Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

¨ 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

LOGO

CLIFFS NATURAL RESOURCES INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Ohio   34-1464672

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

200 Public Square, Cleveland, Ohio   44114-2315
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (216) 694-5700

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  

Name of Each Exchange on Which Registered

Common Shares, par value $0.125 per share

Common Share Purchase Rights

   New York Stock Exchange and Professional Segment of NYSE Euronext Paris

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      YES  x            NO  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      YES  ¨            NO  x

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  x            NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      YES  x            NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s 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.      ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x        Accelerated filer  ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      YES  ¨            NO  x

As of June 30, 2009, the aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based on the closing price of $24.47 per share as reported on the New York Stock Exchange — Composite Index was $3,162,840,459 (excluded from this figure is the voting stock beneficially owned by the registrant’s officers and directors).

The number of shares outstanding of the registrant’s Common Shares, par value $0.125 per share, was 135,224,028 as of February 15, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for its annual meeting of shareholders scheduled to be held on May 11, 2010 are incorporated by reference into Part III.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page No.

Definitions

   2

Part I

  

Item 1.

  

Business

   4

Item 1A.

  

Risk Factors

   21

Item 1B.

  

Unresolved Staff Comments

   29

Item 2.

  

Properties

   29

Item 3.

  

Legal Proceedings

   38

Item 4.

  

Submission of Matters to a Vote of Security Holders

   41

Part II

  

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   42

Item 6.

  

Selected Financial Data

   44

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   46

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   79

Item 8.

  

Financial Statements and Supplementary Data

   80

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   156

Item 9A.

  

Controls and Procedures

   156

Item 9B.

  

Other Information

   157

Part III

  

Item 10.

  

Directors, Executive Officers and Corporate Governance

   158

Item 11.

  

Executive Compensation

   158

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   158

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   159

Item 14.

  

Principal Accountant Fees and Services

   159

Part IV

  

Item 15.

  

Exhibits and Financial Statement Schedules

   160

Signatures

   161

 


Table of Contents

Definitions

The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cliffs Natural Resources Inc. and subsidiaries, collectively. References to “A$” or “AUD” refer to Australian currency, “C$” to Canadian currency and “$” to United States currency.

 

Abbreviation or acronym

  

Term

AAA

   American Arbitration Association

Algoma

   Essar Steel Algoma Inc.

Amapá

   Anglo Ferrous Amapá Mineração Ltda. and Anglo Ferrous Logística Amapá Ltda.

Anglo

   Anglo American plc

APBO

   Accumulated Postretirement Benefit Obligation

ArcelorMittal USA

   ArcelorMittal USA Inc.

ASC

   Accounting Standards Codification

ASU

   Accounting Standards Update

AusQuest

   AusQuest Limited

BART

   Best Available Retrofit Technology

BHP

   BHP Billiton

CAC

   Cliffs Australia Coal Pty Ltd.

CAIR

   Clean Air Interstate Rule

CAWO

   Cliffs Australian Washplant Operations Pty Ltd

CERCLA

   Comprehensive Environmental Response, Compensation and Liability Act

Clean Water Act

   Federal Water Pollution Control Act

Cliffs Erie

   Cliffs Erie LLC

Cockatoo Island

   Cockatoo Island Joint Venture

DEP

   Department of Environment Protection

Directors’ Plan

   Nonemployee Directors’ Compensation Plan, as amended and restated 12/31/2008

Dofasco

   ArcelorMittal Dofasco Inc.

DSA

   Draft stipulation agreement

EAW

   Environmental Assessment Worksheet

EBIT

   Earnings before interest and taxes

EBITDA

   Earnings before interest, taxes, depreciation and amortization

Empire

   Empire Iron Mining Partnership

EPA

   United States Environmental Protection Agency

EPS

   Earnings per share

Exchange Act

   Securities Exchange Act of 1934

FASB

   Financial Accounting Standards Board

F.O.B.

   Free on board

GAAP

   Accounting principles generally accepted in the United States

GHG

   Greenhouse gas

Golden West

   Golden West Resources Ltd.

GRI

   Global Reporting Initiative

Hibbing

   Hibbing Taconite Company

ICE Plan

   Incentive Equity Plan

IRS

   Internal Revenue Service

Ispat

   Ispat Inland Steel Company

JORC

   Joint Ore Reserves Code

LIBOR

   London Interbank Offered Rate

LIFO

   Last-in, first-out

LTVSMC

   LTV Steel Mining Company

MDEQ

   Michigan Department of Environmental Quality

MMBtu

   Million British Thermal Units

 

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Abbreviation or acronym

  

Term

MMX

   MMX Mineração e Metálicos S.A.

MP

   Minnesota Power, Inc.

MPCA

   Minnesota Pollution Control Agency

MPSC

   Michigan Public Service Commission

MSHA

   Mine Safety and Health Administration

NBCWA

   National Bituminous Coal Wage Agreement

NDEP

   Nevada Department of Environmental Protection

Northshore

   Northshore Mining Company

NPDES

   National Pollutant Discharge Elimination System

NRD

   Natural Resource Damages

NYSE

   New York Stock Exchange

Oak Grove

   Oak Grove Resources, LLC

OCI

   Other comprehensive income

OPEB

   Other postretirement benefits

PBO

   Projected benefit obligation

Pinnacle

   Pinnacle Mining Company, LLC

PinnOak

   PinnOak Resources, LLC

PolyMet

   PolyMet Mining Inc.

Portman

   Portman Limited (now known as Cliffs Asia Pacific Iron Ore Holdings Pty Ltd)

PRP

   Potentially responsible party

Qcoal

   Qcoal Pty Ltd

renewaFUEL

   renewaFUEL, LLC

RONA

   Return on net assets

RTWG

   Rio Tinto Working Group

SAR

   Stock Appreciation Rights

SEC

   United States Securities and Exchange Commission

Severstal

   Severstal North America, Inc.

Severstal Warren

   Severstal Warren, Inc., formerly known as WCI Steel Inc.

Silver Bay Power

   Silver Bay Power Company

SMM

   Sonoma Mine Management

Sonoma

   Sonoma Coal Project

Sonoma Sales

   Sonoma Sales Pty Ltd

Tilden

   Tilden Mining Company L.C.

TMDL

   Total Maximum Daily Load

Tonne

   Metric ton (equal to 1,000 kilograms or 2,205 pounds)

TSR

   Total Shareholder Return

UMWA

   United Mineworkers of America

United Taconite

   United Taconite LLC

U.S.

   United States of America

U.S. Steel

   United States Steel Corporation

USW

   United Steelworkers

Vale

   Companhia Vale do Rio Doce

VEBA

   Voluntary Employee Benefit Association trusts

VIE

   Variable interest entity

VNQDC Plan

   Voluntary Non-Qualified Deferred Compensation Plan

Wabush

   Wabush Mines Joint Venture

Weirton

   ArcelorMittal Weirton Inc.

WEPCO

   Wisconsin Electric Power Company

Wheeling

   Wheeling-Pittsburgh Steel Corporation

 

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PART I

Item 1.    Business.

Introduction

Cliffs Natural Resources Inc. traces its corporate history back to 1847. Today, we are an international mining and natural resources company. We are the largest producer of iron ore pellets in North America, a major supplier of direct-shipping lump and fines iron ore out of Australia, and a significant producer of metallurgical coal. With core values of environmental and capital stewardship, our colleagues across the globe endeavor to provide all stakeholders operating and financial transparency as embodied in the GRI framework. Our company’s operations are organized according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal and Latin American Iron Ore.

In North America, we operate six iron ore mines in Michigan, Minnesota and Eastern Canada, and two coking coal mining complexes located in West Virginia and Alabama. Our Asia Pacific operations are comprised of two iron ore mining complexes in Western Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore, and a 45 percent economic interest in a coking and thermal coal mine located in Queensland, Australia. In Latin America, we have a 30 percent interest in a Brazilian iron ore project. In addition, we have recently established a global exploration group under which we have several projects and potential opportunities to diversify our products, expand our production volumes, extend our mine lives and develop large-scale ore bodies through early involvement in exploration and development activities globally.

Industry Overview

In 2009, global crude steel production, a significant driver of our business, was down approximately 8 percent from 2008 with even greater production declines in some areas, including North America. China produced approximately 567 million tonnes of crude steel in 2009, representing approximately 47 percent of global production. Steel production in China in 2009 has increased 13.5 percent and 16 percent from 2008 and 2007, respectively.

The rapid growth in steel production in China over recent years has only been partially met by a corresponding increase in domestic Chinese iron ore production. Chinese iron ore deposits, although substantial, are of a lower grade (less than half of the equivalent iron ore content) than the current iron ore supplied from Brazil and Australia.

The world price of iron ore is heavily influenced by international demand. With the 2008 global financial crisis and a corresponding weakening of steel demand early in 2009, seaborne contract prices for iron ore pellets, lump and fines decreased 48 percent, 44 percent and 33 percent, respectively. However, worldwide stimulus efforts improved demand during the year and rising spot market prices for iron ore have reflected this trend. The rapid growth in Chinese demand, particularly in more recent years, has created a market imbalance, which continues to indicate demand is outpacing supply. In Asia Pacific, the demand for steelmaking raw materials has remained strong throughout 2009, primarily led by demand from China.

The world market for metallurgical coal in 2009 was influenced less by international demand and more by the geographies where it is consumed. Throughout 2009, reported spot prices in Asia Pacific were strong, trading above an announced settlement price of $129 per metric ton. This strength was influenced by China becoming a net importer of metallurgical coal in 2009. Conversely, in the North American and European markets, demand in 2009 was virtually absent through most of the year as steelmakers inventoried large amounts of coke, the finished steelmaking raw material made from metallurgical coal, during the period of low capacity utilization following the financial crisis and economic downturn.

During the second half of 2009, capacity utilization among steelmaking facilities in North America demonstrated continued improvement, reaching approximately 64 percent at year-end from a low of approximately 35 percent in the beginning of 2009. The industry is showing signs of stabilization, reflecting increasing steel production and the restarting of blast furnaces in North America and Europe. As a result, we

 

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have experienced marked improvements in customer demand and market expectations. We have begun to increase production at most of our facilities and have called employees back to work in order to ensure we are positioned to meet increases in demand, while continuing to monitor the markets closely.

Growth Strategy and Recent Developments

Over recent years, we have been executing a strategy designed to achieve scale in the mining industry and focused on serving the world’s largest and fastest growing steel markets. However, the current volatility and uncertainty in global markets, which persisted throughout 2009, coupled with the slowdown in the world’s major economies, has had a significant impact on commodity prices. Throughout 2009, we took proactive measures in response to the high degrees of uncertainty within our industry and the macroeconomic environment as well as to better position ourselves to take advantage of possible opportunities when the market improved. We also continued to focus on cash conservation and generation from our business operations as well as reduction of discretionary capital expenditures, in order to ensure we were positioned to face the challenges and uncertainties associated with the current environment. These actions have allowed us to weather the global financial crisis and continue to pursue our strategic plan.

While maintaining a disciplined approach to our operating activities given the current economic environment, we continue to identify opportunities to grow and at the same time position ourselves to address any uncertainties that lie ahead. We expect to continue increasing our operating scale and presence as an international mining and natural resources company by expanding both geographically and through the minerals we mine and market. Our growth in North America combined with our acquisitions and investments in Australia and Latin America, as well as acquisitions in minerals outside of iron ore, such as metallurgical coal and chromite, illustrates the execution of this strategy. We also expect to achieve growth through early involvement in exploration and development activities by partnering with junior mining companies, which provide us low-cost entry points for potentially significant reserve additions. In 2009, we established a global exploration group, led by professional geologists who have the knowledge and experience to identify new world-class projects for future development or projects that add significant value to existing operations.

Specifically, we continued our strategic growth as an international mining and natural resources company through the following transactions in 2009:

Freewest.    On November 23, 2009, we entered into a definitive arrangement with Freewest Resources Canada Inc. (“Freewest”) to acquire Freewest, including its interests in the Ring of Fire properties, which comprise three premier chromite deposits in Ontario, Canada. The acquisition is consistent with our strategy to broaden our mineral diversification and will allow us to apply our expertise in open-pit mining and mineral processing to a chromite ore resource base which would form the foundation of North America’s only ferrochrome production operation. The planned mine is expected to produce 1 to 2 million tonnes of high-grade chromite ore annually, which will be further processed into 400 to 800 thousand tonnes of ferrochrome. The transaction closed on January 27, 2010.

Wabush.    On October 12, 2009, we exercised our right of first refusal to acquire U.S. Steel Canada’s and ArcelorMittal Dofasco’s interests in Wabush, thereby increasing our ownership stake in Wabush to 100 percent. Ownership transfer to Cliffs was completed on February 1, 2010 for a purchase price of approximately $88 million, subject to certain working capital adjustments. With Wabush’s 5.5 million tons of rated capacity, acquisition of the remaining interest increased our North American Iron Ore rated equity production capacity by approximately 4.0 million tons.

In addition to completing the acquisition of 100 percent of Wabush, in February 2010, we entered into a new five-year labor agreement with the USW for our Wabush mine. The agreement provides for a 15 percent increase in labor costs over the five-year term of the agreement, inclusive of benefits.

RenewaFUEL.    On September 15, 2009, we acquired an additional 20 percent interest in renewaFUEL for a purchase price of approximately $6 million. As a result of this transaction, we have approximately a 90 percent controlling interest in renewaFUEL. This is a strategic investment that provides an opportunity to utilize a “green” solution for further reduction of emissions consistent with our objective to contain costs and enhance efficiencies in a socially responsible manner.

 

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Business Segments

Our company’s primary operations are organized and managed according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal and Latin American Iron Ore. The Asia Pacific Coal and Latin American Iron Ore businesses do not meet the criteria for reportable segments.

All North American business segments are headquartered in Cleveland, Ohio. Our Asia Pacific headquarters is located in Perth, Australia, and our Latin American headquarters is located in Rio de Janeiro, Brazil.

We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company. Financial information about our segments is included in Item 7 and NOTE 2 — SEGMENT REPORTING included in Item 8 of this Annual Report on Form 10-K.

North American Iron Ore

We are the largest producer of iron ore pellets in North America and primarily sell our production to integrated steel companies in the United States and Canada. We manage and operate six North American iron ore mines located in Michigan, Minnesota and Eastern Canada that currently have an annual rated capacity of 38.1 million tons of iron ore pellet production, representing 45.1 percent of total North American pellet production capacity.1 Based on our equity ownership in the North American mines we currently operate, our share of the annual rated pellet production capacity is currently 25.6 million tons, representing 30.3 percent of total North American annual pellet capacity.2

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, 2009:

North American Iron Ore Pellet

Annual Rated Capacity Tonnage

 

     Current Estimated Capacity
(Gross Tons of Raw Ore
in Millions)
   Percent of Total
North American Capacity
 

All Cliffs’ managed mines

   38.1    45.1

Other U.S. mines

     

U.S. Steel’s Minnesota ore operations

     

Minnesota Taconite

   16.0    19.0   

Keewatin Taconite

   5.2    6.2   
           

Total U.S. Steel

   21.2    25.2   

ArcelorMittal USA Minorca mine

   2.8    3.3   
           

Total other U.S. mines

   24.0    28.5   

Other Canadian mines

     

Iron Ore Company of Canada

   13.0    15.4   

ArcelorMittal Mines Canada

   9.3    11.0   
           

Total other Canadian mines

   22.3    26.4   
           

Total North American mines

   84.4    100.0
           

 

 

1

North American pellet capacity as reported here includes plants in the U.S. and Canada but excludes Mexico.

2

In October 2009, Cliffs exercised its rights to purchase the remaining equity shares in Wabush Mines that it did not already own from U.S. Steel Canada and ArcelorMittal Dofasco. The figure presented here includes Cliffs’ pre-exercise ownership share in Wabush Mines at 26.8 percent. Cliffs obtained full ownership of Wabush effective February 1, 2010.

 

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We sell our share of North American iron ore production to integrated steel producers, generally pursuant to term supply agreements with various price adjustment provisions.

For the year ended December 31, 2009, we produced a total of 19.6 million tons of iron ore pellets, including 17.1 million tons for our account and 2.5 million tons on behalf of steel company owners of the mines.

We produce 13 grades of iron ore pellets, including standard, fluxed and high manganese, for use in our customers’ blast furnaces as part of the steelmaking process. The variation in grades results from the specific chemical and metallurgical properties of the ores at each mine and whether or not fluxstone is added in the process. Although the grade or grades of pellets currently delivered to each customer are based on that customer’s preferences, which depend in part on the characteristics of the customer’s blast furnace operation, in many cases our iron ore pellets can be used interchangeably. Industry demand for the various grades of iron ore pellets depends on each customer’s preferences 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 require less processing, are generally the least costly pellets to produce and are called “standard” because no ground fluxstone, such as limestone or dolomite, is added to the iron ore concentrate before turning the concentrates into pellets. In the case of fluxed pellets, fluxstone is added to the concentrate, which produces pellets that can perform at higher productivity levels in the customer’s 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 at our Canadian Wabush operation where there is more natural manganese in the crude ore 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 produces pellets with two levels of manganese, both in standard and fluxed grades.

It is not possible to produce 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 customer’s preferences and availability.

Each of our North American Iron Ore mines is located near the Great Lakes or, in the case of Wabush, near the St. Lawrence Seaway, which is connected to the Great Lakes. The majority of our iron ore pellets are transported via railroads to loading ports for shipment via vessel to steelmakers in the U.S. or Canada.

Our North American Iron Ore 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 conditions on the Great Lakes are navigable, which causes our first quarter inventory levels to rise. Our limited practice of shipping product to ports on the lower Great Lakes or to customers’ facilities prior to the transfer of title has somewhat mitigated the seasonal effect on first quarter inventories and sales, as shipment from this point to the customers’ operations is not limited by weather-related shipping constraints. At December 31, 2009 and 2008, we had approximately 1.2 million and 0.4 million tons of pellets, respectively, in inventory at lower lakes or customers’ facilities.

North American Iron Ore Customers

Our North American Iron Ore revenues are primarily derived from sales of iron ore pellets to the North American integrated steel industry, consisting of seven major customers. Generally, we have multi-year supply agreements with our customers. Sales volume under these agreements is largely dependent on customer requirements, and in many cases, we are the sole supplier of iron ore pellets to the customer. Each agreement has a base price that is adjusted annually using one or more adjustment factors. Factors that could result in a price adjustment include international pellet prices, measures of general industrial inflation and steel prices. Additionally, certain of our supply agreements have a provision that limits the amount of price increase or decrease in any given year.

During 2009, 2008 and 2007, we sold 16.4 million, 22.7 million and 22.3 million tons of iron ore pellets, respectively, from our share of the production from our North American Iron Ore mines. The segment’s five

 

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largest customers together accounted for a total of 86 percent, 84 percent and 83 percent of North American Iron Ore product revenues for the years 2009, 2008 and 2007, respectively. Refer to Concentration of Customers within Item 1— Business, for additional information regarding our major customers.

North American Coal

We own and operate two North American coking coal mining complexes located in West Virginia and Alabama that currently have a rated capacity of 5.5 million short tons of production annually. In 2009, we sold a total of 1.9 million tons, compared with 3.2 million tons in 2008 and 1.2 million tons for the five months ended December 31, 2007. Each of our North American coal mines are positioned near rail or barge lines providing access to international shipping ports, which allows for export of our coal production.

North American Coal Customers

North American Coal’s production is sold to global integrated steel and coke producers in Europe, Latin America and North America. Approximately 76 percent of our 2009 production and 84 percent of our 2008 production was committed under one-year contracts. This compares with approximately 90 percent of our expected 2010 production as of December 31, 2009, of which 40 percent has been committed under new one-year contracts and carryover tonnage. However, North American negotiations are still ongoing, and international negotiations have recently begun. The remaining tonnage is pending price negotiations primarily with our international customers, which is typically dependent on settlement of Australian benchmark pricing for metallurgical coal later in 2010. Customer contracts in North America typically are negotiated on a calendar year basis with international contracts negotiated as of March 31.

International and North American sales represented 65 percent and 35 percent, respectively, of our North American Coal sales in 2009. This compares with 56 percent and 44 percent, respectively, in 2008 and 66 percent and 34 percent, respectively, in 2007. The segment’s five largest customers together accounted for a total of 75 percent, 76 percent and 79 percent of North American Coal product revenues for the years 2009, 2008 and 2007, respectively. Refer to Concentration of Customers within Item 1— Business, for additional information regarding our major customers.

Asia Pacific Iron Ore

Our Asia Pacific Iron Ore operations are located in Western Australia and include our 100 percent owned Koolyanobbing complex and our 50 percent equity interest in Cockatoo Island. We serve the Asian iron ore markets with direct-shipping fines and lump ore. Production in 2009 was 8.3 million tonnes, compared with 7.7 million tonnes in 2008 and 8.4 million tonnes in 2007.

These two operations supply a total of four direct-shipping export products to Asia via the global seaborne trade market. Koolyanobbing produces a standard lump and fines product as well as a low grade fines product. The low grade products will no longer be available beginning in 2010. Cockatoo Island produces and exports a single premium fines product. The lump products are directly fed to the blast furnace, while the fines products are used as sinter feed. The variation in the four export product grades reflects the inherent chemical and physical characteristics of the ore bodies mined as well as the supply requirements of the customers.

Koolyanobbing is a collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling. There are approximately 60 miles separating the three mining areas. Banded iron formations host the mineralization which is predominately hematite and goethite. Each deposit is characterized with different chemical and physical attributes, and in order to achieve customer product quality, ore in varying quantities from each deposit must be blended together.

Blending is undertaken at Koolyanobbing, where the crushing and screening plant is located. Standard and low grade products are produced in separate production runs. Once the blended ore has been crushed and screened into a direct shipping product, it is transported by rail approximately 400 miles south to the Port of Esperance for shipment to Asian customers.

 

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Cockatoo Island is located off the Kimberley coast of Western Australia, approximately 1,200 miles north of Perth and is only accessible by sea and air. Cockatoo Island produces a single high iron product known as Cockatoo Island Premium Fines. The deposit is almost pure hematite and contains very few contaminants enabling the shipping grade to be above 68 percent iron. Ore is mined below the sea level on the southern edge of the island. This is facilitated by a sea wall which enables mining to a depth of 130 feet below sea level. Ore is crushed and screened to the final product sizing. Vessels berth at the island and the fines product is loaded directly to the ship. Cockatoo Island Premium Fines are highly sought in the global marketplace due to its extremely high iron grade and low valueless mineral content. Production at Cockatoo Island ended during 2008 due to construction on Phase 3 of the seawall, which is expected to extend production for approximately two additional years. In April 2009, an unanticipated subsidence of the seawall occurred. As a result, production from the mine has been delayed. Production is not expected to resume until the first half of 2011 once the seawall is completed.

Asia Pacific Iron Ore Customers

Asia Pacific Iron Ore’s production is under contract with steel companies in China and Japan through 2012. A limited spot market exists for seaborne iron ore as most production is sold under supply contracts with annual benchmark prices driven from negotiations between the major suppliers and Chinese, Japanese and other Asian steel mills.

Asia Pacific Iron Ore has five-year term supply agreements with steel producers in China and Japan that account for approximately 85 percent and 15 percent, respectively, of sales. The contracts were renegotiated for the period 2008 through 2012. Sales volume under the agreements is partially dependent on customer requirements. Each agreement is priced based on benchmark pricing established for Australian producers. In 2009, benchmark price negotiations in China did not result in a final settlement. As a result, we negotiated provisional pricing arrangements with certain customers in China consistent with agreed upon price declines reached between Asia Pacific steelmakers outside of China and producers in Australia.

During 2009, 2008 and 2007, we sold 8.5 million, 7.8 million and 8.1 million tonnes of iron ore, respectively, from our Western Australia mines. No customer comprised more than 10 percent of our consolidated sales in 2009, 2008 or 2007. Asia Pacific Iron Ore’s five largest customers accounted for approximately 39 percent of the segment’s sales in 2009, 44 percent in 2008 and 47 percent in 2007.

Investments

In addition to our reportable business segments, we are partner to a number of projects, including Amapá in Brazil and Sonoma in Australia, which comprise our Latin American Iron Ore and Asia Pacific Coal operating segments, respectively.

Amapá

We are a 30 percent minority interest owner in Amapá, which consists of an iron ore deposit, a 120-mile railway connecting the mine location to an existing port facility and 71 hectares of real estate on the banks of the Amazon River, reserved for a loading terminal. Amapá initiated production in late December 2007. The remaining 70 percent of Amapá is owned by Anglo.

The ramp-up of operations at the mine has been significantly slower than previously anticipated, with annual production totaling 2.7 million tonnes in 2009 compared with 1.2 million tonnes in 2008. As operator of the mine, Anglo has indicated that it expects Amapá will produce and sell 4.0 million tonnes of iron ore fines products in 2010 and 5.1 million tonnes annually once fully operational, which is expected to occur in 2012, based on current capital expenditure levels. The majority of Amapá’s production is committed under a long-term supply agreement with an operator of an iron oxide pelletizing plant in the Kingdom of Bahrain.

 

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Sonoma

We own a 45 percent economic interest in Sonoma, located in Queensland, Australia. The project commenced operations in January 2008, with production and sales totaling approximately 2.8 million and 3.1 million tonnes, respectively, in 2009 compared with approximately 2.4 million and 2.1 million tonnes, respectively, in 2008. The project is expected to produce approximately 3.3 million tonnes in 2010 and between 2.5 to 3.2 million tonnes of coal annually in 2011 and beyond. Production will include an approximate 65/35 mix of thermal and metallurgical grade coal, which has been revised from a previously expected 50/50 mix. In 2009, Sonoma experienced intrusions in the coal seams which affected raw coal quality, recoverability in the washing process, and ultimately the quantity of metallurgical coal in the production mix. As a result, the geological model for Sonoma has been enhanced to reflect the presence of the intrusions and to refine the mining sequence in order to optimize the mix of metallurgical and thermal coal despite being lower than initially planned levels. Sonoma has economically recoverable reserves of 47 million tonnes. All 2009 production was committed under supply agreements with customers in Asia. Of the 3.3 million tonnes expected to be produced in 2010, approximately 3.0 million tonnes are committed under supply agreements as of December 31, 2009.

Research and Development

We have been a leader in iron ore mining technology for more than 160 years. We operated some of the first mines on Michigan’s Marquette Iron Range and pioneered early open-pit and underground mining methods. From the first application of electrical power in Michigan’s underground mines to the use of today’s sophisticated computers and global positioning satellite systems, we have been a leader in the application of new technology to the centuries-old business of mineral extraction. Today, our engineering and technical staffs are engaged in full-time technical support of our operations and improvement of existing products.

We are expanding 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 cost saving initiatives. We operate a fully-equipped research and development facility in Ishpeming, Michigan, which supports each of our global operations. Our research and development group is staffed with experienced engineers 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 utilized by iron ore pellet customers for laboratory testing and simulation of blast furnace conditions.

Exploration

Our exploration program is integral to our growth strategy. We have several projects and potential opportunities to diversify our products, expand our production volumes, extend our mine lives and develop large-scale ore bodies through early involvement in exploration and development activities. We achieve this by partnering with junior mining companies, which provide us low-cost entry points for potentially significant reserve additions. In 2009, we established a global exploration group, led by professional geologists who have the knowledge and experience to identify new world-class projects for future development or projects that add significant value to existing operations. We expect to spend between $25 million and $30 million on exploration and development activities in 2010, which will provide us with opportunities for significant future potential reserve additions globally.

Concentration of Customers

We have two customers which individually account for more than 10 percent of our consolidated product revenue in 2009. Total revenue from these customers represents approximately $0.8 billion, $1.6 billion, and $1.1 billion of our total consolidated product revenue in 2009, 2008 and 2007, respectively, and is attributable to our North American Iron Ore and North American Coal business segments. In 2008 and 2007, we had three and two customers, respectively, which individually accounted for more than 10 percent of our consolidated product revenue. The following represents sales revenue from each of these customers as a percentage of our total

 

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consolidated product revenue as well as the portion of product sales for North American Iron Ore and North American Coal that is attributable to each of these customers in 2009, 2008 and 2007, respectively:

 

     Percentage of Total
Product Revenue (1)
    Percentage of
North American
Iron Ore Product
Revenue (1)
    Percentage of
North American
Coal Product
Revenue (1)
 

Customer (2)

   2009     2008     2007     2009     2008     2007     2009     2008     2007  

ArcelorMittal

   28   27   34   42   39   44   28   23   37

Algoma

   10      11      12      17      17      16      —        —        —     

Severstal

   8      12      8      13      18      10      4      5      —     
                                                      

Total

   46   50   54   72   74   70   32   28   37
                                                      

 

(1) Excluding freight and venture partners’ cost reimbursements.

 

(2) Includes subsidiaries of each customer.

ArcelorMittal USA

On March 19, 2007, we executed an umbrella agreement with ArcelorMittal USA, a subsidiary of ArcelorMittal, that covers significant price and volume matters under three separate pre-existing iron ore pellet supply agreements for ArcelorMittal USA’s Cleveland and Indiana Harbor West, Indiana Harbor East and Weirton facilities.

Under the umbrella agreement, ArcelorMittal USA is obligated to purchase specified minimum tonnages of iron ore pellets on an aggregate basis from 2006 through 2010. The umbrella agreement sets the minimum annual tonnage for ArcelorMittal USA through 2010, with pricing based on the facility to which the pellets are delivered. The terms of the umbrella agreement contain buy-down provisions, which permit ArcelorMittal USA to reduce its tonnage purchase obligation each year at a specified price per ton, as well as deferral provisions, which permit ArcelorMittal USA to defer a portion of its annual tonnage purchase obligation. In addition, ArcelorMittal is permitted to nominate tonnage for export out of the U.S. to any facility owned by ArcelorMittal. This ability to nominate tonnage for export will cease when the umbrella agreement expires at the end of 2010. For additional information regarding the pellet nominations, refer to Part 1 — Item 3, Legal Proceedings.

If at the end of the umbrella agreement term in 2010 a new agreement is not executed, our pellet supply agreements with ArcelorMittal USA that were in place prior to executing the umbrella agreement will again become the basis for supplying pellets to ArcelorMittal USA, which is based on customer requirements, except for the Indiana Harbor East facility.

 

Facility

   Agreement
Expiration

Cleveland Works and Indiana Harbor West facilities

   2016

Indiana Harbor East facility

   2015

Weirton facility

   2018

ArcelorMittal USA is a 62.3 percent equity participant in Hibbing and a 21 percent equity partner in Empire with limited rights and obligations. ArcelorMittal USA was a 28.6 percent participant in Wabush Mines through its subsidiary ArcelorMittal Dofasco. As previously noted, on October 12, 2009, we exercised our right of first refusal to acquire the remaining interest in Wabush Mines, including ArcelorMittal Dofasco’s 28.6 percent interest. We subsequently completed the acquisition of Wabush on February 1, 2010.

In 2009, 2008 and 2007, our North American Iron Ore pellet sales to ArcelorMittal USA were 7.7 million, 9.9 million, and 10.3 million tons, respectively.

Our North American Coal supply agreements with ArcelorMittal are negotiated on an annual basis for the period April 1 through March 31 and are based on a tonnage commitment for the 12-month contract period. Contracts are priced on an annual basis, with pricing generally consistent with the Australian benchmark pricing for metallurgical coal. In 2009, 2008 and 2007, our North American Coal sales to ArcelorMittal were 0.6 million, 0.8 million and 0.5 million tons, respectively.

 

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Algoma

Algoma is a Canadian steelmaker and a subsidiary of Essar Steel Holdings Limited. We have a 15-year term supply agreement under which we are Algoma’s sole supplier of iron ore pellets through 2016. Our annual obligation is limited to 4.0 million tons with our option to supply additional pellets. Pricing under the agreement with Algoma is based on a formula which includes international pellet prices. The agreement also provides that, in 2008, 2011 and 2014, either party may request a price re-opener if prices under the agreement with Algoma differ from a specified benchmark price. We sold 2.9 million, 4.1 million and 2.9 million tons to Algoma in 2009, 2008 and 2007, respectively.

Severstal

Under the agreement with Severstal, we must supply all of the customer’s blast furnace pellet requirements for its Dearborn, Michigan facility through 2022, subject to specified minimum and maximum requirements in certain years. The terms of the agreement also require supplemental payments to be paid by the customer during the period 2009 through 2013. Pursuant to an amended term sheet entered into on June 19, 2009, the customer exercised the option to defer a portion of the 2009 monthly supplemental payment up to $22.3 million in exchange for interest payments until the deferred amount is repaid in 2013.

On July 7, 2008, Severstal acquired WCI Steel Inc., located in Warren, Ohio, and as a result, assumed the supply agreement we had previously entered into with the former WCI to supply 100 percent of WCI’s annual requirements up to a maximum of 2.0 million tons of iron ore pellets through 2014.

On August 5, 2008, Severstal also acquired Esmark Incorporated (“Esmark”), and as a result, assumed the supply agreement we had previously entered into with Esmark’s subsidiary, Wheeling-Pittsburgh Steel Corporation. Under the terms of that agreement, we supply certain iron ore pellets through 2011, equal to 25 percent of Wheeling’s total annual iron ore pellet tonnage requirements for consumption in Wheeling’s iron and steel making facilities.

We sold 2.3 million, 4.6 million and 3.0 million tons to Severstal in 2009, 2008 and 2007, respectively.

Competition

Throughout the world, we compete with major and junior mining companies, as well as metals companies, both of which produce steelmaking raw materials, including iron ore and metallurgical coal.

North America

In our North American Iron Ore business segment, we sell our product primarily to steel producers with operations in North America. We compete directly with the Iron Ore Company of Canada as well as steel companies that own interests in iron ore mines, including ArcelorMittal Mines Canada and U.S. Steel.

In the coal industry, our North American Coal business segment competes with many metallurgical coal producers of various sizes, including Alpha Natural Resources, Inc., Patriot Coal Corporation, CONSOL Energy Inc., Arch Coal, Inc., Massey Energy Company, Jim Walter Resources, Inc., Peabody Energy Corp., United Coal Group Company and other producers located in North America and globally.

The North American coal industry remains highly fragmented and competitive, with CONSOL, Massey, Peabody, Alpha and Alliance Resource Partners representing the five largest producers. A number of factors beyond our control affect the markets in which we sell our coal. Continued demand for our coal and the prices obtained by us depend primarily on the coal consumption patterns of the steel industry in the United States and elsewhere around the world as well as the availability, location, cost of transportation and price of competing coal. Coal consumption patterns are affected primarily by demand, environmental and other governmental regulations, and technological developments. The most important factors on which we compete are delivered price, coal quality characteristics such as heat value, sulfur, ash and moisture content, and reliability of supply. Metallurgical coal, which is primarily used to make coke, a key component in the steelmaking process, generally sells at a premium over steam coal due to its higher quality and value in the steelmaking process.

 

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Asia Pacific

In our Asia Pacific Iron Ore business segment we export iron ore products to China and Japan in the world seaborne trade. In the Asia Pacific marketplace, Cliffs competes with major iron ore exporters from Australia, Brazil and India. These include Anglo American, Vale, Rio Tinto, BHP Billiton and Fortescue Metals Group Ltd., among others.

The Sonoma Coal Project, in which Cliffs owns a 45 percent economic interest, competes with many other global metallurgical and thermal coal producers, including Anglo American, Rio Tinto, BHP Billiton, Macarthur Coal, Teck Cominco and Xstrata.

Competition in steelmaking raw materials is predicated upon the usual competitive factors of price, availability of supply, product performance, service and transportation cost to the consumer of the raw materials.

As the global steel industry continues to consolidate, a major focus of the consolidation is on the continued life of the integrated steel industry’s raw steelmaking operations, including blast furnaces and basic oxygen furnaces that produce raw steel. In addition, other competitive forces have become a large factor in the iron ore business. In particular, electric furnaces built by mini-mills, which are steel recyclers, generally produce steel by using scrap steel and reduced-iron products rather than iron ore pellets.

Environment

Our mining and exploration activities are subject to various laws and regulations governing the protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects.

Environmental issues and their management continued to be an important focus at each of our operations throughout 2009. In the construction of our facilities and in their operation, substantial costs have been incurred and will continue to be incurred to avoid undue effect on the environment. Our capital expenditures relating to environmental matters totaled $7.0 million, $7.3 million, and $8.8 million in 2009, 2008 and 2007, respectively. It is estimated that approximately $23 million will be spent in 2010 for capital environmental control facilities. Estimated expenditures in 2010 are primarily comprised of $8 million related to tailings basin improvements at Tilden, including replacement of a tailings line, $7 million related to various environmental projects at Wabush, including treatment of water effluents and installation of improved dust collector controls, and approximately $5 million for air emission improvements and tailings basin construction at United Taconite. There are no material environmental capital expenditures planned for 2010 related to North American Coal or our operations in Asia Pacific.

Regulatory Developments

Various governmental bodies are continually promulgating new laws and regulations affecting our company, 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 reasonably be expected to result in a material adverse effect on our business or financial condition, we cannot predict the collective adverse impact of the expanding body of laws and regulations.

Specifically, there are several notable proposed or potential rulemakings or activities that could potentially have a material adverse impact on our facilities in the future depending on their ultimate outcome: Climate Change and Greenhouse Gas Regulation, the Clean Air Interstate Rule, Regional Haze, Increased Administrative and Legislative Initiatives related to Coal Mining Activities, Proposed Hardrock Mining Financial Assurance Rules, the Minnesota Mercury Total Maximum Daily Load Implementation and Selenium Discharge Regulation.

Climate Change and Greenhouse Gas Regulation.    With the complexities and uncertainties associated with the U.S. and global navigation of the climate change issue as a whole, one of our significant risks for the future is forthcoming in the shape of mandatory carbon legislation. Policymakers are in the design process of carbon

 

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regulation at the state, regional, national, and international levels. The current regulatory patchwork of carbon compliance schemes present a challenge for multi-facility entities to identify their near term risks. Amplifying the uncertainty, the dynamic forward outlook for carbon regulation presents a challenge to large industrial companies to assess the long-term net impacts of carbon compliance costs on their operations.

Internationally, mechanisms to reduce emissions are being implemented in various countries, with differing designs and stringency, according to resources, economic structure, and politics. We expect that momentum to extend carbon regulation following the expiration in 2012 of the first commitment period under the Kyoto Protocol will continue. Australia, Canada and Brazil are all signatories to the Kyoto Protocol. As such, our facilities in each of these countries will be impacted by the Kyoto Protocol, but in varying degrees according to the mechanisms each country establishes for compliance and each country’s commitment to reducing emissions. Australia and Canada are considered Annex 1 countries, meaning that they are obligated to reduce their emissions under the Protocol. In contrast, Brazil is not an Annex 1 country and is, therefore, not currently obligated to reduce its GHG emissions.

Australia has issued guidance outlining the components and rationale for its proposed carbon cap and trade pollution reduction scheme, as well as associated timing. However, our iron ore operations in Asia Pacific will not be required to purchase allowances due to the energy consumption levels being below the scheme threshold. The impact on our operations in Asia Pacific would only occur indirectly via costs that will be passed on by fuel suppliers; however, we do not anticipate such costs to have a material effect on our financial position or results of operations. In the fourth quarter of 2009, the Australian government introduced revised carbon pollution reduction scheme legislation to federal Parliament. However, the proposed legislation was defeated. It is currently unclear how the government will proceed on this issue.

Due to the current landscape of regulation in Australia, Canada and Brazil, and the relatively low emission levels in these countries, we face mild regulatory risk in the short term in Australia and Canada and a weak regulatory risk over the longer term in Brazil.

By contrast, in the U.S., federal carbon regulation potentially presents a significantly greater impact to our operations. To date, the U.S. has not implemented regulated carbon constraints. In the absence of comprehensive federal carbon regulation, numerous state and regional regulatory initiatives are under development or are becoming effective, thereby creating a disjointed approach to carbon control. These U.S. state level initiatives are indicative of the increasing support and need for U.S. federal carbon regulation. For us, the most significant regional initiative is the Midwest GHG Accord. We are well positioned to closely monitor the development of the Midwest GHG Accord through our seat on the Michigan Climate Task Committee.

While the exact form of the final U.S. federal regulatory scheme is uncertain, the House of Representatives passed carbon cap and trade legislation on June 26, 2009. In the Senate, the Environment and Public Works Committee approved a similar version of carbon legislation on November 5, 2009. Although this bill may receive further consideration, it remains in doubt whether the Senate will be able to pass a comprehensive climate bill in 2010. With the lack of a definitive outcome at the Copenhagen climate meetings, the future of U.S. climate change legislation is even more uncertain. Such legislation is still likely to incorporate compliance flexibility provisions, such as free allowances for energy intensive, trade sensitive industries, including iron ore, in an attempt to economically protect entities that are likely to be impacted with compliance costs, either directly or indirectly, as well as foster innovation and carbon-based energy project finance.

Furthermore, on September 22, 2009, the EPA issued a final rule requiring the mandatory reporting of GHG from a variety of covered emission sources in the U.S. Iron and coal mining facilities covered by the GHG reporting rule are required to report their annual GHG emissions. Sources covered by the rule are required to begin collecting emission data by no later than January 1, 2010, with the first annual emission report due to EPA on March 31, 2011.

As an energy-intensive business, our GHG emissions inventory captures a broad range of emissions sources, such as iron ore furnaces and kilns, coal thermal driers, diesel mining equipment and a wholly-owned power generation plant, among others. As such, our most significant regulatory risks are: (1) the costs associated with on-site emissions levels; and (2) the costs passed through to us from power generators and distillate fuel suppliers. In 2008, our overall emission source portfolio consisted of direct emissions of approximately

 

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4.3 million tons of CO2e and indirect emissions of approximately 3.6 million tons of CO2e. This compares with direct emissions of approximately 3.4 million tons of CO2e and indirect emissions of approximately 3.5 million tons of CO2e in 2007. Our 2009 emissions have yet to be totaled. We believe our exposure can be substantially reduced by numerous factors including currently contemplated regulatory flexibility mechanisms, such as allowance allocations, fixed process emissions exemptions, offsets, and international provisions; emission reduction opportunities, including energy efficiency, biofuels, fuel flexibility, and methane reduction; and business opportunities associated with new products and technology, such as our investments in renewaFUEL.

We have proactively worked to develop a comprehensive, enterprise-wide GHG management strategy aimed at considering all significant aspects associated with GHG initiatives to effectively plan for and manage climate change issues, including the risks and opportunities as they relate to the environment, stakeholders, including shareholders and the public, legislative and regulatory developments, operations, products and markets. At this time, while we are unable to predict the potential impacts of any future mandatory governmental GHG legislative or regulatory requirements on our businesses, we have acted proactively in developing our comprehensive implementation plan that has best prepared us to mitigate the potential risks and take advantage of any potential opportunities.

Clean Air Interstate Rule.    In 2005, the EPA issued CAIR to reduce or eliminate the impact of upwind sources on out-of-state downwind non-attainment of National Ambient Air Quality Standards (“NAAQS”) for fine particulate matter and for ozone. CAIR requires upwind states to revise their state implementation plans to include control measures to reduce emissions of nitrogen oxide and sulfur dioxide. As written, CAIR would apply to our Silver Bay Power plant, a cogeneration plant which produces both electricity and steam for internal Northshore ore processing operations and electricity for sale. However, in response to a D.C. Circuit Court of Appeals decision, the EPA must revise the written rule but has no definitive deadline for doing so. Despite redrafting of the rule, an additional final rule was promulgated and became effective December 3, 2009. This additional rule provides a temporary stay from the requirements of CAIR for facilities in the State of Minnesota, while the EPA assesses if Minnesota is one of the states to be covered in the revised rulemaking, including Silver Bay Power, pending further rulemaking in response to the U.S. Circuit Court of Appeals decision. It remains unknown whether Minnesota facilities will be subject to revised rulemaking, and whether the revised rulemaking requirements could have a material impact on Silver Bay Power. As such, at this time, we are unable to predict whether CAIR or its successor rulemaking will have a material adverse effect on Silver Bay Power.

Regional Haze.    In June 2005, the EPA finalized amendments to its regional haze rules. The rules require states to establish goals and emission reduction strategies for improving visibility in all Class I national parks and wilderness areas. Among the states with Class I areas are Michigan, Minnesota, Alabama, and West Virginia where we currently own and manage mining operations. The first phase of the regional haze rule (2008-2018) requires analysis and installation of BART on eligible emission sources and incorporation of BART and associated emission limits into state implementation plans.

As of 2009, Regional Haze will likely have a significant impact only at our Silver Bay Power facility in Minnesota. The State of Michigan has deemed our Michigan operations exempt from BART. The Minnesota Pollution Control Board recently approved the MPCA’s BART state implementation plan. Specifically for us, this current plan is estimated to require between $8 million and $10 million in pollution control expenditure. The EPA must now review and formally approve the state implementation plan. If approved, these requirements will become effective five years after approval.

Increased Administrative and Legislative Initiatives Related to Coal Mining Activities.    Although the focus of significantly increased government activity related to coal mining in the U.S. is generally targeted at eliminating or minimizing the adverse environmental impacts of mountaintop coal mining practices, these initiatives have the potential to impact all types of coal operations. Specifically, the coordinated efforts by various federal agencies to minimize adverse environmental consequences of mountaintop mining have effectively stopped issuance of new permits required by most mining projects in Appalachia. As our facilities do not employ any mountaintop coal mining removal practices, these initiatives have not caused any material impacts, delays or disruptions to our coal operations. However, due to the developing nature of these initiatives and their potential to disrupt even routine necessary mining and water permit practices in the coal industry, we are unable to predict whether these initiatives could have a material effect on our coal operations in the future.

 

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CERCLA — Proposed Hardrock Mining Financial Assurance Rules.    On July 13, 2009, the EPA provided notice that the hardrock mining industry will be its top priority for developing financial responsibility requirements for facilities that use hazardous substances. The purpose of these new requirements is to ensure that operators remain financially responsible for cleanup under CERCLA. The EPA expects to propose the new rules by the spring of 2011. The EPA’s July 13, 2009, announcement only provides notice to the hardrock mining industry that financial responsibility requirements are forthcoming; it does not give guidance on what those rules are expected to entail. We expect to comment extensively during the rule making process on the necessity and extent of these rules relative to iron ore operations. As such, we are unable to determine at this time whether these requirements will have a material impact on our operations.

Mercury TMDL and Minnesota Taconite Mercury Reduction Strategy.    Mercury TMDL regulations are contained in the U.S. Federal Clean Water Act. As a part of Minnesota’s Mercury TMDL Implementation Plan, in cooperation with the MPCA, the taconite industry developed a Taconite Mercury Reduction Strategy and signed a voluntary agreement to effectuate its terms. The strategy includes a 75 percent reduction of mercury air emissions from pellet plants by 2025 as a target. It recognizes that mercury emission control technology currently does not exist and will be pursued through a research effort. Any developed technology must be economically feasible, must not impact pellet quality, and must not cause excessive corrosion in pellet furnaces, associated duct work and existing wet scrubbers on the furnaces.

According to the voluntary agreement, the mines must proceed with medium and long-term testing of possible technologies beginning in 2010. Initial testing will be completed on one straight-grate and one grate-kiln furnace among the mines. Developed mercury emission control technology must then be installed on all taconite furnaces by 2025. For us, the requirements in the voluntary agreement will apply to our United Taconite and Hibbing facilities. At this point in time, we are unable to predict the potential impacts of the Taconite Mercury Reduction Strategy, as it is just in its research phase with no proven technology yet identified.

Selenium Discharge Regulation.    Pinnacle owns the closed West Virginia Maitland mine, which continues to discharge groundwater to Elkhorn Creek under terms of a NPDES permit issued by the West Virginia DEP. On April 30, 2008 the DEP renewed the permit and imposed more stringent effluent quality limitations for iron and aluminum. Current effluent iron concentrations sometimes exceed the new limitation. A permit appeal was filed with the West Virginia Environmental Quality Board regarding the reduced limitations and the absence of a compliance schedule in the permit. In 2009, the West Virginia DEP provided a compliance schedule for meeting the new limits. We believe Pinnacle will be able to achieve the new limits without any material costs or changes in operation.

In West Virginia, new selenium discharge limits will become effective April 6, 2010. Legislation has been passed in West Virginia that gives DEP the authority to extend the deadline for facilities to comply with new selenium discharge limits to July 1, 2012, based on application and approval of the extension. Pinnacle has applied for this extension and is awaiting a response from the DEP. While the impacts of this new limit are more associated with surface mining as opposed to Pinnacle’s underground facility, this requirement is likely to affect Pinnacle’s Smith Branch outfall, which has shown trace amounts of selenium in excess of the future limit. Pinnacle’s long term strategy is to eliminate the discharge and maintain a closed loop process that does not discharge. If the solution proves ineffective for reasons unknown at this time, Pinnacle may be required to implement alternative control measures.

Other Developments

For additional information on our environmental matters, refer to Item 3. Legal Proceedings and NOTE 11 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS in Item 8.

Energy

Electricity

WEPCO is the sole supplier of electric power to our Empire and Tilden mines. The current tariff rates applicable to Tilden and Empire became effective on January 1, 2009. On July 2, 2009, WEPCO filed a new rate case wherein WEPCO proposed an increase to these current tariff rates. On July 13, 2009, we filed a petition to intervene in the new rate case.

 

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On September 30, 2009, WEPCO filed with the MPSC its power supply cost recovery (“PSCR”) plan case for calendar year 2010. As part of its application, WEPCO calculated its proposed 2010 PSCR costs and sought recovery of prior years’ power supply costs. On October 6, 2009, Tilden and Empire filed a petition to intervene in WEPCO’s 2010 PSCR plan case on the grounds that the rates, terms and conditions of service affected by the proceeding will directly and substantially impact them. We are currently reviewing the rate case and the PSCR and analyzing the potential impact on our Tilden and Empire mines. If WEPCO is successful in effectuating the 33 percent rate increase currently being proposed, our estimated energy costs at Tilden and Empire in 2010 may be unfavorably impacted by approximately $29 million.

Electric power for the Hibbing and United Taconite mines is supplied by MP. On September 16, 2008, the mines finalized seven-year agreements with a term from November 1, 2008 through December 31, 2015. The agreements were approved by the Minnesota Public Utilities Commission in 2009.

Silver Bay Power Company, a wholly-owned subsidiary of ours, with a 115 megawatt power plant, provides the majority of Northshore’s energy requirements. Silver Bay Power has an interconnection agreement with MP for backup power. Silver Bay Power entered into an agreement to sell 40 megawatts of excess power capacity to Xcel Energy under a contract that extends to 2011. In March 2008, Northshore reactivated one of its furnaces resulting in a shortage of electrical power of approximately 10 megawatts. As a result, supplemental electric power is purchased by Northshore from MP under an agreement that is renewable yearly with one-year termination notice required. The contract expires on June 30, 2011, which coincides with the expiration of Silver Bay Power’s 40 megawatt sales agreement with Xcel Energy.

Wabush has 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 Wabush’s mining operations. The Wabush pelletizing operations in Quebec are served by Quebec Hydro on an annual contract.

The Oak Grove mine and Concord Preparation Plant are supplied electrical power by Alabama Power under a five-year contract which continues in effect until terminated by either party providing written notice to the other in accordance with applicable rules, regulations, and rate schedules. Rates of the contract are subject to change during the term of the contract as regulated by the Alabama Public Service Commission.

Electrical power to the Pinnacle, Green Ridge No. 1, Green Ridge No. 2 mines and the Pinnacle Preparation Plant are supplied by the Appalachian Power Company under two contracts. The Indian Creek contract was revised in 2008 to include service under Appalachian Power’s lower cost Large Capacity Power Primary Schedule and is renewable annually. The next renewal dates are July 24, 2010 for Indian Creek and July 4, 2010 for Pinnacle Creek. Both contracts specify the applicable rate schedule, minimum monthly charge and power capacity furnished. Rates, terms and conditions of the contracts are subject to the approval of the Public Service Commission of West Virginia. We are currently negotiating an amended agreement with Appalachian Power related to the Indian Creek contract that will result in Pinnacle taking increased amounts of power to accommodate expanding operations at the mine. This will also result in Pinnacle receiving significantly reduced tariff rates as a result of the increased amounts of power being utilized. The amendment is expected to be finalized during the first quarter of 2010. The Pinnacle Creek contract will not be affected.

Koolyanobbing and its associated satellite mines draw power from independent diesel fueled power stations and generators. Temporary diesel power generation capacity has been installed at the Koolyanobbing operations, allowing sufficient time for a detailed investigation into the viability of long-term options such as connecting into the Western Australian South West Interconnected System or provision of natural gas or dual fuel (natural gas and diesel) generating capacity. These options are not economic for the satellite mines, which will continue being powered by diesel generators.

Electrical supply on Cockatoo Island is diesel generated. The powerhouse adjacent to the processing plant powers the shiploader, fuel farm and the processing plant. The workshop and administration office is powered by a separate generator.

 

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Process Fuel

We have contracts providing for the transport of natural gas for our North American iron ore and coal operations. At North American Iron Ore, 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. iron ore mines have the capability of burning natural gas, the pelletizing operations for the U.S. iron ore mines utilize alternate fuels when practicable. Wabush has the capability to burn oil and coke breeze. Our North American Coal operations use natural gas and coal to fire thermal dryers at both the Pinnacle Complex and Oak Grove mine.

RenewaFUEL

We have an approximate 90 percent controlling interest in renewaFUEL. Founded in 2005, renewaFUEL produces high-quality, dense fuel cubes made from renewable and consistently available components such as corn stalks, switch grass, grains, soybean and oat hulls, wood, and wood byproducts. This is a strategic investment that provides an opportunity to utilize a “green” solution for further reduction of emissions consistent with our objective to contain costs and enhance efficiencies in a socially responsible manner. In addition to the potential use of renewaFUEL’s biofuel cubes in our production process, the cubes will be marketable to other organizations as a potential substitute for western coal and natural gas. In 2008, renewaFUEL announced it would build a next-generation biomass fuel production facility near Marquette, Michigan in addition to the current facility located in Battle Creek, Michigan. The Battle Creek facility has the capacity to produce approximately 60,000 tons of biofuel annually. The facility is currently operational, with production in 2009 of approximately 924 tons. In early 2009, renewaFUEL received a draft air permit from MDEQ for the Marquette plant, a significant milestone in the permitting process. Engineering and construction was initiated during 2009 with production projected to begin by the fourth quarter of 2010. The Marquette plant is expected to have the capacity to produce 150,000 tons of high-energy, low-emission biofuel annually.

Employees

As of December 31, 2009, we had a total of 5,404 employees.

 

     North
American
Iron Ore (1)
   North
American
Coal
   Asia Pacific
Iron Ore
   Corporate &
Support
Services
   Total

Salaried

   774    198    151    300    1,423

Hourly

   3,181    799    —      1    3,981
                        

Total

   3,955    997    151    301    5,404
                        

 

(1) Includes our employees and the employees of the North American joint ventures.

As of December 31, 2009, 66 percent of our employees were covered by collective bargaining agreements.

Hourly employees at our Michigan and Minnesota iron ore mining operations, excluding Northshore, are represented by the USW. The four-year labor agreement, which was ratified by the USW on October 6, 2008, covers approximately 2,300 USW-represented workers at our Empire and Tilden mines in Michigan, and our United Taconite and Hibbing mines in Minnesota.

Hourly employees at Wabush are also represented by the USW. Wabush and the USW entered into a collective bargaining agreement in October 2004, which expired on March 1, 2009. On February 5, 2010, the USW ratified a new five-year labor agreement that provides for a 15 percent increase in labor costs over the term of the agreement, inclusive of benefits.

Hourly production and maintenance employees at our North American Coal mines are represented by the UMWA. We entered into collective bargaining agreements with the UMWA in March 2007 that expire on December 31, 2011. Those collective bargaining agreements are identical in all material respects to the NBCWA of 2007 between the UMWA and the Bituminous Coal Operators’ Association.

 

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Employees at our Asia Pacific and Latin American operations are not represented under collective bargaining agreements.

Safety

Safety is one of our main priorities. Our North American Iron Ore segment had a total reportable incident rate, as defined by MSHA, of 2.53 in 2009, compared with the prior year result of 2.29. Although the total reportable injury trend was slightly unfavorable, other recognized safety measures showed marked improvements from 2008. Our North American Iron Ore segment finished the year with a 20 percent improvement in the all injury frequency rate from 2008. Our North American Coal operations had a total reportable incident rate of 5.25 compared with a rate of 8.76 in 2008 and recorded a 30 percent improvement in injury severity rates from the prior year. We have developed close collaboration between our North American segments to drive further improvements in our safety results.

At our Asia Pacific Iron Ore operations, Koolyanobbing’s total reportable incident rate for 2009 was 2.52, compared with the 2008 result of 2.57. Cockatoo Island reported a total reportable incident rate of 0.79 in 2009 compared with 5.94 in 2008. Asia Pacific Iron Ore safety statistics include employees and contractors.

Available Information

Our headquarters are located at 200 Public Square, Cleveland, Ohio 44114-2315, and our telephone number is (216) 694-5700. We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the SEC. Copies of these reports and other information can be read and copied at:

SEC Public Reference Room

100 F Street N.E.

Washington, D.C. 20549

Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s home page at www.sec.gov.

We make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our website at www.cliffsnaturalresources.com — under “Investors”.

We also make available, free of charge on our website, the charters of the Audit Committee, Board Affairs Committee, Compensation and Organization Committee and Strategy Committee as well as the Corporate Governance Guidelines and the Code of Business Conduct & Ethics adopted by our Board of Directors. These documents are posted on our website at www.cliffsnaturalresources.com — under “Investors”, select the “Corporate Governance” link.

References to our website do not constitute incorporation by reference of the information contained on our website, and such information is not part of this Form 10-K.

Copies of the above referenced information will also be made available, free of charge, by calling (216) 694-5700 or upon written request to:

Cliffs Natural Resources Inc.

Investor Relations

200 Public Square

Cleveland, OH 44114-2315

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are: (1) the names and ages of all executive and certain other officers of the Company at February 18, 2010, (2) all positions with the Company presently held by each such person and (3) the positions held by, and principal areas of responsibility of, each such person during the last five years.

 

Name

  

Position(s) Held

  

 Age 

Joseph A. Carrabba

   Chairman, President and Chief Executive Officer    57

Laurie Brlas

   Executive Vice President — Chief Financial Officer    52

Donald J. Gallagher

   President, North American Business Unit    57

William A. Brake, Jr.

   Executive Vice President — Human and Technical Resources    49

William R. Calfee

   Executive Vice President — Commercial, North American Iron Ore    63

William C. Boor

   Senior Vice President — Business Development    43

Richard R. Mehan

   Senior Vice President, President and Chief Executive Officer — Cliffs Asia Pacific    56

Duncan Price

   Senior Vice President — Managing Director of Asia Pacific Iron Ore    54

Duke D. Vetor

   Senior Vice President — North American Coal    51

George W. Hawk, Jr.

   General Counsel and Secretary    53

Terrance M. Paradie

   Vice President — Corporate Controller and Chief Accounting Officer    41

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 officers were elected effective on the dates listed below for each such officer.

Joseph A. Carrabba has been Chairman, President and Chief Executive Officer of Cliffs since May 8, 2007. Mr. Carrabba served as Cliffs’ President and Chief Executive Officer from September 2006 through May 8, 2007 and as Cliffs’ President and Chief Operating Officer from May 2005 to September 2006. Mr. Carrabba previously served as President and Chief Operating Officer of Diavik Diamond Mines, Inc. from April 2003 to May 2005, a subsidiary of Rio Tinto plc., an international mining group. Mr. Carrabba is a Director of KeyCorp and Newmont Mining Corporation.

Laurie Brlas has served as Executive Vice President — Chief Financial Officer of Cliffs since March 2008. Ms. Brlas served as Cliffs’ Senior Vice President — Chief Financial Officer from October 2007 through March 2008. From December 2006 to October 2007, Ms. Brlas served as Senior Vice President — Chief Financial Officer and Treasurer of Cliffs. From April 2000 to December 2006, Ms. Brlas was Senior Vice President — Chief Financial Officer of STERIS Corporation. In addition, Ms. Brlas is a Director of Perrigo Company.

Donald J. Gallagher has served as President, North American Business Unit of Cliffs since November 2007. From December 2006 to November 2007, Mr. Gallagher served as President, North American Iron Ore. From July 2006 to December 2006, Mr. Gallagher served as President, North American Iron Ore, and Acting Chief Financial Officer and Treasurer of Cliffs. From May 2005 to July 2006, Mr. Gallagher was Executive Vice President, Chief Financial Officer and Treasurer of Cliffs. From July 2003 to May 2005, Mr. Gallagher served as Senior Vice President, Chief Financial Officer and Treasurer of Cliffs.

William A. Brake, Jr. has served as Executive Vice President, Human and Technical Resources of Cliffs since November 2008, when Mr. Brake assumed responsibility for human resources and labor relations in addition to his previous responsibilities. From April 2007 until November 2008, Mr. Brake served as Executive Vice President, Cliffs Metallics and Chief Technical Officer. From January 2006 to August 2006, Mr. Brake was Executive Vice President — Operations of Mittal Steel USA and from March 2005 to January 2006, he served as Executive Vice President — Operations East at Mittal Steel USA. From March 2003 to March 2005, Mr. Brake was Vice President and General Manager of International Steel Group.

William R. Calfee has served as Executive Vice President — Commercial, North American Iron Ore of Cliffs since July 2006. From 1996 to July 2006, Mr. Calfee served as Executive Vice President — Commercial of Cliffs.

 

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William C. Boor has served as Senior Vice President, Business Development of Cliffs since May 2007. Mr. Boor served as Executive Vice President — Strategy and Development at American Gypsum Co. (a subsidiary of Eagle Materials Inc.) from February 2005 to April 2007 and Senior Vice President — Corporate Development and Investor Relations at Eagle Materials Inc. from May 2002 to February 2005. Mr. Boor is a Director of Cavco Industries, Inc. and has served as Chairman of its Audit Committee since 2009.

Richard R. Mehan has served as Senior Vice President, President and Chief Executive Officer — Cliffs Asia Pacific since January 2007 in addition to serving as Managing Director of Cliffs Asia Pacific Iron Ore Holdings Pty Ltd (formerly known as Portman Limited), which Mr. Mehan has served since 2005. Prior to that, between 1998 and 2005, Mr. Mehan held the roles of General Manager — Iron Ore, General Manager — Marketing and Chief Operating Officer.

Duncan Price has served as Senior Vice President — Managing Director of Asia Pacific Iron Ore since March 2009. Mr. Price served as Chief Executive Officer, Portman Limited from 2007 to 2009. Prior to joining Cliffs, Mr. Price served as Project Director at Sinosteel/Midwest Joint Venture from 2006 to 2007 and Managing Director at Rio Tinto Group from 1996 to 2006.

Duke D. Vetor has served as Senior Vice President, North American Coal of Cliffs since November 2007. From July 2006 to November 2007, Mr. Vetor served as Vice President — Operations — North American Iron Ore of Cliffs. Mr. Vetor was General Manager of Safety and Operations Improvement of Cliffs from December 2005 to July 2006. From 2003 to November 2005, Mr. Vetor served as Vice President — Operations of Diavik Diamond Mines.

George W. Hawk, Jr. has served as General Counsel and Secretary of Cliffs since January 2005. Prior to that, Mr. Hawk served as Assistant General Counsel and Secretary of Cliffs from August 2003 to December 2004.

Terrance M. Paradie has served as Vice President — Corporate Controller and Chief Accounting Officer of Cliffs since July 2009 when Mr. Paradie was appointed to the additional position of Chief Accounting Officer in addition to his previous responsibilities. Mr. Paradie served as Cliffs’ Vice President — Corporate Controller from October 2007 through July 2009. Prior to joining Cliffs, Mr. Paradie served international accounting and consulting firm KPMG LLP since 1992 in a variety of roles, most recently as an audit partner.

Item 1A.    Risk Factors.

The global economic crisis created uncertainty and could continue to adversely affect our business.

The global economic crisis adversely affected our business and impacted our financial results. All of our customers announced curtailments of production, which adversely affected the demand for our iron ore and coal products in 2009. A continuation or worsening of current economic conditions, a prolonged global, national or regional economic recession or other events that could produce major changes in demand patterns, could have a material adverse effect on our sales, margins and profitability. We are not able to predict whether the global economic crisis will continue or worsen and the impact it may have on our operations and the industry in general going forward.

The global economic crisis resulted in downward pressure on prices for iron ore and metallurgical coal.

The global economic crisis resulted in a great deal of pressure from customers, particularly in China, for a roll back of the 2008 price increases for seaborne iron ore and metallurgical coal in 2009. The 2008 record price increase was driven by high demand for iron ore and coking coal, historically high levels of global steel production, and tight supply conditions for iron ore and coking coal due to production and logistics constraints. None of these conditions existed in early 2009 during the global economic crisis, and the market was characterized by a collapse in steel demand and limited global demand for iron ore and coking coal. Reduced demand for iron ore and coking coal resulted in decreased demand for our products and decreasing prices, resulting in lower revenue levels in 2009, and decreasing margins as a result of decreased production, and adversely affecting our results of operations, financial condition and liquidity. Although the global economic outlook has improved in 2010, with the demand for steel and steel-making products improving, another economic

 

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downturn is a possibility, and if such a downturn were to occur during 2010, we would likely see decreased demand for our products and decreasing prices, resulting in lower revenue levels and decreasing margins in 2010.

Negative economic conditions may adversely impact the ability of our customers to meet their obligations to us on a timely basis or at all.

Although we have contractual commitments for sales in our North American Iron Ore business for 2010 and beyond, the recent decline in the economy, as well as any further decline, may adversely impact the ability of our customers to meet their obligations to us on a timely basis or at all. In light of the current economic environment, we are in continual discussions with our customers regarding our supply agreements. These discussions may result in the modification of our supply agreements. Any modifications to our supply agreements could adversely impact our sales, margins, profitability and cash flows. These discussions or actions by our customers could also result in contractual disputes, which could ultimately require arbitration or litigation, either of which could be time consuming and costly. Any such disputes could adversely impact our sales, margins, profitability and cash flows.

Coal mining is complex due to geological characteristics of the region.

The geological characteristics of coal reserves, such as depth of overburden and coal seam thickness, make them complex and costly to mine. As mines become depleted, replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines, and in turn, decisions to defer mine development activities may adversely impact our ability to substantially increase future coal production. These factors could materially adversely affect our mining operations and cost structures, which could adversely affect our sales, profitability and cash flows.

Anti-takeover provisions could make it more difficult for a third party to acquire us.

Our rights plan may make it more difficult for a third party to acquire us in a transaction. Additionally, Ohio corporate law provides that certain notice and informational filings and special shareholder meeting and voting procedures must be followed prior to consummation of a proposed “control share acquisition” as defined in the Ohio Revised Code. Assuming compliance with the prescribed notice and information filings, a proposed control share acquisition may be made only if, at a special meeting of shareholders, the acquisition is approved by both a majority of our voting power represented at the meeting and a majority of the voting power remaining after excluding the combined voting of the “interested shares,” as defined in the Ohio Revised Code. Our rights plans and the application of these provisions of the Ohio Revised Code could have the effect of delaying or preventing a change of control.

Capacity expansions within the industry could lead to lower global iron ore and coal prices or impact our production.

The increased demand for iron ore and coal, particularly from China, has resulted in the major iron ore and metallurgical coal suppliers announcing plans to increase their capacity. In the current economic environment, any increase in our competitors’ capacity could result in excess supply of iron ore and coal, resulting in increased downward pressure on prices. A decrease in pricing would adversely impact our sales, margins and profitability.

If 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 and coal products may decrease.

Demand for our iron ore and coal products is determined by the operating rates for the blast furnaces of 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 primarily by using scrap steel and other iron products, not iron ore pellets, in their electric furnaces. Production of steel by steel mini-mills was approximately 60 percent of North American total finished steel production in 2009. North American 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

 

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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 and coal products, demand for our iron ore and coal products will decrease, which could adversely affect our sales, margins and profitability.

A substantial majority of our sales are made under term supply agreements to a limited number of customers, which are important to the stability and profitability of our operations.

In 2009, virtually all of our North American Iron Ore sales volume, the majority of our North American Coal sales, and virtually all of our Asia Pacific Iron Ore sales were sold under term supply agreements to a limited number of customers. Five customers together accounted for approximately 80 percent of our North American iron ore and coal sales revenues (representing more than 50 percent of our overall revenues). For North American Coal, these agreements typically cover a twelve-month period and are typically renewed each year. The Asia Pacific Iron Ore contracts expire in 2012. Our North American Iron Ore contracts have an average remaining duration of 5.5 years. We cannot be certain that we will be able to renew or replace existing term supply agreements at the same volume levels, 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.

Our North American Iron Ore 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 North American Iron Ore term supply agreements do not otherwise 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.

The availability of capital for exploration, acquisitions and mine development may be limited.

We expect to grow our business and presence as an international mining company by continuing to expand both geographically and through the minerals that we mine and market. To execute on this strategy we will need to have access to the capital markets to finance exploration, acquisitions and development of mining properties. During the global economic crisis access to capital to finance new projects and acquisitions is extremely limited. If we are unable to access the capital markets, our ability to execute on our growth strategy will be negatively impacted.

Our ability to collect payments from our customers depends on their creditworthiness.

Our ability to receive payment for products sold and delivered to our customers depends on the creditworthiness of our customers. With respect to our North American Coal and Asia Pacific Iron Ore business units, payment is typically received as the products are shipped. However, in our North American Iron Ore business unit, generally, we deliver iron ore products to our customers’ facilities in advance of payment for those products. Although title and risk of loss with respect to those products does not pass to the customer until payment for the pellets is received, there is typically a period of time in which pellets, for which we have reserved title, are within our customers’ control. Consolidations in some of the industries in which our customers operate have created larger customers, some of which are highly leveraged. These factors have caused some customers to be less profitable and increased our exposure to credit risk. Current credit markets are highly volatile, and some of our customers are highly leveraged. A significant adverse change in the financial and/or credit position of a customer could require us to assume greater credit risk relating to that customer and could limit our ability to collect receivables. Failure to receive payment from our customers for products that we have delivered could adversely affect our results of operations, financial condition and liquidity.

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 our other mines, which may not be possible. The closure of a mining operation involves significant fixed closure

 

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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 are subject to uncertainties and estimates that may not be accurate. We recognize the costs of reclaiming open pits and shafts, stockpiles, tailings ponds, roads and other mining support areas based on the estimated mining life of our property. If we were to significantly reduce the estimated life of any of our mines, the 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.

A North American mine permanent closure could significantly increase and accelerate employment legacy costs, including our expense and funding costs for pension and other postretirement benefit obligations. A number of employees would be eligible for immediate retirement under special eligibility rules that apply upon a mine closure. All employees eligible for immediate retirement under the pension plans at the time of the permanent mine closure also would be eligible for postretirement health and life insurance benefits, thereby accelerating our obligation to provide these benefits. Certain mine closures would precipitate a pension closure liability significantly greater than an ongoing operation liability. Finally, a permanent mine closure could trigger severance-related obligations, which can equal up to eight weeks of pay per employee, depending on length of service. No employee entitled to an immediate pension upon closure of a mine is entitled to severance. As a result, the closure of one or more of our mines could adversely affect our financial condition and results of operations.

We rely on estimates of our recoverable reserves, which is complex due to geological characteristics of the properties and the number of assumptions made.

We regularly evaluate our North American iron ore and coal reserves based on revenues and costs and update them as required in accordance with SEC Industry Guide 7. Asia Pacific Iron Ore and Sonoma have published reserves which follow JORC in Australia, which is similar to United States requirements. Changes to the reserve value to make them comply with SEC requirements have been made. There are numerous uncertainties inherent in estimating quantities of reserves of our mines, 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 production capacity, effects of regulations by governmental agencies, future prices for iron ore and coal, future industry conditions and operating costs, severance and excise taxes, development costs and costs of extraction and reclamation, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of mineralized deposits attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of future net cash flows prepared by different engineers or by the same engineers at different times may vary substantially as the criteria change. Estimated ore and coal 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 estimates, and if such variances are material, our sales and profitability could be adversely affected.

We rely on our joint venture partners in our mines to meet their payment obligations and are subject to risks involving the acts or omissions of our joint venture partners when we are not the manager of the joint venture.

We co-own and manage three of our six North American iron ore mines with various joint venture partners that are integrated steel producers or their subsidiaries, including ArcelorMittal USA and U.S. Steel Canada Inc. We also own minority interests in mines located in Brazil and Australia that we do not manage. 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 each joint venture produces. Our North American venture partners are also our customers. 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 postretirement health and

 

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life insurance benefit obligations. 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.

We cannot control the actions of our joint venture partners, especially when we have a minority interest in a joint venture and are not designated as the manager of the joint venture. Further, in spite of performing customary due diligence prior to entering into a joint venture, we cannot guarantee full disclosure of prior acts or omissions of the sellers or those with whom we enter into joint ventures. Such risks could have a material adverse effect on the business, results of operations or financial condition of our joint venture interests.

Our expenditures for postretirement 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 to eligible union and non-union employees in North America, 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 and actual rate of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the rate at which future obligations are discounted.

We cannot predict whether changing market or economic conditions such as the current economic crisis, regulatory changes or other factors will increase our pension expenses or our funding obligations, diverting funds we would otherwise apply to other uses.

We have calculated our unfunded pension and OPEB obligations based on a number of assumptions. If our assumptions do not materialize as expected, cash expenditures and costs that we incur could be materially higher. Moreover, we cannot be certain 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 retirees for whom there is currently no retiree healthcare cost cap. Early retirement rates likely would increase substantially in the event of a mine closure.

Our sales and competitive position depend on the ability to transport our products to our customers at competitive rates and in a timely manner.

In our North American operations, 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. Similarly, our North American coal operations depend on international freighter and rail transportation services, as well as the availability of dock capacity, and any disruptions to such could impair our ability to supply coal to our customers at competitive rates or in a timely manner and, thus, could adversely affect our sales and profitability. Further, reduced levels of government funding may result in a lesser level of dredging, particularly at Great Lakes ports. Less dredging results in lower water levels, which restricts the tonnage freighters can haul over the Great Lakes, resulting in higher freight rates.

Our Asia Pacific iron ore and coal operations are also dependent upon rail and port capacity. Disruptions in rail service or availability of dock capacity could similarly impair our ability to supply iron ore and coal to our customers, thereby adversely affecting our sales and profitability. In addition, our Asia Pacific iron ore operations are also in direct competition with the major world seaborne exporters of iron ore and our customers face higher transportation costs than most other Australian producers to ship our products to the Asian markets because of the location of our major shipping port on the south coast of Australia. Further, increases in transportation costs, decreased availability of ocean vessels 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.

 

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Our operating expenses could increase significantly if the price of electrical power, fuel or other energy sources increases.

Operating expenses at all of our mining locations are sensitive to changes in electricity prices and fuel prices, including diesel fuel and natural gas prices. In our North American Iron Ore locations, for example, these items make up approximately 20 percent of our North American Iron Ore operating costs. 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 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. As an example, WEPCO has filed a rate case with the Michigan Public Utilities Commission requesting a 33 percent increase in rates from its rate payers, including our Empire and Tilden mines. We enter into forward fixed-price supply contracts for natural gas and diesel fuel 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.

Natural disasters, weather conditions, disruption of energy, unanticipated geological conditions, equipment failures, and other unexpected events may lead our customers, our suppliers, or our facilities to curtail production or shut down their operations.

Operating levels within the industry are subject to unexpected conditions and events that are beyond the industry’s control. Those events could cause industry members or their suppliers to curtail production or shut down a portion or all of their operations, which could reduce the demand for our iron ore and coal products, and could adversely affect our sales, margins, and profitability.

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.

A portion of our production costs are fixed regardless of current operating levels. As noted, 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 and coal, variations in rock and other natural materials and variations in geologic conditions and ore processing changes.

The manufacturing processes that take place in our mining operations, as well as in our processing facilities, depend on critical pieces of equipment. 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. In the future, we may experience additional material plant shutdowns or periods of reduced production because of equipment failures. 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. Longer-term business disruptions could result in a loss of customers, which could adversely affect our future sales levels, and therefore our profitability.

Regarding the impact of unexpected events happening to our suppliers, many of our mines are dependent on one source for electric power and for natural gas. A significant interruption in service from our energy suppliers due to terrorism, weather conditions, natural disasters, or any other cause can result in substantial losses that may not be fully recoverable, either from our business interruption insurance or responsible third parties.

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 and coal products.

We are subject to various federal, provincial, state and local laws and regulations in each jurisdiction in which we have operations on matters such as employee health and safety, air quality, water pollution, plant and

 

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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 be certain 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. In addition, new legislation and regulations and orders, including proposals related to climate change and protection of the environment, to which we would be subject or that would further regulate and 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 additional 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.

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. We may be named as a responsible party at other sites in the future and we cannot be certain that the costs associated with these additional sites will not be material.

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.

Our North American coal operations are subject to increasing levels of regulatory oversight, making it more difficult to obtain and maintain necessary operating permits.

The current political and regulatory environment in the U.S. is negatively disposed toward coal mining, with particular focus on certain categories of mining such as mountaintop removal techniques. Although we do not engage in mountaintop removal coal mining, our coal mining operations in North America are subject to increasing levels of scrutiny. Although the focus of significantly increased government activity related to coal mining in the U.S. is generally targeted at eliminating or minimizing the adverse environmental impacts of mountaintop coal mining practices, these initiatives have the potential to impact all types of coal operation since various regulatory agencies have effectively stopped the issuance of new permits required by most coal mining projects. These regulatory initiatives could cause material impacts, delays or disruptions to our coal operations due to our inability to obtain new permits or modifications or amendments to existing permits.

Underground mining is subject to increased safety regulation and may require us to incur additional cost.

Recent mine disasters have led to the enactment and consideration of significant new federal and state laws and regulations relating to safety in underground coal mines. These laws and regulations include requirements for constructing and maintaining caches for the storage of additional self-contained self rescuers throughout underground mines; installing rescue chambers in underground mines; constant tracking of and communication with personnel in the mines; installing cable lifelines from the mine portal to all sections of the mine to assist in emergency escape; submission and approval of emergency response plans; and new and additional safety training. Additionally, new requirements for the prompt reporting of accidents and increased fines and penalties for violations of these and existing regulations have been implemented. These new laws and regulations may cause us to incur substantial additional costs, which may adversely impact our operating performance.

 

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Our profitability could be negatively affected if we fail to maintain satisfactory labor relations.

The USW represents all hourly employees at our North American Iron Ore locations except for Northshore. The UMWA represents hourly employees at our North American Coal locations. On October 6, 2008, we entered into a four-year labor agreement with the USW that covers approximately 2,300 USW-represented workers at our Empire and Tilden mines in Michigan, and our United Taconite and Hibbing mines in Minnesota. The five-year agreement covering our Canadian workforce expired on March 1, 2009. In February 2010, we entered into a new five-year labor agreement with the USW for our Wabush mine. The agreement provides for a 15 percent increase in labor costs over the term of the agreement, inclusive of benefits. The current UMWA agreement runs through 2011 at our coal locations. 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 their expiration, we could face work stoppages or labor strikes.

We may encounter labor shortages for critical operational positions, which could affect our ability to produce our products.

Prior to the global economic crisis, the global mining industry was facing a critical shortage of essential skilled employees. Competition for the available workers was limiting our ability to attract and retain employees prior to the global economic crisis.

Despite the current economic downturn, we are predicting a long term shortage of skilled workers for the mining industry. At our mining locations, many of our mining operational employees are approaching retirement age. As these experienced employees retire, we may have difficulty replacing them at competitive wages. As a result, wages are increasing to address the turnover. In addition, when the global economy recovers, we will again be under increasing pressure to retain our existing skilled workers, which could result in higher wages.

Our profitability could be affected by the failure of outside contractors to perform.

Asia Pacific Iron Ore and Sonoma use contractors to handle many of the operational phases of their mining and processing operations and therefore are subject to the performance of outside companies on key production areas.

We may be unable to successfully identify, acquire and integrate strategic acquisition candidates.

Our ability to grow successfully through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions and to obtain necessary financing. It is possible that we will be unable to successfully complete potential acquisitions. In addition, the costs of acquiring other businesses could increase if competition for acquisition candidates increases. Additionally, the success of an acquisition is subject to other risks and uncertainties, including our ability to realize operating efficiencies expected from an acquisition, the size or quality of the resource, delays in realizing the benefits of an acquisition, difficulties in retaining key employees, customers or suppliers of the acquired businesses, difficulties in maintaining uniform controls, procedures, standards and policies throughout acquired companies, the risks associated with the assumption of contingent or undisclosed liabilities of acquisition targets, the impact of changes to our allocation of purchase price, and the ability to generate future cash flows or the availability of financing.

We must continually replace reserves depleted by production. Our exploration activities may not result in additional discoveries.

Our ability to replenish our ore reserves is important to our long-term viability. Depleted ore reserves must be replaced by further delineation of existing ore bodies or by locating new deposits in order to maintain production levels over the long term. Resource exploration and development are highly speculative in nature. Our exploration projects involve many risks, require substantial expenditures and may not result in the discovery of sufficient additional mineral deposits that can be mined profitably. Once a site with mineralization is discovered, it may take several years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. Substantial expenditures are required to establish recoverable

 

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proven and probable reserves and to construct mining and processing facilities. As a result, there is no assurance that current or future exploration programs will be successful. There is a risk that depletion of reserves will not be offset by discoveries or acquisitions.

We are subject to risks involving operations in multiple countries.

We have a strategy to broaden our scope as a supplier of iron ore and other raw materials to the global integrated steel industry. As we expand beyond our traditional North American base business, we will be subject to additional risks beyond those risks relating to our North American operations, such as currency fluctuations; legal and tax limitations on our ability to repatriate earnings in a tax-efficient manner; potential negative international impacts resulting from U.S. foreign and domestic policies, including government embargoes or foreign trade restrictions; the imposition of duties, tariffs, import and export controls and other trade barriers impacting the seaborne iron ore and coal markets; difficulties in staffing and managing multi-national operations; and uncertainties in the enforcement of legal rights and remedies in multiple jurisdictions. If we are unable to manage successfully the risks associated with expanding our global business, these risks could have a material adverse effect on our business, results of operations or financial condition.

We are subject to a variety of market risks.

Market risks include those caused by changes in the value of equity investments, changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and procedures to manage such risks, however certain risks are beyond our control.

Item 1B.    Unresolved Staff Comments.

There are no comments that remain unresolved that we received more than 180 days before the end of our fiscal year to which this report relates. On September 29, 2009 and December 24, 2009, we received comments from the SEC on our Form 10-K for the fiscal year ended December 31, 2008 and our Form 10-Q for the fiscal quarters ended March 31, 2009, June 30, 2009, and September 30, 2009 which we responded to on October 16, 2009 and January 26, 2010, respectively. We have not received any further comments on our responses as of the date of this filing.

Item 2.    Properties.

The following map shows the locations of our operations:

LOGO

 

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General Information about the Mines

Mining Rights and 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.

Geological Composition.    All iron ore mining operations are open-pit mines that are in production. Additional pit development is underway at each mine as required by long-range mine plans. At our North American Iron Ore mines, 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 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 liberate from the waste minerals upon fine grinding.

All North American Coal mine operations are underground mines that are in production. Drilling programs are conducted periodically for the purpose of refining guidance related to ongoing operations. The Pocahontas No. 3 and Blue Creek Coal Seams are Pennsylvanian Age low ash, high quality coals.

At Koolyanobbing, an exploration program began in 2008 targeting extensions to the iron ore resource base, and regional exploration targets in the Yilgarn Mineral Field were active in 2009. At Cockatoo Island, feasibility studies have been completed for a below-sea-level eastward mine pit extension. The Stage 3 extension was reviewed by the regulators and approved in August 2008. Production at Cockatoo Island ended during 2008 due to construction on Phase 3 of the seawall, which is expected to extend production for approximately two additional years. In April 2009, an unanticipated subsidence of the seawall occurred. As a result, production from the mine has been delayed. Production is not expected to resume until the first half of 2011 once the seawall is completed.

The mineralization at the Koolyanobbing operations is predominantly hematite and goethite replacements in greenstone-hosted banded iron-formations. Individual deposits tend to be small with complex ore-waste contact relationships. The Koolyanobbing operations reserves are derived from 13 separate mineral deposits distributed over a 60-mile operating radius. The mineralization at Cockatoo Island is predominantly soft, hematite-rich sandstone that produces premium high grade, low impurity direct shipping fines.

Mineralized material at the Amapá mine is predominantly hematite occurring in weathered and leached greenstone-hosted banded iron-formation of the Archean Vila Nova Group. Variable degrees of leaching generate soft hematite mineralization suitable for either sinter feed production via crushing and gravity separation or pelletizing feed production via grinding and flotation.

In Australia, the Sonoma mine operation is an open-pit mine located in the northern section of Queensland’s Bowen Basin. A mix of high quality metallurgical coal and thermal coal is recovered from the B and C seams of the Permian Mooranbah Coal Measures.

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 design and life of mine operating schedules.

 

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Mine Facilities and Equipment.    Each of the North American Iron Ore mines has crushing, concentrating, and pelletizing facilities. There are crushing and screening facilities at Koolyanobbing and Cockatoo Island. North American Coal mines have preparation, processing, and load-out facilities, with the Pinnacle and Green Ridge mines sharing 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 electricity, diesel fuel or gasoline. Our share of the total cost of the property, plant and equipment, net of applicable accumulated amortization and depreciation as of December 31, 2009, for each of the mines is set forth in the chart below.

 

     (In Millions)

Mine Location

   Historical Cost of Mine
Plant and Equipment,
Net of Applicable
Accumulated Amortization and
Depreciation (Cliffs’ Share)

Empire

   $ 44.2

Tilden

     168.0

Hibbing

     37.0

Northshore

     114.2

United Taconite

     73.1

Wabush

     11.9

Pinnacle

     510.8

Oak Grove

     227.6

Sonoma

     128.3

Cockatoo Island

     9.9

Koolyanobbing

     777.1

Amapá

     172.5

North American Iron Ore

We directly or indirectly own and operate interests in the following six North American iron ore mines from which we produced 17.1 million, 22.9 million and 21.8 million long tons of iron ore pellets in 2009, 2008 and 2007, respectively, for our account and 2.5 million, 12.3 million and 12.8 million long tons, respectively, on behalf of the steel company partners of the mines:

Empire mine

The Empire mine is located on the Marquette Iron Range in Michigan’s Upper Peninsula approximately 15 miles west-southwest of Marquette, Michigan. The mine has been in operation since 1963. Over the past five years, the Empire mine has produced between 2.6 million and 4.9 million tons of iron ore pellets annually.

We own 79.0 percent of Empire, and a subsidiary of ArcelorMittal USA has retained the remaining 21 percent ownership in Empire with limited rights and obligations, which it has a unilateral right to put to us at any time subsequent to the end of 2007. This right has not been exercised. We own directly approximately one-half of the remaining ore reserves at the Empire mine and lease them to Empire. A subsidiary of ours leases the balance of the Empire reserves from other owners of such reserves and subleases them to Empire.

Tilden mine

The Tilden mine is located on the Marquette Iron Range in Michigan’s Upper Peninsula approximately five miles south of Ishpeming, Michigan. The Tilden mine has been in operation since 1974. Over the past five years, the Tilden mine has produced between 5.6 million and 7.9 million tons of iron ore pellets annually.

We own 85 percent of Tilden, with the remaining minority interest owned by U.S. Steel Canada. 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.

 

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The Empire and Tilden mines are located adjacent to each other. The logistical benefits include a consolidated transportation system, more efficient employee and equipment operating schedules, reduction in redundant facilities and workforce and best practices sharing. Two 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.

Hibbing mine

The Hibbing mine is located in the center of Minnesota’s Mesabi Iron Range and is approximately ten miles north of Hibbing, Minnesota and five miles west of Chisholm, Minnesota. From the Mesabi Range, Hibbing pellets are transported by rail to a shiploading port at Superior, Wisconsin. The Hibbing mine has been in operation since 1976. Over the past five years, the Hibbing mine has produced between 1.7 million and 8.5 million tons of iron ore pellets annually. As a result of market conditions, Hibbing was shut down in May 2009 and is not expected to resume production until the second quarter of 2010.

We own 23.0 percent of Hibbing, ArcelorMittal USA has a 62.3 percent interest, and U.S. Steel Canada has a 14.7 percent interest. 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.

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 Range. Northshore’s processing facilities are located in Silver Bay, Minnesota, near Lake Superior. Crude ore is shipped by a wholly-owned railroad from the mine to the processing and dock facilities at Silver Bay. The Northshore mine has been in continuous operation since 1990. Over the past five years, the Northshore mine has produced between 3.2 million and 5.5 million tons of iron ore pellets annually.

The Northshore mine began production under our management and ownership on October 1, 1994. We own 100 percent of the mine.

United Taconite mine

The United Taconite mine is located on Minnesota’s Mesabi Iron Range in and around the city of Eveleth, Minnesota. The United Taconite concentrator and pelletizing facilities are located ten miles south of the mine, near the town of Forbes, Minnesota. United Taconite pellets are shipped by railroad to the port of Duluth, Minnesota. The mine has been operating since 1965. Over the past five years, the United Taconite mine has produced between 3.8 million and 5.3 million tons of iron ore pellets annually.

In 2008, we completed the acquisition of the remaining 30 percent interest in United Taconite.

Wabush mine

The Wabush mine and concentrator are located in Wabush, Labrador, Newfoundland, and the pellet plant and dock facility is located in Pointe Noire, Quebec, Canada. 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 within Canada, to the United States and other international destinations. Additionally, concentrates may be shipped directly from Pointe Noire for sinter feed. The Wabush mine has been in operation since 1965. Over the past five years, the Wabush mine has produced between 2.7 million and 4.9 million tons of iron ore pellets annually. As of December 31, 2009, we owned 26.8 percent of Wabush. However, on October 12, 2009, we exercised our right of first refusal to acquire the remaining interest in Wabush, including U.S. Steel Canada’s 44.6 percent interest and ArcelorMittal Dofasco’s 28.6 percent interest. Ownership transfer to Cliffs was completed on February 1, 2010.

 

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North American Coal

We directly own and operate the following two North American coal mining complexes from which we produced a total of 1.7 million, 3.5 million and 1.1 million short tons of coal in North America in 2009, 2008 and 2007, respectively, representing our volume since the acquisition of PinnOak on July 31, 2007:

Pinnacle Complex

The Pinnacle Complex includes the Pinnacle and Green Ridge mines and is located approximately 30 miles southwest of Beckley, West Virginia. The Pinnacle mine has been in operation since 1969. Over the past five years, the Pinnacle mine has produced between 0.7 million and 2.5 million tons of coal annually. The Green Ridge mines have been in operation since 2004 and have produced between 0.2 million and 0.5 million tons of coal annually. One of the Green Ridge mines will be closed permanently beginning in February 2010 due to exhaustion of the economic reserves at the mine.

Oak Grove mine

The Oak Grove mine is located approximately 25 miles southwest of Birmingham, Alabama. The mine has been in operation since 1972. Over the past five years, the Oak Grove mine has produced between 0.9 million and 1.7 million tons of coal annually.

Our coal production at each mine is shipped within the U.S. by rail or barge. Coal for international customers is shipped through the port of Mobile, Alabama or Newport News, Virginia.

Asia Pacific Iron Ore

In Australia, we own and operate interests in the following two Asia Pacific iron ore mines from which we produced 8.3 million tonnes, 7.7 million tonnes and 8.4 million tonnes in 2009, 2008 and 2007, respectively:

Koolyanobbing

The Koolyanobbing operations are located 250 miles east of Perth and approximately 30 miles northeast of the town of Southern Cross. Koolyanobbing produces lump and fines iron ore. An expansion program was completed in 2006 to increase capacity from six to eight million tonnes per annum. The expansion was primarily driven by the development of iron ore resources at Mount Jackson and Windarling, located 50 miles and 60 miles north of the existing Koolyanobbing operations, respectively. Over the past five years, the Koolyanobbing operation has produced between 5.8 million and 8.3 million tonnes annually.

All of the ore mined at the Koolyanobbing operations is transported by rail to the Port of Esperance, 350 miles to the south for shipment to Asian customers. In 2009, Asia Pacific Iron Ore completed an upgrade of the rail line used for its operations. The upgrade was performed to mitigate the risk of derailment and reduce service disruptions by providing a more robust infrastructure. The improvements included the replacement of 75 miles of rail and associated parts. We spent a total of approximately $45 million in 2009 and 2008 related to maintenance and improvements to the rail structure.

Cockatoo Island

The Cockatoo Island operation is located four miles to the west of Yampi Peninsula, in the Buccaneer Archipelago, and 90 miles north of Derby in the West Kimberley region of Western Australia. The island has been mined for iron ore since 1951, with a break in operations between 1985 and 1993. During the past five years, Cockatoo Island has ranged from no production to 1.4 million tonnes annually. No ore was mined in 2009 due to subsidence of the seawall and no production is expected in 2010.

We own a 50 percent interest in this joint venture to mine remnant iron ore deposits. Mining from this phase of the operation commenced in late 2000. Production at Cockatoo Island ended during 2008 due to construction on Phase 3 of the seawall, which is expected to extend production for approximately two additional years. In April 2009, an unanticipated subsidence of the seawall occurred. As a result, production from the mine has been

 

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delayed. Production is not expected to resume until the first half of 2011 once the seawall is completed. Ore is hauled by haul truck to the stockpiles, crushed and screened and then transferred by conveyor to the shiploader. Direct ship premium fines mined at Cockatoo Island are then loaded at a local dock.

Mine Capacity and Mineral Reserves

We have a corporate policy relating to internal control and procedures with respect to auditing and estimating mineral reserves. The procedures include the calculation of mineral reserves at each mine by professional mining engineers and geologists. Management compiles and reviews the calculations, and once finalized, such information is used to prepare the disclosures for our annual and quarterly reports. The disclosures are reviewed and approved by management, including our Chief Financial Officer and Chief Executive Officer. Additionally, the long-range mine planning and mineral reserve estimates are reviewed annually by our Audit Committee. Furthermore, all changes to mineral reserve estimates, other than those due to production, are adequately documented and submitted to our President and Chief Executive Officer for review and approval. Finally, we perform periodic reviews of long-range mine plans and mineral reserve estimates at mine staff meetings and senior management meetings.

Reserves are defined by SEC Industry Standard Guide 7 as that part of a mineral deposit that could be economically and legally extracted and produced at the time of the reserve determination. All reserves are classified as proven or probable and are supported by life-of-mine plans.

Iron Ore Reserves

Ore reserve estimates for our iron ore mines as of December 31, 2009 were estimated from fully-designed open pits developed using three-dimensional modeling techniques. These fully designed pits incorporate design slopes, practical mining shapes and access ramps to assure the accuracy of our reserve estimates. The iron ore prices utilized for reserve estimation are derived from 3-year trailing averages of regional benchmark pricing. For North American Iron Ore operations, prices are based on iron ore pellets delivered to the Lower Great Lakes, and for operations in Asia Pacific, iron ore prices represent the 3-year trailing average of international benchmark pricing for the products generated by our Asia Pacific Iron Ore business unit (sinter fines, lump ore). We evaluate and analyze iron ore reserve estimates every three years in accordance with our mineral reserve policy or earlier if conditions merit. For the fiscal year ended December 31, 2009, iron ore prices vary based on the date of the last reserve analysis. The table below identifies the reserve analysis date and the respective 3-year trailing price for each of our iron ore mines as of December 31, 2009.

 

Mine

   Date of Base Economic
Ore Reserve Analysis
    Commodity
Pricing (1)

North America

    

Empire

   2009 (2)    $89.19

Hibbing Taconite

   2008      $90.42

Northshore

   2009 (2)    $90.42

Tilden

   2008      $89.19

United Taconite

   2007      $85.76

Wabush

   2008      $85.16

Asia Pacific

    

Koolyanobbing

   2009      Lump - $1.1692
     Fines - $0.9071

Cockatoo Island

   2008      Fines - $0.6847

 

(1) Pricing in North America reflects US$ per long tons of pellets FOB port, except for Empire and Tilden, which are FOB mine. Pricing in Asia Pacific reflects US$ per product dry metric ton iron unit.

 

(2) The decision was made to exclude anomolous 2008 Benchmark Pricing from the 3-year trailing average price used in determining our North American Iron Ore reserve estimates. Therefore, the 3-year trailing average for the 2009 reserve analysis reflects 2005-2007 prices.

 

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The following tables reflect expected current annual capacity and economic ore reserves for our North American and Asia Pacific iron ore mines as of December 31, 2009. Ore reserves for Amapá, in which we have a 30 percent ownership interest, have not been estimated by Cliffs. The ore reserve estimation process is controlled and managed by Anglo as the parent company and mine operator. Sufficient technical data on the processing of Amapá mineralized material does not exist at this time, precluding estimation of recoverable product and grade, and therefore economic reserves as defined by SEC Industry Guide 7. However, Anglo has indicated that exploration drilling to date has resulted in a currently declared resource size of 207 million tonnes based on measured, indicated and inferred resources.

North American Iron Ore

 

Mine

 

Iron Ore

Mineralization

  Current
Annual
Capacity
  Mineral Reserves (2)   Mineral Rights    

Method of

Reserve

Estimation

  Operating
Since
 

Infrastructure

      Current Year   Previous
Year
       
      Proven   Probable   Total     Owned     Leased        
        Tons in millions (1)                        

Empire

 

Negaunee Iron

Formation (Magnetite)

  5.5   12.6   —     12.6   33   53   47   Geologic - Block Model   1963   Mine, Concentrator, Pelletizer

Tilden

  Negaunee Iron Formation (Hematite, Magnetite)   8.0   214   60   274   280   100   0   Geologic - Block Model   1974   Mine, Concentrator, Pelletizer, Railroad

Hibbing Taconite

  Biwabik Iron Formation (Magnetite)   8.0   103   10   113   114   3   97   Geologic - Block Model   1976   Mine, Concentrator, Pelletizer

Northshore

  Biwabik Iron Formation (Magnetite)   5.7   304   16   320   308   0   100   Geologic - Block Model   1989   Mine, Concentrator, Pelletizer, Railroad

United Taconite

 

Biwabik Iron Formation

(Magnetite)

  5.4   124   16   140   144   0   100  

Geologic -

Block Model

  1965   Mine, Concentrator, Pelletizer

Wabush

  Sokoman Iron Formation (Hematite)   5.5   72.3   —     72.3   75   0   100   Geologic - Block Model   1965   Mine, Concentrator, Pelletizer, Railroad
                               
 

Total

  38.1   830   102   932   954          

 

(1) Tons are long tons of 2,240 pounds.

 

(2) Estimated standard equivalent pellets, including both proven and probable reserves based on life of mine operating schedules.

In 2009, there were no changes in reserve estimates at Tilden, Hibbing Taconite, United Taconite, or Wabush except for production.

New economic reserve analyses were performed at Empire and Northshore in 2009. Each of the new reserve analyses incorporate updates to both iron ore pellet pricing and operating costs. Changes in the reserve estimates are as follows:

 

   

Empire – Pellet reserves are decreased by 18 million tons net of 2009 production. The reserves have decreased due to the postponement of a multi-year development project that can not be economically justified in the present market conditions.

 

   

Northshore – Pellet reserves are increased by 16 million tons net of 2009 production. The increased reserves are the result of improved mine pit designs.

 

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Asia Pacific Iron Ore

 

Mine

  Iron Ore
Mineralization
  Current
Annual
Capacity
  Mineral Reserves (2)   Mineral Rights     Method of
Reserve
Estimation
  Operating
Since
  Infrastructure
      Current Year   Previous
Year
       
      Proven   Probable   Total     Owned     Leased        
        Tonnes in millions (1)                        

Koolyanobbing (3)

  Banded Iron
Formations
Southern
Cross Terrane
Yilgarn Mineral
Field

(Hematite, Goethite)

  8.5   3.5   81.7   85.2   90.5   0   100   Geologic -
Block Model
  1994   Mine, Road
Train Haulage,
Crushing-
Screening Plant

Cockatoo Island JV (4)

  Sandstone Yampi
Formation
Kimberley Mineral
Field (Hematite)
  1.2   —     2.3   2.3   2.3   0   100   Geologic -
Block Model
  1994   Mine,
Crushing-
Screening Plant,
Shiploader
                                 
  Total   9.7   3.5   84.0   87.5   92.8          

 

(1) Metric tons of 2,205 pounds.

 

(2) Reported ore reserves restricted to proven and probable tonnages based on life of mine operating schedules. 3.5 million tonnes of the Koolyanobbing reserves are sourced from current stockpiles.

 

(3) Rail and plant upgrades in 2009 increase the annual capacity to 8.5 million tonnes.

 

(4) Asia Pacific Iron Ore has a 50% interest in the Cockatoo Island joint venture. Reserves reported at 100% and represent the Stage 3 Seawall extension project area.

Net of 2009 production, Koolyanobbing ore reserves have increased by 3 million tonnes. The increase is from the addition of newly discovered resources and mine planning optimization.

During 2009, construction of a Stage 3 extension of the seawall embankment continued at Cockatoo Island, which will provide access to an additional 2.3 million tonnes of premium high grade iron ore fines for the joint venture. However, production from the mine has been delayed due to subsidence of the seawall in April 2009. Production is not expected to resume until the first half of 2011 once the seawall is completed. This extension is expected to extend production for approximately two years.

Coal Reserves

North American Coal

Coal reserve estimates for our North American underground coal mines as of December 31, 2009 were estimated using three-dimensional modeling techniques, coupled with mine plan designs. A complete re-estimation of the moist, recoverable coal reserves was completed subsequent to the 2007 acquisition and was updated most recently in 2009. Coal pricing for the North American Coal reserve estimate in 2009 was $85 per ton FOB mine based upon a 3-year trailing average.

The following table reflects expected current annual capacities and economically recoverable reserves for our North American coal mines as of December 31, 2009.

 

Mine (2)

  Category (3)   Current
Annual
Capacity
  Proven and Probable Reserves   Mineral Rights     Method of
Reserve
Estimation
  Infrastructure
           
      In-place   Moist Recoverable   Owned     Leased      
        Tons in Millions(1)                    

Pinnacle Complex

    4.0       0   100   Geologic -   Mine, Preparation

Pocahontas No 3

  Assigned     114.4   53.4       Block Model   Plant, Load-out

Pocahontas No 4

  Unassigned     26.8   9.8        

Oak Grove

    2.5       0   100   Geologic -   Mine, Preparation

Blue Creek Seam

  Assigned     81.3   43.0       Block Model   Plant, Load-out
                     

Total

    6.5   222.5   106.2        
                     

 

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(1) Short tons of 2,000 pounds.

 

(2) All coal extracted by underground mining using longwall and continuous miner equipment.

 

(3) Assigned reserves represent coal reserves that can be mined without a significant capital expenditure for mine development, whereas unassigned reserves will require significant capital expenditures to mine the reserves.

The North American recoverable coal reserves have decreased 12 million tons net of 2009 production. The decrease is mainly attributed to lower mine face to product yield reconciliations compared to the previous estimate.

All recoverable coal reserves at our North American operations are high quality, low volatile, metallurgical grade coal. The following table presents the coal quality at our North American coal mines.

 

Mine

   Coal Type    Moist Recoverable
Reserves (1)
Proven & Probable
   Sulfur
Content %
   As Received
Btu/lb

Pinnacle Complex

           

Pocahontas No 3

   Metallurgical    53.4    0.77    14,870

Pocahontas No 4

   Metallurgical    9.8    0.58    14,000

Oak Grove

           

Blue Creek Seam

   Metallurgical    43.0    0.57    14,000
             

Total

      106.2      
             

 

(1) In millions of short tons of 2,000 pounds.

Asia Pacific Coal

The coal reserve estimate for our Asia Pacific coal mine as of December 31, 2009 is based on a JORC-compliant resource estimate. An optimized pit design for an initial 10-year mine operating schedule was generated supporting the reserve estimate. Coal pricing for the reserve estimate is based upon international benchmark pricing for our Sonoma joint venture at the time of investment in 2007, which was $71 per tonne FOB port for the range of products generated at Sonoma.

The following table reflects expected current annual capacity and economically recoverable reserves for Sonoma:

 

Mine (2)

  Category (3)   Current
Annual
Capacity
  Proven and Probable   Mineral Rights     Method of
Reserve
Estimation
  Infrastructure
      In-place   Moist Recoverable   Owned     Leased      
        Tonnes in Millions (1)                    

Sonoma

               

Moranbah Coal Measures B, C and E Seams

  Assigned   4.0   38.5   21.6   0   100   Geologic -
Block Model
  Mine, Preparation,
Plant, Load-out

 

(1) Metric tons of 2,205 pounds. In-place coal at 8 percent moisture, recoverable clean coal at 9 percent moisture. Reserves listed on 100 percent basis. Cliffs Natural Resources has an effective 45 percent interest in the joint venture.

 

(2) All coal is extracted by conventional surface mining techniques.

 

(3) Assigned reserves represent coal reserves that can be mined without a significant capital expenditure for mine development, whereas unassigned reserves will require significant capital expenditures to mine the reserves.

An update to the Sonoma resource model and economic reserve estimate is scheduled for 2010.

 

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Sonoma’s recoverable coal reserves are primarily metallurgical grade coal (standard coking coal plus low volatile coal for pulverized coal injection) with lesser steam coal. Sonoma coal quality is presented in the following table.

 

Mine

  

Coal Type (2)

   Moist Recoverable Reserves
Proven & Probable (1)
   Sulfur
Content %
   As Received
Btu/lb

Sonoma

   Metallurgical    9.4    0.48    13,800
   Steam    12.2    0.55    10,800
             

Total

      21.6      

 

(1) In million of metric tons of 2,205 pounds. In-place coal at 8 percent moisture, recoverable clean coal at 9 percent moisture. Reserves listed on 100% basis. Cliffs Natural Resources has an effective 45 percent interest in the joint venture.

 

(2) Sonoma steam coal recoverable reserves meet US compliance standards as defined by Phase II of the Clean Air Act as coal having sulfur dioxide content of 1.2 pounds or less per million Btu.

Item 3.    Legal Proceedings.

Alabama Dust Litigation.    Waid et al. v. U.S. Steel Mining Company et al., was brought in 2004 by approximately 160 individual plaintiffs asserting property damage and injuries arising from particulate emissions from the Concord Preparation Plant. A writ of mandamus had been filed in connection with the Waid litigation arguing that the Waid litigation should be dismissed because of a 2002 settlement agreement in a related case, White et al. v. USX Corporation et al. The Supreme Court of Alabama ruled on this matter on June 26, 2009, denying our writ of mandamus and sending the case back to the Bessemer Division of the Jefferson Circuit Court for trial on claims originating after July 1, 2003. The case is in a very early stage of discovery and we intend to defend this case vigorously.

On February 1, 2009, an additional lawsuit was filed by approximately 210 individual plaintiffs also asserting post-July 1, 2003 property damage and injuries arising from particulate emissions from the Concord Preparation Plant. This case has been consolidated with the Waid litigation for purposes of discovery. We expect this case to be consolidated with the Waid litigation for trial. This litigation is in a very early stage and we intend to defend this case vigorously.

Amapá Environmental Litigation.    In July 2009, an order issued by the Sole State Court for the County of Serra do Navio, State of Amapá was published with respect to a ruling in an ex parte proceeding, ordering the cessation of any activities at Amapá and the neighboring operations of Mineração Pedra Branca do Amapari that caused the displacement of soil into the riverbeds of certain creeks near the two operations, as well as the suspension of the use of water from or discharged into the Mário Cruz Creek by Amapá, pending the completion of an environmental audit to be conducted by experts selected by the plaintiff, the Public Prosecutor of the State of Amapá, and completed within 180 days from notification of the order. In addition, the judge ordered the parties to unclog and extend certain storm drains located on a road that provides access to Amapá. The order also provided for fines of approximately $26,000 per day for violations of the order. Amapá retained independent environmental consultants to assess the situation with respect to the nearby creeks and determine whether Amapá’s operations were impacting the creeks. At a special hearing held in August 2009 the Judge granted Amapá’s motion for suspension of the preliminary injunction for a period of 60 days, allowing immediate resumption of Amapá’s operations as long as appropriate measures were taken to minimize environmental impacts. The 60-day term was later extended an additional 30 days through November 2009. The Judge did not suspend the penalty/fine imposed on Amapá or determine that funds in Amapá’s bank account be blocked in order to guarantee payment of the fine. In September 2009 Amapá filed an interlocutory appeal to the Appellate Court concerning the State Court’s imposition of penalty fines. In October 2009, the reporting judge of the Appellate Court issued an interim order suspending the State Court Judge’s decision to block funds until a decision was rendered on the merits of the interlocutory appeal by the Appellate Court. In the fourth quarter of 2009, the parties entered into a settlement agreement with the Public Prosecutor Office and 33 families affected by the alleged environmental damages caused to Creek Willian. Under the settlement agreement, the parties

 

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agreed to pay (i) R$142,000 for the costs of the environmental assessment of the creeks by the court; and (ii) R$20,580 to each of the 33 families affected by the alleged environmental damages caused to Creek Willian. The settlement agreement was confirmed by the court in December 2009. In its confirmation decision, the Amapá court agreed to suspend the enforceability of the preliminary injunction for an additional 90 days, through March 15, 2010. The settlement agreement did not terminate the current litigation, which is still ongoing. Amapá’s share of the costs has been deposited into an escrow account to fulfill its obligation.

ArcelorMittal Arbitrations.    On August 19, 2009 ArcelorMittal USA Inc. filed an arbitration demand against The Cleveland-Cliffs Iron Company and Cliffs Mining Company with respect to the Pellet Sale and Purchase Agreement dated December 31, 2002 covering the Ispat works. Pursuant to the agreement, beginning in 2009, in the event the price of pellets is above or below a contractually agreed upon amount one of the parties may request a price reopener. Notice of the request must be received in writing before July 1 of the year in determination. ArcelorMittal did not attempt to provide written notice until July 31, 2009, and did not show that the triggering event had occurred. Cliffs declined to enter into price reopener discussions. Cliffs filed its answer on September 9, 2009. Summary judgment motions were filed by both sides on January 11, 2010.

On September 11, 2009 Cliffs, The Cleveland-Cliffs Iron Company, Cliffs Mining Company, Northshore Mining Company and Cliffs Sales Company filed an arbitration demand against ArcelorMittal USA Inc., ISG Cleveland Inc., ISG Indiana Harbor Inc. and Mittal Steel USA Weirton Inc. with respect to the pellet nominations ArcelorMittal submitted to Cliffs in 2008 and 2009 for the calendar year 2009. Pursuant to the umbrella agreement entered into by the parties in 2007, ArcelorMittal is to provide a nomination to Cliffs on or before October 31 for its pellet requirements for the following year. The parties are to reduce to writing a mutual confirmation of the nomination by November 30, which is to include a shipping schedule. After the written confirmation, the nomination and the accompanying shipping schedule are final. In the calendar year 2008, ArcelorMittal attempted to revise its nomination. An AAA panel found that the revised nomination was a nullity and not provided for under the terms of the contract. In 2009, ArcelorMittal again provided several revised nominations and shipping schedules. Cliffs filed the arbitration to enforce the nomination finalized in November 2008 for the year 2009. ArcelorMittal filed an answer on October 1, 2009. A panel for the arbitration has been selected; however the arbitration is in a very early phase.

On September 11, 2009 the same Cliffs companies filed a second arbitration demand against the same ArcelorMittal companies with respect to the pellet nominations submitted in 2008 and 2009 for the calendar year 2009. The umbrella agreement permits ArcelorMittal to make a one-time election to defer tons from one calendar year into the next. If ArcelorMittal elects to defer tonnage from 2009 into 2010, it is prohibited from electing a reduction in its required minimum tonnage for 2010 and must purchase the deferred tonnage in 2010. ArcelorMittal elected to defer 550,000 tons in its nomination for 2009. In early 2009, ArcelorMittal purported to revoke its deferral for the year 2009 tons, attempting to increase its nomination for the calendar year 2009 and thereby permit ArcelorMittal to reduce its required minimum tonnage for 2010. Cliffs filed the AAA demand requesting that the panel enforce the nomination and 2009 deferral contained therein. ArcelorMittal filed an answer and counterdemand on October 1, 2009. This arbitration has been consolidated with the other September 11, 2009 arbitration.

Cliffs Erie Citizens Suit.     On January 28, 2010, we received a notice of intent to sue pursuant to Section 505 of the Clean Water Act on behalf of the Center for Biological Diversity, Save Lake Superior Association and the Indigenous Environmental Network. Pursuant to the notice, these environmental groups intend to file a lawsuit in Federal court for alleged violations by our Cliffs Erie subsidiary of NPDES permits at three separate locations on the Cliffs Erie property. We are currently investigating the allegations and intend to defend any resultant lawsuit vigorously.

Maritime Asbestos Litigation.    The Cleveland-Cliffs Iron Company and/or The Cleveland-Cliffs Steamship Company have been named defendants in 487 actions brought from 1986 to date by former seamen in which the plaintiffs claim damages 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. All of 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

 

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ship-owners and other defendants. All of these cases have been dismissed without prejudice, but could be reinstated upon application by plaintiffs’ counsel. By court orders on October 29, 2009 and January 4, 2010, the court reinstated a total of 760 cases in three groups. We are a defendant in eight cases that have been reinstated. The plaintiffs in these reinstated cases have been ordered to file notices in each case identifying the remaining defendants they intend to pursue and serve the remaining defendants with a medical diagnosis or opinion upon which the plaintiffs intend to rely within ten days of filing the notice. Defendants in each case will then have the opportunity to file answers and procedural motions. It is anticipated that scheduling orders will be issued in each group of cases providing discovery, motion practice and settlement discussions to occur during 2010, with unsettled cases going to trial beginning at the end of 2010. The claims in the eight reinstated cases involve allegations with respect to lung cancer, asbestosis and pleural changes of varying severity. The claims against our entities are 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 them.

Northshore Air Permit Matters.    On December 16, 2006, Northshore submitted an application to the MPCA for an administrative amendment to its air permit. The proposed amendment requested the deletion of a term in the air permit that was derived from a court case brought against the Silver Bay taconite operations in 1972. The permit term incorporated elements of the court-ordered requirement to reduce fiber emissions to below a medically significant level by installing controls that would be deemed adequate if the fiber levels in Silver Bay were below those of a control city such as St. Paul. We requested deletion of this “control city” permit requirement on the grounds that the court-ordered requirements had been satisfied more than 20 years ago and should no longer be included in the permit. The MPCA denied our application on February 23, 2007. We appealed the denial to the Minnesota Court of Appeals. The court of appeals ruled in MPCA’s favor. Subsequent to the court of appeals’ ruling, Northshore filed a major permit amendment on August 28, 2008 requesting the removal of all fiber-related provisions from Northshore’s air permit and proposing that Northshore install additional particulate controls. MPCA issued a “Findings of Fact, Conclusions of Law and Order” on November 25, 2008 declaring that Northshore’s request to remove the “Control City Standard” from its permit constitutes a “project” for which an EAW must be completed. MPCA also stated that it was ceasing all other work on the permit, including its own efforts to create a replacement standard, until the environmental review process was complete.

Northshore subsequently filed an action to challenge the MPCA’s requirement for an EAW in Minnesota State District Court for the Sixth Judicial District. Oral arguments on cross motions for summary judgment were heard on October 19, 2009. On January 13, 2010, the court ruled in Northshore’s favor, ruling that Northshore was entitled to judgment in its favor as a matter of law. The court specifically ruled that our request to remove the “Control City Standard” was not a project under Minnesota law and that MPCA’s determination that Northshore’s application required an EAW was arbitrary and capricious, unsupported by substantial evidence and an error of law. At this time it is not known whether MPCA will appeal the court’s ruling and no action has been taken to date with respect to our major permit amendment.

Republic Arbitration.    On October 1, 2006, we entered into an agreement for the sale of pellets with Republic Engineered Products, Inc. (“Republic”). Pursuant to that agreement Republic was required to purchase a percentage of its iron ore requirements from us. Republic is required to provide us with a firm nomination by a certain date each year. As of the end of 2008 Republic had failed to take delivery and pay for a portion of the tons remaining from its 2008 nomination. After several failed attempts at negotiating a workout agreement, we filed a Demand for Arbitration on February 2, 2009 for a total of $30.7 million plus interest, commencing December 31, 2008. On September 21, 2009 Cliffs provided notice to Republic that it had mitigated its damages and would be offsetting its claim by those amounts. On September 28, 2009 Cliffs notified Republic of the value of the mitigation and that its claim had been reduced to approximately $9 million. Cliffs also amended its arbitration demand to reflect the mitigated damages. On October 30, 2009, the arbitration panel ruled in our favor, entering a judgment in favor of the Company of approximately $9.2 million. Republic paid the award in two equal payments on December 7, 2009 and January 8, 2010, respectively.

The Rio Tinto Mine Site.    The Rio Tinto Mine Site is a historic underground copper mine located near Mountain City, Nevada, where tailings were placed in Mill Creek, a tributary to the Owyhee River. Site investigation and remediation work is being conducted in accordance with a Consent Order between the NDEP

 

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and the RTWG composed of Cliffs, Atlantic Richfield Company, Teck Cominco American Incorporated, and E. I. du Pont de Nemours and Company. The Consent Order provides for technical review by the U.S. Department of the Interior Bureau of Indian Affairs, the U.S. Fish & Wildlife Service, U.S. Department of Agriculture Forest Service, the NDEP and the Shoshone-Paiute Tribes of the Duck Valley Reservation (collectively, “Rio Tinto Trustees”). The Consent Order is expected to continue with the objective of supporting the selection of the final remedy for the site. As of December 31, 2009, the estimated costs of the available remediation alternatives currently range from approximately $10.0 million to $30.5 million in total for all potentially responsible parties. In recognition of the potential for an NRD claim, the parties are actively pursuing a global settlement that would include the EPA and encompass both the remedial action and the NRD issues.

On May 29, 2009, the RTWG entered into a Rio Tinto Mine Site Work and Cost Allocation Agreement (the “Allocation Agreement”) to resolve differences over the allocation of any negotiated remedy. The Allocation Agreement contemplates that the RTWG will enter into an insured fixed-price cleanup agreement, or IFC, pursuant to which a contractor would assume responsibility for the implementation and funding of the remedy in exchange for a fixed price. We are obligated to fund 32.5 percent of the IFC. In the event an IFC is not implemented, the RTWG has agreed on allocation percentages in the Allocation Agreement, with Cliffs being committed to fund 32.5 percent of any remedy. We have a current reserve that we believe is adequate to fund our anticipated portion of the IFC.

United Taconite Air Emissions Matter.    On March 27, 2008, United Taconite received a DSA from the MPCA alleging various air emissions violations of the facility’s air permit limit conditions, reporting and testing requirements. The allegations generally stem from procedures put in place prior to 2004 before our acquisition of our interest in the mine. The DSA requires the facility to install continuous emissions monitoring, evaluate compliance procedures, submit a plan to implement procedures to eliminate air deviations during the relevant time period, and proposes a civil penalty in an amount to be determined. While United Taconite does not agree with MPCA’s allegations, United Taconite and the MPCA continue discussions on the matter with the intent of working toward a mutual resolution. In the second quarter of 2009, United Taconite satisfied various requirements of the DSA, including installation of continuous emission monitoring systems (CEMS) on furnace waste gas stacks, purchase of a new water truck, installation of improved dust collector controls, retirement of 1,160 tons of sulfur dioxide emission allowances, and payment of a $125,000 civil penalty. All outstanding stipulation agreement requirements have been completed except for the certification of the three CEMS units. One unit must be certified by June 1, 2010, and the other two units must be certified within 60 days of the first.

Wisconsin Electric Power Company Rate Cases.    The current tariff rates applicable to Tilden and Empire became effective on January 1, 2009. On July 2, 2009, WEPCO filed a new rate case wherein WEPCO has proposed an increase to these current tariff rates. On July 13, 2009, we filed a petition to intervene in the new rate case. Testimony in the rate case before an administrative law judge was completed in early February 2010. All parties will then have an opportunity to file briefs before the administrative law judge. A proposal for decision is expected from the administrative law judge by the end of April 2010.

On September 30, 2009 WEPCO filed with the MPSC its power supply cost recovery (“PSCR”) plan case for calendar year 2010. As part of its application, WEPCO calculates its proposed 2010 PSCR costs and seeks recovery of prior years’ power supply costs. On October 6, 2009, Tilden and Empire filed a petition to intervene in WEPCO’s 2010 PSCR plan case on the grounds that the rates, terms and conditions of service affected by the proceeding will directly and substantially impact them.

West Virginia Flood Litigation.    As of February 2008, Cliffs’ Pinnacle Mining Company was named as a defendant in six lawsuits brought against over 60 defendants who were allegedly involved in land disturbing activities, primarily mining or logging, in Wyoming County, West Virginia. In each case the plaintiffs alleged that these activities in Wyoming County resulted in flooding on or after July 8, 2001. The plaintiffs sought a permanent injunction and unstated personal and property damages under a number of legal theories. We participated in a mandatory panel mediation on December 2 and 3, 2009. Certain defendants entered into a global confidential settlement with plaintiffs. We participated in the global confidential settlement and were dismissed from the litigation without having to make any payments.

Item  4.    Submission of Matters to a Vote of Security Holders.

None.

 

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PART II

 

Item 5. Market for Registrant’s 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 and the Professional Segment of NYSE Euronext Paris.

Common Share Price Performance and Dividends

The following table sets forth, for the periods indicated, the high and low sales prices per common share as reported on the NYSE and the dividends declared per common share:

 

     2009    2008
     High    Low    Dividends    High    Low    Dividends

First Quarter

   $ 32.48    $ 11.80    $ 0.0875    $ 63.89    $ 38.63    $ 0.0875

Second Quarter

     32.14      17.18      0.0400      121.95      57.32      0.0875

Third Quarter

     35.57      19.44      0.0400      118.10      42.16      0.0875

Fourth Quarter

     48.41      29.05      0.0875      53.30      13.73      0.0875
                         

Year

     48.41      11.80    $ 0.2550      121.95      13.73    $ 0.3500
                         

At February 15, 2010, we had 1,509 shareholders of record.

Shareholder Return Performance

The following graph shows changes over the past five-year period in the value of $100 invested in: (1) Cliffs’ Common Shares; (2) S&P Stock Index; (3) S&P Steel Group Index; and (4) S&P Mid Cap 400 Index. The values of each investment are based on price change plus reinvestment of all dividends.

LOGO

 

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         2004    2005    2006    2007    2008    2009

CLIFFS NATURAL RESOURCES INC.

   Return%      70.90    9.77    108.77    -48.90    81.92
   Cum $   100.00    170.90    187.59    391.64    200.14    364.10

S&P 500 Index - Total Returns

   Return%      4.91    15.78    5.49    -36.99    26.47
   Cum $   100.00    104.91    121.46    128.13    80.73    102.10

S&P 500 Steel Index

   Return%      23.33    80.26    21.72    -51.73    28.88
   Cum $   100.00    123.33    222.31    270.60    130.62    168.34

S&P Midcap 400 Index

   Return%      12.55    10.31    7.97    -36.24    37.37
   Cum $   100.00    112.55    124.16    134.05    85.47    117.41

Issuer Purchases of Equity Securities

 

Period

   Total
Number
of Shares
(or Units)
Purchased
    Average
Price Paid
per Share
(or Unit)
$
   Total Number of
Shares
(or Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs
   Maximum
Number
(or Approximate
Dollar Value)

of Shares
(or Units) that
May Yet be
Purchased
Under the Plans
or Programs (1)

October 1 — 31, 2009

   —        —      —      2,495,400

November 1 — 30, 2009

   —        —      —      2,495,400

December 1 — 31, 2009

   76 (2)    35.57    —      2,495,400
                    

Total

   76      35.57    —      2,495,400

 

(1) On July 11, 2006, we received the approval by the Board of Directors to repurchase up to an aggregate of four million outstanding Common Shares. There were no repurchases in the fourth quarter under this program.

 

(2) On December 4, 2009, the Company acquired 76 Common Shares pursuant to a scheduled distribution election from a VNQDC Plan participant. The shares were repurchased by the Company to satisfy the tax withholding obligation of that participant pursuant to the distribution.

 

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Item 6. Selected Financial Data.

Summary of Financial and Other Statistical Data

Cliffs Natural Resources Inc. and Subsidiaries

 

    2009     2008 (a)     2007 (b)     2006     2005 (a)  

Financial data (in millions, except per share amounts and employees)

         

Revenue from product sales and services

  $ 2,342.0      $ 3,609.1      $ 2,275.2      $ 1,921.7      $ 1,739.5   

Cost of goods sold and operating expenses

    (2,033.1     (2,449.4     (1,813.2     (1,507.7     (1,350.5

Other operating expense

    (78.7     (220.8     (80.4     (48.3     (32.5
                                       

Operating income

    230.2        938.9        381.6        365.7        356.5   

Income from continuing operations

    204.3        537.0        285.4        296.9        283.3   

Income (loss) from discontinued operations

    —          —          0.2        0.3        (0.8
                                       

Income before cumulative effect of accounting changes

    204.3        537.0        285.6        297.2        282.5   

Cumulative effect of accounting changes (c)

    —          —          —          —          5.2   
                                       

Net income

    204.3        537.0        285.6        297.2        287.7   

Less: Net income (loss) attributable to noncontrolling interest

    (0.8 )      21.2        15.6        17.1        10.1   
                                       

Net income attributable to Cliffs shareholders

    205.1        515.8        270.0        280.1        277.6   

Preferred stock dividends

    —          (1.1     (5.2     (5.6     (5.6
                                       

Income attributable to Cliffs common shareholders

    205.1        514.7        264.8        274.5        272.0   

Earnings (loss) per common share attributable to Cliffs shareholders — basic (d)

         

Continuing operations

    1.64        5.07        3.19        3.26        3.08   

Discontinued operations

    —          —          —          —          (0.01

Cumulative effect of accounting changes

    —          —          —          —          0.06   
                                       

Earnings per common share attributable to Cliffs shareholders — basic (d)

    1.64        5.07        3.19        3.26        3.13   

Earnings (loss) per common share attributable to Cliffs shareholders — diluted (d)

         

Continuing operations

    1.63        4.76        2.57        2.60        2.46   

Discontinued operations

    —          —          —          —          (0.01

Cumulative effect of accounting changes

    —          —          —          —          0.05   
                                       

Earnings per common share attributable to Cliffs shareholders — diluted (d)

    1.63        4.76        2.57        2.60        2.50   

Total assets

    4,639.3        4,111.1        3,075.8        1,939.7        1,746.7   

Long-term obligations

    644.3        580.2        490.9        47.2        49.6   

Net cash from operating activities

    185.7        853.2        288.9        428.5        514.6   

Redeemable cumulative convertible perpetual preferred stock

    —          0.2        134.7        172.3        172.5   

Distributions to preferred shareholders cash dividends

    —          1.1        5.5        5.6        5.6   

Distributions to common shareholders cash dividends (e)

         

- Per share (d)

    0.26        0.35        0.25        0.24        0.15   

- Total

    31.9        36.1        20.9        20.2        13.1   

Repurchases of common shares

    —          —          2.2        121.5        —     

Iron ore and coal production and sales statistics (tons in millions — North America; tonnes in millions — Asia-Pacific)

         

Production tonnage - North American iron ore

    19.6        35.2        34.6        33.6        35.9   

- North American coal

    1.7        3.5        1.1        —          —     

- Asia Pacific iron ore

    8.3        7.7        8.4        7.7        5.2   

Production tonnage - North American iron ore (Cliffs’ share)

    17.1        22.9        21.8        20.8        22.1   

Sales tonnage - North American iron ore

    16.4        22.7        22.3        20.4        22.3   

- North American coal

    1.9        3.2        1.2        —          —     

- Asia Pacific iron ore

    8.5        7.8        8.1        7.4        4.9   

Common shares outstanding - basic (millions) (d)

         

- Average for year

    125.0        101.5        83.0        84.1        86.9   

- At year-end

    131.0        113.5        87.2        81.8        87.6   

 

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(a) On April 19, 2005, we completed the acquisition of 80.4 percent of our Asia Pacific Iron Ore segment (formerly known as Portman, an iron ore mining company in Australia). Results for 2005 include Portman’s results since the acquisition. On May 21, 2008, Portman authorized a tender offer to repurchase shares, and as a result, our ownership interest in Portman increased from 80.4 percent to 85.2 percent on June 24, 2008. On September 10, 2008, we announced an off-market takeover offer to acquire the remaining shares in Portman, which closed on November 3, 2008. We subsequently proceeded with a compulsory acquisition of the remaining shares and have full ownership of Portman as of December 31, 2008. Results for 2008 reflect the increase in our ownership of Portman since the date of each step acquisition.

 

(b) On July 31, 2007, we completed the acquisition of Cliffs North American Coal LLC (formerly PinnOak), a producer of high-quality, low-volatile metallurgical coal. Results for 2007 include PinnOak’s results since the acquisition.

 

(c) Effective January 1, 2005, we adopted the provisions of ASC 930-330-25-1 related to accounting for stripping costs incurred during production in the mining industry.

 

(d) On March 11, 2008, our board of directors declared a two-for-one stock split of our common shares. The record date for the stock split was May 1, 2008 with a distribution date of May 15, 2008. On May 9, 2006, our board of directors approved a two-for-one stock split of our common shares. The record date for the stock split was June 15, 2006 with a distribution date of June 30, 2006. Accordingly, all common shares and per share amounts for all periods presented have been adjusted retroactively to reflect the stock splits.

 

(e) On May 12, 2009, our board of directors enacted a 55 percent reduction in our quarterly common share dividend to $0.04 from $0.0875 for the second and third quarters of 2009 in order to enhance financial flexibility. The $0.04 common share dividends were paid on June 1, 2009 and September 1, 2009 to shareholders of record as of May 22, 2009 and August 14, 2009, respectively. In the fourth quarter of 2009, the dividend was reinstated to its previous level.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Cliffs Natural Resources Inc. traces its corporate history back to 1847. Today, we are an international mining and natural resources company. We are the largest producer of iron ore pellets in North America, a major supplier of direct-shipping lump and fines iron ore out of Australia, and a significant producer of metallurgical coal. Our company’s operations are organized according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal and Latin American Iron Ore.

In North America, we operate six iron ore mines in Michigan, Minnesota and Eastern Canada, and two coking coal mine complexes located in West Virginia and Alabama. Our Asia Pacific operations are comprised of two iron ore mining complexes in Western Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore, and a 45 percent economic interest in Sonoma, a coking and thermal coal mine located in Queensland, Australia. In Latin America, we have a 30 percent interest in Amapá, a Brazilian iron ore project.

Over recent years, we have been executing a strategy designed to achieve scale in the mining industry and focused on serving the world’s largest and fastest growing steel markets. However, the current volatility and uncertainty in global markets, which persisted throughout 2009, coupled with the slowdown in the world’s major economies, has had a significant impact on commodity prices and demand. While showing signs of improvement during the second half of 2009, global crude steel production, a significant driver of our business, was down approximately 8 percent from 2008, with even greater production declines in some areas, including North America.

Consolidated revenues for 2009 decreased to $2.3 billion, with net income per diluted share of $1.63. This compares with revenues of $3.6 billion and net income per diluted share of $4.76 in 2008. In response to the economic downturn and its impact on the steel industry, we initiated and extended production curtailments at our North American mines during 2009 necessary to align output with lower demand and optimize inventory. In Asia Pacific, the demand for steelmaking raw materials remained strong throughout the year primarily led by demand from China. Despite the absence of benchmark price settlements in China, we negotiated final pricing arrangements consistent with agreed upon price declines reached between Asia Pacific steelmakers outside of China and producers in Australia. Results for 2009 were favorably impacted by the rise in the Australian dollar to an exchange rate of A$0.90 at December 31, 2009, resulting in $85.7 million of unrealized gains on foreign currency exchange contracts during the year.

Throughout 2009, we took proactive measures in response to the high degrees of uncertainty within our industry and the macroeconomic environment as well as to better position ourselves to take advantage of possible opportunities when the market improved. In 2009, we also continued to focus on cash conservation and generation from our business operations as well as reduction of discretionary capital expenditures, in order to ensure we were positioned to face the challenges and uncertainties associated with the current environment. These actions have allowed us to weather the financial crisis and continue to pursue our strategic plan.

Segments

We organize our business according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal and Latin American Iron Ore. The Asia Pacific Coal and Latin American Iron Ore operating segments do not meet the criteria for reportable segments.

All North American business segments are headquartered in Cleveland, Ohio. Our Asia Pacific headquarters is located in Perth, Australia, and our Latin American headquarters is located in Rio de Janeiro, Brazil. See NOTE 2 — SEGMENT REPORTING for further information.

Growth Strategy and Strategic Transactions

While maintaining a disciplined approach to our operating activities given the current economic environment, we continue to identify opportunities to grow and at the same time position ourselves to address any uncertainties that lie ahead. We expect to continue increasing our operating scale and presence as an

 

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international mining and natural resources company by expanding both geographically and through the minerals we mine and market. Our growth in North America combined with our investments in Australia and Latin America, as well as acquisitions in minerals outside of iron ore, such as metallurgical coal and chromite, illustrates the execution of this strategy. We also expect to achieve growth through early involvement in exploration and development activities by partnering with junior mining companies, which provide us low-cost entry points for potentially significant reserve additions. In 2009, we established a global exploration group, led by professional geologists who have the knowledge and experience to identify new world-class projects for future development or projects that add significant value to existing operations.

We continued our strategic growth and transformation to an international mining and natural resources company through the following transactions:

 

   

Acquisition of Freewest

 

   

Acquisition of remaining interest in Wabush

 

   

Acquisition of additional interest in renewaFUEL

 

   

Establishment of a global exploration group

Refer to Recent Developments within Item 1 — Business, for additional information regarding each of these strategic transactions.

Results of Operations — Consolidated

2009 Compared to 2008

The following is a summary of our consolidated results of operations for 2009 compared with 2008:

 

     (In Millions)  
     2009     2008     Variance
Favorable/
(Unfavorable)
 

Revenues from product sales and services

   $ 2,342.0      $ 3,609.1      $ (1,267.1

Cost of goods sold and operating expenses

     (2,033.1     (2,449.4     416.3   
                        

Sales Margin

   $ 308.9      $ 1,159.7      $ (850.8
                        

Sales Margin %

     13.2     32.1     -18.9
                        

Revenue from Product Sales and Services

Sales revenue in 2009 declined $1.3 billion, or 35 percent from 2008. The decrease in sales revenue was primarily due to lower sales volumes related to our North American business operations as a result of the volatility and uncertainty in global markets throughout much of 2009, which led to production slowdowns in the North American steel industry, and in turn reduced demand for iron ore and metallurgical coal. In addition, the global economic crisis resulted in a great deal of pressure from customers, particularly in China, for a roll back of the 2008 price increases for seaborne iron ore and metallurgical coal in 2009. We experienced a reduction in current year pricing at each of our business units, thereby contributing to lower revenue levels in 2009.

As a result of the deteriorating market conditions that continued throughout much of 2009, revenues related to our North American Iron Ore and Coal segments decreased approximately $921.8 million and $139.1 million, respectively, compared with 2008. Based upon the economic downturn and the resulting impact on demand, sales volumes in 2009 declined approximately 28 percent at North American Iron Ore. North American Coal experienced a decrease in volume of 42 percent year over year. Revenues in 2009 were also negatively impacted by base rate adjustments related to reductions in World Pellet Pricing and producer price indices referenced in certain of our North American Iron Ore contracts as well as the estimated decline in average annual hot band steel pricing for one of our North American Iron Ore customers.

 

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Revenues from our Asia Pacific operations were negatively impacted by the decline in 2009 iron ore prices caused by lower demand for steel worldwide. As a result, revenues at Asia Pacific Iron Ore in 2009 declined 30 percent from the prior year. Pricing decreases in the current year contrast with settled price increases in 2008 of 97 percent and 80 percent for lump and fines, respectively. The overall decline in current year revenue at Asia Pacific Iron Ore was partially offset by positive sales mix and a 9 percent increase in sales volume as a result of increased demand from China.

Refer to “Results of Operations — Segment Information” for additional information regarding the impact of specific factors that impacted revenue during the period.

Cost of Goods Sold

Cost of goods sold was $2.0 billion in 2009, a decrease of $416.3 million, or 17 percent compared with 2008. The decrease is primarily attributable to lower costs at our North American business operations as a result of declines in sales volume and cost reductions during the year related to ongoing cash conservation efforts that have been reinforced in light of the economic environment. Costs were also favorably impacted in 2009 by approximately $35.2 million related to favorable foreign exchange rates compared with the prior year. In addition, year-to-date fuel and energy costs in our North American and Asia Pacific iron ore operations decreased approximately $71.6 million from 2008.

The overall decrease in cost of goods in 2009 was partially offset by idle expense of approximately $159.6 million related to production curtailments in North America throughout the year. In addition, costs in 2009 reflect the impact of the Asia Pacific Iron Ore and United Taconite step acquisitions, which occurred in the second half of 2008.

Refer to “Results of Operations — Segment Information” for additional information regarding the impact of specific factors that impacted our operating results during the period.

Other Operating Income (Expense)

Following is a summary of other operating income (expense) for 2009 and 2008:

 

     (In Millions)  
     2009     2008     Variance
Favorable/
(Unfavorable)
 

Royalties and management fee revenue

   $ 4.8      $ 21.7      $ (16.9

Selling, general and administrative expenses

     (120.7     (188.6     67.9   

Terminated acquisition costs

     —          (90.1     90.1   

Gain on sale of other assets — net

     13.2        22.8        (9.6

Casualty recoveries

     —          10.5        (10.5

Miscellaneous — net

     24.0        2.9        21.1   
                        
   $ (78.7   $ (220.8   $ 142.1   
                        

The decrease in royalties and management fee revenue of $16.9 million in 2009 compared with 2008 is primarily attributable to lower production at our iron ore mines and reduced sales prices. Additionally, we received all of Tilden’s production in 2009. Therefore, the remaining venture partner at Tilden was not required to pay us the resulting royalty for their share of tons mined and produced from the ore reserves owned by Cliffs.

The decrease in selling, general and administrative expense of $67.9 million in 2009 compared with 2008 is primarily the result of an increased focus on cost reduction efforts due to the current economic conditions. In particular, outside professional service and legal fees associated with the expansion of our business declined approximately $38.4 million during the year. Additionally, employment costs were reduced by $26.2 million primarily as a result of lower share-based and incentive compensation. Expenses at our Asia Pacific Iron Ore segment were $6.2 million higher in 2009 when compared with 2008, reflecting an increased focus on marketing activities due to the weakening economic climate, as well as higher employment costs and outside professional

 

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services to support business development and improvement efforts. In addition, selling, general and administrative expense in the prior year was impacted by a charge in the first quarter of 2008 of approximately $6.8 million in connection with a legal judgment.

On November 17, 2008, we announced the termination of the definitive merger agreement with Alpha Natural Resources, Inc., under which we would have acquired all outstanding shares of Alpha. Both our board of directors and Alpha’s board of directors made the decision after considering various issues, including the current macroeconomic environment, uncertainty in the steel industry, shareholder dynamics, and the risks and costs of potential litigation. Considering these issues, each board determined that termination of the merger agreement was in the best interest of its equity holders. Under the terms of the settlement agreement, we were required to pay Alpha a $70 million termination fee, which was financed through our revolving credit facility and paid in November 2008. As a result, $90.1 million in termination fees and associated acquisition costs were expensed in the fourth quarter of 2008 upon termination of the definitive merger agreement.

In October 2009, Asia Pacific Iron Ore completed the sale of its 50 percent interest in the Irvine Island iron ore project to its joint venture partner, Pluton Resources Limited (“Pluton Resources”). The consideration received consisted of a cash payment of approximately $5 million and the issuance of 19.4 million shares in Pluton Resources, all of which resulted in recognition of a gain on sale amounting to $12.1 million. Our interest in Pluton Resources is approximately 12.5 percent at December 31, 2009. The prior year gain on sale of assets of $22.8 million primarily related to the sale of Cliffs Synfuel Corp. (“Synfuel”), which was completed in June 2008.

Casualty recoveries in 2008 were primarily attributable to a $9.2 million insurance recovery related to a 2006 electrical explosion at our United Taconite facility.

Miscellaneous — net of $24.0 million in 2009 is primarily attributable to exchange rate gains on foreign currency transactions related to loans denominated in Australian dollars, as a result of the increase in exchange rates during the period from A$0.69 at December 31, 2008 to A$0.90 at December 31, 2009.

Other income (expense)

Following is a summary of other income (expense) for 2009 and 2008:

 

     (In Millions)  
     2009     2008     Variance
Favorable/
(Unfavorable)
 

Changes in fair value of foreign currency contracts, net

   $ 85.7      $ (188.2   $ 273.9   

Interest income

     10.8        26.2        (15.4

Interest expense

     (39.0     (39.8     0.8   

Impairment of securities

     —          (25.1     25.1   

Other non-operating income

     2.9        4.3        (1.4
                        
   $ 60.4      $ (222.6   $ 283.0   
                        

 

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The impact of changes in the fair value of our foreign currency contracts on the Statement of Consolidated Operations is due to fluctuations in foreign currency exchange rates during the year. The favorable unrealized mark-to-market fluctuation of $85.7 million in 2009 relates to the Australian to U.S. dollar spot rate of A$0.90 as of December 31, 2009, which increased considerably from the Australian to U.S. dollar spot rate of A$0.69 as of December 31, 2008. The changes in the spot rates are correlated to the appreciation of the Australian dollar relative to the United States dollar during the year. During 2009, approximately $780 million of outstanding contracts matured or were sold, resulting in a cumulative net realized loss of $37.0 million since inception of the contracts. The following table represents our foreign currency derivative contract position as of December 31, 2009:

 

    ($ in Millions)

Contract Maturity

  Notional Amount   Weighted Average
Exchange Rate
  Spot Rate   Fair Value

Contract Portfolio (excluding AUD Call Options) (1) :

       

Contracts expiring in the next 12 months

  $ 33.0   0.82   0.90   $ 0.9
               

Total

  $ 33.0   0.82   0.90   $ 0.9
               

AUD Call Options (2)

       

Contracts expiring in the next 12 months

  $ 75.5   0.88   0.90   $ 3.3
               

Total

  $ 75.5   0.88   0.90   $ 3.3
               

Total Hedge Contract Portfolio

  $ 108.5       $ 4.2
               

 

(1) Includes collar options and convertible collar options.

 

(2) AUD call options are excluded from the weighted average exchange rate used for the remainder of the contract portfolio due to the unlimited downside participation associated with these instruments.

The decrease in interest income in 2009 compared with 2008 is attributable to a decline in interest-bearing cash and investments held during the current year coupled with lower overall average returns. Investment returns in 2009 are lower as a result of market declines. The slight decrease in interest expense in 2009 is primarily due to lower average interest rates on total debt outstanding of 4.48 percent at December 31, 2009, compared with 5.85 percent at December 31, 2008, partially offset by an increase in the period outstanding related to borrowings under our senior notes. Higher interest expense in 2008 also reflected interest accretion for the deferred payment related to the PinnOak acquisition. See NOTE 9 — DEBT AND CREDIT FACILITIES for further information.

In 2008, we recorded impairment charges of $25.1 million related to declines in the fair value of our available-for-sale securities which we concluded were other than temporary. As of December 31, 2008, our investments in PolyMet and Golden West had fair values totaling $6.2 million and $4.7 million, respectively, compared with a cost of $14.2 million and $21.8 million, respectively. The severity of the impairments in relation to the carrying amounts of the individual investments was consistent with the macroeconomic market and industry developments during 2008. However, we evaluated the near-term prospects of the issuers in relation to the severity and rapid decline in the fair value of each of these investments, and based upon that evaluation, we could not reasonably assert that the impairment period would be temporary primarily as a result of the global economic crisis and the corresponding uncertainties in the market.

As a result of acquiring the remaining interest in Freewest effective January 27, 2010, results in the first quarter of 2010 will be impacted by approximately $13 million of realized gains, which will be recognized in Other income (expense) on the Statement of Operations for the period ended March 31, 2010.

Income Taxes

Our tax rate is affected by recurring items, such as depletion and tax rates in foreign jurisdictions and the relative amount of income we earn in our various jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The following represents a summary of our tax provision and corresponding effective rates for the years ended December 31, 2009 and 2008:

 

     (In Millions)  
     2009     2008  

Income tax expense

   $ 20.8      $ 144.2   

Effective tax rate

     7.2     20.1

 

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Our tax provision for the years ended December 31, 2009 and 2008 was $20.8 million and $144.2 million, respectively. The $123.4 million decrease in income tax expense and 12.9 percent decrease in the effective tax rate are primarily attributable to lower pre-tax book income and increased benefits from certain discrete items, partially offset by increased valuation allowances. Discrete items in 2009 relate to benefits associated with the settlement of tax audits and filings for prior years. We had a $39.0 million increase in the valuation allowance of certain deferred tax assets. Of this amount, $24.5 million relates to certain foreign operating losses and $14.5 million relates to certain foreign assets where tax basis exceeds book basis.

A reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2009 and 2008 is as follows:

 

         2009             2008      

U.S. statutory rate

   35.0   35.0

Increases/(Decreases) due to:

    

Percentage depletion

   (11.6   (11.9

Impact of foreign operations

   (9.1   (2.1

Valuation allowance

   11.9      1.6   

Other items — net

   0.4      (0.6
            

Effective income tax rate before discrete items

   26.6      22.0   

Discrete items

   (19.4   (1.9
            

Effective income tax rate

   7.2   20.1
            

See NOTE 14 — INCOME TAXES for further information.

Equity Loss in Ventures

Equity loss in ventures is primarily comprised of our share of the results from Amapá and AusQuest, for which we have a 30 percent ownership interest in each. The equity loss in ventures for the year ended December 31, 2009 of $65.5 million primarily represents our share of the operating results of our equity method investment in Amapá. Such results consist of operating losses of $62.2 million. Results in 2008 mainly consisted of operating losses of $45.6 million, partially offset by foreign currency hedge gains of $10.5 million. The negative operating results in each year are primarily due to slower than anticipated ramp-up of operations and product yields. Our equity share of the losses for Amapá were also higher in the current year due to a write-down in the value of inventory, asset impairment charges, as well as changes in foreign currency exchange rates during 2009 and the resulting impact on project debt denominated in Brazilian real.

Noncontrolling Interest

Noncontrolling interest in consolidated income was a loss of $0.8 million in 2009 compared with income of $21.2 million in 2008. The change is primarily attributable to the acquisition of the remaining 19.6 percent interest in Asia Pacific Iron Ore (formerly known as Portman Limited) during 2008, thereby eliminating the related noncontrolling interests in 2009.

2008 Compared to 2007

The following is a summary of our consolidated results of operations for 2008 compared with 2007:

 

     (In Millions)  
     2008     2007     Variance
Favorable/
(Unfavorable)
 

Revenues from product sales and services

   $ 3,609.1      $ 2,275.2      $ 1,333.9   

Cost of goods sold and operating expenses

     (2,449.4     (1,813.2     (636.2
                        

Sales Margin

   $ 1,159.7      $ 462.0      $ 697.7   
                        

Sales Margin %

     32.1     20.3     11.8
                        

 

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Revenue from Product Sales and Services

Sales revenue in 2008 increased $1.3 billion, or 59 percent, compared with 2007. The increase in sales revenue was primarily due to higher sales prices combined with increases in sales volume. Higher sales volume in 2008 was primarily due to increased demand and commitments under our long-term pellet sales agreements, increased spot sales, and customer plant outages during the prior year. However, this increase was partially offset by declines in sales volumes to customers during the fourth quarter of 2008 as a result of the volatility and uncertainty in global markets, which led to production slowdowns in the steel industry. In addition, sales volume was negatively impacted throughout the year by adverse mining conditions and production delays at our North American Coal segment. Results for North American Coal in 2007 represent five months of operations since the July 31, 2007 acquisition.

Revenues in 2008 related to our North American Iron Ore segment increased approximately $624.2 million over 2007 primarily as a result of higher steel prices, renegotiated and new long-term supply agreements with certain customers, which were negotiated at world pellet prices, and other contractual price adjustment factors. In 2008, revenue also included $225.5 million related to the supplemental steel payments compared with $98.3 million in 2007. In addition, the Australian benchmark prices for lump and fines settled at increases of 97 percent and 80 percent in 2008, thereby resulting in higher revenues from our Asia Pacific Iron Ore segment compared with 2007.

Cost of Goods Sold

Cost of goods sold was $2.4 billion in 2008, an increase of $636.2 million, or 35 percent compared with 2007. The increase in cost of goods sold in 2008 was primarily due to the fact that results for North American Coal in 2007 only represented five months of operations since the July 31, 2007 acquisition. In addition, the increase in cost of goods sold in 2008 was attributable to higher costs of production, higher royalty fees related to increases in pellet pricing, and increased maintenance costs associated with the Michigan expansion project and major furnace repairs at Empire and United Taconite during the first quarter of 2008. In 2008, we continued to be challenged with adverse geological conditions across the mines at our North American Coal segment and delays in delivery of new capital equipment, which contributed to overall equipment performance and availability issues, thereby resulting in production delays and increased costs in all operations. Costs were also negatively impacted in 2008 by approximately $1.6 million related to unfavorable foreign exchange rates as well as higher fuel and energy costs primarily related to our North American and Asia Pacific iron ore operations, which together increased $42.5 million compared with 2007. In addition, the impact of the United Taconite and Asia Pacific Iron Ore step acquisitions also contributed to the increase in 2008.

Other Operating Income (Expense)

Following is a summary of other operating income (expense) for 2008 and 2007:

 

     (In Millions)  
     2008     2007     Variance
Favorable/
(Unfavorable)
 

Royalties and management fee revenue

   $ 21.7      $ 14.5      $ 7.2   

Selling, general and administrative expenses

     (188.6     (114.2     (74.4

Terminated acquisition costs

     (90.1     —          (90.1

Gain on sale of other assets — net

     22.8        18.4        4.4   

Casualty recoveries

     10.5        3.2        7.3   

Miscellaneous — net

     2.9        (2.3     5.2   
                        
   $ (220.8   $ (80.4   $ (140.4
                        

The increase in selling, general and administrative expense of $74.4 million in 2008 compared with 2007 is primarily a result of $20.2 million in higher share-based and incentive compensation, and higher wages and benefits related to an increase in the number of employees. We also incurred approximately $2.2 million in

 

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corporate severance costs during the fourth quarter of 2008. Outside professional service and legal fees associated with the expansion of our business increased approximately $15.1 million in 2008. Expenses at our Asia Pacific Iron Ore segment were $5.7 million higher than 2007, reflecting higher employment costs and outside professional services to support business development and improvement efforts. Selling, general and administrative expense in 2008 was also impacted by additional corporate development activities in Latin America, Asia Pacific, and other general business development, resulting in an increase of approximately $13.0 million. In addition, 2008 includes a full year of selling, general and administrative expenses from our North American Coal segment, compared with five months in 2007 based on a July 31, 2007 date of acquisition, resulting in an increase of $5.1 million. Selling, general and administrative expense in 2008 was also impacted by a charge in the first quarter of approximately $6.8 million in connection with a legal case as well as $4.3 million related to our interest in Sonoma acquired in 2007.

On November 17, 2008, we announced the termination of the definitive merger agreement with Alpha Natural Resources, Inc., under which we would have acquired all outstanding shares of Alpha. Both our Board of Directors and Alpha’s Board of Directors made the decision after considering various issues, including the macroeconomic environment, uncertainty in the steel industry, shareholder dynamics, and the risks and costs of potential litigation. Considering these issues, each board determined that termination of the merger agreement was in the best interest of its equity holders. Under the terms of the settlement agreement, we were required to pay Alpha a $70 million termination fee, which was financed through our revolving credit facility and paid in November 2008. As a result, $90.1 million in termination fees and associated acquisition costs were expensed in the fourth quarter of 2008 upon termination of the definitive merger agreement.

The gain on sale of other assets of $22.8 million in 2008 primarily relates to the sale of our wholly-owned subsidiary, Synfuel, which was completed on June 4, 2008. Under the agreement, Oil Shale Exploration Company-Skyline, LLC acquired 100 percent of Synfuel for $24 million. As additional consideration for the stock, a perpetual nonparticipating royalty interest was granted initially equal to $0.02 per barrel of shale oil and $0.01 per barrel of shale oil produced from lands covered by existing State of Utah oil shale leases, plus 25 percent of royalty payments from conventional oil and gas operations. We recorded a gain of $19 million in the second quarter of 2008 upon completion of the transaction. The gain on sale of assets in 2007 of $18.4 million primarily reflected the fourth quarter 2007 gain on the sale of portions of the former LTVSMC site. The sale included cash proceeds of approximately $18 million.

The increase in casualty recoveries in 2008 compared with 2007 is primarily attributable to a $9.2 million insurance recovery recognized in the current year related to a 2006 electrical explosion at our United Taconite facility.

Other income (expense)

Following is a summary of other income (expense) for 2008 and 2007:

 

     (In Millions)  
     2008     2007     Variance
Favorable/
(Unfavorable)
 

Changes in fair value of foreign currency contracts, net

   $ (188.2   $ —        $ (188.2

Interest income

     26.2        20.0        6.2   

Interest expense

     (39.8     (22.6     (17.2

Impairment of securities

     (25.1     —          (25.1

Other non-operating income

     4.3        1.7        2.6   
                        
   $ (222.6   $ (0.9   $ (221.7
                        

The impact of changes in the fair value of our foreign currency contracts on the Statement of Consolidated Operations in 2008 is due to fluctuations in foreign currency exchange rates during the year. We are required to record the market value of our open derivative positions on our Statements of Consolidated Financial Position. Previously, when the derivative instruments were designated as cash flow hedges, the mark-to-market

 

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adjustments related to the effective portions of the hedges were recorded as a component of Other comprehensive income. Upon de-designation of the cash flow hedges, effective July 1, 2008, the instruments are prospectively marked to fair value, and the adjustments resulting from changes in the market value of these derivative instruments are recorded as an unrealized gain or loss each reporting period. The following table represents our foreign currency derivative contract position as of December 31, 2008:

 

     ($ in Millions)  

Contract Maturity

   Notional Amount    Weighted Average
Exchange Rate
   Spot Rate    Fair Value  

Contract Portfolio (excluding AUD Call Options) (1) :

           

Contracts expiring in the next 12 months

   $ 537.0    0.81    0.69    $ (77.5

Contracts expiring in the next 13 to 24 months

     202.5    0.74    0.69      (25.5

Contracts expiring in the next 25 to 36 months

     55.0    0.77    0.69      (8.8
                     

Total

   $ 794.5    0.79    0.69    $ (111.8
                     

AUD Call Options (2)

           

Contracts expiring in the next 12 months

   $ 33.0    0.87    0.69    $ 0.3   

Contracts expiring in the next 13 to 24 months

     41.5    0.90    0.69      0.6   

Contracts expiring in the next 25 to 36 months

     —      —      —        —     
                     

Total

   $ 74.5    0.88    0.69    $ 0.9   
                     

Total Hedge Contract Portfolio

   $ 869.0          $ (110.9
                     

 

(1) Includes collar options, convertible collar options and forward exchange contracts.

 

(2) AUD call options are excluded from the weighted average exchange rate used for the remainder of the contract portfolio due to the unlimited downside participation associated with these instruments.

The significant unrealized mark-to-market fluctuations are related to the Australian to U.S. dollar spot rate of A$0.69 as of December 31, 2008, which significantly decreased from the Australian to U.S. dollar spot rate of A$0.96 as of June 30, 2008 upon de-designation of the hedges. The changes in the spot rates are correlated to the depreciation of the Australian dollar relative to the United States dollar during the period. In addition, the amount of outstanding contracts in our foreign exchange hedge book significantly increased from $559.2 million at June 30, 2008 to approximately $869.0 million as of December 31, 2008, primarily as a result of higher sales prices in 2008 partially offset by the expiration of contracts upon maturity.

In 2008, we recorded impairment charges of $25.1 million related to declines in the fair value of our available-for-sale securities which we concluded were other than temporary. As of December 31, 2008, our investments in PolyMet and Golden West had fair values totaling $6.2 million and $4.7 million, respectively, compared with a cost of $14.2 million and $21.8 million, respectively. The metals and mining industry and our investees are susceptible to changes in the U.S. and global economies and the industries of their customers. Their principal customers are part of the global steel industry, and their businesses had been adversely affected by the slowdown of the global economy, particularly during the last quarter of 2008 when our investments became impaired. The severity of the impairments in relation to the carrying amounts of the individual investments was consistent with the macroeconomic market and industry developments. However, we had evaluated the near-term prospects of the issuers in relation to the severity and rapid decline in the fair value of each of these investments, and based upon that evaluation, we could not reasonably assert that the impairment period would be temporary primarily as a result of the global economic crisis and the corresponding uncertainties in the market at the end of 2008.

The increase in interest income in 2008 compared with 2007 is attributable to additional cash and investments held by our Asia Pacific Iron Ore segment during 2008 coupled with higher overall average returns. However, investment returns were lower in the fourth quarter of 2008 as a result of market declines. Higher interest expense in 2008 reflected increased borrowings under our senior notes and interest accretion for the deferred payment related to the PinnOak acquisition.

 

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Income Taxes

Our tax rate is affected by recurring items, such as depletion and tax rates in foreign jurisdictions and the relative amount of income we earn in our various jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The following represents a summary of our tax provision and corresponding effective rates for the years ended December 31, 2008 and 2007:

 

     (In Millions)  
     2008     2007  

Income tax expense

   $ 144.2      $ 84.1   

Effective tax rate

     20.1     22.1

Our tax provision for the year ended December 31, 2008 and 2007 was $144.2 million and $84.1 million, respectively. The increase was primarily attributable to higher pre-tax book income partially offset by a decrease in our effective tax rate. Our effective tax rate for the year ended December 31, 2008 and 2007 was 20.1 percent and 22.1 percent, respectively. The 2.0 percent decrease is primarily attributable to increased percentage depletion and release of the valuation allowance related to foreign net operating losses.

A reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2008 and 2007 is as follows:

 

     2008     2007  

U.S. statutory rate

   35.0   35.0

Increases/(Decreases) due to:

    

Percentage depletion

   (11.9   (12.3

Impact of foreign operations

   (2.1   (1.9

Valuation allowance

   1.6      3.4   

Other items — net

   (0.6   (2.3
            

Effective income tax rate before discrete items

   22.0      21.9   

Discrete items

   (1.9   0.2   
            

Effective income tax rate

   20.1   22.1
            

Equity Loss in Ventures

The equity loss in ventures for the year ended December 31, 2008 of $35.1 million primarily represents our share of the operating results of our equity method investment in Amapá. Such results mainly consist of start-up and operating losses of $45.6 million, which includes operating losses from Amapá’s railroad of $5.8 million. The loss was partially offset by foreign currency hedge gains of $10.5 million. This compares with a loss of $11.2 million in 2007, comprised of $7.2 million in pre-production costs and $4.0 million of operating losses from the railroad. The negative operating results in 2008 were mainly due to slower than anticipated ramp-up of operations and product yields.

Noncontrolling Interest

Noncontrolling interest in consolidated income increased $5.6 million, or 36 percent, for the year ended December 31, 2008. The increase was primarily driven by a corresponding increase in the operating results of Asia Pacific Iron Ore (formerly known as Portman Limited), a consolidated subsidiary in which we owned approximately 80.4 percent in 2007 and throughout the first half of 2008. In June 2008, we acquired an additional 4.8 percent interest in Asia Pacific Iron Ore through a share repurchase program offered by Portman. We subsequently made an off-market offer to purchase the outstanding shares and proceeded with a compulsory acquisition of the remaining shares to obtain full ownership of Asia Pacific Iron Ore in the fourth quarter of 2008. The transaction constituted a step acquisition of a noncontrolling interest, thereby reducing noncontrolling interest in consolidated income on a prospective basis. We accounted for the acquisition of the noncontrolling interest by the purchase method. As a result of the step acquisition, the then historical cost basis of the noncontrolling interest balance was reduced to the extent of the percentage interest sold, and the increased ownership obtained was accounted for by increasing the entity’s basis from historical cost to fair value for the portion of the assets acquired and liabilities assumed based on the additional ownership acquired.

 

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Results of Operations — Segment Information

Our company is organized and managed according to product category and geographic location. Segment information reflects our strategic business units, which are organized to meet customer requirements and global competition. We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.

2009 Compared to 2008

North American Iron Ore

Following is a summary of North American Iron Ore results for 2009 and 2008:

 

     (In Millions)  
                 Change due to        
     2009     2008     Sales price
and rate
    Sales
volume
    Idle cost/
Production
volume
variance
    Freight and
reimbursements
    Total
change
 

Revenues from product sales and services

   $ 1,447.8      $ 2,369.6      $ (165.5   $ (580.7   $ —        $ (175.6   $ (921.8

Cost of goods sold and operating expense

     (1,172.3     (1,565.3     (22.0     358.3        (118.9     175.6        393.0   
                                                        

Sales margin

   $ 275.5      $ 804.3      $ (187.5   $ (222.4   $ (118.9   $ —        $ (528.8
                                                        

Sales tons

     16.4        22.7             

Revenue in 2009 decreased $921.8 million, or 39 percent compared with 2008 primarily as a result of a 28 percent decline in sales volume, which contributed $580.7 million to the overall decrease in revenue. The decline in sales volume is a result of the economic downturn and its impact on the global steel industry, which led to a decline in demand for steel-making products in North America during 2009. In addition to the year-over-year decline in sales volume, reported price settlements for iron ore pellets reflected a decrease of approximately 48 percent below 2008 prices, compared with an increase of 87 percent in the prior year. As a result, base rate adjustments related to estimated reductions in World Pellet Pricing and producer price indices have contributed to a $165.5 million decline in revenues in 2009. Revenue in the current year included approximately $22.2 million related to supplemental contract payments compared with $225.5 million in 2008. The decrease between periods relates to the estimated decline in average annual hot band steel pricing for one of our North American Iron Ore customers.

In August 2009, an arbitration demand was filed against us by one of our customers relating to a pellet price reopener provision in one of our supply contracts. The customer claims that it is entitled to request a price renegotiation even though it did not provide written notice before the deadline specified in the supply agreement and did not show that the triggering event had occurred. Should the arbitration panel determine that the customer is permitted to request a price renegotiation, the two sides have 60 days following notice per the supply agreement to negotiate revised pricing. In the event these negotiations are unsuccessful, further arbitration would be utilized to determine the revised applicable price under the supply agreement. The price determined by the arbitrator would be effective retroactive to the beginning of 2009. In the event this matter goes to supplementary arbitration to determine the revised price under the supply agreement, and we are unsuccessful in defending our position, the retroactive revised pricing for 2009 sales under the supply agreement would have a material impact on our consolidated operating results. Refer to Part I — Item 3, Legal Proceedings, for additional information.

In 2009 and 2008, certain customers purchased and paid for approximately 0.9 million tons and 1.2 million tons of pellets, respectively, in order to meet minimum contractual purchase requirements for each year under the terms of take-or-pay contracts. The inventory was stored at our facilities in upper lakes stockpiles. At the request of the customers, the ore was not shipped, resulting in deferred revenue at December 31, 2009 and 2008 of $81.9 million and $82.9 million, respectively. As of December 31, 2009, all of the 1.2 million tons that were deferred at the end of 2008 were delivered, resulting in the related revenue being recognized in 2009. Furthermore, the

 

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supply agreement with one of our customers requires the customer to pay for any tons remaining under its 2009 nomination in addition to certain stockpile payments by December 31, 2009. There were approximately 1.7 million unshipped tons remaining under the customer’s 2009 nomination and 0.8 million tons related to December 2009 shipments, for which payment of $147.5 million was due on December 31, 2009 per the terms of the contract. The customer did not remit payment of this amount until January 4, 2010. As a result, such amounts are not reflected in our 2009 consolidated financial statements.

Cost of goods sold and operating expense in 2009 decreased $393.0 million or 25 percent from the prior year primarily due to lower sales volume, which resulted in cost reductions of approximately $358.3 million. The overall decrease was partially offset by idle expense of $118.9 million related to production curtailments at nearly all of the North American Iron Ore mines during 2009 in order to balance production with anticipated sales demand. In addition, cost of goods sold and operating expenses were unfavorably impacted in 2009 by approximately $22 million due to higher cost rates. The increase was primarily attributable to $43 million of higher labor costs related to the new labor agreement entered into in September 2008 at our iron ore facilities as well as higher fringe rates combined with an increase of $22 million related to higher energy costs. This was partially offset by a $25 million reduction in fuel costs, a decrease in royalty costs of $18 million as a result of lower iron ore pellet pricing, and cost reductions of $11 million related to ongoing cash conservation efforts during the current year. In addition, due to lower partner demand, Cliffs acquired 1.6 million tons produced at Tilden and Wabush from the mine partners’ share at variable cost, which resulted in a favorable cost impact of approximately $79 million in 2009.

Production

Following is a summary of iron ore production tonnage for 2009 and 2008:

 

     (In Millions) (1)
     Company Share    Total

Mine

   2009     2008    2009    2008

Empire

   2.0      3.6    2.6    4.6

Tilden

   5.6      6.5    5.6    7.6

Hibbing

   0.4      1.9    1.7    8.2

Northshore

   3.2      5.5    3.2    5.5

United Taconite

   3.8      4.3    3.8    5.1

Wabush

   2.1      1.1    2.7    4.2
                    

Total

   17.1 (2)    22.9    19.6    35.2
                    

 

(1) Long tons of pellets (2,240 pounds).

 

(2) Includes 1.6 million tons allocated to Cliffs due to re-nominations by Cliffs’ partners at Tilden and Wabush.

In response to the economic downturn, we continue to rationalize production to match customer demand. In 2009, we reduced production at our six North American Iron Ore mines to 17.1 million equity tons compared with 2008 production of 22.9 million equity tons.

Based on signs of marked improvements in customer demand beginning in the second half of 2009, we have increased production at most of our facilities and have called employees back to work in order to ensure we are positioned to meet increases in demand. During the fourth quarter of 2009, Tilden and United Taconite began operating at full capacity. Northshore was operating its two large furnaces, and Empire continued to maintain its current production levels. Wabush was operating two of its three furnaces with Cliffs taking essentially all of the tonnage. Only Hibbing continues to be fully curtailed and is expected to remain idled until the second quarter of 2010.

Based on current market uncertainties and corresponding blast furnace capacity utilization in North America, we continue to monitor the marketplace closely and will adjust our production plans for 2010 accordingly to meet customer demand.

 

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North American Coal

Following is a summary of North American Coal results for 2009 and 2008:

 

    (In Millions, except tonnage)  
                Change due to        
    2009     2008     Sales price
and rate
    Sales
volume
    Idle cost/
Production
volume
variance
    Freight and
reimbursements
    Total
change
 

Revenues from product sales and services

  $ 207.2      $ 346.3      $ 0.9      $ (127.1   $ —        $ (12.9   $ (139.1

Cost of goods sold and operating expense

    (279.1     (392.7     (5.3     146.7        (40.7     12.9        113.6   
                                                       

Sales margin

  $ (71.9   $ (46.4   $ (4.4   $ 19.6      $ (40.7   $ —        $ (25.5
                                                       

Sales tons (in thousands)

    1,874        3,241             

We reported sales margin losses of $71.9 million and $46.4 million for the years ended December 31, 2009 and 2008, respectively. Revenue of $207.2 million in 2009 was 40 percent lower than the prior year. The decrease in revenue is primarily attributable to a 42 percent decline in sales volume as a result of market conditions which have adversely impacted the demand for steel-making raw materials throughout the current year.

Cost of goods sold and operating expense in 2009 decreased $113.6 million or 29 percent from the prior year primarily due to lower sales volume, which resulted in cost reductions of approximately $146.7 million. The decrease in current year sales volume also resulted in a decline in freight costs of $12.9 million and a reduction in royalty costs of $7.5 million. In addition, in response to the economic downturn, we decreased spending across the North American Coal business segment and idled production at both the Oak Grove and Pinnacle complexes during 2009. Production curtailments and headcount reductions during the current year have resulted in lower production-related costs, including maintenance, supplies, and labor costs. Headcount reductions resulted in labor and benefit cost reductions of $32.2 million in 2009. Spending on operating supplies and maintenance costs was reduced in 2009 by approximately $26.1 million as we continued to focus on cash conservation and cost management strategies. However, these cost reductions were more than offset by higher cost per ton rates in 2009, due to the impact of lower volume, resulting in an overall unfavorable rate variance of $5.3 million. Cost of goods sold and operating expenses in 2009 were also negatively impacted by an increase in idle expense and production volume variance of $40.7 million related to production curtailments at both mine locations during the year and delays associated with development of longwall panels at Oak Grove in early 2009.

Production

Following is a summary of coal production tonnage for 2009 and 2008:

 

     (In Thousands) (1)
         2009            2008    

Mine:

         

Pinnacle Complex

   864    2,489

Oak Grove

   877    979
         

Total

   1,741    3,468
         

 

(1) Tons are short tons (2,000 pounds).

Metallurgical coal demand has been reduced in the current year as the steel industry has cut back production in response to the global economic slowdown. As a result, we initiated plans in 2009 to align production with customer demand. In West Virginia, production was idled at our Green Ridge mines for part of the year, and production at our Pinnacle mine was temporarily suspended. In Alabama, operating levels were also reduced at our Oak Grove mine. However, production levels began to increase at the end of 2009 due to improvements in

 

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market conditions and increases in customer demand. In particular, during the fourth quarter, production increased at Oak Grove and development was also accelerated to avoid downtime in 2010. At Pinnacle, the longwall move was completed and we resumed production in mid-October. These production adjustments at North American Coal resulted in a 2009 annual operating rate of approximately 1.7 million tons. This compares with 2008 production of 3.5 million tons.

The Oak Grove mine was recently idled due to ventilation, water and roofing issues at the mine. MSHA denied our request to continue limited production while we addressed these issues. Oak Grove continued to operate a continuous miner section to develop future longwall panels. MSHA approval was finally received on February 9, 2010 for longwall operations to resume.

Asia Pacific Iron Ore

Following is a summary of Asia Pacific Iron Ore results for 2009 and 2008:

 

     (In Millions)  
                 Change due to        
     2009     2008     Sales price
and rate
    Sales
volume
    Other     Total
change
 

Revenues from product sales and services

   $ 542.1      $ 769.8      $ (257.5   $ 72.5      $ (42.7   $ (227.7

Cost of goods sold and operating expense

     (454.9     (421.2     1.8        (33.8     (1.7     (33.7
                                                

Sales margin

   $ 87.2      $ 348.6      $ (255.7   $ 38.7      $ (44.4   $ (261.4
                                                

Sales tonnes

     8.5        7.8           

Sales margin for Asia Pacific Iron Ore declined to $87.2 million in 2009 compared with $348.6 million in 2008. Revenue decreased 30 percent in the current year primarily as a result of lower pricing for lump and fines in 2009 compared with 2008 prices. While the 2009 benchmark prices for iron ore lump and fines did not settle with all of our customers, we negotiated pricing arrangements with certain customers in China to reflect the decline in steel demand and prices. Pricing decreases in the current year of 44 percent and 33 percent for lump and fines, respectively, contrast with settled price increases in 2008 of 97 percent and 80 percent, respectively. Pricing in 2009 was based upon previously reported settlements in Japan and worldwide pressures in the market and remained unchanged from the estimates we made throughout most of 2009. The overall decline in current year revenue was partially offset by a favorable variance of $72.5 million due to a 9 percent increase in sales volume as a result of increased demand as well as a positive sales mix variance of $34.1 million due to more sales of lump and fines at higher prices and reduced sales of low-grade fines.

Cost of goods sold and operating expenses in 2009 were relatively consistent with 2008. Costs were unfavorably impacted by approximately $38.8 million of amortization expense related to the accounting for the acquisition of the remaining ownership interest in Asia Pacific Iron Ore which occurred during the second half of 2008. Costs in 2009 also increased by approximately $29.6 million due to higher sales volumes as well as higher shipping costs of $5.3 million due to freight arrangements with customers to secure sales during the current year. Increases in costs during 2009 were partially offset by favorable foreign exchange variances of $35.2 million.

Production

Following is a summary of iron ore production tonnage for 2009 and 2008:

 

     (In Millions) (1)
      2009    2008

Mine:

         

Koolyanobbing

   8.3    7.3

Cockatoo Island

   —      0.4
         

Total

   8.3    7.7
         

 

(1) Tonnes are metric tons (2,205 pounds). Cockatoo production reflects our 50 percent share.

 

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Production at Asia Pacific Iron Ore in 2009 was higher than 2008 as a result of increased demand and initiatives taken during the year to improve supply conditions and eliminate certain production and logistics constraints, including rail upgrades and stockpile utilization. Increases in production in 2009 were partially offset by the end of production at Cockatoo during 2008. Production is not expected to resume until the first half of 2011 once the seawall is completed.

2008 Compared to 2007

North American Iron Ore

Following is a summary of North American Iron Ore results for 2008 and 2007:

 

     (In Millions)  
                 Change due to        
     2008     2007     Sales price
and rate
    Sales
volume
    Freight and
reimbursements
    Total
change
 

Revenues from product sales and services

   $ 2,369.6      $ 1,745.4      $ 596.1      $ 34.4      $ (6.3   $ 624.2   

Cost of goods sold and operating expense

     (1,565.3     (1,347.5     (199.0     (25.1     6.3        (217.8
                                                

Sales margin

   $ 804.3      $ 397.9      $ 397.1      $ 9.3      $ —        $ 406.4   
                                                

Sales tons

     22.7        22.3           

The increase in sales revenue in 2008 was primarily due to higher sales prices combined with an increase in sales volume. Revenue per ton increased 33.3 percent in 2008 primarily as a result of higher steel prices, renegotiated and new long-term supply agreements with certain customers, which were negotiated at a time of higher world pellet prices, and other contractual price adjustment factors. In 2008, revenue included $225.5 million related to the supplemental steel payments compared with $98.3 million in 2007.

The comparison of sales volume between 2008 and 2007 shows a slight increase year over year. However, in 2007, certain of our customers purchased and paid for approximately 1.5 million tons of iron ore pellets in stockpiles at the end of the year in order to comply with the take-or-pay provisions of their existing long-term supply agreements. The customers requested via a fixed shipping schedule that we not ship the iron ore until the spring of 2008, when the Great Lakes waterways re-opened for shipping. We recognized revenue on the 1.5 million tons in 2007. The following represents a comparison of sales volume in 2008, 2007 and 2006 as if the impact of the stockpile sales were excluded from the period reported and instead recognized in the period shipped:

 

     (In Millions)
     Actual Sales
Tons Recognized
   Cash Received /
Sales Tons Not
Recognized
    Pro Forma
Sales Tons

2006

   20.3    1.2      21.5

2007

   22.3    (1.2   21.1

2008

   22.7    1.2      23.9

Absent the impact of the stockpile sales, the increase in sales volume in 2008 is primarily due to increased demand during the first three quarters of 2008, commitments under our long-term pellet sales agreements, and customer plant outages during 2007. However, this increase was partially offset by declines in sales volumes to customers during the fourth quarter of 2008 as a result of the volatility and uncertainty in global markets, which led to production curtailments in the steel industry.

The increase in 2008 revenue is also attributable to a $50.6 million favorable mark-to-market adjustment related to the unsold tons associated with our purchase of the remaining 30 percent interest in United Taconite.

The increase in cost of goods sold and operating expense in 2008 was primarily due to higher costs of production, higher royalty fees primarily related to the increases in pellet pricing, and increased maintenance

 

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costs associated with the Michigan expansion project. Fuel and energy costs increased $28.4 million compared with 2007. In addition, the impact of the United Taconite step acquisition also contributed to the increase year over year.

Production

Following is a summary of iron ore production tonnage for 2008 and 2007:

 

     (In Millions) (1)
     Company Share    Total

Mine

     2008        2007        2008        2007  

Empire

   3.6    3.9    4.6    4.9

Tilden

   6.5    6.1    7.6    7.2

Hibbing

   1.9    1.7    8.2    7.4

Northshore

   5.5    5.2    5.5    5.2

United Taconite

   4.3    3.7    5.1    5.3

Wabush

   1.1    1.2    4.2    4.6
                   

Total

   22.9    21.8    35.2    34.6
                   

 

(1) Long tons of pellets (2,240 pounds).

The decrease in production at Empire in 2008 compared with 2007 is primarily due to Empire processing Tilden ore to produce 0.4 million tons of pellets under a test period. The corresponding increase is reflected at Tilden, bringing total 2008 production to 7.6 million tons compared with 7.2 million tons in 2007.

The increase in Hibbing’s production in 2008 compared with 2007 was a result of the shutdown in late February 2007 due to severe weather conditions that caused significant buildup of ice in the basin supplying water to the processing facility. The full year production loss in 2007 totaled approximately 0.8 million tons (Company share 0.2 million tons).

The increase in production in 2008 at Northshore was due to reactivation of one of the furnaces at the end of March 2008. Accordingly, production at Northshore benefited from an incremental increase of approximately 0.6 million tons in 2008. This increase was partially offset by production curtailments totaling 0.3 million tons in the fourth quarter of 2008 from idling pellet furnaces in response to production slowdowns in the steel industry.

The increase in our share of production at United Taconite is primarily related to the acquisition of the remaining 30 percent interest in July 2008. United Taconite’s 2008 production was reduced by 0.2 million tons in the fourth quarter from idling a pellet furnace in response to production slowdowns in the steel industry.

In December 2008, we executed plans to reduce production at our six North American iron ore mines. In order to implement the lower production levels, we temporarily idled various pellet furnaces and initiated workforce adjustments at each of our North American Iron Ore mines.

North American Coal

Following is a summary of North American Coal results for 2008 and 2007:

 

     (In Millions, except tonnage)  
     Twelve Months     Five Months     Change due to        
     Ended December 31,     Sales price
and rate
    Sales
volume
    Freight and
reimbursements
    Total
change
 
     2008     2007          

Revenues from product sales and services

   $ 346.3      $ 85.2      $ 70.5      $ 147.9      $ 42.7      $ 261.1   

Cost of goods sold and operating expense

     (392.7     (116.9     (29.3     (203.8     (42.7     (275.8
                                                

Sales margin

   $ (46.4   $ (31.7   $ 41.2      $ (55.9   $ —        $ (14.7
                                                

Sales tons (in thousands)

     3,241        1,171           

 

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Results for 2007 represent five month totals since the July 31, 2007 acquisition.

We reported losses of $46.4 million and $31.7 million in sales margin for the years ended December 31, 2008 and 2007, respectively. Sales volume and costs in 2008 were negatively impacted by adverse mining conditions and production delays throughout the year. In addition, we declared force majeure on customer shipments from our Pinnacle mine in mid-March 2008. Production at the mine slowed as a result of encountering a fault area within the coal panel being mined at the time. The force majeure was lifted in mid-June 2008.

Despite completion of a longwall move in June 2008, our Oak Grove mine continued to experience delays and lower than planned production levels during the second half of 2008. The mine encountered lower than planned coal heights in the current mining panel and harsh geological conditions in the development areas. Additional costs have also been incurred for repairs and maintenance as a result of mechanical problems caused by adverse geological conditions, delays associated with equipment replacements and availability of experienced mining personnel. Oak Grove decreased production in the fourth quarter of 2008 to enable continuous miners to prepare longwall panels. One of our Green Ridge facilities, located in the Pinnacle Complex shut down production in an effort to focus on mining the remaining other Green Ridge location, resulting in lower overall production for the facility.

We continued to be challenged with adverse geological conditions across the mines and delays in delivery of new capital equipment, which contributed to overall equipment performance and availability issues, which increased costs in all operations in 2008.

Production

Following is a summary of coal production tonnage for 2008 and 2007:

 

     (In Thousands) (1)
     Twelve Months    Five Months
     Ended December 31,
     2008    2007 (2)
Mine:          

Pinnacle Complex

   2,489    685

Oak Grove

   979    406
         

Total

   3,468    1,091
         

 

(1) Tons are short tons (2,000 pounds).

 

(2) Prior year results represent production since the July 31, 2007 acquisition.

Production in 2008 was impacted by the extension of longwall development timing related to unplanned geological conditions, difficulty in obtaining additional equipment and personnel, and mechanical problems experienced within the second half of 2008 at our Oak Grove Mine. Also impacting production in 2008 were adverse mining conditions at our Pinnacle Complex. In addition, as a result of the economic downturn and its impact on the global steel industry, we initiated operating plans to reduce production and commence workforce adjustments at the Pinnacle Complex in December 2008.

Asia Pacific Iron Ore

Following is a summary of Asia Pacific Iron Ore results for 2008 and 2007:

 

     (In Millions)  
                 Change due to        
     2008     2007     Sales price
and rate
    Sales
volume
    Total
change
 

Revenues from product sales and services

   $ 769.8      $ 444.6      $ 343.9      $ (18.7   $ 325.2   

Cost of goods sold and operating expense

     (421.2     (348.8     (87.1     14.7        (72.4
                                        

Sales margin

   $ 348.6      $ 95.8      $ 256.8      $ (4.0   $ 252.8   
                                        

Sales tons

     7.8        8.1         

 

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In 2008, the Australian benchmark prices for lump and fines settled at increases of 97 percent and 80 percent, respectively. As a result of the price settlement, sales from our Asia Pacific Iron Ore segment were recorded at the higher 2008 prices, thereby resulting in record revenues.

Cost of goods sold and operating expenses in 2008 increased primarily due to higher costs of production partially offset by lower volume and reduction of stockpiles. Increased costs of production were a result of higher fuel, maintenance and contract labor expenditures arising from inflationary pressures. Fuel and energy costs in 2008 increased approximately $14.1 million compared with 2007. Costs were also negatively impacted in 2008 by increased royalty payments due to higher revenues and approximately $1.6 million related to unfavorable foreign exchange rates. In addition, 2008 was impacted by the step acquisition of the remaining ownership interest in Asia Pacific Iron Ore.

Production

Following is a summary of iron ore production tonnage for 2008 and 2007:

 

     (In Millions) (1)
     Total
     2008    2007

Mine:

     

Koolyanobbing

   7.3    7.7

Cockatoo Island

   0.4    0.7
         

Total

   7.7    8.4
         

 

(1) Tonnes are metric tons (2,205 pounds). Cockatoo production reflects our 50 percent share.

The decrease in production in 2008 compared with 2007 was primarily due to inventory stockpile reductions in an effort to improve working capital. In addition, production at Cockatoo declined as the second stage of the seawall reserves were exhausted.

Liquidity, Cash Flows and Capital Resources

Our primary sources of liquidity are cash generated from our operating and financing activities. Our cash flows from operating activities are driven primarily by our operating results and changes in our working capital requirements. Our cash flows from financing activities are dependent upon our ability to access credit or other capital.

Throughout 2009, we have taken a balanced approach to allocation of our capital resources and free cash flow. We continued to focus on cash conservation and generation in our business operations as well as reduction of any discretionary capital expenditures in order to ensure we are positioned to face the challenges and uncertainties associated with the current economic environment.

 

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The following is a summary of significant sources and uses of cash in 2009 and 2008:

 

     (In Millions)  
     2009     2008  

Cash and cash equivalents — January 1

   $ 179.0      $ 157.1   
                

Significant Transactions

    

Investment in ventures

   $ (81.8   $ (93.1

Rail upgrade in Asia Pacific

     (28.8     (11.7

Payments for new longwall system at North American Coal

     —          (29.6

Purchase of noncontrolling interest in Asia Pacific Iron Ore

     —          (485.1

Purchase of noncontrolling interest in United Taconite

     —          (104.4

Acquisition termination fees

     —          (70.0

Michigan expansion project

     —          (47.7

Other capital expenditures

     (87.5     (93.5

Sale of assets

     28.3        41.2   

Dividend distributions (1)

     (31.9     (37.2
                

Total

     (201.7     (931.1

Sources of Financing

    

Net cash provided by operating activities (2)

     185.7        923.2   

Proceeds from sale of common shares

     347.3        —     

Net borrowings under senior notes

     —          325.0   

Net borrowings (repayments) under credit facility

     3.3        (240.0
                

Total

     536.3        1,008.2   

Other net activity

     (10.9     (55.2
                

Cash and cash equivalents — December 31

   $ 502.7      $ 179.0   
                

 

(1) On May 12, 2009, our board of directors enacted a 55 percent reduction in our quarterly common share dividend to $0.04 from $0.0875 for the second and third quarters of 2009 in order to enhance financial flexibility. In the fourth quarter of 2009, the dividend was reinstated to its previous level.

 

(2) Excludes $70 million of acquisition termination fees paid in 2008 related to the Alpha transaction.

The following discussion summarizes the significant activities impacting our cash flows during the year as well as those expected to impact our future cash flows over the next 12 months. Refer to the Statements of Consolidated Cash Flows for additional information.

Operating Activities

Net cash provided by operating activities was $185.7 million in 2009, compared with $853.2 million in 2008 and $288.9 million in 2007. Operating cash flows in 2009 were impacted by lower operating results, as previously noted, and increases in working capital primarily at our North American Iron Ore business segment. Our operating cash flows vary with prices realized from iron ore and coal sales, production levels, production costs, cash payments for income taxes and interest, other working capital changes and other factors. As a result of weak economic conditions, operating plans were revised earlier in 2009 to curtail production, defer or eliminate capital projects and reduce costs.

We have responded to the uncertain near-term outlook and will continue to adjust our operating strategy as market conditions change. Beginning in the second half of 2009, capacity utilization among steelmaking facilities in North America demonstrated ongoing improvement, which continued through the remainder of 2009 and is expected to continue into 2010. The industry is showing signs of stabilization and recovery based on increasing steel production and the restarting of blast furnaces in North America and Europe. As a result, we have experienced marked improvements in customer demand and market expectations and have increased production at most of our facilities.

 

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While we do not expect demand to return to the levels seen in 2008 for some time, we remain cautiously optimistic for a slow and progressive recovery. Based on current mine plans and subject to future iron ore and coal prices, we expect estimated operating cash flows in 2010 to be greater than our budgeted investments and capital expenditures, expected debt payments, dividends, and other cash requirements. Refer to “Outlook” for additional guidance regarding expected future results, including projections on pricing, sales volume and production for our various businesses.

Investing Activities

Net cash used by investing activities was $179.3 million in 2009, compared with $795.6 million and $745.4 million in 2008 and 2007, respectively. Capital expenditures were $116.3 million, $182.5 million and $199.5 million in 2009, 2008 and 2007, respectively. Investing activities in 2009 also included additional capital contributions of $70.2 million related to our investment in Amapá during the year. In addition, in January 2009, Asia Pacific Iron Ore sold a fleet of rail cars and subsequently leased them back for a period of 10 years. We received proceeds of $23.8 million from the sale of the rail cars, and the leaseback has been accounted for as a capital lease.

Aside from capital expenditures, significant investing activities in 2008 included $485.1 million for the acquisition of the remaining noncontrolling interest in our Asia Pacific Iron Ore segment and $104.4 million for the acquisition of the remaining 30 percent interest in United Taconite. In addition, we received proceeds of approximately $24 million from the sale of our wholly-owned subsidiary, Synfuel, in June 2008. Non-cash investing activities in 2008 included the issuance of $165 million of unregistered common shares and the commitment to provide 1.2 million tons of iron ore pellets as part of the consideration paid to acquire the remaining 30 percent interest in United Taconite. Non-cash investing activities during the prior year also included the issuance of four million of our common shares at a share price of $38.27 to the former owners of PinnOak to accelerate the deferred payment and settle the contingent earn-out associated with the initial purchase agreement. Investing activities in 2007 primarily included the purchase of PinnOak as well as our investments in Sonoma and Amapá.

The current volatility and uncertainty in global markets, coupled with the slowdown in the world’s major economies, has had a significant impact on commodity prices in 2009. In addition, the credit environment is expected to limit the funding and expansion capabilities of many mining companies. Based on these economic conditions, we continue to evaluate and assess our capital expenditures, in order to ensure we are positioned to face the challenges, uncertainties, as well as opportunities, associated with the current environment.

We anticipate that total cash used for investments and capital expenditures in 2010 will be approximately $250 million, including approximately $30 million related to the funding of our investment in Amapá. This amount does not include the additional investment to acquire the remaining interest in Wabush, which is approximately $88 million, subject to certain working capital adjustments. As we continue to increase production and look toward continued recovery in 2010, capital expenditures will include the construction of a new portal at Oak Grove to improve productivity and support growth and expansion of the mine. At Pinnacle, a new longwall plow system was purchased to reduce maintenance costs and increase production at the mine. Remaining expenditures for the new system of approximately $54 million will be made throughout 2010 and 2011. In addition, based on signs of improving demand for iron ore pellets, we continue to perform studies to determine whether to resume a previously announced expansion project at our Empire and Tilden mines in Michigan’s Upper Peninsula. Furthermore, in 2009 we implemented a global exploration program, which is integral to our growth strategy and is focused on identifying and capturing new world-class projects for future development or projects that add significant value to existing operations. We expect to spend between $25 million and $30 million on exploration and development activities in 2010, which will provide us with opportunities for significant future potential reserve additions globally.

We are evaluating funding options for our capital needs and expect to be able to fund these requirements through operations and availability under our borrowing arrangements. Other funding options may include new lines of credit or other financing arrangements.

 

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The following represents our future cash commitments and contractual obligations as of December 31, 2009:

 

     Payments Due by Period (1) (In Millions)

Contractual Obligations

   Total    Less Than
1 Year
   1 - 3
Years
   3 - 5
Years
   More Than
5 Years
              

Long-term debt

   $ 529.6    $ 4.6    $ 200.0    $ 270.0    $ 55.0

Interest on debt (2)

     94.2      25.8      50.8      15.8      1.8

Operating lease obligations

     94.3      22.4      33.3      26.4      12.2

Capital lease obligations

     183.2      24.3      47.2      43.7      68.0

Purchase obligations:

              

Asia Pacific rail upgrade

     8.8      8.8      —        —        —  

Longwall plow system

     54.0      40.0      14.0      

Open purchase orders

     235.0      226.5      8.5      —        —  

Minimum “take or pay” purchase commitments (3)

     798.0      120.7      194.8      146.8      335.7
                                  

Total purchase obligations

     1,095.8      396.0      217.3      146.8      335.7

Other long-term liabilities:

              

Pension funding minimums

     242.9      45.9      102.1      94.9      —  

OPEB claim payments

     134.5      35.2      53.0      46.3      —  

Deferred revenue

     105.1      94.8      10.3      —        —  

Environmental and mine closure obligations

     132.3      7.9      4.5      3.3      116.6

FIN 48 obligations (4)

     21.2      —        17.9      3.3      —  

Personal injury

     23.3      4.1      8.2      2.9      8.1

Other (5)

              
                                  

Total other long-term liabilities

     659.3      187.9      196.0      150.7      124.7
                                  

Total

   $ 2,656.4    $ 661.0    $ 744.6    $ 653.4    $ 597.4
                                  

 

(1) Includes our consolidated obligations.

 

(2) Interest on the $200 million term debt is calculated using actual rates through April 2010 and is estimated using an average 2 and 3-year Libor swap rate of 1.74 percent plus a margin of 1.125 from April 2010 through maturity in August 2012. For the $325 million senior notes, interest is calculated for the $270 million five-year senior notes using a fixed rate of 6.31 percent from 2010 to maturity in June 2013, and for the $55 million seven-year senior notes, interest is calculated at 6.59 percent from 2010 to maturity in June 2015.

 

(3) Includes minimum electric power demand charges, minimum coal, diesel and natural gas obligations, minimum railroad transportation obligations, and minimum port facility obligations.

 

(4) Includes accrued interest.

 

(5) Other contractual obligations of approximately $11.3 million primarily include income taxes payable and deferred income tax amounts for which timing of payment is non-determinable.

Refer to NOTE 18 — COMMITMENTS AND CONTINGENCIES of the Consolidated Financial Statements for additional information regarding our future purchase commitments and obligations.

Financing Activities

Net cash provided by financing activities in 2009 was $304.3 million compared with $32.4 million in 2008 and $250.1 million in 2007. Cash flows from financing activities in 2009 primarily included $348 million in net proceeds from the sale of our common shares. Cash flows from financing activities in 2008 primarily included borrowings under our revolving credit facility and senior notes of $865 million, partially offset by debt repayments of $780 million and dividend distributions of $37.2 million. In 2007, financing activities included borrowings under our revolving credit facility of approximately $1.2 billion, partially offset by the repayment of $755.0 million under our credit facility and $159.6 million of PinnOak debt.

 

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Throughout 2009 we have implemented proactive initiatives to enhance financial flexibility and strengthen liquidity, including a public offering of our common shares, a 55 percent reduction in our common share quarterly dividend to $0.04 from $0.0875 for the second and third quarters of 2009, and compensation reductions across the organization. These initiatives were taken in response to the high degree of uncertainty within our industry and the macroeconomic environment as well as to better position ourselves to take advantage of possible opportunities when the market improves.

Through the public offering of our common shares, which closed on May 19, 2009, we sold a total of 17.25 million shares out of treasury stock. Net proceeds at a price of $21.00 per share were approximately $348 million, which will be used for general corporate purposes, including, among other things, funding certain capital expenditures, repayment of indebtedness or other strategic transactions. In addition, the quarterly dividend and compensation reductions resulted in savings of approximately $22 million and $15 million, respectively, in 2009.

Capital Resources

We expect to fund our business obligations from available cash, current operations and borrowings under our credit facility. The following represents a summary of key liquidity measures as of December 31, 2009 and 2008:

 

     (In Millions)  
   December 31,
2009
    December 31,
2008
 
    

Cash and cash equivalents

   $ 502.7      $ 179.0   
                

Credit facility

   $ 800.0      $ 800.0   

Senior notes

     325.0        325.0   

Asia Pacific Iron Ore facilities

     —          27.6   

Senior notes drawn

     (325.0     (325.0

Term loans drawn

     (200.0     (200.0

Letter of credit obligations and other commitments

     (31.4     (40.3
                

Borrowing capacity available

   $ 568.6      $ 587.3   
                

Refer to NOTE 9 — DEBT AND CREDIT FACILITIES of our consolidated financial statements for further information regarding our debt and credit facilities.

Apart from cash generated by the business, our primary source of funding is cash on hand, which totals $502.7 million as of December 31, 2009 based on successful execution of an equity offering in the second quarter of 2009. We also have a $600 million revolving credit facility, which matures in 2012. This facility has available borrowing capacity of $569 million as of December 31, 2009. Effective October 29, 2009, we amended our credit facility agreement, which resulted in improved borrowing flexibility, more liberally defined financial covenants and debt restrictions, and other benefits in exchange for a modest increase in pricing. The combination of cash and the credit facility give us over $1 billion in liquidity entering 2010.

As previously noted under Results of Operations — Segment Information, at the end of 2009, one of our North American Iron Ore customers did not pay $147.5 million that was due by December 31, 2009 under the terms of its supply agreement. Instead, the customer remitted payment of the full amount on January 4, 2010. As a result, this amount is not included in the $502.7 million of cash on hand at December 31, 2009.

We are party to financing arrangements under which we issue guarantees on behalf of certain of our unconsolidated subsidiaries. In the event of non-payment, we are obligated to make payment in accordance with the provisions of the guarantee arrangement. At December 31, 2009 and 2008, Amapá had total project debt outstanding of approximately $530 million and $493 million, respectively, for which we have provided a several guarantee on our 30 percent share. Amapá is currently in violation of certain operating and financial loan covenants contained in the debt agreements. However, Amapá and its lenders have agreed to waive these covenants through May 31, 2010 related to the remaining debt outstanding. If Amapá is unable to either

 

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renegotiate the terms of the debt agreements or obtain further extension of the compliance waivers, violation of the operating and financial loan covenants may result in the lenders calling the debt, thereby requiring us to recognize and repay our share of the debt in accordance with the provisions of the guarantee arrangement.

Based on our current borrowing capacity and the actions we have taken in response to the global economic crisis to conserve cash, we have adequate liquidity and expect to fund our business obligations from available cash, current operations and borrowing under our current credit facilities. Other sources of funding may include new lines of credit or other financing arrangements.

Several credit markets may provide additional capacity should that become necessary. The bank market may provide funding through a term loan or through exercising the $200 million accordion in our credit facility. The risk associated with this market is significant increases in borrowing costs as a result of decreasing capacity. Capacity, as in all debt markets, is a global issue that impacts the private placement market. However, capacity in the bond market has rebounded for investment grade companies. Longer term debt arrangements at current corporate bond rates must be aligned with our longer term capital structure needs.

Off-Balance Sheet Arrangements

We have entered into certain agreements under which we have provided guarantees to an unconsolidated entity that are off-balance sheet arrangements. In addition, we have operating leases, which are primarily utilized for certain equipment and office space. Aside from this, we do not have any other off-balance sheet financing arrangements. Refer to NOTE 18 — COMMITMENTS AND CONTINGENCIES for additional information regarding our guarantees.

Market Risks

We are subject to a variety of risks, including those caused by changes in the market value of equity investments, changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and procedures to manage such risks; however, certain risks are beyond our control.

Foreign Currency Exchange Rate Risk

We are subject to changes in foreign currency exchange rates primarily as a result of our operations in Australia, which could impact our financial condition. Foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because our reporting currency is the United States dollar. Our Asia Pacific operations receive funds in United States currency for their iron ore and coal sales and incur costs in Australian currency. We use forward exchange contracts, call options, collar options and convertible collar options to hedge our foreign currency exposure for a portion of our sales receipts. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and United States currency exchange rates and to protect against undue adverse movement in these exchange rates. At December 31, 2009, we had $108.5 million of outstanding exchange rate contracts with varying maturity dates ranging from January 2010 to October 2010. A 10 percent increase in the value of the Australian dollar from the month-end rate would increase the fair value by approximately $7.4 million, and a 10 percent decrease would reduce the fair value by approximately $5.6 million. We may enter into additional hedging instruments in the near future as needed in order to further hedge our exposure to changes in foreign currency exchange rates.

Our share of pellets produced at the Wabush operation in Canada represented approximately 12 percent of our North American Iron Ore pellet production in 2009. This operation is subject to currency exchange fluctuations between the United States and Canadian currency; however, we do not hedge our exposure to this currency exchange fluctuation.

Under the majority ownership of MMX, Amapá’s functional currency was previously determined to be the Brazilian real. The change in control of Amapá to Anglo in August 2008 resulted in the review of financial, operating and treasury policies of the entity under new management. This, along with efforts to mitigate exposures related to fluctuations in foreign currency exchange rates resulted in the reassessment of the accounting principles related to the determination of Amapá’s functional currency during the fourth quarter of

 

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2008. As a result, effective October 1, 2008, the functional currency of Amapá was changed from the local currency to the U.S. dollar reporting currency primarily due to changes in the debt structure under which the entity is financed as well as changes in the treasury, risk mitigation and financial reporting policies under which the entity’s operations are managed, resulting in the U.S. dollar becoming the currency of the primary economic environment in which the business operates.

Interest Rate Risk

Interest for borrowings under our credit facility is at a floating rate, dependent in part on the LIBOR rate, which exposes us to the effects of interest rate changes. Based on $200 million in outstanding term loans at December 31, 2009, with a floating interest rate and no corresponding fixed rate swap, a 100 basis point change to the LIBOR rate would result in a change of $2.0 million to interest expense on an annual basis.

In October 2007, we entered into a $100 million fixed rate swap to convert a portion of this floating rate into a fixed rate. The interest rate swap terminated in October 2009. Based on the current interest rate environment and the mix of fixed and variable interest rates that apply to our outstanding debt, we have no plans at this time to replace the interest rate swap.

Pricing Risks

The current global economic crisis has resulted in increasing downward pressure from customers, particularly in China, for a roll back of the 2008 price increases for seaborne iron ore and metallurgical coal in 2009. The 2008 record price increase was driven by high demand for iron ore and coking coal, global steel production at historically high levels, combined with production and logistics constraints for both iron ore and coking coal, resulting in tight supply conditions. With the current global economic crisis, the market in some geographies, including North America, now is characterized by a reduction in steel demand with limited demand for iron ore and coking coal. Reduced demand for iron ore and coking coal has resulted in decreased demand for our products and decreasing prices, resulting in lower revenue levels in 2009 and decreasing margins as a result of decreased production, thereby adversely affecting our results of operations, financial condition and liquidity.

Certain supply agreements with one North American Iron Ore customer provide for supplemental revenue or refunds based on the customer’s average annual steel pricing at the time the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as an embedded derivative, which is finalized based on a future price, and is marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. The fair value of the instrument is determined using an income approach based on an estimate of the annual realized price of hot rolled steel at the steelmaker’s facilities.

At December 31, 2009, we had a derivative asset of $63.2 million, representing the fair value of the pricing factors, based upon the amount of unconsumed tons and an estimated average hot band steel price related to the period in which the tons are expected to be consumed in the customer’s blast furnace at each respective steelmaking facility, subject to final pricing at a future date. This compares with a derivative asset of $76.6 million as of December 31, 2008, based upon the amount of unconsumed tons and the related estimated average hot band steel price. We estimate that a $25 change in the average hot band steel price realized from the December 31, 2009 estimated price recorded would cause the fair value of the derivative instrument to increase or decrease by approximately $13.7 million, thereby impacting our consolidated revenues by the same amount.

We have not entered into any hedging programs to mitigate the risk of adverse price fluctuations, nor do we intend to hedge our exposure to such risks in the future; however, certain of our term supply agreements contain price collars, which typically limit the percentage increase or decrease in prices for our products during any given year.

Nonperformance and Liquidity Risks

The current global economic crisis has adversely affected our business and could impact our financial results. All of our customers have announced curtailments of production, which has adversely affected the demand for our iron ore and coal products. Continuation or worsening of the current economic conditions, a

 

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prolonged global, national or regional economic recession or other events that could produce major changes in demand patterns, could have a material adverse effect on our sales, margins, liquidity and profitability. We are not able to predict the impact the current global economic crisis will have on our operations and the industry in general going forward.

In addition, consolidations in some of the industries in which our customers operate have created larger customers, some of which are highly leveraged. These factors have caused some customers to be less profitable and increased our exposure to credit risk. A significant adverse change in the financial and/or credit position of a customer could require us to assume greater credit risk relating to that customer and could limit our ability to collect receivables. Failure to receive payment from our customers for products that we have delivered could adversely affect our results of operations, financial condition and liquidity.

Our investment policy relating to short-term investments is to preserve principal and liquidity while maximizing the short-term return through investment of available funds. The carrying value of these investments approximates fair value on the reporting dates. We commonly use AAA-rated money market funds for short-term investments. All money market funds in which we invest have maintained daily cash redemptions throughout 2009.

Volatile Energy and Fuel Costs

The volatile cost of energy and supplies is an important issue affecting our production costs, primarily in relation to our iron ore operations. Recent trends have shown that although electric power, natural gas, and oil costs are declining, the direction and magnitude of short-term changes are difficult to predict. Our consolidated North American Iron Ore mining ventures consumed approximately 8.4 million MMBtu’s of natural gas at an average delivered price of $6.63 per MMBtu, and 15.5 million gallons of diesel fuel at an average delivered price of $2.17 per gallon in 2009. Consumption of diesel fuel by our Asia Pacific Operations was approximately 13.3 million gallons for the same period.

Our strategy to address increasing energy rates includes improving efficiency in energy usage and utilizing the lowest cost alternative fuels. Through 2009, our North American Iron Ore mining ventures entered into forward contracts for certain commodities, primarily natural gas and diesel fuel, as a hedge against price volatility. Such contracts were in quantities expected to be delivered and used in the production process. As of December 31, 2009, all of our hedge contracts have matured. At the present time we have no specific plans to enter into further hedging activity for 2010 and beyond and do not plan to enter into any new forward contracts for natural gas or diesel fuel in the near term. We will continue to monitor relevant energy markets for risk mitigation opportunities and may make forward purchases or employ other hedging instruments in the future as warranted and deemed appropriate by management. Assuming we do not enter into further hedging activity in the near term, a 10 percent change in natural gas and diesel fuel prices would result in a change of approximately $13.8 million in our annual fuel and energy costs based on expected consumption in 2010.

Supply Concentration Risks

Many of our mines are dependent on one source for electric power and for natural gas. A significant interruption or change in service or rates from our energy suppliers could materially impact our production costs, margins and profitability. As an example, WEPCO, the sole supplier of electric power to our Tilden and Empire mines, has filed a rate case with the Michigan Public Utilities Commission requesting a 33 percent increase in rates from its rate payers, including our Empire and Tilden mines. If WEPCO is successful in effectuating the 33 percent rate increase currently being proposed, our estimated energy costs at Tilden and Empire in 2010 may be unfavorably impacted by approximately $29 million.

Uncertainties of Proposed Tax Reform Legislation

In 2010, significant proposed changes to U.S. income tax rules were announced as part of the Obama Administration’s 2011 budget proposals. The proposed changes that could have a significant impact include the deferral of certain U.S. income tax deductions related to foreign operations, repeal of LIFO inventory accounting,

 

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and elimination of certain current tax incentives for the coal industry, such as percentage depletion. These changes, if enacted, may reduce the competitive position of many U.S. businesses across all industries. The impact of the proposed changes on our business operations and financial statements remains uncertain. However, as the possibility of enactment progresses, we will continue to monitor current developments and assess the potential implications of these tax law changes on our business.

Outlook

We expect continued stabilization of the macroeconomic environment throughout 2010 and corresponding improvements for steelmaking raw material demand. Annual price settlements for iron ore products in 2010 are not yet concluded. As such, we are using the following assumptions, based on an average of widely published industry analyst estimates, to provide expectations for our iron ore businesses, which use the settlement prices as factors in determining individual customer pricing. Any deviation from the following assumptions will impact average realized price:

 

   

Increases of 40 percent for world blast furnace iron ore pellet price settlements;

 

   

Increases of 35 percent and 30 percent, respectively, for Australian lump and fines benchmark price settlements; and,

 

   

North America hard coking coal prices of $125 per short ton FOB mine

Based on the above assumptions, the following table provides a summary of our 2010 guidance for our three reportable business segments, including further detail below:

 

     2010 Outlook Summary
     North American
Iron Ore
   North American Coal    Asia Pacific
Iron Ore
     Current
Outlook
   Previous
Outlook
   Current
Outlook
   Previous
Outlook
   Current
Outlook
   Previous
Outlook

Sales volume (million tons/tonnes)

     25.0    23.0      3.4    3.0      8.5    8.5

Revenue per ton/tonne

   $ 90 - $95    —      $ 115 - $120    —      $ 80 - $85    —  

Cost per ton/tonne

   $ 65 - $70    —      $ 105 - $110    —      $ 50 - $55    —  

North American Iron Ore Outlook

For 2010, we are increasing our sales volume expectations to approximately 25 million tons, up from a previous expectation of 23 million tons due to improving demand from customers.

We used a number of widely published analyst estimates, which call for an average 40 percent increase in blast furnace pellet pricing settlements, in providing guidance on average revenue per ton in our North American Iron Ore business segment. Applying this assumption, along with a 2010 range for hot band steel pricing of $550 to $650 per ton and no inflation for any other factors contained in our current supply agreements, we expect revenue per ton in North American Iron Ore to be $90 to $95. This expectation also considers the contractual base price changes, lag year adjustments and pricing caps and floors contained in our North American Iron Ore supply agreements. Actual realized average revenue per ton will ultimately depend on sales volume levels and customer mix, blast furnace pellet price settlements, production input costs and/or steel prices, all of which are factors in the our formula based pricing for the North American Iron Ore business segment.

In addition, the following approximate sensitivities would impact our actual realized price:

 

   

For every 10 percent change from the above average analyst expectation for blast furnace pellet price settlements, we would expect our average realized revenue per ton in North American Iron Ore to change by $4 to $5.

 

   

For every $25 change from the estimated 2010 hot rolled steel prices noted above, we would expect our average revenue per ton in North American Iron Ore to change by $0.40.

 

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We expect 2010 production of approximately 25 million tons in our North American Iron Ore business segment. At this level of production, 2010 cost per ton is expected to be between $65 and $70 and includes a $5 per ton benefit from increased volume, offset by increased costs related to the acquisition of Wabush, and increases in labor costs as well as maintenance spending that was deferred in 2009.

North American Coal Outlook

In our North American Coal business segment, we are increasing our sales volume expectations to approximately 3.4 million tons, up from a previous expectation of 3.0 million tons.

We begin 2010 with approximately 1.4 million tons of coal under contractual obligation, or approximately 40 percent of our current annual production guidance. This coal is priced at an average of $110 per ton, which includes production earmarks to fulfill obligations for 2009 international contracts ending March 31, 2010. Approximately 30 percent of our 2010 production volume is committed, but not yet priced, as benchmark pricing has not yet settled. We currently expect to sell the remaining 30 percent of uncommitted production on a spot basis throughout the year.

In 2010, we expect cost per ton for the year to be approximately $105 to $110, with approximately $14 per ton comprised of depreciation, depletion and amortization.

Asia Pacific Iron Ore Outlook

Asia Pacific Iron Ore 2010 sales volume is expected to be 8.5 million tonnes, with production of 8.6 million tonnes. With annual price settlements for iron ore in 2010 not yet concluded, as noted above, we used an average industry analyst estimated increase for Australian lump and fines benchmark price settlements of 35 percent and 30 percent, respectively, in providing guidance on average revenue per ton in our Asia Pacific Iron Ore business segment. With these estimates, we expect revenue per ton in Asia Pacific Iron Ore to be $80 to $85. We expect 2010 Asia Pacific Iron Ore costs per tonne of approximately $50 to $55.

Outlook for Sonoma and Amapá

We have a 45 percent economic interest in the Sonoma Coal. In 2010, we expect total production of approximately 3.3 million tonnes. Sonoma expects to have sales volume of 3.5 million tonnes with an approximate 65/35 mix between thermal and metallurgical coal respectively. We expect Sonoma average revenue per tonne to be $85 to $90 in 2010. Per-tonne costs at Sonoma are expected to be between $80 and $85.

We have a 30 percent interest in Amapá. In 2010, assuming a 30 percent increase in iron ore pricing settlements for iron ore concentrate products, we expect to report an equity loss between $10 million and $20 million for our share of Amapá’s results.

Selling, General and Administrative Expenses and Other Expectations

Selling, general and administrative expenses are anticipated to be approximately $130 million in 2010. As noted above, we intend to incur costs of approximately $25 to $30 million related to our global exploration efforts. We anticipate an effective tax rate of approximately 24 percent for the year and depreciation and amortization of approximately $275 million.

We recently completed our previously announced acquisition of Freewest and, under the terms of the acquisition agreement, issued approximately 4.2 million shares. As a result, we currently have total diluted shares outstanding of approximately 136 million.

2010 Capital Budget and Other Uses of Cash

Based on the above guidance, we expect to generate approximately $900 million in cash from operations in 2010. We expect capital expenditures of approximately $200 million, comprised of approximately $110 million in sustaining capital and approximately $90 million earmarked for expansion, including the following projects:

 

   

$40 million related to installation of a new longwall mining system at the Pinnacle Mine in West Virginia, which is expected to be complete in the fourth quarter of 2010.

 

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$15 million related to an upgrade of the Pinnacle Complex preparation plant, which is expected to be complete in the third quarter of 2011.

 

   

$20 million related to installing a new mine shaft closer to current mining areas at our Oak Grove mine, which is expected to be complete in the first quarter of 2011.

Combined, the above projects are anticipated to enable future production from our North American Coal assets to ramp up to 5 million tons annually from an expectation of 3.4 million tons in 2010. Other expected uses of cash in 2010 include approximately:

 

   

$90 million related to the acquisition of Cliffs’ partners’ 73.2 percent interest in Wabush.

 

   

$30 million related to our investment in Amapá, comprised of expected losses and capital spending.

 

   

$70 million related to the reduction of Cliffs’ debt obligation at Amapá.

 

   

$15 million related to renewaFUEL’s build out of its first commercial-scale production facility in Michigan.

 

   

$10 million related to Cliffs’ recently acquired chromite project in Ontario, Canada.

Recently Issued Accounting Pronouncements

Refer to NOTE 1 — BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES of the consolidated financial statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects on results of operations and financial condition.

Critical Accounting Estimates

Management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with 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. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are fairly presented in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Management believes that the following critical accounting estimates and judgments have a significant impact on our financial statements.

Revenue Recognition

North American Iron Ore Customer Supply Agreements

Most of our North American Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The base price is the primary component of the purchase price for each contract. The inflation-indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement but typically include adjustments based upon changes in international pellet prices, changes in specified Producers Price Indices including those for all commodities, industrial commodities, energy and steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we estimate the adjustment factors at each reporting period based upon the best third-party information available and adjust the estimate to actual when the information has been finalized.

With respect to international pellet prices, certain long-term supply agreements reference the previous year’s settled price, in which case, no estimate is required. However, pricing in some of our supply agreements is based upon the international pellet price for the current year. The period during which we must estimate changes in

 

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international pellet prices varies year to year based on the timing of final settlement. Historically, contract negotiations were completed and pricing settlements for the upcoming year were reached during the first quarter of the contract year, in which case an estimate was required only for a short period of time and was adjusted to actual prior to reporting first quarter results. This was the case in 2007. As a result, the price adjustment provisions related to international pellet prices were essentially a fixed component of the purchase price for that contract year based upon the timing of settlement. However, several instances have occurred in more recent years, including 2009 and 2008, in which contract negotiations have been extended with settlement occurring later in the year. Information used in developing the estimate prior to settlement includes such factors as previous pricing settlements among other iron ore producers and consumers in the industry, current spot prices, market trends, publications and other industry information. However, based on the timing of settlement, adjustments of our estimate to the actual international pellet price were not material in 2009 or 2008 as a result of having limited shipments to customers with these contract provisions during the first quarter of each respective year.

The producer price indices remain a provisional component of the sales price throughout the contract year and are estimated each quarter using publicly available forecasts of such indices. The final indices referenced in certain of the North American Iron Ore supply contracts are typically not published by the U.S. Department of Labor until the second quarter of the subsequent year. As a result, we record an adjustment for the difference between the fourth quarter estimate and the final price in the following year. Historically, such adjustments have not been material as they have represented less than half of 1 percent of North American Iron Ore’s revenue for each of the three preceding fiscal years ended December 31, 2008, 2007 and 2006.

In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds based on the customer’s average annual steel pricing for the year the product is consumed in the customer’s blast furnaces. The supplemental pricing is characterized as an embedded derivative, which is finalized based on a future price, and is marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. The fair value of the instrument is determined using an income approach based on an estimate of the annual realized price of hot rolled steel at the steelmaker’s facilities. At December 31, 2009, we had a derivative asset of $63.2 million, representing the fair value of the pricing factors, based upon the amount of unconsumed tons and an estimated average hot band steel price related to the period in which the tons are expected to be consumed in the customer’s blast furnace at each respective steelmaking facility, subject to final pricing at a future date. This compares with a derivative asset of $76.6 million as of December 31, 2008, based upon the amount of unconsumed tons and the related estimated average hot band steel price.

 

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The customer’s average annual price is not known at the time of sale and the actual price is received on a delayed basis at the end of the year, once the average annual price has been finalized. As a result, we estimate the average price and adjust the estimate to actual in the fourth quarter when the information is provided by the customer at the end of each year. Information used in developing the estimate includes such factors as production and pricing information from the customer, current spot prices, third-party analyst forecasts, publications and other industry information. The accuracy of our estimates typically increases as the year progresses based on additional information in the market becoming available and the customer’s ability to more accurately determine the average price it will realize for the year. The following represents the historical accuracy of our pricing estimates related to the derivative as well as the impact on revenue resulting from the difference between the estimated price and the actual price for each quarter during 2009, 2008 and 2007 prior to receiving final information from the customer for tons consumed during each year:

 

     Hot Band Steel Price - Estimate vs. Actual  
     2009     2008     2007  
     Final
Price
   Estimated
Price
   Impact on
Revenue
(in millions)
    Final
Price
   Estimated
Price
   Impact on
Revenue
(in millions)
    Final
Price
   Estimated
Price
   Impact on
Revenue
(in millions)
 

First Quarter

   $ 528    $ 523    $ 1.2      $ 763    $ 645    $ 24.9      $ 559    $ 568    $ (1.2

Second Quarter

     528      545      (1.3     763      773      (5.4     559      564      (1.3

Third Quarter

     528      536      (0.6     763      794      (17.6     559      560      (0.7

Fourth Quarter

     528      528      —          763      763      —          559      559      —     

We estimate that a $25 change in the average hot band steel price realized from the December 31, 2009 estimated price recorded for the unconsumed tons remaining at year-end would cause the fair value of the derivative instrument to increase or decrease by approximately $13.7 million, thereby impacting our consolidated revenues by the same amount.

Benchmark Pricing Provision

Certain supply agreements primarily with our Asia Pacific Iron Ore customers provide for revenue or refunds based on the ultimate settlement of annual international benchmark pricing for lump and fines. As a result of the derivative accounting treatment applied to these provisions, revenue reflects the estimated benchmark price until final settlement occurs. Therefore, to the extent final prices are higher or lower than what was recorded on a provisional basis, an increase or decrease to revenues is recorded each reporting period until the date of final pricing. Accordingly, in times of rising iron ore prices, our revenues benefit from higher prices received for contracts priced at the current benchmark price and also from an increase related to the final pricing of provisionally priced sales pursuant to contracts entered into in prior periods; in times of falling iron ore prices, the opposite occurs. Pricing estimates are primarily based upon reported price settlements in the industry and worldwide pressures in the market. The following represents the historical accuracy of our benchmark price estimates as well as the impact on Product revenues resulting from the difference between the estimated change in price and the actual change in price for each quarter during 2009 and 2008 prior to settlement. In 2007, benchmark prices settled prior to reporting first quarter results; therefore, no estimate was required.

 

     Benchmark Price - Estimate vs. Actual
     2009 (1)    2008 (2)
             First Quarter    Second
Quarter
   Third
Quarter
       First Quarter

Customer
(geographic location)

   Final
Settled
Price
Decrease
(lump/

fines)
     Estimated
Price
Decrease
(lump/

fines)
   Revenue
Impact (3)
(in millions)
   Estimated
Price
Decrease
(lump/

fines)
   Estimated
Price
Decrease
(lump/fines)
   Final
Settled
Price
Increase
(lump/fines)
  Estimated
Price
Increase
(lump/fines)
  Revenue
Impact (3)
(in millions)

Japan

   -44%/-33%      -30%/-30%    $    (1.3)    N/A    N/A    97%/80%   0.0%   $  —  

China

   -44%/-33%      -30%/-30%        (17.1)    -44%/-33%    -44%/-33%    97%/80%   0.0%   65.0
                           
           $  (18.4)              $65.0
                           

 

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(1) The 2009 benchmark prices referenced in our Asia Pacific Iron Ore contracts settled with Japan in the second quarter of 2009. We agreed to final prices with our customers in China during the fourth quarter of 2009.

 

(2) In 2008, Cliffs used 2007 prices as a proxy for 2008 prices prior to settlement. The 2008 benchmark prices referenced in our Asia Pacific Iron Ore contracts settled in the second quarter of 2008.

 

(3) The impact on product revenue resulting from the difference between the estimated price and the actual price was recorded in the second quarter of each respective year.

The derivative instrument was settled during the fourth quarter of 2009 upon settlement of the pricing provisions with each of our customers, which reflected pricing decreases of 44 percent and 33 percent for lump and fines, respectively. The settlement was consistent with previously reported price settlements in Japan as well as with our most recent estimates used for reporting revenue throughout the year. As a result, settlement of the pricing provisions referenced in certain of our Asia Pacific Iron Ore customer supply agreements did not have an impact on our consolidated financial statements for the year ended December 31, 2009.

Refer to NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, for further information.

Mineral Reserves

We regularly evaluate our economic mineral reserves and update them as required in accordance with SEC Industry Guide 7. The estimated mineral reserves could be affected by future industry conditions, geological conditions and ongoing mine planning. Maintenance of effective production capacity or the mineral 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 mineral reserves could decrease capacity or mineral reserves. Technological progress could alleviate such factors, or increase capacity of mineral reserves.

We use our mineral reserve estimates combined with our estimated annual production levels, to determine the mine closure dates utilized in recording the fair value liability for asset retirement obligations. Refer to NOTE 11 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS, for further information. Since the liability represents the present value of the expected future obligation, a significant change in mineral reserves or mine lives would have a substantial effect on the recorded obligation. We also utilize economic mineral 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 mineral reserves or mine lives could significantly affect these items.

Asset Retirement Obligations and Environmental Remediation Costs

The accrued mine closure obligations for our active mining operations provide for contractual and legal obligations associated with the eventual closure of the mining operations. Our obligations are determined based on detailed estimates adjusted for factors that a market participant would consider (i.e., inflation, overhead and profit), which are escalated at an assumed rate of inflation to the estimated closure dates, and then discounted using the current credit-adjusted risk-free interest rate. The estimate also incorporates incremental increases in the closure cost estimates and changes in estimates of mine lives. The closure date for each location is determined based on the exhaustion date of the remaining iron ore reserves, which is dependent on our estimate of the economically recoverable mineral 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 changes in legal or contractual requirements, available technology, inflation, overhead or profit rates would also have a significant impact on the recorded obligations.

We have a formal policy for environmental protection and restoration. Our obligations for known environmental matters 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 obligation can only be estimated as a

 

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range of possible amounts, with no specific amount being more 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, and which are subject to 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 unless the amount and timing of the cash disbursements can be reasonably estimated. Potential insurance recoveries are not recognized until realized. Refer to NOTE 11 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS, for further information.

Income Taxes

Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

Deferred income taxes arise from temporary differences between tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions required significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

At December 31, 2009, we had a valuation allowance of $89.4 million against our deferred tax assets. Our losses in certain foreign locations in recent periods represented sufficient negative evidence to require a full valuation allowance against certain of our foreign deferred tax assets. We intend to maintain a valuation allowance against our net deferred tax assets until sufficient positive evidence exists to support the realization of such assets.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations.

Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit from an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on technical merits.

We recognize tax liabilities in accordance with ASC 740, and we adjust these liabilities when our judgment changes as a result of evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.

Goodwill and Asset Impairment

In assessing the recoverability of our goodwill and other long-lived assets, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets must be made, including among other things, estimates related to pricing, volume and reserves. The fair value of goodwill is estimated using a discounted cash flow valuation model. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for these assets in the period such determination was made.

 

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We monitor conditions that indicate that the carrying value of an asset or asset group may be impaired. We determine impairment based on the asset’s ability to generate cash flow greater than its carrying value, utilizing an undiscounted probability-weighted analysis. If the analysis indi