage its
expertise in mining and processing iron ore to capitalize on
global demand for steel and iron ore in areas such as China. The
Companys innovative United Taconite joint venture with
Laiwu is one example of its ability to expand geographically by
supplying pellets from Wabush Mines in Eastern Canada in
exchange for Laiwus United Taconite pellets, and the
Company intends to continue to pursue similar opportunities in
other regions. In addition, the Company will continue to
investigate opportunities in North America including Eastern
Canadian and U.S. mines. In the event of any future acquisitions
or joint-venture opportunities, the Company may consider using
available liquidity or other sources of funding to make
investments.
Offer to Purchase Portman Limited
On January 11, 2005, the Company, through a wholly-owned
subsidiary incorporated for the sole purpose of making an
acquisition offer, announced an all-cash offer for the
outstanding shares of Portman Limited (Portman), a
Western Australia-based independent iron ore mining and
exploration company. The Companys offer
(Offer) consisted of A$3.40 per share, or
US$2.65 per share (assuming an exchange rate of A$1.28
equal to US$1.00), which will result in a total acquisition
price of approximately US $500 million. The Offer has the
support of Portmans Board of Directors. If successful, the
Company expects to fund the acquisition with existing cash and
borrowings under its revolving credit facility. The Company has
hedged its potential foreign exchange exposure through the
acquisition of a put option. The Company has a commitment from
its bankers to increase its revolving credit facility from
$30 million to $100 million and extend its term
through January 6, 2006; the Company is working on a longer
term $250 million revolving credit facility to replace the
existing facility.
Portman supplies iron ore to the Chinese and Japanese markets,
with approximately 75 percent of the product exported to
China and 25 percent exported to Japan. Portman currently
has approximately six million tons of annual iron ore capacity,
which will be expanded to eight million tons by late 2005.
Environmental and Closure Obligations
At December 31, 2004, the Company had environmental and
closure obligations, including its share of the obligations of
unconsolidated ventures, of $99.0 million
($97.8 million at December 31, 2003), of which
$6.0 million is current. Payments in 2004 were
$6.4 million ($7.5 million in 2003). The obligations
at December 31, 2004 include certain responsibilities for
environmental remediation sites, $13.0 million, closure of
LTV Steel Mining Company (LTVSMC),
$33.8 million, and obligations for closure of the
Companys six operating mines, $52.2 million,
reflecting implementation of SFAS No. 143, Asset
Retirement Obligations effective January 1, 2002.
The LTVSMC closure obligation resulted from an October 2001
transaction where subsidiaries of the Company received a net
payment of $50.0 million and certain other assets and
assumed environmental and certain facility closure obligations
of $50.0 million, which obligations have declined to
$33.8 million at December 31, 2004, as a result of
expenditures totaling $16.2 million since 2001.
In September 2002, the Company received a draft of a proposed
Administrative Order by Consent (Consent Order) from
the EPA for cleanup and reimbursement of costs associated with
the Milwaukee Solvay coke plant site in Milwaukee, Wisconsin.
The plant was operated by a predecessor of the Company from 1973
to 1983, which predecessor was acquired by the Company in 1986.
In January 2003, the Company completed the sale of the plant
site and property to a third party. Following this sale, a
Consent Order was entered into with the EPA by the Company, the
new owner and another third party who had operated on the site.
In connection with the Consent Order, the new owner agreed to
take responsibility for the removal action and agreed to
indemnify the Company for all costs and expenses in connection
with the removal action. In the third quarter of 2003, the new
owner, after completing a portion of the removal, experienced
financial
38
difficulties. In an effort to continue progress on the removal
action, the Company expended approximately $.9 million in
the second half of 2003 and $2.1 million in 2004. At this
time, the Company believes the requirements of the removal
action have been substantially completed.
On August 26, 2004, the Company received a Request for
Information pursuant to Section 104(e) of CERCLA relative
to the investigation of additional contamination below the
ground surface at the Milwaukee Solvay site. The Request for
Information was also sent to 13 other potentially responsible
parties (PRPs). At this time, the nature and extent
of the contamination, the required remediation, the total cost
of the cleanup and the cost sharing responsibilities of the PRPs
cannot be determined. The Company increased its environmental
reserve for Milwaukee Solvay by $.8 million in 2004 for
potential additional exposure.
Summary of Contractual Obligations
Following is a summary of the Companys contractual
obligations at December 31, 2004:
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|
Payments due by Period(1) (Millions) | |
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|
| |
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|
|
Less than | |
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|
More than | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1 - 3 Years | |
|
3 - 5 Years | |
|
5 Years | |
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|
| |
|
| |
|
| |
|
| |
|
| |
Capital Lease Obligations
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|
$ |
9.1 |
|
|
$ |
2.6 |
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|
$ |
5.2 |
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|
$ |
1.3 |
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|
Operating Leases
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|
|
51.1 |
|
|
|
16.0 |
|
|
|
21.2 |
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|
|
11.1 |
|
|
$ |
2.8 |
|
Purchase Obligations
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|
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|
|
|
|
|
|
|
|
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Open Purchase Orders
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|
|
47.1 |
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|
|
46.0 |
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|
|
.6 |
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|
|
.5 |
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|
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Minimum Take or Pay Purchase Commitments(2)
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|
|
182.2 |
|
|
|
59.5 |
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|
|
68.6 |
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|
|
29.1 |
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|
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25.0 |
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Total Purchase Obligations
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|
|
229.3 |
|
|
|
105.5 |
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|
|
69.2 |
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|
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29.6 |
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|
|
25.0 |
|
Other Long-Term Liabilities
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|
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|
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|
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|
|
|
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|
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|
|
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|
|
Pension Funding Minimums
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|
|
158.4 |
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|
|
33.9 |
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|
|
82.0 |
|
|
|
42.5 |
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|
|
|
|
|
OPEB Claim Payments
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|
|
145.8 |
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|
|
35.2 |
|
|
|
66.9 |
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|
|
43.7 |
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|
|
|
|
|
Mine Closure Obligations
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|
|
86.0 |
|
|
|
3.2 |
|
|
|
14.9 |
|
|
|
13.8 |
|
|
|
54.1 |
|
|
Coal Industry Retiree Health Benefits
|
|
|
7.4 |
|
|
|
.8 |
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
3.6 |
|
|
Personal Injury
|
|
|
11.3 |
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|
|
3.4 |
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|
|
4.4 |
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|
|
1.6 |
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|
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1.9 |
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Other(3)
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|
|
59.3 |
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Total Other Long-Term Liabilities
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|
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468.2 |
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76.5 |
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|
|
169.8 |
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|
|
103.0 |
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|
|
59.6 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
$ |
757.7 |
|
|
$ |
200.6 |
|
|
$ |
265.4 |
|
|
$ |
145.0 |
|
|
$ |
87.4 |
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|
|
|
|
|
|
|
|
|
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(1) |
Includes the Companys consolidated obligations and the
Companys ownership share of unconsolidated ventures
obligations. |
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(2) |
Includes minimum electric power demand charges, minimum coal and
natural gas obligations, and minimum railroad transportation
obligations. |
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(3) |
Primarily includes deferred income taxes payable and other
contingent liabilities for which payment timing is
non-determinable. |
Market Risk
The Company is subject to a variety of market risks, including
those caused by changes in market value of equity investments,
commodity prices, foreign currency exchange rates and interest
rates. The Company has established policies and procedures to
manage risks; however, certain risks are beyond the control of
the Company.
39
The Companys investment policy relating to its short-term
investments (classified as cash equivalents) is to preserve
principal and liquidity while maximizing the return through
investment of available funds. The carrying value of these
investments approximates fair value on the reporting dates.
The rising cost of energy is an important issue for us. Energy
costs account for approximately 25 percent of our
production costs. Recent trends indicate that electric power,
natural gas and oil costs can be expected to increase over time,
although the direction and magnitude of short-term changes are
difficult to predict. Our strategy to address increasing energy
rates includes improving efficiency in energy usage and
utilizing the lowest cost alternative fuel. We also use forward
purchases of natural gas to stabilize fluctuations in near-term
natural gas prices.
The Companys mining ventures enter into forward contracts
for certain commodities, primarily natural gas, as a hedge
against price volatility. Such contracts, which are in
quantities expected to be delivered and used in the production
process, are a means to limit exposure to price fluctuations. At
December 31, 2004, the notional amounts of the outstanding
forward contracts were $28.3 million (Company
share $23.9 million), with an unrecognized fair
value loss of $3.2 million (Company share
$2.7 million) based on December 31, 2004 forward
rates. The contracts mature at various times through December
2005. If the forward rates were to change 10 percent
from the year-end rate, the value and potential cash flow effect
on the contracts would be approximately $2.5 million
(Company share $2.1 million).
Our Wabush mine operation in Canada represented approximately
five percent of the Companys pellet production. This
operation is subject to currency exchange fluctuations between
the U.S. and Canadian dollars; however, we do not hedge our
exposure to this currency exchange fluctuation. During 2003 and
2004, the value of the Canadian dollar rose against the
U.S. dollar from $.64 U.S. dollar per Canadian dollar
at the beginning of 2003 to $.83 U.S. dollars per Canadian
dollar at December 31, 2004, an increase of
30 percent. The average exchange rate increased to $.77
U.S. dollar per Canadian dollar in 2004 from an average of
$.72 U.S. dollar per Canadian dollar for 2003, an increase
of seven percent. The Company does not believe that the recent
increase in the U.S./ Canadian exchange rate is a trend that
will continue in the long-term; however, short-term fluctuations
cannot reasonably be predicted.
Critical Accounting Policies
Managements discussion and analysis of financial condition
and results of operations is based on the Companys
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States (GAAP). Preparation of financial
statements requires management to make assumptions, estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues, costs and expenses, and the related
disclosures of contingencies. Management bases its estimates on
various assumptions and historical experience, which are
believed to be reasonable; however, due to the inherent nature
of estimates, actual results may differ significantly due to
changed conditions or assumptions. Management believes that the
following critical accounting policies and practices incorporate
estimates and judgments that have the most significant impact on
the Companys financial statements.
The Company recognizes revenue on the sale of products when
title to the product has transferred to the customer in
accordance with the specified terms of each term supply
agreement. Generally, our term supply agreements provide that
title transfers to the customer when payment is received. Under
some term supply agreements, we deliver the product to ports on
the lower Great Lakes and/or to the customers facilities
prior to the transfer of title. Most of the Companys term
supply agreements contain provisions for annual pricing
adjustments. These provisions vary from agreement to agreement
but typically include adjustments based upon changes in
specified PPI including those for all commodities, industrial
commodities, energy and steel, as well as changes in
international pellet prices. In most cases, these adjustment
factors have not been finalized at the time our product is sold;
the Company routinely estimates these adjustment factors for
purposes of revenue recognition. Certain supply agreements with
one customer include provisions for supplemental revenue or
refunds based on the customers annual steel pricing at the
time the product is
40
consumed in the customers blast furnaces. The Company
estimates these amounts for recognition at the time of sale. The
Companys 2004 revenues included $6.6 million of
supplemental revenue on 2004 sales based on estimates of the
customers 2005 steel pricing.
Our rationale for delivering iron ore products to customers in
advance of payment for the products is to more closely relate
timing of payment by customers to consumption, which also
provides additional liquidity to our customers. Title and risk
of loss do not pass to the customer until payment for the
pellets is received. This is a revenue recognition practice
utilized to reduce our financial risk to customer insolvency.
This practice is not believed to be widely used throughout the
balance of the industry.
Revenue is recognized on the sale of services when the services
are performed.
Where we are joint venture participants in the ownership of a
mine, our contracts entitle us to receive royalties and
management fees, which we earn as the pellets are produced.
The Company regularly evaluates its economic iron ore reserves
and updates them as required in accordance with SEC Industry
Guide 7. The estimated ore reserves could be affected by future
industry conditions, geological conditions and ongoing mine
planning. Maintenance of effective production capacity or the
ore reserve could require increases in capital and development
expenditures. Generally as mining operations progress, haul
lengths and lifts increase. Alternatively, changes in economic
conditions or the expected quality of ore reserves could
decrease capacity or ore reserves. Technological progress could
alleviate such factors, or increase capacity or ore reserves.
Remaining Empire mine ore reserves (23 million tons at
December 31, 2004) were previously decreased to
29 million tons at December 31, 2003 from
63 million tons at December 31, 2002 and
116 million tons at December 31, 2001. The reduction
in ore reserves reflected increasing production and processing
costs in recent years as the Empire mine approaches the latter
portion of its economic life. Additionally, economic ore
reserves at Wabush Mines (57 million tons at
December 31, 2004) were previously reduced to
61 million tons at December 31, 2003 from
94 million tons at December 31, 2002 and
244 million tons at December 31, 2001. The decrease in
ore reserves at Wabush reflects increased operating costs, the
impact of currency exchange rates, and a reduction in the
maximum mining depth in one critical mining area due to
assessment of dewatering capabilities based on a recently
completed hydrologic evaluation, partially offset by higher
Eastern Canadian pellet pricing and an increase in Wabush
production to its capacity of six million tons per year. The
Company uses its ore reserve estimates to determine the mine
closure dates utilized in recording the fair value liability for
asset retirement obligations. See Note 5
Environmental and Mine Closure Obligations Mine
Closure in the Notes to Consolidated Financial Statements. Since
the liability represents the present value of the expected
future obligation, a significant change in ore reserves would
have a substantial effect on the recorded obligation. The
Company also utilizes economic ore reserves for evaluating
potential impairments of mine assets and in determining maximum
useful lives utilized to calculate depreciation and amortization
of long-lived mine assets. Decreases in ore reserves could
significantly affect these items.
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Asset Retirement Obligations |
The accrued mine closure obligations for the Companys
active mining operations reflect the adoption of
SFAS No. 143 effective January 1, 2002 to provide
for contractual and legal obligations associated with the
eventual closure of the mining operations. The Companys
obligations are determined based on detailed estimates adjusted
for factors that an outside party would consider (i.e.,
inflation, overhead and profit), which were escalated (at an
assumed three percent) to the estimated closure dates, and then
discounted using a credit-adjusted risk-free interest rate
(12.0 percent for United Taconite and 10.25 percent
for all others). The closure date for each location was
determined based on the exhaustion date of the remaining iron
ore reserves. The estimated obligations are particularly
sensitive to the impact of changes in mine lives given the
difference between the inflation and discount rates. Changes in
the base estimates of legal and contractual closure costs due to
changed legal or contractual requirements, available technology,
inflation, overhead or profit rates
41
would also have a significant impact on the recorded
obligations. See Note 5 Environmental and Mine
Closure Obligations Mine Closure in the Notes to
Consolidated Financial Statements.
The Company monitors conditions that indicate that the carrying
value of an asset or asset group may be impaired. The Company
determines impairment based on the assets ability to
generate cash flow greater than its carrying value, utilizing an
undiscounted probability-weighted analysis. If the analysis
indicates the asset is impaired, the carrying value is adjusted
to fair value. The impairment analysis and fair value
determination can result in significantly different outcomes
based on critical assumptions and estimates including the
quantity and quality of remaining economic ore reserves, and
future iron ore prices and production costs. See
Note 1 Operations and Customers
Empire Mine and Wabush Mines and Note 3
Discontinued Operation in the Notes to Consolidated Financial
Statements.
|
|
|
Environmental Remediation Costs |
The Company has a formal code of environmental protection and
restoration. The Companys obligations for known
environmental problems at active and closed mining operations
and other sites have been recognized based on estimates of the
cost of investigation and remediation at each site. If the
estimate can only be estimated as a range of possible amounts,
with no specific amount being most likely, the minimum of the
range is accrued. Management reviews its environmental
remediation sites quarterly to determine if additional cost
adjustments or disclosures are required. The characteristics of
environmental remediation obligations, where information
concerning the nature and extent of clean-up activities is not
immediately available, or changes in regulatory requirements,
result in a significant risk of increase to the obligations as
they mature. Expected future expenditures are not discounted to
present value. Potential insurance recoveries are not recognized
until realized.
|
|
|
Employee Retirement Benefit Obligations |
The Company and its mining ventures sponsor defined benefit
pension plans covering substantially all employees. These plans
are largely noncontributory, and except for U.S. salaried
employees, benefits are generally based on employees years
of service and average earnings for a defined period prior to
retirement. Additionally, the Company and its ventures provide
post-retirement medical and life insurance benefits
(OPEBs) to most full-time employees who meet certain
length-of-service and age requirements. The Companys
pension and medical costs (including OPEBs) have increased
substantially over the past several years. Lower interest rates,
lower asset returns and continued escalation of medical costs
have been the predominant causes of the increases. The Company
has taken actions to control pension and medical costs.
Effective July 1, 2003, the Company implemented changes to
U.S. salaried employee plans to reduce costs by more than
an estimated $8.0 million on an annualized basis. Benefits
under the current defined benefit formula were frozen for
affected U.S. salaried employees and a new cash balance
formula was instituted. Increases in affected U.S. salaried
retiree healthcare co-pays became effective for retirements
after June 30, 2003. A cap on the Companys share of
annual medical premiums was also implemented for existing and
future U.S. salaried retirees.
Pursuant to the new four-year U.S. labor agreements reached
with the USWA, effective August 1, 2004, OPEB expense for
2004 and the accumulated post-retirement benefit obligation
(APBO) has decreased $4.9 million and
$48.0 million, respectively, to reflect negotiated plan
changes, which capped the Companys share of future
bargaining unit retirees healthcare premiums at 2008
levels for the years 2009 and beyond. The new agreements also
provide that the Company and its partners fund an estimated
$220 million into bargaining unit pension plans and VEBAs
during the term of the contracts.
Year 2004 OPEB expense also reflects an estimated cost reduction
of $4.1 million due to the effect of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003.
The Company elected to adopt the retroactive transition method
for recognizing the OPEB cost reduction in the second quarter of
2004.
42
Accordingly, first quarter 2004 results have been re-stated to
reduce the previously reported net loss by $.6 million or
$.05 per share. Additionally, the APBO decreased
$25.1 million.
Year 2004 OPEB expense also reflects a cost reduction for the
Canadian OPEB plan of $.4 million due to the net effect of
favorable claims and demographic experience, offset by moderate
benefit improvements negotiated with the USWA effective
March 1, 2004.
Following is a summary of the Companys defined benefit
pension and OPEB funding and expense for the years 2002 through
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Pension | |
|
OPEB | |
|
|
| |
|
| |
|
|
Funding | |
|
Expense | |
|
Funding | |
|
Expense | |
|
|
| |
|
| |
|
| |
|
| |
2002
|
|
$ |
1.1 |
|
|
$ |
7.2 |
|
|
$ |
16.8 |
|
|
$ |
21.5 |
|
2003
|
|
|
6.4 |
|
|
|
32.0 |
|
|
|
17.0 |
|
|
|
29.1 |
|
2004
|
|
|
63.0 |
|
|
|
23.1 |
|
|
|
30.9 |
|
|
|
28.5 |
|
2005 (Estimated)
|
|
|
33.9 |
|
|
|
19.1 |
|
|
|
35.2 |
|
|
|
21.8 |
|
Assumptions used in determining the benefit obligations and the
value of plan assets for defined benefit pension plans and
post-retirement benefit plans (primarily retiree healthcare
benefits) offered by the Company and its unconsolidated ventures
are evaluated periodically by management in conjunction with
outside actuaries. Critical assumptions, such as the discount
rate used to measure the benefit obligations, the expected
long-term rate of return on plan assets, and the medical care
cost trend are reviewed annually. At December 31, 2004, the
Company reduced its discount rate for U.S. plans to
5.75 percent from 6.25 percent at December 31,
2003, and reduced its discount rate for Canadian plans to
5.75 percent from 6.00 percent at December 31,
2003. Following are sensitivities on estimated 2005 pension and
OPEB expense of potential further changes in these key
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Increase in 2005 | |
|
|
Expense | |
|
|
(In Millions) | |
|
|
| |
|
|
Pension | |
|
OPEB | |
|
|
| |
|
| |
Decrease discount rate .25 percent
|
|
$ |
1.2 |
|
|
$ |
.6 |
|
Decrease return on assets 1 percent
|
|
|
4.5 |
|
|
|
.5 |
|
Increase medical trend rate 1 percent
|
|
|
N/A |
|
|
|
2.6 |
|
Changes in actuarial assumptions, including discount rates,
employee retirement rates, mortality, compensation levels, plan
asset investment performance, and healthcare costs, are selected
by the Company after consulting with outside actuaries. Changes
in actuarial assumptions and/or investment performance of plan
assets can have a significant impact on the Companys
financial condition due to the magnitude of the Companys
retirement obligations. See Note 8 Retirement
Related Benefits in the Notes to Consolidated Financial
Statements.
Risks Relating to the Company
|
|
|
Excess global capacity and the availability of competitive
substitute materials may result in intense competition in the
steel industry, which may reduce steel prices and decrease steel
production and our customers demand for iron ore
products. |
More than 95 percent of our revenues are derived from the
North American integrated steel industry, which is highly
competitive. From time to time, global overcapacity in steel
manufacturing has a negative impact on North American steel
sales and reduces the production of steel and consequently the
demand for iron ore. Further, production of steel by North
American integrated steel manufacturers may be replaced to a
certain extent by production of substitute materials by other
manufacturers. In the case of certain product applications,
North American steel manufacturers compete with manufacturers of
other materials, including plastic, aluminum, graphite
composites, ceramics, glass, wood and concrete. Most of our term
supply agreements for the sale of iron ore products are
requirements-based or provide for flexibility of volume above a
43
minimum level. Reduced demand for and consumption of iron ore
products by North American integrated steel producers have had
and may continue to have a significant negative impact on our
sales, margins and profitability.
|
|
|
Increased imports of steel into the United States could
adversely impact North American steel sales, which could
adversely affect demand for our products and our sales, margins
and profitability. |
From time to time, global overcapacity in steel manufacturing
and a weakening of certain foreign economies, particularly in
Eastern Europe, Asia and Latin America, may negatively impact
steel prices in those foreign economies and result in high
levels of steel imports from those countries into the United
States at depressed prices. Based on the American Iron and Steel
Institutes Apparent Steel Supply (excluding semi-finished
steel products), imports of steel into the United States
constituted 22.1 percent (estimated), 16.5 percent and
21.1 percent of the domestic steel market supply for 2004,
2003 and 2002, respectively. Significant imports of steel into
the United States could substantially reduce sales, margins and
profitability of North American steel producers, and
consequently, reduce demand for iron ore. The purchase by North
American steel producers of semi-finished steel products from
foreign suppliers could also decrease demand for our iron ore
products.
|
|
|
The North American steel industry continues to undergo a
restructuring process that has resulted in industry
consolidation that could result in a reduction of integrated
steelmaking capacity over time, and thereby reduce iron ore
consumption. |
The North American steel industry has undergone consolidation,
and that consolidation is likely to continue as evidenced by the
recently-announced acquisition of ISG by Mittal. Consolidation
of the North American steel industry will result in fewer
customers for iron ore. The restructuring process may reduce
integrated steelmaking capacity, which would reduce demand for
our iron ore products and may adversely affect our sales.
Further, if the steel producers that have captive iron ore mines
obtain a larger share of North American steel production, they
may obtain their iron ore from their own mines, if they have
excess capacity, rather than from us. These factors could
adversely affect our sales, margins and profitability.
|
|
|
Our sales and earnings are subject to significant
fluctuations as a result of the cyclical nature of the North
American steel industry. |
In 2003 and 2004, 18.6 million and 22.2 million tons,
respectively, of the iron ore pellets we produced were sold to
North American steel manufacturers, while only .6 million
and .4 million tons, respectively, of our pellets were sold
outside of North America. The North American steel industry has
been highly cyclical in nature, influenced by a combination of
factors, including periods of economic growth or recession,
strength or weakness of the U.S. dollar, worldwide
production capacity, the strength of the U.S. automotive
industry, levels of steel imports and applicable tariffs. The
demand for steel products is generally affected by macroeconomic
fluctuations in North America and the global economies in which
steel companies sell their products. For example, future
economic downturns, stagnant economies or currency fluctuations
in the United States or globally could decrease the demand for
steel products or increase the amount of imports of steel or
iron ore into the United States.
In addition, a disruption or downturn in the oil and gas, gas
transmission, construction, commercial equipment, rail
transportation, appliance, agricultural, automotive or durable
goods industries, all of which are significant markets for steel
products and are highly cyclical, could negatively impact sales
of steel by North American producers. These trends could
decrease the demand for iron ore products and significantly
adversely affect our sales, margins and profitability.
44
|
|
|
If North American steelmakers use methods other than blast
furnace production to produce steel, or if their blast furnaces
shut down or otherwise reduce production, the demand for our
iron ore products may decrease, which would adversely affect our
sales, margins and profitability. |
Demand for our iron ore products is determined by the operating
rates for the blast furnaces of North American steel companies.
However, not all finished steel is produced by blast furnaces;
finished steel also may be produced by other methods that do not
require iron ore products. For example, steel
mini-mills, which are steel recyclers, generally
produce steel by using scrap steel, not iron ore pellets, in
their electric furnaces. Production of steel by steel
mini-mills was approximately 50 percent of
North American total finished steel production in 2004. Steel
producers also can produce steel using imported iron ore or
semi-finished steel products, which eliminates the need for
domestic iron ore. Environmental restrictions on the use of
blast furnaces also may reduce our customers use of their
blast furnaces. Maintenance of blast furnaces can require
substantial capital expenditures. Our customers may choose not
to maintain their blast furnaces, and some of our customers may
not have the resources necessary to adequately maintain their
blast furnaces. If our customers use methods to produce steel
that do not use iron ore products, demand for our iron ore
products will decrease, which could adversely affect our sales,
margins and profitability.
|
|
|
Natural disasters, equipment failures and other unexpected
events may lead our steel industry customers to curtail
production or shut down their operations. |
Operating levels at our steel industry customers are subject to
conditions beyond their control, including raw material
shortages, weather conditions, natural disasters, interruptions
in electrical power or other energy services, equipment
failures, and other unexpected events. Any of those events could
also affect other suppliers to the North American steel
industry. In either case, those events could cause our steel
industry customers to curtail production or shut down a portion
or all of their operations, which could reduce their demand for
our iron ore products. For example, in late 2003, a fire
occurred in a mine of a major coal supplier to U.S. Steel,
which supplies a majority of the coke, a processed form of coal,
used by our steel industry customers to operate their blast
furnaces. The fire caused U.S. Steel to curtail its
production of coke, and to reduce its coke shipments to at least
two of our steel industry customers. As a result, one of our
steel industry customers had to curtail its steel production,
and its demand for our iron ore products decreased. Decreased
demand for our iron ore products could adversely affect our
sales, margins and profitability.
|
|
|
If the rate of steel consumption in China slows, the
demand for iron ore could decrease. |
Although we do not have significant international sales, the
price of iron ore is strongly influenced by international
demand. The current growing level of international demand for
iron ore and steel is largely due to the rapid industrial growth
in China. A large quantity of steel is currently being used in
China to build roads, bridges, railroads and factories. If the
economic growth rate in China slows, which may be difficult to
forecast, less steel will be used in construction and
manufacturing, which would decrease demand for iron ore.
According to the China Daily newspaper, China imported
29.3 million tons of steel products in 2004, down
7.9 million tons from 2003. This slowdown in Chinese steel
demand began in March 2004 when Chinese banks restricted lending
in the steel sector and the Chinese government withdrew import
duty rebates for equipment used in steel plants and ended
discounts on electricity consumption by steel factories. This
could adversely impact the world iron ore market, which would
impact the North American iron ore market, and also adversely
impact our United Taconite joint venture with Laiwu. A slowing
of the economic growth rate in China could also result in
greater exports of steel out of China, which if imported into
North America could decrease demand for domestically produced
steel, thereby decreasing the demand for iron ore produced in
North America.
|
|
|
We operate in a very competitive industry. |
The iron mining business is highly competitive, with producers
in all iron-producing regions. Some of our competitors may have
greater financial resources than we have and may be better able
to withstand changes in conditions within the North American
steel industry than we are. In the future, we may face increasing
45
competition. As a result, we may face pressures on sales prices
and volumes of our products from competitors and large customers.
|
|
|
Our sales and competitive position depend on our ability
to transport our products to our customers at competitive rates
and in a timely manner. |
Our competitive position requires the ability to transport iron
ore to our markets at competitive rates. Disruption of the lake
freighter and rail transportation services because of
weather-related problems, including ice and winter weather
conditions on the Great Lakes, strikes, lock-outs or other
events, could impair our ability to supply iron ore pellets to
our customers at competitive rates or in a timely manner and,
thus, could adversely affect our sales and profitability.
Further, increases in transportation costs, or changes in such
costs relative to transportation costs incurred by our
competitors, could make our products less competitive, restrict
our access to certain markets and have an adverse effect on our
sales, margins and profitability.
|
|
|
If a substantial portion of our term supply agreements
terminate and are not renewed, and we are unable to find
alternate buyers willing to purchase our products on terms
comparable to those in our existing term supply agreements, our
sales, margins and profitability will suffer. |
A substantial majority of our sales are made under term supply
agreements, which are important to the stability and
profitability of our operations. In 2004, more than
96 percent of our sales volume was sold under term supply
agreements. If a substantial portion of our term supply
agreements were modified or terminated, we could be materially
adversely affected to the extent that we are unable to renew the
agreements or find alternate buyers for our iron ore at the same
level of profitability. We cannot assure you that we will be
able to renew or replace existing term supply agreements at the
same prices or with similar profit margins when they expire. A
loss of sales to our existing customers could have a substantial
negative impact on our sales, margins and profitability.
|
|
|
We depend on a limited number of customers, and the loss
of, or significant reduction in, purchases by our largest
customers would adversely affect our sales. |
The following seven customers together accounted for a total of
94 percent of Product sales and services
revenues for the years 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
Percent of | |
|
|
Sales | |
|
|
Revenues* | |
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
Customer |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ISG
|
|
|
44 |
% |
|
|
29 |
% |
Algoma
|
|
|
14 |
|
|
|
17 |
|
Severstal/Rouge
|
|
|
13 |
|
|
|
16 |
|
Ispat Inland/ Mittal
|
|
|
10 |
|
|
|
8 |
|
WCI
|
|
|
6 |
|
|
|
7 |
|
Stelco
|
|
|
5 |
|
|
|
1 |
|
Weirton
|
|
|
2 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
94 |
% |
|
|
94 |
% |
|
|
|
|
|
|
|
|
|
* |
Excluding freight and minority interest cost reimbursements. |
If one or more of these customers were to significantly reduce
their purchases of iron ore products from us, or if we were
unable to sell iron ore products to them on terms as favorable
to us as the terms under our current term supply agreements, our
sales, margins and profitability could suffer materially due to
the high level of fixed costs and the high costs to idle or
close mines. We are a merchant mine producer of iron ore
products,
46
not a captive producer owned by a steel
manufacturer, and therefore rely on sales to our joint-venture
partners and other third-party customers for our revenues. In
addition, WCI and Stelco have petitioned for protection under
bankruptcy or similar laws, and the bankruptcy or reorganization
of our customers could affect our sales, margins and
profitability.
|
|
|
Changes in demand for our products by our customers could
cause our sales, margins and profitability to fluctuate. |
Our term supply agreements generally are requirements contracts,
the majority of which have no minimum requirement provisions,
and some of which provide for flexibility of volume above
minimum levels. A decrease in one or more of our customers
requirements could cause our sales to decline, as we may not be
able to find other customers to purchase our iron ore pellets.
In addition, if our customers requirements decline, since
many of our production costs are fixed, our production costs per
ton may rise, which may affect our margins and profitability.
Unmitigated loss of revenues would have a greater impact on
margins and profitability than sales, due to the high level of
fixed costs in the iron ore mining business and the high cost to
idle or close mines.
|
|
|
The provisions of our term supply agreements could cause
our sales, margins and profitability to fluctuate. |
Our term supply agreements typically contain force majeure
provisions allowing temporary suspension of performance by the
customer during specified events beyond the customers
control, including raw material shortages, power failures,
equipment failures, adverse weather conditions and other events.
For example, one of our large customers notified us in January
2004 that it was reducing its requirements for iron ore pellets
in the first quarter of 2004 by 180,000 long tons pursuant to
the force majeure provisions of its term supply agreement with
us. That customer invoked the force majeure provision due to a
failure of U.S. Steel to ship the quantity of coke that the
customer had ordered due to shortages caused by a fire at a mine
that supplied coal to U.S. Steel.
Price escalators in our term supply agreements also expose us to
short-term price volatility, which can adversely affect our
margins and profitability. Our term supply agreements also
contain provisions requiring us to deliver iron ore pellets
meeting quality thresholds for certain characteristics, such as
chemical makeup. Failure to meet these specifications could
result in economic penalties. All of these contractual
provisions could adversely affect our sales, margins and
profitability.
|
|
|
Mine closures entail substantial costs, and if we close
one or more of our mines sooner than anticipated, our results of
operations and financial condition may be significantly and
adversely affected. |
If we close any of our mines, our revenues would be reduced
unless we were able to increase production at any of our other
mines, which may not be possible. The closure of an open pit
mine involves significant fixed closure costs, including
accelerated employment legacy costs, severance-related
obligations, reclamation and other environmental costs, and the
costs of terminating long-term obligations, including energy
contracts and equipment leases. We base our assumptions
regarding the life of our mines on detailed studies we perform
from time to time, but those studies and assumptions do not
always prove to be accurate. We accrue for the costs of
reclaiming open pits, stockpiles, tailings ponds, roads and
other mining support areas over the estimated mining life of our
property. If we were to reduce the estimated life of any of our
mines, the fixed mine-closure costs would be applied to a
shorter period of production, which would increase production
costs per ton produced and could significantly and adversely
affect our results of operations and financial condition.
Further, if we were to close one or more of our mines
prematurely, we would incur significant accelerated employment
legacy costs, severance-related obligations, reclamation and
other environmental costs, as well as asset impairment charges,
which could materially and adversely affect our financial
condition.
A mine closure would significantly increase employment legacy
costs, including our expense and funding costs for pension and
other post-retirement benefit obligations. First,
retirement-eligible employees would be eligible for enhanced
pension benefits under certain pension plans upon a mine
closure. Second, the number of
47
employees who are eligible for retirement under the pension
plans would increase under special eligibility rules that apply
upon a mine closure. Third, all employees eligible for
retirement under the pension plans at the time of the mine
closure also would be eligible for post-retirement health and
life insurance benefits, thereby accelerating our obligation to
provide these benefits. Fourth, a closure of the Empire or
Tilden mine likely would trigger withdrawal liability to the
pension plan covering hourly employees there. Finally, a mine
closure could trigger significant severance-related obligations,
which could adversely affect our financial condition and results
of operations.
Applicable statutes and regulations require that mining property
be reclaimed following a mine closure in accordance with
specified standards and an approved reclamation plan. The plan
addresses matters such as removal of facilities and equipment,
regrading, prevention of erosion and other forms of water
pollution, revegetation and post-mining land use. We may be
required to post a surety bond or other form of financial
assurance equal to the cost of reclamation as set forth in the
approved reclamation plan. The establishment of the final mine
closure reclamation liability is based upon permit requirements
and requires various estimates and assumptions, principally
associated with reclamation costs and production levels.
Although our management believes, based on currently available
information, we are making adequate provisions for all expected
reclamation and other costs associated with mine closures for
which we will be responsible, our business, results of
operations and financial condition would be adversely affected
if such accruals were later determined to be insufficient.
|
|
|
We have significantly reduced our ore reserve estimates
for the Empire mine and may close the Empire mine sooner than we
had anticipated, which could materially and adversely affect our
results of operations and financial condition. |
We significantly decreased our ore reserve estimates for the
Empire mine from 116 million tons at December 31, 2001
to 63 million tons at December 31, 2002 and further to
29 million tons at December 31, 2003. Our Empire ore
reserves were approximately 23 million tons at
December 31, 2004, with the decrease in 2004 resulting from
production. The 2003 reduction was due to our inability to
develop effective mine plans to produce cost-effective
combinations of production volume, ore quality and stripping
requirements. We may reduce the annual production at the Empire
mine as a result of these decreased ore reserve estimates. If
the ore reserves at Empire are insufficient to sustain our
operations there, we may be required to close the mine. We have
taken significant asset impairment charges relating to the
Empire mine.
If we were to close the Empire mine, we would incur significant
mine closure costs, employment legacy costs, severance-related
obligations, reclamation and other environmental costs and the
costs of terminating long-term obligations, including energy
contracts and equipment leases. A closure of the Empire mine
sooner than we anticipate could materially and adversely affect
our results of operations and financial condition.
|
|
|
We rely on the estimates of our recoverable reserves, and
if those estimates are inaccurate, our financial condition may
be adversely affected. |
We regularly evaluate our economic iron ore reserves based on
expectations of revenues and costs and update them as required
in accordance with Industry Guide 7 promulgated by the SEC.
There are numerous uncertainties inherent in estimating
quantities of reserves of our mines, many of which have been in
operation for several decades, including many factors beyond our
control. Estimates of reserves and future net cash flows
necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area
compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions
concerning future prices for iron ore, assumptions regarding
future industry conditions and operating costs, severance and
excise taxes, development costs and costs of extraction and
reclamation costs, all of which may in fact vary considerably
from actual results. For these reasons, estimates of the
economically recoverable quantities of reserves attributable to
any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of future net
cash flows expected therefrom prepared by different engineers or
by the same engineers at different times may vary substantially.
Estimated reserves could be affected by future industry
conditions, geological conditions and ongoing mine planning.
Actual production, revenues and expenditures with respect to our
reserves will likely vary from
48
estimates, and if such variances are material, our sales and
profitability could be adversely affected. For example, based on
revised economic mine planning studies that we completed in the
fourth quarter of 2002, we reduced the estimates of the ore
reserves at the Empire mine from 116 million tons to
63 million tons due to increasing mining and processing
costs. Based on an update to those studies completed in the
fourth quarter of 2003, we further significantly reduced the ore
reserve estimates to 29 million tons. The reduction was due
to the inability to develop effective mine plans to produce
cost-effective combinations of production volume, ore quality
and stripping requirements with the 2003 reserve base.
We also completed revised economic mine planning studies in the
fourth quarter of 2002 for Wabush Mines, and reduced the
estimate of ore reserves at the Wabush mine from
244 million tons to 94 million tons due to increasing
mining and processing costs. Based on an update to those studies
completed in the fourth quarter of 2003, we further
significantly reduced the Wabush mine ore reserve estimate to
61 million tons. Our reserves at Wabush Mines were
approximately 57 million tons at December 31, 2004,
with the reduction from 2003 attributable to 2004 production.
The revised Wabush estimate is largely a reflection of increased
operating costs, the impact of currency exchange rates and a
reduction in maximum mining depth due to dewatering capabilities
based on a recently completed hydrologic evaluation.
|
|
|
The price adjustment provisions of our term supply
agreements may prevent us from increasing our prices to match
international ore contract prices or to pass increased costs of
production on to our customers. |
Our term supply agreements contain a number of price adjustment
provisions, or price escalators, including adjustments based on
general industrial inflation rates, the price of steel and the
international price of iron ore pellets, among other factors,
that allow us to adjust the prices under those agreements
generally on an annual basis. Our price adjustment provisions
are weighted and some are subject to annual collars, which limit
our ability to raise prices to match international levels and
fully capitalize on strong demand for iron ore. Most of our term
supply agreements do not allow us to increase our prices and to
directly pass through higher production costs to our customers.
An inability to increase prices or pass along increased costs
could adversely affect our margins and profitability.
|
|
|
Our ability to collect payments from our customers depends
on their creditworthiness. |
Our ability to receive payment for iron ore products sold and
delivered to our customers depends on the creditworthiness of
our customers. Generally, we deliver iron ore products to our
customers yard in advance of payment for those products.
Our rationale for delivering iron ore products to customers in
advance of payment for the product is to more closely relate
timing of payment to consumption, thereby providing additional
liquidity to our customers, and to reduce our financial risk to
customer insolvency as title and risk of loss with respect to
those products does not pass to the customer until payment for
the pellets is received. Accordingly, there is typically a
period of time in which pellets, as to which we have reserved
title, are within our customers control. Several of our
customers have petitioned for protection under bankruptcy or
other similar laws, and most of our North American customers
have below-investment grade or no credit rating. Failure to
receive payment from our customers for products that we have
delivered could adversely affect our results of operations.
|
|
|
Our change in strategy from a manager of iron ore mines on
behalf of steel company owners to primarily a merchant of iron
ore to steel company customers has increased our obligations
with respect to those mines and has made our revenues, earnings
and profit margins more dependent on sales of iron ore products
and more susceptible to product demand and pricing
fluctuations. |
Historically, we have acted as a manager of iron ore mines on
behalf of steel company owners, and in that capacity have been
generally entitled to management fees, royalties on reserves
that we have leased or subleased to the Empire and Tilden mines,
and income from our sales of iron ore products to our customers,
including the other mine owners. Our revised business strategy
is to increase our ownership in our co-owned mines. In
accordance with that revised strategy, in fiscal year 2002 we
increased our ownership in (1) the Empire mine from
47 percent to 79 percent, (2) the Tilden mine
from 40 percent to 85 percent, (3) the Hibbing
mine from 15 percent to 23 percent, and (4) the
Wabush mine from 23 percent to 27 percent. While
49
we have gained greater control of the mines we operate, we have
also increased our share of the operating costs, employment
legacy costs and financial obligations associated with those
mines. Our increased ownership of those mines has caused the
management fees and royalties due to us from our partners in the
mines to decline from $29.8 million in 2001 to
$11.3 million in 2004. The decline in royalties and
management fees has made our revenues, earnings and profit
margins more volatile and more dependent on sales of our iron
ore products to third-party customers.
|
|
|
We rely on our joint-venture partners in our mines to meet
their payment obligations, and the inability of a joint-venture
partner to do so could significantly affect our operating
costs. |
We co-own five of our six mines with various joint venture
partners that are integrated steel producers or their
subsidiaries, including Dofasco, ISG, Ispat Inland, Laiwu and
Stelco. While we are the manager of each of the mines we co-own,
we rely on our joint-venture partners to make their required
capital contributions and to pay for their share of the iron ore
pellets that we produce. Most of our venture partners are also
our customers and are subject to the creditworthiness risks
described above. If one or more of our venture partners fail to
perform their obligations, the remaining venturers, including
ourselves, may be required to assume additional material
obligations, including significant pension and post-retirement
health and life insurance benefit obligations. On
January 29, 2004, Stelco applied and obtained
bankruptcy-court protection from creditors in Ontario Superior
Court under the Companies Creditors Arrangement Act.
Stelco is a 44.6 percent participant in the Wabush Mines
joint venture, and U.S. subsidiaries of Stelco (which have
not filed for bankruptcy protection) own 14.7 percent of
Hibbing Taconite Company Joint Venture and
15 percent of Tilden Mining Company L.C. Stelco has met its
cash call requirements at the mining ventures to date. The
premature closure of a mine due to the failure of a
joint-venture partner to perform its obligations could result in
significant fixed mine-closure costs, including severance,
employment legacy costs and other employment costs, reclamation
and other environmental costs, and the costs of terminating
long-term obligations, including energy contracts and equipment
leases.
|
|
|
Unanticipated geological conditions and natural disasters
could increase the cost of operating our business. |
A portion of our production costs are fixed regardless of
current operating levels. Our operating levels are subject to
conditions beyond our control that can delay deliveries or
increase the cost of mining at particular mines for varying
lengths of time. These conditions include weather conditions
(for example, extreme winter weather, floods and availability of
process water due to drought) and natural disasters, pit wall
failures, unanticipated geological conditions, including
variations in the amount of rock and soil overlying the deposits
of iron ore, variations in rock and other natural materials and
variations in geologic conditions and ore processing changes.
These conditions could impair our ability to fulfill our plan to
operate all of our mines at full capacity, which could
materially adversely affect our ability to meet the expected
demand for our iron ore products.
In the second and third quarters of 2003, pellet production at
the Tilden mine was adversely affected by approximately
..3 million tons as a result of unexpected variations in the
composition of the iron ore in one area of the mining pit, which
made the ore difficult to process, causing low throughput and
recovery rates.
|
|
|
Many of our mines are dependent on a single-source energy
supplier, and interruption in energy services may have a
significant adverse effect on our sales, margins and
profitability. |
Many of our mines are dependent on one source for electric power
and for natural gas. For example, Minnesota Power is the sole
supplier of electric power to our Hibbing and United Taconite
mines; Wisconsin Energy Corporation is the sole supplier of
electric power to our Tilden and Empire mines; and our
Northshore mine is largely dependent on its wholly-owned power
facility for its electrical supply. A significant interruption
in service from our energy suppliers due to terrorism or any
other cause can result in substantial losses that may not be
fully covered by our business interruption insurance. For
example, in May 2003, we incurred approximately
$11.1 million in fixed costs relating to lost production
when our Empire and Tilden mines were idled for approximately
five weeks due to loss of power stemming from the failure of a
dam in the Upper
50
Peninsula of Michigan. One natural gas pipeline serves all of
our Minnesota and Michigan mines, and a pipeline failure may
idle those operations. Any substantial unmitigated interruption
of our business due to these conditions could materially
adversely affect our sales, margins and profitability.
|
|
|
Our mines and processing facilities have been in operation
for several decades. Equipment failures and other unexpected
events at our facilities may lead to production curtailments or
shutdowns. |
Interruptions in production capabilities will inevitably
increase our production costs and reduce our profitability. We
do not have meaningful excess capacity for current production
needs, and we are not able to quickly increase production at one
mine to offset an interruption in production at another mine. In
addition to equipment failures, our facilities are also subject
to the risk of loss due to unanticipated events such as fires,
explosions or adverse weather conditions. The manufacturing
processes that take place in our mining operations, as well as
in our crushing, concentrating and pelletizing facilities,
depend on critical pieces of equipment, such as drilling and
blasting equipment, crushers, grinding mills, pebble mills,
thickeners, separators, filters, mixers, furnaces, kilns and
rolling equipment, as well as electrical equipment, such as
transformers. This equipment may, on occasion, be out of service
because of unanticipated failures. In addition, many of our
mines and processing facilities have been in operation for
several decades, and the equipment is aged. For example, in
November 2003, our Tilden facility experienced a crack in a kiln
riding ring that required the shutdown of that kiln in its
pelletizing plant, resulting in a production loss of
approximately .3 million tons in 2003. In the future, we
may experience additional material plant shutdowns or periods of
reduced production because of equipment failures. Material plant
shutdowns or reductions in operations could materially adversely
affect our sales, margins and profitability. Further,
remediation of any interruption in production capability may
require us to make large capital expenditures that could have a
negative effect on our profitability and cash flows. Our
business interruption insurance would not cover all of the lost
revenues associated with equipment failures. Further, longer
term business disruptions could result in a loss of customers,
which could adversely affect our future sales levels, and
therefore our profitability.
|
|
|
We are subject to extensive governmental regulation, which
imposes, and will continue to impose, significant costs and
liabilities on us, and future regulation could increase those
costs and liabilities or limit our ability to produce iron ore
products. |
We are subject to various federal, provincial, state and local
laws and regulations on matters such as employee health and
safety, air quality, water pollution, plant and wildlife
protection, reclamation and restoration of mining properties,
the discharge of materials into the environment, and the effects
that mining has on groundwater quality and availability.
Numerous governmental permits and approvals are required for our
operations. We cannot assure you that we have been or will be at
all times in complete compliance with such laws, regulations and
permits. If we violate or fail to comply with these laws,
regulations or permits, we could be fined or otherwise
sanctioned by regulators.
Prior to commencement of mining, we must submit to, and obtain
approval from, the appropriate regulatory authority of plans
showing where and how mining and reclamation operations are to
occur. These plans must include information such as the location
of mining areas, stockpiles, surface waters, haul roads,
tailings basins and drainage from mining operations. All
requirements imposed by any such authority may be costly and
time-consuming and may delay commencement or continuation of
exploration or production operations. See Item 2.
Properties. Environment.
In addition, new legislation and/or regulations and orders,
including proposals related to the protection of the
environment, to which we would be subject or that would further
regulate and/or tax our customers, namely the North American
integrated steel producer customers, may also require us or our
customers to reduce or otherwise change operations significantly
or incur costs. Such new legislation, regulations or orders (if
enacted) could have a material adverse effect on our business,
results of operations, financial condition or profitability. In
particular, we are subject to the new rules promulgated by the
EPA that will require us to utilize MACT standards for our air
emissions by 2006. The costs, including capital expenditures,
that we will incur in order to meet the new MACT standards may
be substantial. See Item 2. Properties.
Environment.
51
Further, we are subject to a variety of potential liability
exposures arising at certain sites where we do not currently
conduct operations. These sites include sites where we formerly
conducted iron ore mining or processing or other operations,
inactive sites that we currently own, predecessor sites,
acquired sites, leased land sites and third-party waste disposal
sites. While we believe our liability at sites where claims have
been asserted will not have a material adverse effect on our
financial condition, liquidity or results of operations, we may
be named as a responsible party at other sites in the future,
and we cannot assure you that the costs associated with these
additional sites will not be material. See Item 2.
Properties. Environment.
We also could be held liable for any and all consequences
arising out of human exposure to hazardous substances used,
released or disposed of by us or other environmental damage,
including damage to natural resources. In particular,
we and certain of our subsidiaries are involved in various
claims relating to the exposure of asbestos and silica to seamen
who sailed on the Great Lakes vessels formerly owned and
operated by certain of our subsidiaries. The full impact of
these claims, as well as whether insurance coverage will be
sufficient and whether other defendants named in these claims
will be able to fund any costs arising out of these claims,
continues to be unknown. Based on currently available
information, however, we believe the resolution of currently
pending claims in the aggregate would not reasonably be expected
to have a material adverse effect on our financial position. See
Item 3. Legal Proceedings.
|
|
|
Our expenditures for post-retirement benefit and pension
obligations could be materially higher than we have predicted if
our underlying assumptions prove to be incorrect, if there are
mine closures or our joint-venture partners fail to perform
their obligations that relate to employee pension plans. |
We provide defined benefit pension plans and OPEB benefits to
eligible union and non-union employees, including our share of
expense and funding obligations with respect to unconsolidated
ventures. Our pension expense and our required contributions to
our pension plans are directly affected by the value of plan
assets, the projected rate of return on plan assets, the rate of
return on plan assets and the actuarial assumptions we use to
measure our defined benefit pension plan obligations, including
the rate that future obligations are discounted to a present
value (discount rate). We decreased the discount
rate to 5.75 percent at December 31, 2004 from
6.25 percent at December 31, 2003, 6.90 percent
at December 31, 2002 and 7.50 percent at
December 31, 2001. For pension accounting purposes, we
assumed a 8.5 percent rate of return on pension plan assets
(9 percent for all periods prior to 2004). Based on these
assumptions, our actual funding levels and pension expense for
2002, 2003 and 2004 and our estimated funding obligations and
pension expense for 2005, including our share of expense and
funding obligations with respect to unconsolidated ventures are
as follows:
|
|
|
|
|
|
|
|
|
Pension | |
| |
|
|
(In Millions) | |
|
|
| |
Year |
|
Expense | |
|
Funding | |
|
|
| |
|
| |
2002
|
|
$ |
7.2 |
|
|
$ |
1.1 |
|
2003
|
|
|
32.0 |
|
|
|
6.4 |
|
2004
|
|
|
23.1 |
|
|
|
63.0 |
|
2005 (estimate)
|
|
|
19.1 |
|
|
|
33.9 |
|
We cannot predict whether changing market or economic
conditions, regulatory changes or other factors will increase
our pension expenses or our funding obligations, diverting funds
we would otherwise apply to other uses.
Further, our minimum funding projections in 2005 reflect our new
four-year agreements with the USWA to fund the multi-employee
pension plan covering hourly employees at the Empire and Tilden
mines based on the significantly higher single employer plan
formula for the duration of the contract.
We calculate our total accumulated post-retirement benefit
obligation (APBO) for our OPEB benefits under
Statement of Financial Accounting Standards No. 106,
Employers Accounting for Post-retirement Benefits
Other Than Pensions. The unfunded APBO obligation had a
present value of $242.7 million at December 31, 2004.
We have calculated the unfunded obligation based on a number of
assumptions. Discount
52
rate and return on plan asset assumptions parallel those
utilized for pensions. We increased our assumed rate of annual
increase in the cost of healthcare benefits to 10 percent
for 2003 (from 7.50 percent in 2002) and assumed a one
percent decrease per year for the following five years to five
percent in 2008 and thereafter. We increased the assumed rate of
annual increase in the cost of healthcare benefits again to
10 percent for 2004 and again assume a one percent decrease
per year for the following five years, thereby delaying the
decrease to five percent until 2009. We also contribute annually
to trusts for certain mining ventures that are available to fund
these liabilities, and we assume a 8.50 percent rate of
return on the assets held in these trusts. We expect to
contribute approximately $15.2 million to these trusts in
2005, based on production at the Empire, Hibbing, Tilden and
United Taconite mines in 2004 and accelerated funding pursuant
to bargaining agreements. We also implemented a cap on the
amounts that we would pay per retiree annually for existing and
future U.S. salaried retirees. Pursuant to the new
four-year labor agreements with the USWA, effective
August 1, 2004, OPEB expense for 2004 decreased
$4.9 million to reflect negotiated plan changes, which
capped the Companys share of future bargaining unit
retirees healthcare premiums at 2008 levels in 2009 and
beyond. The agreements also provide that the Company and its
partners fund an estimated $220 million into bargaining
unit pension and retiree healthcare accounts during the
four-year term of the contracts. Year 2004 expense also reflects
an estimated cost reduction of $4.1 million due to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003. Based on these assumptions and plan provisions, our actual
expenses and funding for these benefits for 2002, 2003 and 2004
and estimated expense and funding requirements for 2005,
including our share of expense and funding obligations with
respect to unconsolidated ventures are as follows:
|
|
|
|
|
|
|
|
|
OPEB | |
| |
|
|
(In Millions) | |
|
|
| |
Year |
|
Expense | |
|
Funding* | |
|
|
| |
|
| |
2002
|
|
$ |
21.5 |
|
|
$ |
16.8 |
|
2003
|
|
|
29.1 |
|
|
|
17.0 |
|
2004
|
|
|
28.5 |
|
|
|
30.9 |
|
2005 (estimate)
|
|
|
21.8 |
|
|
|
35.2 |
|
|
|
* |
Includes direct benefit payments. |
If our assumptions do not materialize as expected, cash
expenditures and costs that we incur could be materially higher.
Moreover, we cannot assure that regulatory changes will not
increase our obligations to provide these or additional
benefits. These obligations also may increase substantially in
the event of adverse medical cost trends or unexpected rates of
early retirement, particularly for bargaining unit employees for
whom there is no retiree healthcare cost cap. Early retirement
rates likely would increase substantially in the event of a mine
closure.
Additionally, our pension and post-retirement health and life
insurance benefits obligations, expenses and funding costs would
increase significantly if one or more of the mines in which we
have invested is closed, or if one or more of our joint
venturers at one or more mines is unable to perform its
obligations. A mine closure would trigger accelerated pension
and OPEB obligations, and the failure of a joint venturer to
perform its obligations could shift additional pension and OPEB
liabilities to us. Any of these events could significantly
adversely affect our financial condition and results of
operations.
|
|
|
We are a related person to certain companies that were
operators and are required under the Coal Industry Retiree
Health Benefit Act of 1992 (the Coal Retiree Act) to
make premium payments to the United Mine Workers Association
Combined Benefit Fund (the Combined Fund), and our
obligations to the Combined Fund could increase if other coal
mine operators file for bankruptcy protection or become
insolvent. |
We are a related-party to certain companies that were coal mine
operators. As a result we are subject to the Coal Retiree Act
and are obligated to make premium payments to the Combined Fund
for health and death benefits paid by the Combined Fund to
retired coal miners. At December 31, 2004, the net present
value
53
of our estimated liability to the Combined Fund was
$6.4 million. We are assessed premiums for unassigned or
orphan retirees on a pro rata basis with other coal
mine operators and related parties. If other coal mine operators
and related parties file for bankruptcy protection or become
insolvent, our pro rata portion of the liability to the Combined
Fund could increase, which could have an adverse effect on our
results of operation and financial condition, sales, margins and
profitability.
|
|
|
Our profitability could be negatively affected if we fail
to maintain satisfactory labor relations. |
The USWA represents all hourly employees at our Empire, Hibbing,
Tilden and United Taconite mines, as well as Wabush Mines in
Canada. A new four-year labor agreement was reached in August
2004 with our U.S. labor force and a five-year agreement
that runs through March 2009 was reached with our Canadian work
force. Hourly employees at the railroads we own that transport
products among our facilities are represented by multiple unions
with labor agreements that expire at various dates. If the
collective bargaining agreements relating to the employees at
our mines or railroads are not successfully renegotiated prior
to this expiration, we could face work stoppages or labor
strikes.
The workforce at our Northshore mine is currently not
represented by a union.
|
|
|
Our operating expenses could increase significantly if the
price of electrical power, fuel or other energy sources
increases. |
Operating expenses at our mining locations are sensitive to
changes in electricity prices and fuel prices, including diesel
fuel and natural gas prices. Prices for electricity, natural gas
and fuel oils can fluctuate widely with availability and demand
levels from other users. During periods of peak usage, supplies
of energy may be curtailed and we may not be able to purchase
them at historical market rates. While we have some long-term
contracts with electrical suppliers, we are exposed to
fluctuations in energy costs that can affect our production
costs. Although we enter into forward fixed-price supply
contracts for natural gas for use in our operations, those
contracts are of limited duration and do not cover all of our
fuel needs, and price increases in fuel costs could cause our
profitability to decrease significantly.
Forward-Looking Statements
This report contains statements that constitute
forward-looking statements. These forward-looking
statements may be identified by the use of predictive,
future-tense or forward-looking terminology, such as
believes, anticipates,
expects, estimates, intends,
may, will or similar terms. These
statements speak only as of the date of this report, and we
undertake no ongoing obligation, other than that imposed by law,
to update these statements. These statements appear in a number
of places in this report and include statements regarding our
intent, belief or current expectations of our directors or our
officers with respect to, among other things:
|
|
|
|
|
trends affecting our financial condition, results of operations
or future prospects; |
|
|
|
estimates of our economic iron ore reserves; |
|
|
|
our business and growth strategies; |
|
|
|
our financing plans and forecasts; and |
|
|
|
the potential existence of significant deficiencies or material
weaknesses in internal controls over financial reporting that
may be identified during the performance of testing under
Section 404 of the Sarbanes-Oxley Act of 2002. |
You are cautioned that any such forward-looking statements are
not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may differ
materially from those
54
contained in the forward-looking statements as a result of
various factors, some of which are unknown. The factors that
could adversely affect our actual results and performance
include, without limitation:
|
|
|
|
|
decreased steel production in North America caused by global
overcapacity of steel, intense competition in the steel
industry, increased imports of steel, consolidation in the steel
industry, cyclicality in the North American steel market and
other factors, all of which could result in decreased demand for
iron ore products; |
|
|
|
use by North American steel makers of products other than
domestic iron ore in the production of steel; |
|
|
|
uncertainty about the continued demand for steel to support
rapid industrial growth in China; |
|
|
|
the highly competitive nature of the iron ore mining industry; |
|
|
|
our dependence on our term supply agreements with a limited
number of customers as the steel industry consolidation
continues (as evidenced by the announced merger affecting ISG
and Ispat Inland); |
|
|
|
changes in demand for our products under the requirements
contracts we have with our customers; |
|
|
|
the provisions of our term supply agreements, including price
adjustment provisions that may not allow us to match
international prices for iron ore products; |
|
|
|
the substantial costs of mine closures, and the uncertainties
regarding mine life and estimates of ore reserves; |
|
|
|
uncertainty relating to the outcome of our customers
bankruptcies or reorganization proceedings, and the
creditworthiness of our customers; |
|
|
|
our change in strategy from a manager of iron ore mines to
primarily a merchant of iron ore to steel company customers; |
|
|
|
increases in the cost or length of time required to complete
capacity expansions; |
|
|
|
inability of the capacity expansions to achieve expected
additional production volumes; |
|
|
|
our reliance on our joint-venture partners to meet their
obligations; |
|
|
|
unanticipated geological conditions, natural disasters,
interruptions in electrical or other power sources and equipment
failures, which could cause shutdowns or production curtailments
for us or our steel industry customers; |
|
|
|
increases in our costs of electrical power, fuel or other energy
sources; |
|
|
|
uncertainties relating to governmental regulation of our mines
and our processing facilities, including under environmental
laws; |
|
|
|
uncertainties relating to our pension plans; |
|
|
|
uncertainties relating to our ability to identify and consummate
any strategic investments, including the offer to purchase
Portman Limited; |
|
|
|
adverse changes in currency values; |
|
|
|
uncertainties relating to labor relations, including the
potential for, and duration of, work stoppages; and |
|
|
|
the success of our cost reduction efforts. |
You are urged to carefully consider these factors and the
Risks Relating to the Company above. All
forward-looking statements attributable to us are expressly
qualified in their entirety by the foregoing cautionary
statements.
|
|
Item 7A. |
Qualitative and Quantitative Disclosures About Market
Risk. |
Information regarding our Market Risk is presented under the
caption Market Risk, which is included in
Item 7 and is incorporated by reference and made a part
hereof.
55
|
|
Item 8. |
Financial Statements and Supplementary Data |
Statement of Consolidated Operations
Cleveland-Cliffs Inc and Consolidated Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
|
|
(In Millions, Except Per Share | |
|
|
Amounts) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
REVENUES FROM PRODUCT SALES AND SERVICES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iron ore
|
|
$ |
998.6 |
|
|
$ |
686.8 |
|
|
$ |
510.8 |
|
|
Freight and minority interest
|
|
|
208.1 |
|
|
|
138.3 |
|
|
|
75.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,206.7 |
|
|
|
825.1 |
|
|
|
586.4 |
|
COST OF GOODS SOLD AND OPERATING EXPENSES
|
|
|
(1,056.8 |
) |
|
|
(835.0 |
) |
|
|
(582.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
SALES MARGIN
|
|
|
149.9 |
|
|
|
(9.9 |
) |
|
|
3.7 |
|
OTHER OPERATING INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties and management fee revenue
|
|
|
11.3 |
|
|
|
10.6 |
|
|
|
12.2 |
|
|
Casualty insurance recoveries
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
Administrative, selling and general expenses
|
|
|
(33.1 |
) |
|
|
(25.1 |
) |
|
|
(23.8 |
) |
|
Impairment of mining assets
|
|
|
(5.8 |
) |
|
|
(2.6 |
) |
|
|
(52.7 |
) |
|
Provision for customer bankruptcy exposures
|
|
|
(1.6 |
) |
|
|
(7.5 |
) |
|
|
(.7 |
) |
|
Restructuring (charge) credit
|
|
|
.2 |
|
|
|
(8.7 |
) |
|
|
|
|
|
Miscellaneous net
|
|
|
(2.9 |
) |
|
|
(5.1 |
) |
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(31.9 |
) |
|
|
(38.4 |
) |
|
|
(65.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
118.0 |
|
|
|
(48.3 |
) |
|
|
(61.7 |
) |
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of ISG common stock
|
|
|
152.7 |
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11.5 |
|
|
|
10.6 |
|
|
|
4.8 |
|
|
Interest expense
|
|
|
(.8 |
) |
|
|
(4.6 |
) |
|
|
(6.6 |
) |
|
Other-net
|
|
|
4.2 |
|
|
|
7.1 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167.6 |
|
|
|
13.1 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
285.6 |
|
|
|
(35.2 |
) |
|
|
(57.3 |
) |
INCOME TAX CREDIT (EXPENSE)
|
|
|
34.9 |
|
|
|
.3 |
|
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
320.5 |
|
|
|
(34.9 |
) |
|
|
(66.4 |
) |
INCOME (LOSS) FROM DISCONTINUED OPERATION (Net of tax
$1.7 2004)
|
|
|
3.1 |
|
|
|
|
|
|
|
(108.5 |
) |
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE
|
|
|
323.6 |
|
|
|
(34.9 |
) |
|
|
(174.9 |
) |
EXTRAORDINARY GAIN (Net of: tax $.5; minority interest $1.7)
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
|
|
|
|
|
|
|
|
|
|
|
(13.4 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
323.6 |
|
|
|
(32.7 |
) |
|
|
(188.3 |
) |
|
PREFERRED STOCK DIVIDENDS
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) APPLICABLE TO COMMON SHARES
|
|
$ |
318.3 |
|
|
$ |
(32.7 |
) |
|
$ |
(188.3 |
) |
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
14.79 |
|
|
$ |
(1.70 |
) |
|
$ |
(3.29 |
) |
|
Discontinued operation
|
|
|
.15 |
|
|
|
|
|
|
|
(5.36 |
) |
|
Extraordinary gain
|
|
|
|
|
|
|
.10 |
|
|
|
|
|
|
Cumulative effect of accounting changes
|
|
|
|
|
|
|
|
|
|
|
(.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE BASIC
|
|
$ |
14.94 |
|
|
$ |
(1.60 |
) |
|
$ |
(9.31 |
) |
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
11.69 |
|
|
$ |
(1.70 |
) |
|
$ |
(3.29 |
) |
|
Discontinued operation
|
|
|
.11 |
|
|
|
|
|
|
|
(5.36 |
) |
|
Extraordinary gain
|
|
|
|
|
|
|
.10 |
|
|
|
|
|
|
Cumulative effect of accounting changes
|
|
|
|
|
|
|
|
|
|
|
(.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE DILUTED
|
|
$ |
11.80 |
|
|
$ |
(1.60 |
) |
|
$ |
(9.31 |
) |
|
|
|
|
|
|
|
|
|
|
AVERAGE NUMBER OF SHARES (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,308 |
|
|
|
20,512 |
|
|
|
20,234 |
|
|
Diluted
|
|
|
27,421 |
|
|
|
20,512 |
|
|
|
20,234 |
|
See notes to consolidated financial statements.
56
Statement of Consolidated Financial Position
Cleveland-Cliffs Inc and Consolidated Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
216.9 |
|
|
$ |
67.8 |
|
|
Marketable securities
|
|
|
182.7 |
|
|
|
|
|
|
Trade accounts receivable net
|
|
|
54.1 |
|
|
|
9.5 |
|
|
Receivables from associated companies
|
|
|
3.5 |
|
|
|
1.4 |
|
|
Product inventories
|
|
|
108.2 |
|
|
|
129.7 |
|
|
Work in process inventories
|
|
|
15.8 |
|
|
|
14.4 |
|
|
Supplies and other inventories
|
|
|
59.6 |
|
|
|
58.7 |
|
|
Deferred and refundable income taxes
|
|
|
41.5 |
|
|
|
2.9 |
|
|
Other
|
|
|
51.5 |
|
|
|
24.4 |
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
733.8 |
|
|
|
308.8 |
|
PROPERTIES
|
|
|
|
|
|
|
|
|
|
Plant and equipment
|
|
|
416.5 |
|
|
|
369.2 |
|
|
Minerals
|
|
|
20.9 |
|
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
437.4 |
|
|
|
390.2 |
|
|
Allowances for depreciation and depletion
|
|
|
(153.5 |
) |
|
|
(135.2 |
) |
|
|
|
|
|
|
|
|
|
NET PROPERTIES
|
|
|
283.9 |
|
|
|
255.0 |
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
.5 |
|
|
|
196.7 |
|
|
Long-term receivables
|
|
|
52.1 |
|
|
|
63.8 |
|
|
Deferred income taxes
|
|
|
44.2 |
|
|
|
|
|
|
Deposits and miscellaneous
|
|
|
18.4 |
|
|
|
18.8 |
|
|
Intangible pension asset
|
|
|
12.6 |
|
|
|
14.3 |
|
|
Other investments
|
|
|
15.6 |
|
|
|
24.2 |
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER ASSETS
|
|
|
143.4 |
|
|
|
317.8 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
1,161.1 |
|
|
$ |
881.6 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
57
Statement of Consolidated Financial Position
Cleveland-Cliffs Inc and Consolidated
Subsidiaries (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
LIABILITIES AND SHAREHOLDERS EQUITY |
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
$ |
25.0 |
|
|
Accounts payable
|
|
$ |
73.3 |
|
|
|
64.7 |
|
|
Accrued employment costs
|
|
|
41.3 |
|
|
|
33.8 |
|
|
Other post-retirement benefits
|
|
|
34.9 |
|
|
|
22.3 |
|
|
Pensions
|
|
|
31.0 |
|
|
|
5.3 |
|
|
State and local taxes
|
|
|
21.9 |
|
|
|
12.6 |
|
|
Accrued expenses
|
|
|
21.7 |
|
|
|
18.0 |
|
|
Environmental and mine closure obligations
|
|
|
6.0 |
|
|
|
10.2 |
|
|
Payables to associated companies
|
|
|
4.6 |
|
|
|
2.5 |
|
|
Other
|
|
|
22.4 |
|
|
|
17.2 |
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
257.1 |
|
|
|
211.6 |
|
POSTEMPLOYMENT BENEFIT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Pensions, including minimum pension liability
|
|
|
42.7 |
|
|
|
131.7 |
|
|
Other post-retirement benefits
|
|
|
102.7 |
|
|
|
124.2 |
|
|
|
|
|
|
|
|
|
|
TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES
|
|
|
145.4 |
|
|
|
255.9 |
|
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
|
|
|
82.4 |
|
|
|
77.9 |
|
DEFERRED INCOME TAXES
|
|
|
|
|
|
|
34.5 |
|
OTHER LIABILITIES
|
|
|
49.7 |
|
|
|
53.4 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
534.6 |
|
|
|
633.3 |
|
MINORITY INTEREST
|
|
|
30.0 |
|
|
|
20.2 |
|
3.25% REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED
STOCK ISSUED 172,500 SHARES
|
|
|
172.5 |
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred Stock no par value
|
|
|
|
|
|
|
|
|
|
|
Class A 3,000,000 shares authorized,
172,500 issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
Class B 4,000,000 shares authorized and
unissued
|
|
|
|
|
|
|
|
|
|
Common Shares par value $.50 a share
|
|
|
|
|
|
|
|
|
|
|
Authorized 56,000,000 shares;
|
|
|
|
|
|
|
|
|
|
|
Issued 33,655,882 shares
|
|
|
16.8 |
|
|
|
16.8 |
|
|
Capital in excess of par value of shares
|
|
|
86.3 |
|
|
|
74.3 |
|
|
Retained Earnings
|
|
|
565.3 |
|
|
|
255.7 |
|
|
Cost of 12,057,110 Common Shares in treasury (2003
12,659,852 shares)
|
|
|
(169.4 |
) |
|
|
(173.6 |
) |
|
Accumulated other comprehensive income (loss)
|
|
|
(81.0 |
) |
|
|
56.4 |
|
|
Unearned compensation
|
|
|
6.0 |
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
424.0 |
|
|
|
228.1 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$ |
1,161.1 |
|
|
$ |
881.6 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
Statement of Consolidated Cash Flows
Cleveland-Cliffs Inc and Consolidated Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
(In Millions, Brackets | |
|
|
Indicate Cash Decrease) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
CASH FLOW FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
323.6 |
|
|
$ |
(32.7 |
) |
|
$ |
(188.3 |
) |
|
|
|
(Income) loss from discontinued operation
|
|
|
(3.1 |
) |
|
|
|
|
|
|
108.5 |
|
|
|
|
Extraordinary gain
|
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
320.5 |
|
|
|
(34.9 |
) |
|
|
(66.4 |
) |
|
|
Adjustments to reconcile net income (loss) from continuing
operations to net cash from (used by) operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
25.0 |
|
|
|
25.3 |
|
|
|
24.8 |
|
|
|
|
|
|
Share of associated companies
|
|
|
4.3 |
|
|
|
3.7 |
|
|
|
9.1 |
|
|
|
|
|
Impairment of mining assets
|
|
|
5.8 |
|
|
|
2.6 |
|
|
|
52.7 |
|
|
|
|
|
Accretion of asset retirement obligation
|
|
|
4.6 |
|
|
|
3.6 |
|
|
|
1.8 |
|
|
|
|
|
Provision for customer bankruptcy exposures
|
|
|
1.6 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
Gain on sale of ISG common stock
|
|
|
(152.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(86.7 |
) |
|
|
.5 |
|
|
|
13.9 |
|
|
|
|
|
Pensions and other post-retirement benefits
|
|
|
(48.0 |
) |
|
|
42.1 |
|
|
|
10.8 |
|
|
|
|
|
Gain on sale of assets
|
|
|
(4.2 |
) |
|
|
(7.1 |
) |
|
|
(6.2 |
) |
|
|
|
|
Other
|
|
|
5.1 |
|
|
|
4.7 |
|
|
|
(12.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before changes in operating assets and liabilities
|
|
|
75.3 |
|
|
|
48.0 |
|
|
|
28.0 |
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
(182.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories and prepaid expenses
|
|
|
(3.4 |
) |
|
|
(12.0 |
) |
|
|
(15.2 |
) |
|
|
|
|
|
Receivables
|
|
|
(50.7 |
) |
|
|
(2.1 |
) |
|
|
21.6 |
|
|
|
|
|
|
Payables and accrued expenses
|
|
|
20.4 |
|
|
|
8.8 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total changes in operating assets and liabilities
|
|
|
(216.4 |
) |
|
|
(5.3 |
) |
|
|
12.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used by) operating activities
|
|
|
(141.1 |
) |
|
|
42.7 |
|
|
|
40.9 |
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
(54.4 |
) |
|
|
(16.1 |
) |
|
|
(8.5 |
) |
|
|
|
Share of associated companies
|
|
|
(6.3 |
) |
|
|
(5.5 |
) |
|
|
(2.1 |
) |
|
|
Proceeds from sale of ISG common stock
|
|
|
170.1 |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from steel company debt
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
4.4 |
|
|
|
8.9 |
|
|
|
8.2 |
|
|
|
Proceeds from Weirton investment
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
Purchase of EVTAC assets
|
|
|
|
|
|
|
(2.0 |
) |
|
|
|
|
|
|
Investment in steel companies equity and debt
|
|
|
|
|
|
|
|
|
|
|
(27.4 |
) |
|
|
Investment in power-related joint venture
|
|
|
|
|
|
|
|
|
|
|
(6.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used by) investing activities
|
|
|
127.6 |
|
|
|
(14.7 |
) |
|
|
(35.8 |
) |
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Convertible Preferred Stock
|
|
|
172.5 |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
17.9 |
|
|
|
6.0 |
|
|
|
|
|
|
|
Contributions by minority interest
|
|
|
9.7 |
|
|
|
2.0 |
|
|
|
.3 |
|
|
|
Repayment of long-term debt
|
|
|
(25.0 |
) |
|
|
(30.0 |
) |
|
|
(15.0 |
) |
|
|
Issuance cost Convertible Preferred Stock
|
|
|
(6.6 |
) |
|
|
|
|
|
|
|
|
|
|
Repurchases of Common Stock
|
|
|
(6.5 |
) |
|
|
|
|
|
|
|
|
|
|
Preferred Stock dividends
|
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
Common Stock dividends
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
Repayments under revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used by) financing activities
|
|
|
155.9 |
|
|
|
(22.0 |
) |
|
|
(114.7 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FROM (USED BY) CONTINUING OPERATIONS
|
|
|
142.4 |
|
|
|
6.0 |
|
|
|
(109.6 |
) |
CASH FROM (USED BY) DISCONTINUED OPERATION
|
|
|
6.7 |
|
|
|
|
|
|
|
(12.4 |
) |
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
149.1 |
|
|
|
6.0 |
|
|
|
(122.0 |
) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
67.8 |
|
|
|
61.8 |
|
|
|
183.8 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$ |
216.9 |
|
|
$ |
67.8 |
|
|
$ |
61.8 |
|
|
|
|
|
|
|
|
|
|
|
Taxes paid on income
|
|
$ |
57.1 |
|
|
$ |
2.7 |
|
|
$ |
.5 |
|
Interest paid on debt obligations
|
|
$ |
.2 |
|
|
$ |
3.6 |
|
|
$ |
6.7 |
|
See notes to consolidated financial statements.
59
Statement of Consolidated Shareholders Equity
Cleveland-Cliffs Inc and Consolidated Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
|
|
Capital | |
|
|
|
|
|
|
in | |
|
|
|
Other | |
|
|
|
|
|
|
Excess | |
|
|
|
Compre- | |
|
|
|
|
|
|
of Par | |
|
|
|
Common | |
|
hensive | |
|
Unearned | |
|
|
|
|
Common | |
|
Value of | |
|
Retained | |
|
Shares in | |
|
Income | |
|
Compens- | |
|
|
|
|
Shares | |
|
Shares | |
|
Earnings | |
|
Treasury | |
|
(Loss) | |
|
ation | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
January 1, 2002
|
|
$ |
16.8 |
|
|
$ |
66.2 |
|
|
$ |
476.7 |
|
|
$ |
(183.3 |
) |
|
$ |
(1.0 |
) |
|
$ |
(1.2 |
) |
|
$ |
374.2 |
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(188.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188.3 |
) |
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109.7 |
) |
|
|
|
|
|
|
(109.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(298.0 |
) |
|
Stock and other incentive plans
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
(1.5 |
) |
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
|
16.8 |
|
|
|
69.7 |
|
|
|
288.4 |
|
|
|
(182.2 |
) |
|
|
(110.7 |
) |
|
|
(2.7 |
) |
|
|
79.3 |
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(32.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32.7 |
) |
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144.9 |
|
|
|
|
|
|
|
144.9 |
|
|
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.2 |
|
|
|
|
|
|
|
22.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134.4 |
|
|
Stock options exercised
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
6.0 |
|
|
Stock and other incentive plans
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
|
|
3.7 |
|
|
|
|
|
|
|
1.2 |
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
16.8 |
|
|
|
74.3 |
|
|
|
255.7 |
|
|
|
(173.6 |
) |
|
|
56.4 |
|
|
|
(1.5 |
) |
|
|
228.1 |
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
323.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323.6 |
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3 |
|
|
|
|
|
|
|
7.3 |
|
|
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2 |
|
|
|
|
|
|
|
.2 |
|
|
|
|
Reclassification adjustment included in net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(144.9 |
) |
|
|
|
|
|
|
(144.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186.2 |
|
|
Stock options exercised
|
|
|
|
|
|
|
8.1 |
|
|
|
|
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
17.9 |
|
|
Stock and other incentive plans
|
|
|
|
|
|
|
3.9 |
|
|
|
|
|
|
|
.9 |
|
|
|
|
|
|
|
7.5 |
|
|
|
12.3 |
|
|
Issuance cost Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
(6.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.5 |
) |
|
Repurchases of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.5 |
) |
|
|
|
|
|
|
|
|
|
|
(6.5 |
) |
|
Preferred Stock dividends
|
|
|
|
|
|
|
|
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.3 |
) |
|
Common Stock dividends
|
|
|
|
|
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$ |
16.8 |
|
|
$ |
86.3 |
|
|
$ |
565.3 |
|
|
$ |
(169.4 |
) |
|
$ |
(81.0 |
) |
|
$ |
6.0 |
|
|
$ |
424.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
60
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
Two-for-One Stock Split
On November 9, 2004, the Board of Directors of
Cleveland-Cliffs Inc approved a two-for-one stock split of its
Common Shares with a corresponding decrease in par value from
$1.00 to $.50. The record date for the stock split was
December 15, 2004 with a distribution date of
December 31, 2004. Accordingly, all Common Shares, per
share amounts, stock compensation plans and preferred stock
conversion rates have been adjusted retroactively to reflect the
stock split.
Accounting Policies
Business: The Company is the largest supplier of iron ore
pellets to integrated steel companies in North America. The
Company manages and owns interests in North American mines and
owns ancillary companies providing transportation and other
services to the mines.
Basis of Consolidation: The consolidated financial
statements include the accounts of the Company and its
majority-owned subsidiaries (Company), including:
|
|
|
|
|
Tilden Mining Company L.C. (Tilden) in Michigan;
consolidated since January 31, 2002, when the Company
increased its ownership from 40 percent to 85 percent; |
|
|
|
Empire Iron Mining Partnership (Empire) in Michigan;
consolidated effective December 31, 2002, when the Company
increased its ownership from 46.7 percent to
79 percent; and |
|
|
|
United Taconite LLC (United Taconite) in Minnesota;
consolidated since December 1, 2003, when the Company
acquired a 70 percent ownership interest (see
Note 1 Operations and Customers
United Taconite). |
Intercompany accounts are eliminated in consolidation.
Investments in joint ventures in which our ownership is
50 percent or less, or in which we do not have control but
have the ability to exercise significant influence over
operating and financial policies, are accounted for under the
equity method. The Companys share of equity income (if
any) is eliminated against consolidated product inventory upon
production, and against cost of goods sold and operating
expenses when sold. This effectively reduces the Companys
cost for its share of the mining ventures production to
its cost, reflecting the cost-based nature of the Companys
participation in non-consolidated ventures.
Other Investments include the Companys
26.83 percent equity interest in Wabush Mines
(Wabush) and related entities, which the Company
does not control. The Companys 23 percent equity
interest in Hibbing Taconite Company (Hibbing), an
unincorporated joint venture in Minnesota, which the Company
does not control, was a net liability, and accordingly, was
classified as Other Liabilities. Cliffs and
Associates Limited (CAL) results are included in
Discontinued Operation in the Statement of
Consolidated Operations. See Note 3
Discontinued Operation.
Revenue Recognition: Revenue is recognized on the sale of
products when title to the product has transferred to the
customer in accordance with the specified terms of each term
supply agreement. Generally, our term supply agreements provide
that title transfers to the customer when payment is received.
Under some term supply agreements, we deliver the product to
ports on the lower Great Lakes and/or to the customers
facilities prior to the transfer of title. Certain sales
contracts with one customer include provisions for supplemental
revenue or refunds based on the customers annual steel
pricing at the time the product is consumed in this
customers blast furnaces. The Company estimates these
amounts for recognition at the time of sale. Revenue for the
year from product sales includes reimbursement for freight
charges ($71.7 million 2004;
$59.2 million 2003;
$38.7 million 2002) paid on behalf of customers
and cost reimbursement
($136.4 million 2004;
$79.1 million 2003;
$36.9 million 2002) from minority interest
partners for their share of mine costs.
61
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Our rationale for delivering iron ore products to customers in
advance of payment for the products is to more closely relate
timing of payment by customers to consumption, thereby providing
additional liquidity to our customers. Title and risk of loss do
not pass to the customer until payment for the pellets is
received. This is a revenue recognition practice utilized to
reduce our financial risk to customer insolvency. This practice
is not believed to be widely used throughout the balance of the
industry.
Revenue is recognized on the sale of services when the services
are performed.
Where we are joint venture participants in the ownership of a
mine, our contracts entitle us to receive royalties and
management fees, which we earn as the pellets are produced.
Business Risk: The major business risk faced by the
Company, as it increases its merchant position, is lower
customer consumption of iron ore from the Companys mines,
which may result from competition from other iron ore suppliers;
increased use of iron ore substitutes, including imported
semi-finished steel; customers rationalization or financial
failure; or decreased North American steel production, resulting
from increased imports or lower steel consumption. The
Companys sales are concentrated with a relatively few
number of customers. Unmitigated loss of sales would have a
greater impact on operating results and cash flow than revenue,
due to the high level of fixed costs in the iron ore mining
business and the high cost to idle or close mines. In the event
of a venture participants failure to perform, remaining
solvent venturers, including the Company, may be required to
assume and record additional material obligations. The premature
closure of a mine due to the loss of a significant customer or
the failure of a venturer would accelerate substantial
employment and mine shutdown costs. See Note 1
Operations and Customers.
Use of Estimates: The preparation of financial
statements, in conformity with accounting principles generally
accepted in the United States of America, 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.
Cash Equivalents: The Company considers investments in
highly liquid debt instruments with an initial maturity of three
months or less to be cash equivalents.
Marketable Securities: The Company determines the
appropriate classification of debt and equity securities at the
time of purchase and reevaluates such designation as of each
balance sheet date. At December 31, 2004, the Company had
$182.7 million in highly-liquid securities with put options
classified as trading. Trading securities are stated at fair
value, and unrealized holding gains and losses are included in
income. At December 31, 2004 and 2003, the Company had
$.5 million and $196.1 million, respectively, of
non-current marketable securities, classified as available
for sale, which are stated at fair value, with unrealized
holding gains and losses included in other comprehensive income.
Derivative Financial Instruments: In the normal course of
business, the Company enters into forward contracts for the
purchase of commodities, primarily natural gas, which are used
in its 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.
Inventories: Product inventories are stated at the lower
of cost or market. Cost of iron ore inventories is determined
using the last-in, first-out (LIFO) method. The
excess of current cost over LIFO cost of iron ore inventories
was $17.6 million and $13.1 million at
December 31, 2004 and 2003, respectively. During 2004, the
inventory balances declined resulting in liquidation of LIFO
layers. The effect of the inventory reduction decreased
cost of goods sold and operating expenses by
$2.3 million. At December 31, 2004 and 2003, we had
approximately 1.9 million tons and 2.3 million tons,
respectively, stored at ports on the lower Great Lakes to
service customers. We maintain ownership of the inventories
until title has transferred to the customer, usually when
payment is made. Maintaining iron ore products at ports on the
lower Great Lakes reduces risk
62
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
of non-payment by customers, as the Company retains title to the
product until payment is received from the customer. It also
assists the customers by more closely relating the timing of the
customers payments for the product to the customers
consumption of the products and by providing the three-month
supply of inventories of iron ore the customers require during
the winter when we are unable to ship products over the Great
Lakes. We track the movement of the inventory and have the right
to verify the quantities on hand. Supplies and other inventories
reflect the average cost method. Finished product, work in
process and supplies inventories as of December 31, 2004,
were valued at $183.6 million, of which
$108.2 million, or 59 percent (64 percent in
2003), is finished product and is shown as a separate line item
on the Statement of Consolidated Financial Position.
Iron Ore Reserves: The Company reviews the iron ore
reserves based on current expectations of revenues and costs,
which are subject to change. Iron ore reserves include only
proven and probable quantities of ore which can be economically
mined and processed utilizing existing technology. Asset
retirement obligations reflect remaining economic iron ore
reserves.
Properties: Properties are stated at cost. Depreciation
of plant and equipment is computed principally by straight-line
methods based on estimated useful lives, not to exceed the
estimated economic iron ore reserves. Depreciation is provided
over the following estimated useful lives:
|
|
|
|
|
Buildings
|
|
|
45 Years |
|
Mining Equipment
|
|
|
10 to 20 Years |
|
Processing Equipment
|
|
|
15 to 45 Years |
|
Information Technology
|
|
|
2 to 7 Years |
|
Depreciation is not adjusted when operations are temporarily
idled.
The following table indicates the value of each of the major
classes of our depreciable assets as of December 31, 2004
and 2003:
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
December 31 | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Minerals
|
|
$ |
20.9 |
|
|
$ |
21.0 |
|
Office and information technology
|
|
|
20.6 |
|
|
|
20.6 |
|
Buildings
|
|
|
24.8 |
|
|
|
24.7 |
|
Mining equipment
|
|
|
65.4 |
|
|
|
56.3 |
|
Processing equipment
|
|
|
160.6 |
|
|
|
153.6 |
|
Railroad equipment
|
|
|
52.6 |
|
|
|
50.4 |
|
Electric power facilities
|
|
|
28.6 |
|
|
|
27.1 |
|
Interest capitalized during construction
|
|
|
18.8 |
|
|
|
18.7 |
|
Land improvements
|
|
|
11.1 |
|
|
|
11.2 |
|
Other
|
|
|
5.3 |
|
|
|
2.2 |
|
Construction in progress
|
|
|
28.7 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
437.4 |
|
|
|
390.2 |
|
Allowance for depreciation and depletion
|
|
|
(153.5 |
) |
|
|
(135.2 |
) |
|
|
|
|
|
|
|
|
|
$ |
283.9 |
|
|
$ |
255.0 |
|
|
|
|
|
|
|
|
Amortization of interest capitalized during construction is at
the rate of approximately $2 million per year.
63
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The costs capitalized and classified under the caption
Minerals represent lands where we own the surface
and/or mineral rights. The value of the lands is split between
surface only, surface and minerals, and minerals only. The
approximate net book value of lands is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
December 31 | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Surface lands
|
|
$ |
6.0 |
|
|
$ |
6.7 |
|
|
|
|
|
|
|
|
Mineral lands:
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$ |
14.9 |
|
|
$ |
14.3 |
|
|
Less depletion
|
|
|
5.5 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
Net mineral lands
|
|
$ |
9.4 |
|
|
$ |
8.9 |
|
|
|
|
|
|
|
|
Accumulated depletion relating to minerals, which was recorded
using the unit-of-production method, is included in
Allowance for depreciation and depletion.
Preferred Stock: In January 2004, the Company issued
172,500 shares of redeemable cumulative convertible
perpetual preferred stock, without par value, issued at
$1,000 per share. The preferred stock pays quarterly cash
dividends at a rate of 3.25 percent per annum and can be
converted into the Companys common shares at an adjusted
rate of 32.3354 common shares per share of preferred stock. The
preferred stock is classified as temporary equity
reflecting certain provisions of the agreement that could, under
remote circumstances, require the Company to redeem the
preferred stock for cash. See Note 10 Preferred
Stock for a more detailed discussion.
Asset Impairment: The Company monitors conditions that
may affect the carrying value of its long-lived and intangible
assets when events and circumstances indicate that the carrying
value of the assets may be impaired. The Company determines
impairment based on the assets ability to generate cash
flow greater than the carrying value of the asset, using an
undiscounted probability-weighted analysis. If projected
undiscounted cash flows are less than the carrying value of the
asset, the asset is adjusted to its fair value. See
Note 1 Operations and Customers and
Note 3 Discontinued Operation.
Repairs and Maintenance: The cost of major power plant
overhauls is amortized over the estimated useful life, which is
the period until the next scheduled overhaul, generally
5 years. All other planned and unplanned repairs and
maintenance costs are expensed during the year incurred.
Income Taxes: Income taxes are based on income (loss) for
financial reporting purposes and reflect a tax liability
(asset) for the estimated taxes payable (recoverable) for
all open tax years and changes in deferred taxes. Deferred tax
assets or liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax laws and rates. A
valuation allowance is provided on deferred tax assets if it is
determined that it is more likely than not that the asset will
not be realized.
Environmental Remediation Costs: The Company has a formal
code of environmental protection and restoration. The
Companys obligations for known environmental problems at
active and closed mining operations, and other sites have been
recognized based on estimates of the cost of investigation and
remediation at each site. If the cost can only be estimated as a
range of possible amounts with no specific amount being most
likely, the minimum of the range is accrued. Costs of future
expenditures are not discounted to their present value.
Potential insurance recoveries have not been reflected in the
determination of the liabilities.
64
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Stock Compensation: Effective January 1, 2003, the
Company adopted the fair value method, which is considered the
preferable accounting method, of recording stock-based employee
compensation as contained in Statement of Financial Accounting
Standards (SFAS) No. 123 (Revised December
2004), Accounting for Stock-Based Compensation. As
prescribed in SFAS No. 148, Accounting for
Stock-Based Compensation Transition and
Disclosure, the Company elected to use the
prospective method. The prospective method requires
expense to be recognized for all awards granted, modified or
settled beginning in the year of adoption. Historically, the
Company applied the intrinsic method as provided in Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations and
accordingly, no compensation cost had been recognized for stock
options in prior years. As a result of adopting the fair value
method for stock compensation, all future awards will be
expensed over the stock options vesting period. The
adoption did not have a significant financial effect in 2003.
The following illustrates the pro forma effect on net income and
earnings per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to all awards
unvested in each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net income (loss) as reported
|
|
$ |
323.6 |
|
|
$ |
(32.7 |
) |
|
$ |
(188.3 |
) |
Stock-based employee compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add expense included in reported results
|
|
|
6.6 |
|
|
|
6.0 |
|
|
|
2.0 |
|
|
Deduct fair value-based method
|
|
|
(5.4 |
) |
|
|
(3.8 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
324.8 |
|
|
$ |
(30.5 |
) |
|
$ |
(189.0 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic-as reported
|
|
$ |
14.94 |
|
|
$ |
(1.60 |
) |
|
$ |
(9.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic-pro forma
|
|
$ |
14.99 |
|
|
$ |
(1.49 |
) |
|
$ |
(9.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted-as reported
|
|
$ |
11.80 |
|
|
$ |
(1.60 |
) |
|
$ |
(9.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted-pro forma
|
|
$ |
11.84 |
|
|
$ |
(1.49 |
) |
|
$ |
(9.35 |
) |
|
|
|
|
|
|
|
|
|
|
The market value of restricted stock awards and performance
shares is charged to expense over the vesting period.
In December 2004, FASB issued SFAS 123R, Share-Based
Payment which replaces SFAS 123 and supersedes APB Opinion
No. 25. SFAS 123R requires all share-based payments to employees
to be recognized in the financial statements at fair value and
eliminates the intrinsic value method. The Statement which is
effective for periods beginning after June 15, 2005 is not
expected to have a significant impact on the Companys
consolidated financial statements.
Research and Development Costs: Research and development
costs, principally relating to the Mesabi Nugget project at the
Northshore mine in Minnesota, are expensed as incurred. Mesabi
Nugget project costs of $.9 million, $1.6 million and
$1.9 million in 2004, 2003 and 2002, respectively, were
included in Miscellaneous net. Mining
development costs (stripping) are expensed as
incurred.
Earnings Per Common Share: Basic earnings per common
share is calculated on the average number of common shares
outstanding during each period. Diluted earnings per common
share is based on the average number of common shares
outstanding during each period, adjusted for the effect of
outstanding stock options, restricted stock and performance
shares, including the as-if-converted effect of the
convertible preferred stock.
65
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Reclassifications: Certain prior year amounts have been
reclassified to conform to current year classifications.
Accounting and Disclosure Changes: In December 2004, the
Financial Accounting Standard Board (FASB) issued
SFAS No. 153, Exchange of Nonmonetary Assets an
amendment of APB Opinion No. 29.
SFAS No. 153 eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive
assets and replaces it with an exception for exchanges that do
not have commercial substance. The Statement is effective for
nonmonetary exchanges occurring in fiscal periods beginning
after June 15, 2005. Implementation of the Statement is not
expected to have a significant effect on the Companys
operations.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, which amends the guidance in ARB
No. 43, Chapter 4, Inventory Pricing.
SFAS No. 151 clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and requires such costs
to be recognized as current-period charges. Additionally,
SFAS No. 151 requires that allocation of fixed
production overhead costs be based on normal capacity. The
Statement is effective for years beginning after June 15,
2005, with early adoption permitted. The implementation of this
standard in the fourth quarter of 2004 did not have an impact on
the Companys consolidated financial statements.
On October 13, 2004, the FASB ratified Emerging Issues Task
Force (EITF) Consensus No. 04-8, The
Effect of Contingently Convertible Debt on Diluted Earnings Per
Share. The consensus specified that the dilutive effect of
contingently convertible debt and preferred stock
(CoCos) should be included in dilutive earnings per
share computations (if dilutive), regardless of whether the
market price trigger has been met. Previously, CoCos were only
required to be included in the calculation of diluted earnings
per share when the contingency was met. The effective date for
EITF 04-8 implementation is for reporting periods ending
after December 15, 2004. Earnings per share for 2004 have
been restated from the date of issuance of the Companys
preferred stock.
In March 2004, the EITF reached consensus on Issue 04-3,
Mining Assets: Impairment and Business Combinations.
EITF 04-3 relates to estimating cash flows used to value
mining assets or assess those assets for impairment. The Company
assesses impairment on economically recoverable ore utilizing
existing technology. The release, which was effective for
business combinations and impairment testing after
March 31, 2004, did not have a significant impact on the
Companys consolidated financial results.
In December 2003, the FASB modified SFAS No. 132
(originally issued in February 1998), Employers
Disclosures about Pensions and Other Post-retirement
Benefits, to improve financial statement disclosures for
defined benefit plans. The change replaces the existing SFAS
disclosure requirements for pensions. The standard requires that
companies provide more details about their plan assets, benefit
obligations, cash flows, benefit costs and other relevant
information. The guidance is effective for fiscal years ending
after December 15, 2003. Accordingly, the Companys
footnote disclosure regarding its pension and other
post-retirement (OPEB) benefits has been updated to
conform to the requirements of SFAS No. 132R. See
Note 8 Retirement Related Benefits.
In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, to
establish standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires an
issuer to classify a financial instrument that is within its
scope as a liability, or an asset, which may have previously
been classified as equity. The Company adopted
SFAS No. 150 effective June 30, 2003, as
required. The adoption of the Statement did not have an impact
on the Companys consolidated financial statements.
In January 2003 (as revised December 2003), the FASB issued
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46
clarifies the application of Accounting Research
66
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Bulletin No. 51, Consolidated Financial
Statements, for certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties. FIN 46 requires that
variable interest entities, as defined, should be consolidated
by the primary beneficiary, which is defined as the entity that
is expected to absorb the majority of the expected losses,
receive the majority of the gains, or both. FIN 46 requires
that companies disclose certain information about a variable
interest entity created prior to February 1, 2003 if it is
reasonably possible that the enterprise will be required to
consolidate that entity. The application of FIN 46, which
was previously required on July 1, 2003 for entities
created prior to February 1, 2003 and immediately for any
variable interest entities created subsequent to
January 31, 2003, has been deferred until years ending
after December 31, 2003, except for those companies which
previously issued financial statements implementing the
provisions of FIN 46. The Company has evaluated its
unconsolidated entities and does not believe that any entity in
which it has an interest, but does not currently consolidate,
meets the requirements for a variable interest entity to be
consolidated.
In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, when the liability is incurred and not as a
result of an entitys commitment to an exit plan. The
Statement is effective for exit or disposal activities initiated
after December 31, 2002. In 2003, and in accordance with
SFAS No. 146 provisions, the Company recorded a charge
of $8.7 million relating to the Companys staff
reduction program. See Note 2 Restructuring.
Effective January 1, 2002, the Company implemented
SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the related asset retirement
costs. The Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period
in which it is incurred and capitalized as part of the carrying
amount of the long-lived asset. When a liability is initially
recorded, the entity capitalizes the cost by increasing the
carrying value of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, a gain or loss
is recorded. The cumulative effect of this accounting change
related to prior years was a one-time non-cash charge to income
of $13.4 million (net of $3.3 million recorded under
the Companys previous mine closure accrual method)
recognized as of January 1, 2002. The net effect of the
change was $1.9 million of additional expense in year 2002
results. See Note 5 Environmental and Mine
Closure Obligations.
|
|
Note 1 |
Operations and Customers |
Effective December 1, 2003, United Taconite, a newly formed
company owned 70 percent by a subsidiary of the Company and
30 percent by a subsidiary of Laiwu Steel Group Limited
(Laiwu) of China, purchased the ore mining and
pelletizing assets of Eveleth Mines LLC (Eveleth
Mines). Eveleth Mines had ceased mining operations in May
2003 after filing for chapter 11 bankruptcy protection on
May 1, 2003. Under the terms of the purchase agreement,
United Taconite purchased all of Eveleth Mines assets for
$3 million in cash and the assumption of certain
liabilities, primarily mine closure-related environmental
obligations. As a result of this transaction, the assets
acquired exceeded the cost of the acquisition, resulting in an
extraordinary gain of $2.2 million, net of $.5 million
tax and $1.2 million minority interest. In conjunction with
this transaction, the Company and its Wabush Mines venture
partners entered into pellet sales and trade agreements with
Laiwu to optimize shipping efficiency. Sales to Laiwu under
these contracts totaled .2 million tons and .1 million
tons of pellets in 2004 and 2003, respectively.
The mine began production in late December 2003 and produced
approximately 80,000 tons in 2003 and 4.1 million tons
(Company share 2.9 million tons) in 2004. In the third
quarter 2004, the Company initiated a production capacity
expansion project that will add approximately 1.0 million
tons (Company share .7 million
67
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
tons) of annual production capacity at a cost of approximately
$35 million, with $13.3 million expended in 2004.
Production for 2005 is estimated to approximate 5.0 million
tons (Company share 3.5 million tons). A further expansion
is being evaluated.
Effective December 31, 2002, the Company increased its
ownership in Empire from 46.7 percent to 79 percent
for assumption of mine liabilities. Under terms of the
agreement, the Company has indemnified Ispat Inland Inc.
(Ispat Inland), a subsidiary of Ispat International,
N.V., from obligations of Empire in exchange for certain future
payments to Empire and to the Company by Ispat Inland of
$120.0 million, recorded at a present value, including
accrued interest, of $64.1 million at December 31,
2004 ($61.3 million at December 31, 2003) with
$52.1 million classified as Long-term
receivable and the balance current, over the 12-year life
of the supply agreement. A subsidiary of Ispat Inland retained a
21 percent ownership in Empire, for which it has the
unilateral right to put the interest to the Company in 2008. The
Company is the sole supplier of pellets purchased by Ispat
Inland for the term of the supply agreement.
On October 25, 2004, the acquisition of LNM Holdings N.V.
and International Steel Group Inc. (ISG) by Ispat
International, N.V., the parent of Ispat Inland, was announced.
On December 17, 2004, Ispat International N.V. completed
its acquisition of LNM Holdings N.V. to form Mittal Steel
Company N.V. (Mittal). The merger with ISG, subject
to shareholder approvals, is expected to be completed by the end
of the first quarter of 2005, resulting in the worlds
largest steel company. ISG is currently the Companys
largest customer with total pellet sales of 8.9 million
tons and 6.9 million tons in 2004 and 2003, respectively.
Additionally, ISG is a 62.3 percent equity participant in
Hibbing. The Companys pellet sales to Ispat Inland totaled
2.6 million tons and 2.8 million tons in 2004 and
2003, respectively. In December 2004, ISG and the Company
amended their sales agreement, which runs through 2016, to
increase the base price and moderate the supplemental steel
price sharing provisions. The Companys sales to ISG and
Ispat Inland are under agreements that are not scheduled to
expire for at least ten years. In 2004, the combined sales to
ISG and Ispat Inland accounted for 51 percent of the
Companys sales volume and, including their equity share of
Hibbing and Empire production, accounted for 52 percent of
the Companys managed production. The Company does not
expect the merger to affect its relationships with ISG and Ispat
Inland for the foreseeable future.
As a result of increasing production costs at the Empire mine,
revised economic mine planning studies were completed in the
fourth quarter of 2002 and updated in the fourth quarter of
2003. Based on the outcome of these studies, the ore reserve
estimates at Empire were reduced from 116 million tons at
December 31, 2001 to 63 million tons at
December 31, 2002 and 29 million tons at
December 31, 2003. Ore reserves were approximately
23 million tons at December 31, 2004, reflecting 2004
production. As a result of an impairment analysis, the Company
concluded that the assets of Empire were impaired and
accordingly recorded an impairment charge in 2002 of
$52.7 million to write-off the carrying value of the
long-lived assets of Empire. The Company calculates estimated
future net cash flows for purposes of assessing and measuring
impairment by utilizing the guidance provided in
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The Company utilized an
undiscounted probability-weighted cash flow analysis to
determine whether the Empire mine could generate cash flows
greater than the carrying value of its long-lived assets. In its
analysis, the Company based its revenue estimate on unescalated
contractual pricing under the Ispat Inland 12-year pellet supply
agreement and included special payments of up to
$120 million by Ispat Inland to Empire and the Company over
the duration of the contract. The Ispat Inland pellet revenue
rate was utilized because Ispat Inland purchases the majority of
Empires production. The Companys analysis was
limited to the recovery of proven and probable ore reserves,
reflected alternate annual production levels and unescalated
production and capital costs (based on the production-level
adjusted current year budget and five-year forecast) net of
royalties and management fees paid to the Company. The analysis
also incorporated funding requirements for employment legacy and
environmental and mine closure obligations. The cash flow
analysis
68
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
indicated that the Empire assets were impaired and that the fair
value of the Empire long-lived assets was determined to be zero.
In 2004 and 2003, the Company recorded additional impairment
charges of $5.8 million and $2.6 million,
respectively, for fixed asset additions. Approximately
$2.2 million of the 2004 Empire fixed-asset additions
related to an increase in the asset retirement obligations
reflecting a one-year decrease in the estimated mine life due to
a change in annual production levels.
The Company is proceeding with plans to expand annual production
capacity by reactivating an idled furnace at its wholly-owned
Northshore mine. The expansion, which is estimated to cost
approximately $30 million, will increase annual production
capacity by about .8 million tons to 5.6 million tons
per year when fully operational. The re-start of the furnace is
expected in the third quarter of 2005. Northshores 2005
production is estimated to be 5.2 million tons.
On January 31, 2002, the Company increased its ownership in
Tilden from 40 percent to 85 percent with the
acquisition of Algoma Steel Inc.s (Algoma)
interest in Tilden for assumption of mine liabilities associated
with the interest. The acquisition increased the Companys
annual production capacity by 3.5 million tons.
Concurrently, a term supply agreement was executed that made the
Company the sole supplier of iron ore pellets purchased by
Algoma for a 15-year period. Sales to Algoma totaled
3.3 million tons in 2004 (3.3 million tons in 2003 and
2.7 million tons in 2002).
In July 2002, the Company acquired (effective retroactive to
January 1, 2002) an eight percent interest in Hibbing
from Bethlehem Steel Corporation (Bethlehem) for the
assumption of mine liabilities associated with the interest. The
acquisition increased the Companys ownership of Hibbing
from 15 percent to 23 percent. This transaction
reduced Bethlehems ownership interest in Hibbing to
62.3 percent. In October 2001, Bethlehem filed for
protection under chapter 11 of the U.S. Bankruptcy
Code. In May 2003, ISG purchased the assets of Bethlehem,
including Bethlehems 62.3 percent interest in Hibbing.
In August 2002, Acme Steel Company, a wholly-owned subsidiary of
Acme Metals Incorporated, which had been under chapter 11
bankruptcy protection since 1998, rejected its 15.1 percent
interest in Wabush. As a result, the Companys interest
increased from 22.78 percent to 26.83 percent.
Economic ore reserves at Wabush were reduced to 94 million
tons at December 31, 2002 and further reduced to
61 million tons at December 31, 2003. Wabush ore
reserves at December 31, 2004 decreased to 57 million
tons, reflecting 2004 production. Impairment analyses were
prepared in each year with results indicating that our
long-lived assets at Wabush were not impaired. The ore reserve
decreases reflected the impacts of higher operating costs, a
weaker U.S. currency and a reduction in the maximum mining
depth in one critical mining area; partially offsetting these
impacts were higher Eastern Canadian pellet pricing and an
increase in Wabush production to its capacity of 6 million
tons per year. Both the increase in pellet pricing and the
increase in Wabush production are being driven by the overall
strength in overseas markets. As directly related to Wabush, the
Company believes that its ten-year supply agreement with Laiwu
should ensure that Wabush operates at capacity for the
foreseeable future.
69
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
|
|
|
Effect of Mine Ownership Increases |
While none of the increases in mine ownerships during 2002
required cash payments or assumption of debt, the ownership
changes resulted in the Company recognizing net obligations of
approximately $93 million at December 31, 2002.
Additional consolidated obligations assumed totaled
approximately $163 million at December 31, 2002,
primarily related to employment and legacy obligations at Empire
and Tilden mines, partially offset by non-capital long-term
assets, principally the $59 million Ispat Inland long-term
receivable. United Taconites acquisition of the Eveleth
Mines assets in Minnesota in December 2003 was for
$3 million cash and assumption of certain liabilities,
primarily mine closure-related environmental expenses.
On October 23, 2003, Rouge Industries, Inc.
(Rouge), a significant pellet sales customer of the
Company, filed for chapter 11 bankruptcy protection. On
January 30, 2004, Rouge sold substantially all of its
assets to Severstal North America, Inc. (Severstal).
Severstal, as part of the acquisition of assets of Rouge,
assumed the Companys term supply agreement with Rouge with
minimal modifications. The contract provides that the Company
would be the sole supplier of iron ore pellets through 2012. The
Company sold 3.3 million tons to Rouge in 2004 and
3.0 million tons in 2003. Additionally, in the first
quarter 2004, Rouge repaid a $10 million secured loan
balance outstanding plus accrued interest.
On September 16, 2003, WCI Steel Inc. (WCI)
petitioned for protection under chapter 11 of the
U.S. Bankruptcy Code. At the time of the filing, the
Company had a trade receivable exposure of $4.9 million,
which was fully reserved in the third quarter 2003. WCI
purchased 1.7 million tons, or 8 percent of total tons
sold in 2004, and has purchased 1.5 million tons, or
8 percent of total tons sold, in 2003. WCI continues to
operate and purchase pellets from the Company. On
October 14, 2004, the Company and the current owners of WCI
reached tentative agreement for the Company to supply
1.4 million tons of iron ore pellets in 2005 and, in 2006
and thereafter, to supply one hundred percent of WCIs
annual requirements up to a maximum of two million tons of iron
ore pellets. The new agreement, which is for a ten-year term
beginning in 2005 and provides for the Companys recovery
of its $4.9 million pre-petition receivable, plus
$.9 million of subsequent pricing adjustments, over time,
was approved by the Bankruptcy Court on November 16, 2004.
The agreement provides the Company with a right to terminate the
agreement after 2005 if a plan of reorganization is not
confirmed before June 30, 2005 and consummated by
July 31, 2005; in that event, the $5.8 million
receivable would be due at the end of 2005.
On May 19, 2003, Weirton Steel Corporation
(Weirton) filed for protection under chapter 11
of the U.S. Bankruptcy Code. Weirton, a significant
customer of the Company, purchased approximately .5 million
tons in 2004 through May 17, or two percent of all
tons sold in 2004, and 2.8 million tons, or 14 percent
of tons sold in 2003. On April 22, 2004, the Bankruptcy
Court issued an order approving the sale of Weirtons
assets to a subsidiary of ISG, and on May 18, 2004, ISG
completed the acquisition of substantially all of the assets,
including the power-related leased assets (discussed below), of
Weirton. As part of the acquisition, ISG assumed the
Companys term supply agreement with Weirton with some
modifications. The contract term is for 15 years with the
Company supplying the majority of pellets required for the
ISG-Weirton facility in 2004 and 2005 and all of
ISG-Weirtons pellet requirements thereafter. The Company
sold 1.4 million tons to ISG-Weirton in 2004 under the
assumed contract.
The Company is a 40.5 percent participant in a joint
venture that acquired certain power-related assets from FW
Holdings, Inc. (FW Holdings), a subsidiary of
Weirton, in 2001, in a purchase-leaseback arrangement. On
February 26, 2004, FW Holdings filed a petition for
chapter 11 bankruptcy protection. In connection with its
bankruptcy filing, FW Holdings filed an adversary complaint
against the joint venture members for declaratory relief and the
return of assets acquired in the purchase-leaseback transaction.
In that complaint, FW Holdings asserted that the lease
transaction should be recharacterized as a secured loan. As a
result, FW Holdings did not make its quarterly lease payment due
on March 31, 2004, of which the
70
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Companys share was $.5 million. In conjunction with
ISGs purchase of the Weirton assets, a settlement
agreement was reached between Weirton, ISG and the joint
venture. As a result of the settlement agreement, the Company
wrote down its investment to $6.1 million as of
March 31, 2004 from $10.3 million. An additional
$1.6 million charge was included in Provision for
customer bankruptcy exposures in the first quarter 2004;
the Company had previously recorded a $2.6 million reserve
for Weirton bankruptcy exposures in May 2003. The sale of
Weirtons assets to ISG resulted in a $10 million
payment to the joint venture on closing (Company share
$4.0 million), which was made on May 18, 2004, and
annual payments of $.5 million (Company share
$.2 million) including interest at the rate of five percent
over the next 15 years. The joint venture members also
received a release from Weirton and FW Holdings of bankruptcy
claims, such as preference actions, upon the closing of the sale
to ISG.
On January 29, 2004, Stelco Inc. (Stelco)
applied and obtained Bankruptcy Court protection from creditors
in Ontario Superior Court under the Companies Creditors
Arrangement Act. Pellet sales to Stelco totaled 1.2 million
tons in 2004 and .1 million tons in 2003. Stelco is a
44.6 percent participant in Wabush, and
U.S. subsidiaries of Stelco (which have not filed for
bankruptcy protection) own 14.7 percent of Hibbing and
15 percent of Tilden. At the time of the filing, the
Company had no trade receivable exposure to Stelco.
Additionally, Stelco has continued to operate and has met its
cash call requirements at the mining ventures to date. The Court
has extended the deadline for the submittal of bids to purchase
Stelco until February 14, 2005. Stelco has received an
extension of the stay period under its Court-ordered
restructuring from February 11, 2005 to April 29, 2005.
In the third quarter 2003, the Company initiated a salaried
employee reduction program, in order to place it in a better
position to address long-term strategic issues. The action
resulted in a reduction of 136 staff employees at its corporate,
central services and various mining operations, which
represented an approximate 20 percent decrease in salaried
workforce at the Companys U.S. operations (prior to
the acquisition of United Taconite). Accordingly, the Company
recorded restructuring charges of $8.7 million in 2003. The
Companys share of the restructuring charges is principally
related to pension and OPEB obligations, $6.2 million, and
one-time severance benefits, $2.5 million. Included in the
long-term restructuring charge was an OPEB plan curtailment
credit of $1.5 million. The programs impact on the
long-term pension and OPEB obligations was accounted for through
the benefit plans in which the individual employees
participated. Less than $1.6 million of the one-time
severance benefits required cash funding in 2003 leaving a
remaining severance liability of approximately $.9 million
at December 31, 2003. In 2004, the Company expended
$.7 million and recorded a $.2 million credit to the
restructuring charge in satisfaction of the obligation. The
recognition of the one-time severance benefits were accounted
for under SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.
|
|
Note 3 |
Discontinued Operation |
In the fourth quarter of 2002, the Company exited the ferrous
metallics business and abandoned its 82 percent investment
in CAL, an HBI facility located in Trinidad and Tobago. For the
year 2002, the Company reported a loss from discontinued
operation of $108.5 million, consisting of
$97.4 million ($95.7 million in the third quarter) of
impairment charges, due to uncertainties concerning the HBI
market, operating costs and volume, and startup timing, when the
Company determined that its investment in CAL was impaired, and
$11.1 million of idle expense.
On July 23, 2004, Cliffs and Outokumpu Technology GmbH (the
18 percent co-owner of CAL) sold the assets of CALs
HBI facility to ISG. Terms of the sale include a purchase price
of $8.0 million plus assumption of liabilities. CAL may
receive up to $10 million in future payments contingent on
HBI
71
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
production and shipments. The Company recorded after-tax income
of approximately $3.1 million in 2004, which is classified
under Discontinued Operation in the Statement of
Consolidated Operations.
|
|
Note 4 |
Segment Reporting |
In 2004 and 2003, the Company operated in one reportable segment
offering iron products and services to the steel industry. The
ferrous metallics segment, which included the Companys CAL
operations, was discontinued in 2002.
Included in the consolidated financial statements are the
following amounts relating to geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenue(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
923.3 |
|
|
$ |
653.2 |
|
|
$ |
448.3 |
|
|
Canada
|
|
|
231.2 |
|
|
|
162.4 |
|
|
|
145.5 |
|
|
Other Countries
|
|
|
63.5 |
|
|
|
20.1 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$ |
1,218.0 |
|
|
$ |
835.7 |
|
|
$ |
598.6 |
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
285.8 |
|
|
$ |
255.0 |
|
|
|
|
|
|
Canada
|
|
|
16.9 |
|
|
|
16.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
302.7 |
|
|
$ |
271.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Revenue is attributed to countries based on the location of the
customer and includes both Product sales and
services and Royalties and management fees
revenues. |
|
(2) |
Net properties include Companys equity share of
unconsolidated ventures. |
Following is a summary of the Companys significant
customers measured as a percent of Product sales and
services revenues from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Sales | |
|
|
Revenues* | |
|
|
| |
Customer |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
ISG
|
|
|
44 |
% |
|
|
29 |
% |
|
|
20 |
% |
Algoma
|
|
|
14 |
|
|
|
17 |
|
|
|
19 |
|
Severstal/ Rouge
|
|
|
13 |
|
|
|
16 |
|
|
|
11 |
|
Ispat Inland/ Mittal
|
|
|
10 |
|
|
|
8 |
|
|
|
5 |
|
WCI
|
|
|
6 |
|
|
|
7 |
|
|
|
8 |
|
Stelco
|
|
|
5 |
|
|
|
1 |
|
|
|
2 |
|
Weirton
|
|
|
2 |
|
|
|
16 |
|
|
|
21 |
|
Laiwu
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
AK Steel
|
|
|
1 |
|
|
|
|
|
|
|
9 |
|
Others
|
|
|
4 |
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
* Excludes freight and minority interest cost
reimbursements.
72
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Note 5 Environmental and Mine Closure
Obligations
At December 31, 2004, the Company, including its share of
unconsolidated ventures, had environmental and mine closure
liabilities of $99.0 million, of which $6.0 million
was classified as current. Payments in 2004 were
$6.4 million (2003 $7.5 million;
2002 $8.3 million). Following is a summary of
the obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Environmental
|
|
$ |
13.0 |
|
|
$ |
15.5 |
|
Mine Closure
|
|
|
|
|
|
|
|
|
|
LTV Steel Mining Company
|
|
|
33.8 |
|
|
|
37.1 |
|
|
Operating Mines
|
|
|
52.2 |
|
|
|
45.2 |
|
|
|
|
|
|
|
|
|
|
Total Mine Closure
|
|
|
86.0 |
|
|
|
82.3 |
|
|
|
|
|
|
|
|
|
|
Total Environmental and Mine Closure*
|
|
$ |
99.0 |
|
|
$ |
97.8 |
|
|
|
|
|
|
|
|
|
|
* |
Includes $10.6 million and $9.7 million at
December 31, 2004 and 2003, respectively, of the
Companys share of unconsolidated ventures. |
Included in the obligation are environmental liabilities of
$13.0 million. The Companys obligations for known
environmental remediation exposures at active and closed mining
operations and other sites have been recognized based on the
estimated cost of investigation and remediation at each site. If
the cost can only be estimated as a range of possible amounts
with no specific amount being most likely, the minimum of the
range is accrued in accordance with SFAS No. 5,
Accounting for Contingencies. Future expenditures
are not discounted, and potential insurance recoveries have not
been reflected. Additional environmental exposures could be
incurred, the extent of which cannot be assessed.
The environmental liability includes the Companys
obligations related to six sites which are independent of the
Companys iron mining operations, seven former iron
ore-related sites, eight leased land sites where the Company is
lessor and miscellaneous remediation obligations at the
Companys operating units. Included in the obligation are
Federal and State sites where the Company is named as a
potentially responsible party (PRP); the Rio Tinto
mine site in Nevada, the Milwaukee Solvay site in Wisconsin and
the Pellestar site in Michigan, where significant site cleanup
activities have taken place, and the Kipling and Deer Lake sites
in Michigan.
In September 2002, the Company received a draft of a proposed
Administrative Order by Consent from the United States
Environmental Protection Agency (EPA) for cleanup
and reimbursement of costs associated with the Milwaukee Solvay
coke plant site in Milwaukee, Wisconsin. The plant was operated
by a predecessor of the Company from 1973 to 1983, which
predecessor was acquired by the Company in 1986. In January
2003, the Company completed the sale of the plant site and
property to a third party. Following this sale, an
Administrative Order by Consent (Consent Order) was
entered into with the EPA by the Company, the new owner and
another third party who had operated on the site. In connection
with the Consent Order, the new owner agreed to take
responsibility for the removal action and agreed to indemnify
the Company for all costs and expenses in connection with the
removal action. In the third quarter of 2003, the new owner,
after completing a portion of the removal, experienced financial
difficulties. In an effort to continue progress on the removal
action, the Company expended approximately $.9 million in
the second half
73
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
of 2003 and $2.1 million in 2004. At this time, the Company
believes the requirements of the removal action have been
substantially completed.
On August 26, 2004, the Company received a Request for
Information pursuant to Section 104(e) of CERCLA relative
to the investigation of additional contamination below the
ground surface at the Milwaukee Solvay site. The Request for
Information was also sent to thirteen other PRPs. At this time,
the nature and extent of the contamination, the required
remediation, the total cost of the cleanup and the cost sharing
responsibilities of the PRPs cannot be determined. The Company
increased its environmental reserve for Milwaukee Solvay by
$.8 million in 2004 for potential additional exposure.
By letter dated November 19, 1991, the Michigan Department
of Natural Resources, now the Michigan Department of
Environmental Quality (MDEQ), notified the Company
that it believed the Company was liable for contamination at the
Kipling Furnace Site in Kipling, Michigan and requested that the
Company voluntarily undertake actions to remediate the site. The
Company owned and operated a portion of the site from
approximately 1902 through 1925 when it sold the property to
CITGO Petroleum Company (CITGO). CITGO in turn
operated at the site and thereafter sold the northern portion of
the site to a third party. This northern portion of the site was
the location of the majority of the Companys former
operations. CITGO has been working formally with MDEQ to address
the portions of the site impacted by CITGOs operations on
the property, which occurred between 1925 and 1986. CITGO
submitted a remedial action plan in August 2003 to the MDEQ.
However, the MDEQ subsequently rejected this remedial action
plan as being inadequate.
The Company responded to the 1991 letter by performing a
hydrogeological investigation at the site pursuant to
Michigans Natural Resources and Environmental Protection
Act, which allows parties to conduct environmental response
activity without state agency oversight. The Companys
initial investigation took place in 1996, with follow-up
monitoring occurring in 1998 through 2003. The Company developed
a proposed remedial action plan to address materials associated
with its former operations at the site. The Company currently
estimates the cost of implementing its proposed remedial action
to be approximately $.3 million, which expenditures were
previously provided in the Companys environmental reserve.
The Company has not yet implemented the proposed remedial action
plan.
By a letter dated June 10, 2004, the MDEQ made a new demand
to both CITGO and the Company to take responsive activities at
the property, including development and submittal of a remedial
action plan to the MDEQ for approval. The Company met with the
MDEQ to discuss this letter and submitted a response.
Subsequently, the Company and CITGO agreed to cooperate in the
development of a joint remedial action plan as encouraged by
MDEQ. Additional investigative work at the site has been
undertaken by CITGO. At this time, it is unclear whether the
MDEQ, once it is apprised of the Companys response
activities at the site to date, will require it to conduct
further investigations or implement a remedial action plan going
beyond what it has already developed internally. Conducting
further investigations, revising the Companys proposed
remedial action plan, or implementing the plan, could result in
much higher costs than currently anticipated.
The mine closure obligation of $86.0 million includes the
accrued obligation at December 31, 2004 for a closed
operation formerly known as the LTV Steel Mining Company
(LTVSMC) and for the Companys six operating
mines. The closure obligation results from an October 2001
transaction where subsidiaries of the Company received a net
payment of $50.0 million and certain other assets and
assumed environmental and certain facility closure obligations
of $50.0 million, which at December 31, 2004, have
declined to $33.8 million as a result of expenditures
totaling $16.2 million since 2001 ($3.3 million in
2004).
74
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The accrued closure obligation for the Companys active
mining operations of $52.2 million reflects the adoption of
SFAS No. 143, Accounting for Asset Retirement
Obligations, which was effective January 1, 2002, to
provide for contractual and legal obligations associated with
the eventual closure of the mining operations and the effects of
mine ownership increases in 2002. The Company determined the
obligations, based on detailed estimates, adjusted for factors
that an outside third party would consider (i.e., inflation,
overhead and profit), escalated to the estimated closure dates
and then discounted using a credit adjusted risk-free interest
rate of 10.25 percent (12.0 percent for United
Taconite). The closure date for each location was determined
based on the exhaustion date of the remaining economic iron ore
reserves. The accretion of the liability and amortization of the
property and equipment will be recognized over the estimated
mine lives for each location. Upon adoption on January 1,
2002, the Companys share of the obligation, including its
unconsolidated ventures, was a present value liability,
$17.1 million, a net increase to plant and equipment,
$.4 million, and net cumulative effect charge,
$13.4 million. The net cumulative effect charge reflected
the offset of $3.3 million of accruals made under the
Companys previous mine closure accrual method.
The following summarizes the Companys asset retirement
obligation liability at December 31:
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Asset Retirement Obligation at Beginning of Year
|
|
$ |
45.2 |
|
|
$ |
36.1 |
|
Accretion Expense
|
|
|
4.6 |
|
|
|
3.6 |
|
Additional Ownership
|
|
|
|
|
|
|
2.4 |
|
Minority Interest
|
|
|
.2 |
|
|
|
1.0 |
|
Revision in Estimated Cash Flows
|
|
|
2.2 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
Asset Retirement Obligation at End of Year
|
|
$ |
52.2 |
|
|
$ |
45.2 |
|
|
|
|
|
|
|
|
In the first quarter 2004, the Company repaid the remaining
$25.0 million balance on its senior unsecured note
agreement. On April 30, 2004, the Company entered into a
$30 million unsecured revolving credit agreement, which
expires on April 29, 2005. There have been no borrowings
under the facility.
|
|
Note 7 |
Lease Obligations |
The Company and its unconsolidated ventures lease certain
mining, production, and other equipment under operating leases.
The Companys operating lease expense, including its share
of unconsolidated ventures, was $19.7 million in 2004,
$24.6 million in 2003 and $25.3 million in 2002.
Assets acquired under capital leases by the Company, including
its share of unconsolidated ventures, were $13.9 million
and $15.0 million, respectively, at December 31, 2004
and 2003. Corresponding accumulated amortization of capital
leases included in respective allowances for depreciation was
$8.2 million and $8.4 million at December 31,
2004 and 2003, respectively.
75
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Future minimum payments under capital leases and noncancellable
operating leases, at December 31, 2004 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Companys Share | |
|
Total | |
|
|
| |
|
| |
|
|
Capital | |
|
Operating | |
|
Capital | |
|
Operating | |
Year Ending December 31, |
|
Leases | |
|
Leases | |
|
Leases | |
|
Leases | |
|
|
| |
|
| |
|
| |
|
| |
|
2005
|
|
$ |
2.6 |
|
|
$ |
16.0 |
|
|
$ |
5.2 |
|
|
$ |
27.1 |
|
|
2006
|
|
|
2.3 |
|
|
|
12.2 |
|
|
|
4.0 |
|
|
|
20.2 |
|
|
2007
|
|
|
2.9 |
|
|
|
9.0 |
|
|
|
3.4 |
|
|
|
12.1 |
|
|
2008
|
|
|
.7 |
|
|
|
6.7 |
|
|
|
.7 |
|
|
|
7.6 |
|
|
2009
|
|
|
.6 |
|
|
|
4.4 |
|
|
|
.6 |
|
|
|
4.6 |
|
|
2010 and thereafter
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
9.1 |
|
|
$ |
51.1 |
|
|
|
13.9 |
|
|
$ |
74.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts representing interest
|
|
|
1.3 |
|
|
|
|
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$ |
7.8 |
|
|
|
|
|
|
$ |
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys share of total minimum lease payments,
$60.2 million, is comprised of the Companys
consolidated obligation of $51.4 million and the
Companys ownership share of unconsolidated associated
companies obligations of $8.8 million, principally
related to Hibbing and Wabush.
|
|
Note 8 |
Retirement Related Benefits |
The Company and its unconsolidated ventures offer defined
benefit pension plans, defined contribution pension plans and
other post-retirement benefit plans, primarily consisting of
retiree healthcare benefits, as part of a total compensation and
benefits program.
The defined benefit pension plans are largely noncontributory,
and, except for U.S. salaried employees, benefits are
generally based on employees years of service and average
earnings for a defined period prior to retirement or a minimum
formula. Effective July 1, 2003, the pension benefits for
certain U.S. salaried employees were frozen under the prior
benefit formula and a cash balance pension formula was
implemented for service after June 30, 2003. Effective
July 1, 2004, the pension benefits for U.S. salaried
employees of the Lake Superior and Ishpeming Railroad
(LS&I) Pension Plan were frozen under the prior
benefit formula and a cash balance pension formula was
implemented for service after June 30, 2004. The cash
balance formula provides benefits based on employees years
of service and average earnings.
In addition, the Company and its unconsolidated ventures
currently provide various levels of retirement health care and
life insurance benefits (Other Benefits or OPEB) to
most full-time employees who meet certain length of service and
age requirements (a portion of which are pursuant to collective
bargaining agreements). Most plans require retiree contributions
and have deductibles, co-pay requirements, and benefit limits.
Most bargaining unit plans require retiree contributions and
co-pays for major medical and prescription drug coverage.
Effective July 1, 2003, the Company imposed an annual limit
on its cost for medical coverage under the U.S. salaried
plans, except for the plans covering participants at the
Northshore and LS&I Railroad Company operations. A similar
type of limit was previously implemented at Northshore. The
annual limit applies to each covered participant and equals
$7,000 for coverage prior to age 65 and $3,000 for coverage
after age 65, with the retirees participation
adjusted based on the age at which retiree benefits commence.
The covered participant pays an amount for coverage equal to the
excess of (i) the average cost of coverage for all covered
participants, over (ii) the participants individual
limit, but in no event will the participants cost be less
than 15 percent of the average cost of coverage for all
covered participants. Currently, the average cost for
76
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
coverage prior to age 65 and after age 65 are below
the respective limits of $7,000 and $3,000. The changes
implemented to the U.S. salaried pension and other benefits
plans reduced costs by more than an estimated $8.0 million
on an annualized basis. The Company does not provide Other
Benefits for most U.S. salaried employees hired after
January 1, 1993. Other Benefits are provided through
programs administered by insurance companies whose charges are
based on benefits paid.
Pursuant to the new four-year labor agreements reached with the
USWA for U.S. employees, effective August 1, 2004,
OPEB expense for 2004 and the accumulated postretirement benefit
obligation (APBO) decreased $4.9 million and
$48.0 million, respectively, to reflect negotiated plan
changes, which capped the Companys share of future
bargaining unit retirees healthcare premiums at 2008
levels for the years 2009 and beyond. The new agreements also
provide that the Company and its partners fund an estimated
$220 million into bargaining unit pension plans and retiree
healthcare accounts (VEBAs) during the term of the
contracts.
Furthermore, year 2004 OPEB expense reflects an estimated cost
reduction of $4.1 million due to the effect of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(Medicare Drug Act). The Company elected to adopt
the retroactive transition method for recognizing the OPEB cost
reduction in the second quarter 2004. Accordingly, first quarter
2004 results have been re-stated to reduce the previously
reported net loss by $.6 million or $.05 per share.
Additionally, the APBO decreased $25.1 million.
Year 2004 OPEB expense also reflects a cost reduction for the
Canadian OPEB plan of $.4 million due to the net effect of
favorable claims and demographic experience, offset by moderate
benefit improvements negotiated with the USWA effective
March 1, 2004.
During 2003, the Company terminated certain U.S. salaried
employees. Enhanced benefits were provided to most of these
employees under the defined benefit pension and post-retirement
benefit plans. Such employees who were within 3 years
(4 years for employees at LS&I) of meeting retirement
eligibility under the plans were granted an additional
3 years (4 years for employees at LS&I) of age and
service for purposes of satisfying such eligibility
requirements. In addition, such employees covered under the
Pension Plan for Employees of Cleveland-Cliffs Inc and its
Associated Employers were granted a special credit under their
cash balance account, generally equal to 2 weeks of base
pay per year of service up to 52 weeks of such pay,
increased by 11 percent to reflect certain tax liabilities.
The following table summarizes the annual costs for the
retirement plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Defined benefit pension plans
|
|
$ |
23.1 |
|
|
$ |
32.0 |
|
|
$ |
7.2 |
|
Defined contribution pension plans
|
|
|
3.0 |
|
|
|
1.9 |
|
|
|
1.9 |
|
Other post-retirement benefits
|
|
|
28.5 |
|
|
|
29.1 |
|
|
|
21.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
54.6 |
|
|
$ |
63.0 |
|
|
$ |
30.6 |
|
|
|
|
|
|
|
|
|
|
|
77
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The following one-time loss (gain) recognized in 2003 due
to the special termination benefits and curtailment under the
plans associated with the involuntary terminations in the
U.S. during 2003 are included in the annual costs shown
above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Special | |
|
|
|
|
Termination | |
|
Curtailment | |
|
|
|
|
Benefits | |
|
(Gain)/Loss | |
|
Total | |
|
|
| |
|
| |
|
| |
Defined benefit pension plans
|
|
$ |
7.1 |
|
|
$ |
|
|
|
$ |
7.1 |
|
Other post-retirement benefits
|
|
|
1.5 |
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8.6 |
|
|
$ |
(1.5 |
) |
|
$ |
7.1 |
|
|
|
|
|
|
|
|
|
|
|
The effect of the benefit plan changes in the year of
recognition for the previously mentioned salaried benefit plan
changes in 2003 and benefit changes associated with the new
labor agreements and the Medicare Drug Act in 2004 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Reduction in annual cost
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans
|
|
$ |
|
|
|
$ |
3.8 |
|
|
Other post-retirement benefits
|
|
|
9.0 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9.0 |
|
|
$ |
7.2 |
|
|
|
|
|
|
|
|
Reduction in PBO or APBO
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans (PBO)
|
|
$ |
|
|
|
$ |
20.7 |
|
|
Other post-retirement benefits (APBO)
|
|
|
73.1 |
|
|
|
23.4 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
73.1 |
|
|
$ |
44.1 |
|
|
|
|
|
|
|
|
The Company utilized December 31 as its measurement date
for determining pension and other benefits obligations and
assets.
The following tables and information provide additional
disclosures for the Companys plans, including its
proportionate share of plans of its unconsolidated ventures.
|
|
|
Obligations and Funded Status |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Change in Benefit Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations beginning of year
|
|
$ |
642.6 |
|
|
$ |
613.3 |
|
|
$ |
373.8 |
|
|
$ |
322.8 |
|
Service cost (excluding expenses)
|
|
|
10.7 |
|
|
|
11.6 |
|
|
|
4.0 |
|
|
|
4.4 |
|
Interest cost
|
|
|
40.9 |
|
|
|
39.0 |
|
|
|
19.8 |
|
|
|
21.6 |
|
Plan amendments
|
|
|
(.1 |
) |
|
|
(20.7 |
) |
|
|
(48.0 |
) |
|
|
(23.4 |
) |
Actuarial loss (gain)
|
|
|
73.9 |
|
|
|
37.8 |
|
|
|
(9.5 |
) |
|
|
65.4 |
|
Benefits paid
|
|
|
(44.5 |
) |
|
|
(45.5 |
) |
|
|
(21.3 |
) |
|
|
(19.7 |
) |
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
2.7 |
|
Effect of curtailment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
Effect of special termination benefits
|
|
|
|
|
|
|
7.1 |
|
|
|
|
|
|
|
1.5 |
|
Other
|
|
|
(8.0 |
) |
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations end of year
|
|
$ |
715.5 |
|
|
$ |
642.6 |
|
|
$ |
318.2 |
|
|
$ |
373.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets beginning of year
|
|
$ |
471.4 |
|
|
$ |
424.3 |
|
|
$ |
56.6 |
|
|
$ |
48.7 |
|
Actual return on plan assets
|
|
|
57.2 |
|
|
|
86.3 |
|
|
|
6.5 |
|
|
|
7.9 |
|
Employer contributions
|
|
|
63.0 |
|
|
|
6.4 |
|
|
|
13.1 |
|
|
|
3.4 |
|
Benefits paid
|
|
|
(44.5 |
) |
|
|
(45.5 |
) |
|
|
(0.5 |
) |
|
|
|
|
Asset transfers/refund
|
|
|
(.1 |
) |
|
|
(.1 |
) |
|
|
|
|
|
|
(3.4 |
) |
Other
|
|
|
(5.8 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets end of year
|
|
$ |
541.2 |
|
|
$ |
471.4 |
|
|
$ |
75.5 |
|
|
$ |
56.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$ |
541.2 |
|
|
$ |
471.4 |
|
|
$ |
75.5 |
|
|
$ |
56.6 |
|
Benefit obligations
|
|
|
715.5 |
|
|
|
642.6 |
|
|
|
318.2 |
|
|
|
373.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status (plan assets less benefit obligations)
|
|
|
(174.3 |
) |
|
|
(171.2 |
) |
|
|
(242.7 |
) |
|
|
(317.2 |
) |
Amounts not recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
|
|
213.4 |
|
|
|
175.4 |
|
|
|
166.8 |
|
|
|
193.4 |
|
Unrecognized prior service cost (benefit)
|
|
|
16.4 |
|
|
|
11.6 |
|
|
|
(70.2 |
) |
|
|
(29.6 |
) |
Unrecognized net obligation (asset) at date of adoption
|
|
|
(6.3 |
) |
|
|
(10.2 |
) |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
49.2 |
|
|
$ |
5.6 |
|
|
$ |
(145.8 |
) |
|
$ |
(153.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$ |
158.6 |
|
|
$ |
24.5 |
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
|
(109.4 |
) |
|
|
(18.9 |
) |
|
|
|
|
|
|
|
|
Additional minimum liability
|
|
|
(133.6 |
) |
|
|
(146.5 |
) |
|
|
|
|
|
|
|
|
Intangible asset
|
|
|
14.5 |
|
|
|
15.6 |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
77.8 |
|
|
|
89.1 |
|
|
|
|
|
|
|
|
|
Effect of change in mine ownership & minority interest
|
|
|
41.3 |
|
|
|
41.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
49.2 |
|
|
$ |
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Information on Pension Benefit Obligations as of
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
|
|
Canadian | |
|
|
|
|
U.S. | |
|
Pension | |
|
|
|
|
Pension Plans | |
|
Plans | |
|
|
|
|
| |
|
| |
|
|
|
|
Salaried | |
|
Hourly | |
|
Mining | |
|
Salaried | |
|
Hourly | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Projected benefit obligation
|
|
$ |
232.0 |
|
|
$ |
403.2 |
|
|
$ |
36.4 |
|
|
$ |
17.7 |
|
|
$ |
26.2 |
|
|
$ |
715.5 |
|
Accumulated benefit obligation (ABO)
|
|
|
230.6 |
|
|
|
383.8 |
|
|
|
33.9 |
|
|
|
12.9 |
|
|
|
26.2 |
|
|
|
687.4 |
|
Fair value of plan assets
|
|
|
237.2 |
|
|
|
238.3 |
|
|
|
25.5 |
|
|
|
18.5 |
|
|
|
21.7 |
|
|
|
541.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded ABO
|
|
|
|
|
|
|
145.5 |
|
|
|
8.4 |
|
|
|
|
|
|
|
4.5 |
|
|
|
158.4 |
|
Net amount recognized
|
|
|
71.2 |
|
|
|
(25.9 |
) |
|
|
.5 |
|
|
|
2.8 |
|
|
|
.6 |
|
|
|
49.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional minimum liability
|
|
|
|
|
|
|
119.6 |
|
|
|
8.9 |
|
|
|
|
|
|
|
5.1 |
|
|
|
133.6 |
|
Intangible asset
|
|
|
|
|
|
|
(12.7 |
) |
|
|
(.6 |
) |
|
|
|
|
|
|
(1.2 |
) |
|
|
(14.5 |
) |
Effect of change in mine ownership & minority interest
|
|
|
|
|
|
|
(40.9 |
) |
|
|
(.2 |
) |
|
|
|
|
|
|
(.2 |
) |
|
|
(41.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
$ |
66.0 |
|
|
$ |
8.1 |
|
|
|
|
|
|
$ |
3.7 |
|
|
$ |
77.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The Companys net pension liability of $84.4 million
at December 31, 2004 is recorded as $42.4 million of
$42.7 million in Pensions, including minimum pension
liability, $31.0 million in current liabilities as
Pensions, and the remainder minor amounts reflected
as equity investments.
The $145.8 million liability for Other Benefits at
December 31, 2004 is recorded as $102.7 million of
long-term Other post-retirement benefits, and
$34.9 million in current liabilities as Other
post-retirement benefits, with the remainder reflected in
equity investments.
The accumulated benefit obligation for all defined benefit
pension plans was $687.4 million and $609.4 million at
December 31, 2004 and 2003, respectively.
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the pension plans
with an accumulated benefit obligation in excess of plan assets
were $465.8 million, $443.9 million, and
$285.5 million, respectively, as of December 31, 2004,
and $626.5 million, $597.7 million, and
$454.3 million, respectively, as of December 31, 2003.
|
|
|
Components of Net Periodic Benefit Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Service cost
|
|
$ |
10.7 |
|
|
$ |
11.6 |
|
|
$ |
4.0 |
|
|
$ |
4.4 |
|
Interest cost
|
|
|
40.9 |
|
|
|
39.0 |
|
|
|
19.8 |
|
|
|
22.0 |
|
Expected return on plan assets
|
|
|
(38.1 |
) |
|
|
(36.2 |
) |
|
|
(5.4 |
) |
|
|
(4.3 |
) |
Amortizations, curtailment and special termination benefits
|
|
|
9.6 |
|
|
|
17.6 |
|
|
|
10.1 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
23.1 |
|
|
$ |
32.0 |
|
|
$ |
28.5 |
|
|
$ |
29.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Effect of change in mine ownership & minority interest
|
|
$ |
41.3 |
|
|
$ |
41.8 |
|
|
|
N/A |
|
|
|
N/A |
|
Minimum liability included in other comprehensive income
|
|
|
77.8 |
|
|
|
89.1 |
|
|
|
N/A |
|
|
|
N/A |
|
Actual return on plan assets
|
|
|
57.2 |
|
|
|
86.3 |
|
|
$ |
6.5 |
|
|
$ |
7.9 |
|
Weighted-average assumptions used to determine benefit
obligations at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
6.25 |
% |
|
Rate of compensation increase
|
|
|
4.16 |
|
|
|
4.19 |
|
|
|
N/A |
|
|
|
N/A |
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
Rate of compensation increase
|
|
|
4.00 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
80
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Weighted-average assumptions used to determine net benefit cost
for years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.25 |
% |
|
|
6.90 |
% |
|
|
6.25 |
% |
|
|
6.90 |
% |
|
Expected return on plan assets
|
|
|
8.50 |
|
|
|
9.00 |
|
|
|
8.50 |
|
|
|
8.35 |
|
|
Rate of compensation increase
|
|
|
4.19 |
|
|
|
4.19 |
|
|
|
4.19 |
|
|
|
4.19 |
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
Expected return on plan assets
|
|
|
8.00 |
|
|
|
8.00 |
|
|
|
6.50 |
|
|
|
6.00 |
|
|
Rate of compensation increase
|
|
|
4.00 |
|
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Health Care Cost Trend Rates at December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
U.S.
|
|
|
|
|
|
|
|
|
|
Health care cost trend rate assumed for next year
|
|
|
9.0 |
% |
|
|
10.0 |
% |
|
Ultimate health care cost trend rate
|
|
|
5.0 |
|
|
|
5.0 |
|
|
Year that the ultimate rate is reached
|
|
|
2009 |
|
|
|
2009 |
|
Canada
|
|
|
|
|
|
|
|
|
|
Health care cost trend rate assumed for next year
|
|
|
9.0 |
% |
|
|
10.0 |
% |
|
Ultimate health care cost trend rate
|
|
|
5.0 |
|
|
|
5.0 |
|
|
Year that the ultimate rate is reached
|
|
|
2009 |
|
|
|
2009 |
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend
rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Increase | |
|
Decrease | |
|
|
| |
|
| |
Effect on total of service and interest cost
|
|
$ |
2.1 |
|
|
$ |
(1.7 |
) |
Effect on post-retirement benefit obligation
|
|
|
27.8 |
|
|
|
(22.5 |
) |
The pension plans asset allocation at December 31, 2004 and
2003, and target allocation for 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
|
|
Plan Assets at | |
|
|
2005 | |
|
December 31 | |
|
|
Target | |
|
| |
Asset Category |
|
Allocation | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Equity securities
|
|
|
63.8 |
% |
|
|
63.6 |
% |
|
|
72.0 |
% |
Debt securities
|
|
|
29.7 |
|
|
|
29.2 |
|
|
|
20.0 |
|
Real estate
|
|
|
6.5 |
|
|
|
7.2 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
81
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Assets at | |
|
|
December 31 | |
|
|
| |
Asset Category |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Equity securities
|
|
$ |
344.2 |
|
|
$ |
339.4 |
|
Debt securities
|
|
|
158.0 |
|
|
|
94.3 |
|
Real estate
|
|
|
39.0 |
|
|
|
37.7 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
541.2 |
|
|
$ |
471.4 |
|
|
|
|
|
|
|
|
The expected return on plan assets represents the weighted
average of expected returns for each asset category. Expected
returns are determined based on historical performance, adjusted
for current trends. The expected return is net of benefit plan
expenses.
Assets for other benefits include deposits relating to insurance
contracts (CLIR) and VEBA trusts pursuant to
bargaining agreements that are available to fund retired
employees life insurance obligations and medical benefits.
The other benefit plan asset allocation at December 31,
2004 and 2003, and target allocation for 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
|
|
Plan Assets at | |
|
|
2005 | |
|
December 31 | |
|
|
Target | |
|
| |
Asset Category |
|
Allocation | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Equity securities
|
|
|
65.0 |
% |
|
|
65.0 |
% |
|
|
67.1 |
% |
Debt securities
|
|
|
35.0 |
|
|
|
35.0 |
|
|
|
32.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
Assets at | |
|
|
December 31 | |
|
|
| |
Asset Category |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Equity securities
|
|
$ |
49.2 |
|
|
$ |
38.0 |
|
Debt securities
|
|
|
26.4 |
|
|
|
18.6 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
75.6 |
|
|
$ |
56.6 |
|
|
|
|
|
|
|
|
The expected return on plan assets represents the weighted
average of expected returns for each asset category. Expected
returns are determined based on historical performance, adjusted
for current trends. The expected return is net of benefit plan
expenses.
|
|
|
Participant and Company Contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
|
|
Other Benefits | |
|
|
|
|
| |
|
|
Pension | |
|
|
|
Direct | |
|
|
Company Contributions |
|
Benefits | |
|
VEBA | |
|
Payments | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
2003
|
|
$ |
6.4 |
|
|
$ |
3.4 |
|
|
$ |
13.6 |
|
|
$ |
17.0 |
|
2004
|
|
|
63.0 |
|
|
|
13.1 |
|
|
|
17.8 |
|
|
|
30.9 |
|
2005 (expected)
|
|
|
33.9 |
|
|
|
15.2 |
|
|
|
20.0 |
|
|
|
35.2 |
|
|
|
* |
The Company is currently considering various options for the
amount to be contributed to the pension plans during 2005. The
amounts reflected represent minimum funding requirements and
bargaining agreements. |
82
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Annual contributions to the pension plans are made within income
tax deductibility restrictions in accordance with statutory
regulations. In the event of plan termination, the plan sponsors
could be required to fund additional shutdown and early
retirement obligations that are not included in the pension
obligations.
VEBA plans are not subject to minimum regulatory funding
requirements. Amounts contributed are pursuant to bargaining
agreements.
Contributions by participants to the other benefit plans were
$3.3 million and $2.7 million for the years ending
December 31, 2004 and 2003, respectively.
For 2005, the Company, including its share of the plans of its
unconsolidated ventures, estimates net periodic benefit cost for
the U.S. and Canadian plans as follows:
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
Defined benefit pension plans
|
|
$ |
19.1 |
|
Defined contribution plans
|
|
|
1.2 |
|
Other post-retirement benefits
|
|
|
21.8 |
|
|
|
|
|
Total
|
|
$ |
42.1 |
|
|
|
|
|
|
|
|
Estimated Company Benefit Payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | |
|
|
| |
|
|
|
|
Other Benefits | |
|
|
|
|
| |
|
|
|
|
Gross | |
|
Less | |
|
Net | |
|
|
Pension | |
|
Company | |
|
Medicare | |
|
Company | |
|
|
Benefits | |
|
Payments | |
|
Subsidy | |
|
Payments | |
|
|
| |
|
| |
|
| |
|
| |
2005
|
|
$ |
46.1 |
|
|
$ |
20.0 |
|
|
$ |
|
|
|
$ |
20.0 |
|
2006
|
|
|
47.2 |
|
|
|
21.6 |
|
|
|
1.4 |
|
|
|
20.2 |
|
2007
|
|
|
48.6 |
|
|
|
23.1 |
|
|
|
1.4 |
|
|
|
21.7 |
|
2008
|
|
|
50.9 |
|
|
|
24.1 |
|
|
|
1.3 |
|
|
|
22.8 |
|
2009
|
|
|
51.5 |
|
|
|
25.0 |
|
|
|
1.2 |
|
|
|
23.8 |
|
2010-2014
|
|
|
277.3 |
|
|
|
142.5 |
|
|
|
|