TURNING POINT
CLEVELAND-CLIFFS
2003 Annual Report
COMPANY
PROFILE
Cleveland-Cliffs Inc is the
largest producer of iron ore
pellets in North America, selling
the majority of its pellets to
integrated steel companies in the
United States and Canada. Iron ore
pellets are the fundamental raw material
for these companies, which use blast
furnaces to make steel. The Company
operates six iron ore mines located in Michigan,
Minnesota and Eastern Canada. Cliffs is in its
Safe Production > record production with: lack of injuries....good
housekeeping and orderly work areas....well-maintained
equipment....proper training and procedures....looking out for and
correcting each other....safe conditions, safe behavior....Sentinels
of Safety award winner.
Customer Focus > listening to the customer....being responsive
and on time....meeting quality expectations....helping the
customer succeed.
Creating Economic Value > doing the right things right the first
time....elimination of waste and inefficiency....breakthroughs
in productivity and technology.
Bias For Action > getting things done....reduced red tape....
barrierless....call anybody you want....management by fact....plan
157th year of service to the steel industry.
the work – work the plan.
CORE VALUES
Trust, Respect and Open Communication > open access
to information....constructive conflict....delegation to the
appropriate level....toleration of failure in pursuit of business
success....encouraging and accepting different views....feeling an
obligation to explain your actions to those it affects....gender and
racial diversity.
Group and Individual Accountability > behaving in line with
our core values....being responsible for our actions....providing
plans/standards/expectations....holding yourself and/or the group
to a high standard of performance...walk the talk.
Integrity > doing what you say you’re going to do....no hidden
agendas....doing the right thing....being truthful....zero tolerance –
not walking away from a situation...be credible.
Teamwork > actively involve others in decision making....know
when to take a leadership role and when to be an active
member....recognize the value of teamwork and the synergy
it creates.
Recognize and Reward Achievement > celebrating
successes....stress training and development....an effective
appraisal of performance....giving a simple thank you.
Environmental Stewardship > going beyond compliance....being
socially responsible....anticipating and addressing potential
impacts before they occur....personal accountability....operating to
preserve the environment for future generations.
COMPARATIVE
HIGHLIGHTS
2003 2002
FINANCIAL (In Millions, Except Per Share Amounts)
FOR THE YEAR:
Revenues from Iron Ore Sales and Services
Sales Margin (Loss):
Total
Excluding Costs of Production Curtailments
(Loss) from Continuing Operations
(Loss) from Discontinued Operation
Extraordinary Gain
Cumulative Effect of Accounting Changes
Net (Loss):
Amount
Per Share
AT DECEMBER 31:
Cash and Cash Equivalents
Less Debt
Net Cash
Shareholders’ Equity
Per Common Share:
Book Value
Market Value
IRON ORE SALES AND PRODUCTION (Millions of Gross Tons)
CLIFFS’ SALES
PRODUCTION AT CLIFFS’ MINES:
Cliffs’ Share
Partners’ Share
Total Production
$825.1
$586.4
(9.9)
1.2
(34.9)
2.2
3.7
24.3
(66.4)
(108.5)
(13.4)
(188.3)
(32.7)
(3.19) (18.62)
67.8
(25.0)
42.8
228.1
61.8
(55.0)
6.8
79.3
21.73 7.84
50.95 19.85
19.2
18.1
12.2
30.3
14.7
14.7
13.2
27.9
1
LETTER TO OUR
SHAREHOLDERS
As this letter goes to press, we are experiencing one of
With the acquisition of EvTac and the consolidation of the
the most remarkable periods in the history of the global iron and
ownership in our existing mines, Cliffs’ own capacity has nearly
steel business. The global demand for iron ore is soaring, thanks
doubled from about 12 million tons at the end of 2001 to about
largely to the amazing economic growth in China and the resul-
22 million tons currently. We had record pellet sales volume of
tant demand for steel. Virtually all iron ore merchants are sold
19.2 million tons in 2003, up 31 percent over 2002. In 2004,
out for 2004, and Cleveland-Cliffs is no exception.
we expect to sell our new full capacity of 22 million tons.
Our Company is positioned to participate in the global
There are iron ore companies that are much larger,
growth of the iron ore business and is aggressively taking
but arguably none possess the world-class competency of
advantage of the opportunities. In 2003, for example, we
Cleveland-Cliffs to turn low-grade iron ore, or taconite, into
were introduced to Laiwu Steel Group, one of China’s premier
high-grade blast furnace pellets. Going forward, we expect
steel companies, which has been significantly expanding its
that this competency will be in high demand as low-grade ores
steelmaking capacity and has a tremendous need for iron ore
inevitably become a greater part of global iron ore consumption,
supplies. Together we formed United Taconite and acquired the
just as they have in North America. We are just now starting an
assets of EvTac Mining Company, which was not operating and
assignment for Venezuela’s Ferrominera to manage its Minorca
in bankruptcy. Today, the mine is up and running at near full
pellet plant, with the objective of increasing the output and
capacity with a streamlined work force and a more efficient cost
productivity of this 3 million ton pellet plant.
structure. The mine’s pellet production is being used by Cliffs to
Encouraging signs notwithstanding, the past few years
satisfy its domestic demand and by Laiwu to satisfy its iron ore
have been very challenging for Cleveland-Cliffs and our industry
requirements.
as a whole. In fact, a large portion of our iron ore customers
The addition of United Taconite increases Cliffs’ man-
today are steel mills that have been acquired out of bankruptcy
aged North American iron ore capacity to 37 million tons, or
or have been reorganized. While the process has been difficult,
about 45 percent of total North American capacity. Cliffs’ man-
a stronger, better capitalized steel industry has emerged.
aged tonnage represents about 58 percent of North American
iron ore consumption. We manage six of the 11 iron ore mines
in North America.
2
Perhaps the best example is International Steel Group,
now our largest customer. ISG represents the acquisition of
three steel companies out of bankruptcy – all of which were
Cliffs’ customers or partners. With the expected acquisition
of Weirton Steel, ISG will consume approximately 9 million of
John S. Brinzo
Chairman, President and
Chief Executive Officer
Cliffs’ 22 million tons of sales capacity this year. At its forma-
and contributed funds to our underfunded pension plans. Book
tion, Cliffs invested $13 million in ISG to buy the idled assets of
net worth, which was as low as $79 million on December 31,
LTV and $13 million more to acquire the assets of Acme and
2002, has been increased to about $400 million. We now have
Bethlehem. As of March 1, Cliffs’ share of ISG from these invest-
the financial position to create additional value for shareholders.
ments has a market value of $238 million, including $20 million
In addition to the important task of reducing liabilities,
in our pension plan.
we believe that Cliffs has a number of exciting investment
Cliffs has managed through this industry reorganization
opportunities. One is the Mesabi Nugget Project, which is in
with skill and innovation. We have carefully controlled our credit
development at our Northshore Mine in Silver Bay, Minnesota.
exposure and, as a result, have had only minor losses during
Cliffs has a 48 percent ownership interest in the project, and
a period of massive insolvency of our customer base. A good
our other development partners are Steel Dynamics, Kobe
example is Rouge Steel, now Severstal North America. We
Steel, Ferrometrics and the State of Minnesota. While we are
extended a secured $10 million loan to Rouge Steel in 2002
taking a very careful approach in evaluating this project, the pilot
in return for all of its iron ore business. Now, as Severstal takes
plant results have been encouraging and we have successfully
over Rouge, we have an exclusive contract for all of Severstal’s
converted Northshore iron concentrates into high-grade pig
iron business and have fully recovered our $10 million loan,
iron, which has performed well in electric arc furnace trials.
including interest, from the Rouge estate.
Assuming our last pilot plant campaign is successful, we expect
The value of our ISG investment and the $166 million
to go ahead with a commercial-sized plant with Steel Dynamics
net proceeds from a January 2004 convertible preferred stock
issue have restored financial strength to Cleveland-Cliffs. With
the stock proceeds, we have paid off all of our remaining debt
3
and Kobe Steel. Cliffs’ investment would be in the range of $20
While we accomplished much in 2003 – including the
million to $50 million, depending on our ownership interest and
formation of United Taconite and the commencement of our
available financing.
cost reduction efforts – we were disappointed by our operating
In 2001, your management team began the task of re-
results. High energy costs, unexpected ore quality upsets and
making Cliffs from primarily a mine management company and
even a flood in Michigan adversely affected our bottom line.
mineral holder to a merchant mining company. Some of this was
We are dedicated to improving the competitiveness of our cost
done out of necessity, as our partners at the time were becom-
structure.
ing insolvent and unwilling to perform on their mine obligations.
Although we are currently enjoying improved pricing for
While we have been successful at increasing revenues through
our pellets, the challenge to protect our future is the unending
consolidation – our total revenues should approximate $1 billion
quest to reduce the cost of operations. The only way we can
in 2004 – the job of improving our cost structure is ongoing.
protect the jobs and benefits of our employees is by being as
Even though we expect our price realizations to
productive and cost effective as we can be. In 2003, we restruc-
improve in 2004, we must still improve our margins. In 2003,
tured not only salaried headcount, but also salaried pension
we began a program to reduce our operating expenses by at
and retiree medical benefits. In addition, our lack of profitability
least $35 million, and that program remains on track. Before
meant that salaried employees received no bonus payments.
acquiring United Taconite, we had reduced our U.S. salaried staff
Looking ahead, our labor contracts with the United Steelwork-
by nearly 20 percent, including a 30 percent reduction in our
ers of America, which represents production and maintenance
corporate office, and had successfully combined the Empire and
employees at five of our six operations, must be renegotiated in
Tilden mines in Michigan under a common management and
2004. To protect jobs and benefits, it is imperative that these
eliminated redundant practices. We call this the “turning point”
new contracts address the growth of pension and medical
in how we manage our business for cost effectiveness, and we
expense for both active and retired employees, as well as foster
are dedicated to achieving our goal. In a commodity business,
improved productivity.
particularly one based on mining low-grade deposits, the job of
improving cost effectiveness and productivity can never stop.
4
On a positive note, we were very pleased with our safety
record in 2003. We have set best-in-class safety objectives for
the Company. Our safety performance in 2003, as measured
by the MSHA frequency index (Total Reportable Incident rate),
represented an improvement of 31 percent over 2002 and 48
percent over 2001. With an overall TRI rate of 2.7 percent, we
believe that Cliffs ranks in the upper tier of domestic mining
companies in protecting its employees and, in turn, enhancing
productivity.
In closing, I want to thank all of our employees for
their exceptional efforts in 2003. You have shown, once again,
that you are up to the challenge and dedicated to making
Cleveland-Cliffs a better company. Continued success can come
only with everyone working together as a team.
John S. Brinzo
Chairman, President and Chief Executive Officer
March 1, 2004
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Safe production is a core value at Cleveland-Cliffs Inc – We strive for record production
with lack of injuries....good housekeeping and orderly work areas....well-maintained
equipment....proper training and procedures....looking out for and correcting each
other....safe conditions, safe behavior....Sentinels of Safety award winner.
Safety Performance 2003
SAFETY AND HEALTH
SAFETY ACCOUNTABILITY AND LEADERSHIP TRAINING
Cliffs’ safety systems, which reflect the shared com-
mitment of management and employees to the prevention
of incidents and illnesses, continue to pay off in improved
performance.
Demonstrating this commitment, Cliffs established an
ambitious safe production goal of a 50 percent reduction in the
reportable incident rate to 2.0 for 2003. Although the target
was not achieved, corporatewide safety performance was again
the best in Company history.
The frequency rate as defined by the Mine Safety and
Health Administration (MSHA) for total reportable incidents
(TRI) was 2.72, an improvement of 31 percent from 2002
and 48 percent from 2001. The frequency rate for lost-time
incidents (LTI) was 1.4, a 26 percent improvement from 2002
and 48 percent from 2001.
Cliffs’ Northshore Mining Company’s mine achieved
nearly 1,000 consecutive days without a lost-time incident and
was first runner-up for the 2001 and 2002 Sentinels of Safety
awards based on the number of hours worked. As the oldest
established award for mining safety, the Sentinels of Safety
program has promoted a commitment to mine safety and to
the continuing development of effective incident prevention
programs for more than 75 years. Northshore Mining has also
won Cliffs’ President’s Award for Safety the past three years in a
row and four of the six years of the award’s existence.
Employees at Cliffs’ Technology Center celebrated 26
consecutive years without a lost-time incident on January 31,
2004, a remarkable 2.7 million work hours.
LS&I Railroad also had a tremendous year of improved
safety – with one reportable injury, one lost work day and a
total reportable incident rate of 0.67 in 2003 compared with
seven reportable injuries, 119 lost work days and a total report-
able incident rate of 4.89 in 2002.
With continued effort and achievements such as these,
Cliffs can achieve its goal of being among the industry’s safety
leaders.
Three years of hard work by the Safety Leadership
Team to make safe production a way of life throughout the
Company reached a new level in 2003 with implementation of
a comprehensive safety-training program. The program con-
sists of a series of five workshops presented over 18 months to
develop skills that will help manage the day-to-day safety and
incident prevention process.
A workshop on communication was completed at all U.S.
operations, and a workshop on incident analysis training is in
progress. The three remaining workshops will continue through
2004 and be completed in the first quarter of 2005. Approxi-
mately 550 participants, including coordinators, labor commit-
tee members, supervisors, managers and top management
at each site, are attending the workshops. At the completion
of the workshops, all participants will be trained in the Safety
Systems of Cliffs.
Meanwhile, safe production training was implemented at
the Scully mine in Canada, directed at all supervisors and labor
leadership.
Cliffs remains committed to these and other long-term
“upstream investments” in incident prevention activities as part
of its everyday business. Such investments have resulted in a
57 percent reduction in reportable incidents and a 42 percent
reduction in lost-time incidents since the implementation of
safe production in 1998.
SAFETY SYSTEM AUDITS
Cliffs’ internal safety audit team is currently developing
an audit of the current Cliffs Safety System, which will be imple-
mented in 2004, and an audit to measure the effectiveness of
the Safety Accountability and Leadership Training.
INDUSTRIAL HYGIENE
Employee response continues to be highly favorable to
Cliffs’ Internet-based, corporatewide material safety data sheet
system, which provides immediate online access to product
safety information. Employees at U.S. mining operations have
also enthusiastically embraced the Company’s commitment to
ensure compliance with MSHA’s Hazard Communications rule.
6
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
80
70
60
50
40
30
20
10
0
8
7
6
5
4
3
2
1
0
MSHA Reportable Injury Frequency Rate
(PER 200,000 HOURS WORKED)
Cliffs
Industry
> Cleveland-Cliffs Inc and associated companies are
Safety Policy
committed to protecting the occupational health and well
being of each employee and to conserve property from
2.7
loss. Safe practices and a healthful workplace are
1998
1999
2000
2001
2002
2003
INDUSTRY COMPARISON IS TOTAL MINES, MILLS AND SHOPS
(EXCLUDING COAL) AS PUBLISHED BY MSHA
Lost Workday Injury Frequency Rate (LTI)
(PER 200,000 HOURS WORKED)
Cliffs
Industry
1998
1999
2000
2001
2002
2003
INDUSTRY COMPARISON IS TOTAL MINES, MILLS AND SHOPS
(EXCLUDING COAL) AS PUBLISHED BY MSHA
Average Severity
(PER 200,000 HOURS WORKED)
Cliffs
Industry
1.4
34.6
1998
1999
2000
2001
2002
2003
INDUSTRY COMPARISON IS TOTAL MINES, MILLS AND SHOPS
(EXCLUDING COAL) AS PUBLISHED BY MSHA
MSHA Reportable Incidents – Cliffs Mines
2002 vs. 2003
(PER 200,000 HOURS WORKED)
2002
2003
CMMC
Hibbing
N.Shore
Wabush
CLIFFS MINE COMPARISON
consistent with efficient operations that produce a high-
quality product. Our CORE VALUE of SAFE PRODUCTION
is sustainable only through an acceptance of ZERO
TOLERANCE FOR RISK. This means everyone doing
every job the right way, the safe way every time.
> In fulfilling this commitment, we shall use our best and
continuous efforts to maintain a safe and healthful work
environment in accordance with sound industry practices
and legislative requirements. We shall strive to eliminate
hazards that might result in personal injuries, fires,
security losses or damage to property by providing the
necessary training, encouragement, resources and
accountability. Occupational illness prevention shall be
accomplished through appropriate industrial hygiene and
occupational medical programs, including engineering
controls, employee monitoring, health testing and education.
> Safety, occupational health and loss prevention are the
responsibility of management and all employees. Elimination
of loss and occupational illnesses can only be achieved
through the active participation of all employees. It is also
the responsibility of management and all employees to
identify and correct incidents or conditions with potential
for an unsafe or unhealthful workplace, including near-miss
incidents. The Safety Department shall assist management
in monitoring and implementing this policy.
> Our success in this area is primarily dependent on individual
attitudes, practices and accountability. Constant planning,
personal awareness, attention to detail and a spirit of
cooperation and positive thinking are essential to achieve
our stated safety and health goals. Performance will be
continuously measured and periodically evaluated to
determine areas requiring improvement.
> Every employee must join in a personal commitment to
safety, occupational health and loss prevention in all of
our activities.
8
7
6
5
4
3
2
1
0
7
At Cleveland-Cliffs Inc, environmental stewardship is one of our core values.
That requires going beyond compliance....being socially responsible....anticipating
and addressing potential impacts before they occur....personal accountability....and
operating to preserve the environment for future generations.
Environmental Performance 2003
Cliffs’ continued commitment to the pursuit of environ-
mental excellence remained resolute in 2003, and programs
were further strengthened toward that end. Under the leader-
ship of Ed Dowling, Executive Vice President-Operations; Jim
Trethewey, Senior Vice President-Operations Improvement; and
Dave Crouch, Director-Environmental Affairs, the management
team continued the Annual Environmental Tour with visits to all
Cliffs properties for firsthand reviews of environmental programs
and goals with the respective mine management teams.
In addition, the Cliffs Environmental Policy Implementa-
tion Team was inaugurated, with each mine represented by
both an operations member and an environmental member.
The team is focused on facilitating implementation of uniform
environmental management systems (EMS), conforming to ISO
14001 protocols, at each of Cliffs’ operating properties. The
program is patterned after the Northshore Mine’s EMS, which
has been recommended for ISO 14001 certification by an inde-
pendent auditor; formal certification is expected early in 2004.
In cooperation with the Minnesota Pollution Control
Agency (MPCA), a Voluntary Mercury Reduction Program is
continuing at Cliffs’ Minnesota mines. MPCA has reported that
approximately 90 percent of mercury entering state waters is
airborne and originates from outside the state, and that no
significant deposition originates from taconite operations.
Meanwhile, a clean fuels technology project being
considered at the Northshore Mine in Minnesota would provide
a source of low-cost, clean gas for the taconite furnaces as well
as other energy requirements. The process would be capable
of combusting coal, biomass and other energy sources such as
shredded scrap tires that currently are landfilled.
At Cliffs-Erie, a former taconite mine, mill and pellet
plant in Minnesota, the Company is conducting reclamation
and closure activities in accordance with a state-approved plan.
Following the guidelines of sustainable development, Cliffs-Erie
is considering various options for renewed uses of the mine
and plant site, including mining and processing of base and
precious metals utilizing hydrometallurgical procedures, and
wind generation of electricity. Cliffs Natural Stone LLC, already
in commercial operation, is harvesting uniquely patterned and
colored stone from the former mine areas for sale to landscape,
greenhouse and masonry markets. Approximately 2,500 tons
were shipped during 2003, and a significant increase in sales
is forecast for 2004 following enthusiastic response at the
Minnesota Landscaping Show.
CLIFFS ECOLOGICAL PROJECTS
Every Cliffs mine actively reclaims and revegetates
areas disturbed by mining activities, in accordance with plans
approved by the respective state and provincial agencies. For
areas that will no longer be disturbed, this may involve reshap-
ing and contouring, as appropriate, applying soil amendments,
mulching, seeding and planting trees. Particular attention is
given to wetlands, with preserves established in both Michigan
and Minnesota. During 2003, the Michigan Department of
Environmental Quality formally registered the 2,300-acre
Republic Wetlands Preserve, which was constructed on a for-
mer tailings basin and has become the home for numerous
species of wildlife.
Elsewhere, the Cliffs Michigan Mining Company has
initiated a cooperative program with northern Michigan paper
mills to utilize paper mill residual materials as a growth medium
on rock stockpiles. These residual materials are rich in organic
matter, plant-available nutrients and microbial biomass that
make them ideally suited for mine reclamation. This program
will have the double advantage of recycling an otherwise waste
material that is landfilled and facilitating the establishment of a
sustainable soil system and vegetation on rocky stockpiles.
Another innovative reclamation project in Michigan is
benefiting from mine reclamation that was conducted at the
historic Humboldt Mine in the 1970s. Hybrid aspen trees
planted on the tailings basin have thrived and are now providing
a source of tree cuttings with superior disease resistance and
hardiness that can be used for reclamation at other sites. The
goal for 2004 is to harvest 20,000 cuttings to establish nurser-
ies and reclaim mine lands at the Empire and Tilden mines.
The 6,500-acre tailings basin at Hibbing Taconite
Company in Minnesota has become the summer home for a
population of Canada geese. The basin provides open water for
the geese to escape predators, and the acres of beach planted
with grasses and grains for control of wind erosion are a good
food source. These combined features provide an excellent
habitat for geese and other waterfowl. The Minnesota Depart-
ment of Natural Resources has chosen the Hibbing basin as a
banding site for its survey of regional waterfowl populations.
8
It is the policy of the Company to conduct its affairs in
accordance with appropriate best available practices.
To accomplish this, the Company will:
> Adopt standards that build from a foundation of compliance
with applicable government laws and regulations, permits
and related agreements.
> Establish management systems, standards, programs and
procedures within its corporate and operating units for
implementation of this policy, and integrate environmental
considerations into business planning.
>
Inform managers and employees of their responsibility to
comply with this policy, and to be sensitive to the effects of
the Company’s operations on the environment.
> Conduct periodic environmental audits of operating practices
to verify compliance with this policy, and identify revisions or
improvements required to minimize environmental effects.
> Conduct environmental assessments for all new properties,
activities, acquisitions, closures, divestitures and proposed
changes in operating procedures.
> Ensure that contractors working on the Company’s premises
or on properties managed by the Company comply with
relevant environmental standards.
> Contribute to the development and administration of
technically and economically sound environmental standards
and compliance procedures through interaction with
professional and trade groups, legislative bodies, regulatory
agencies and citizens organizations.
> Establish procedures for the reporting of conditions or
incidents with the potential for adverse environmental
effects, and responding with appropriate corrective actions.
Provision shall be made for the communication of
environmental information with the Company’s
various publics.
Environmental
Policy
CLEVELAND-CLIFFS INC
ENVIRONMENTAL METRICS
Air Emissions Point Sources (a)
Total Particulate Matter
NOx
SO2
Water Discharges Compliance Rate
Number of Analyses Passed
Number of Analyses Conducted
Percent Compliance
Releases
Volume Spilled (Gallons)
Number of Spills
Waste Disposal (Tons)
Hazardous
Non-Hazardous
Recycled
Reclamation (Acres) (b)
Total Final Reclamation
2003
2002
119
804
350
99
1,009
410
15,142 11,945
15,329 12,074
99
99
10,576
137
9,717
130
342
233
4,407
4,627
17,154 12,878
1,184
572
Environmental Training and Awareness
Number of Trainee Hours
Number of Employees
Number of Env. Awareness Activities
2,427
3,956
141
4,363
3,858
149
Agency Inspections
Number of Inspections
Notices of Violation
Number of Notices
34
46
3
3
Notes
a) Tons per million tons of pellets produced
(b) Includes Cliffs-Erie
9
MANAGEMENT’S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Founded in 1847, Cleveland-Cliffs Inc (including its consolidated
subsidiaries, the “Company” or “Cliffs”) is the largest producer of iron
ore pellets in North America and sells the majority of its pellets to inte-
grated steel companies in the United States and Canada. The Company
operates six iron ore mines located in Michigan, Minnesota and Eastern
Canada that currently have a rated capacity of 36.9 million tons of iron
ore pellet production annually. Based on its percentage ownership in the
mines it operates, Cliffs’ share of the rated pellet production capacity is
currently 22.6 million tons annually, representing approximately 28
percent of total North American annual pellet capacity. The Company
sells its share of iron ore production to integrated steel producers,
generally pursuant to term supply agreements with various price
adjustment provisions. Sales volume under these agreements is largely
dependent on customer requirements, and in some cases, Cliffs is the
sole supplier of pellets to the customer. Each agreement has a base
price that is adjusted over the life of the agreement using one or more
adjustment factors. Factors that can adjust price include measures of
general industrial inflation, steel prices and the international pellet price.
In past years, Cliffs held a minority interest in the mines it
managed, with the majority interest in each mine held by various North
American steel companies. Cliffs’ earnings were principally comprised
of royalties and management fees paid by the partnerships, along with
sales of its equity share of the mine pellet production. In recent years,
Cliffs has repositioned itself from a manager of iron ore mines on behalf
of steel company customers to primarily a merchant of iron ore to
those customers by increasing its interests in its mines. The Company’s
ownership interests in its six North American mines are as follows:
O w n e r s h i p I n t e re s t a s o f
D e c e m b e r 31,
LO C AT I O N A N D N A M E
2003
2002
2001
Michigan (Marquette Range)
Empire Iron Mining Partnership
Tilden Mining Company L.C.
Minnesota (Mesabi Range)
Hibbing Taconite Company –
Joint Venture
Northshore Mining Company
United Taconite LLC
Canada (Newfoundland and Quebec)
79.0%
85.0
79.0%
85.0
46.7%
40.0
23.0
100.0
70.0
23.0
100.0
15.0
100.0
Wabush Mines – Joint Venture
26.8
26.8
22.8
The Company increased its ownership in its mines (other than
Northshore and United Taconite) through assumption of liabilities
associated with the mine interests. This increased ownership has allowed
it to convert its mine partners into customers with term supply agree-
ments. The increased mine ownership has also served to improve the
competitiveness of Cliffs’ operations by allowing it to make operating and
capital decisions faster and more efficiently and enhancing its ability
to improve productivity, decrease production costs and continuously
improve pellet quality.
Following is a summary of the Company’s key operating and
financial indicators for the years 2003, 2002 and 2001:
Pellet Sales (Million Tons)
Revenues from Iron Ore Sales and
Services (Millions)*
Pellet Production (Million Tons)
Total
Company's Share
Sales Margin (Loss)
Amount (Millions)
Per Ton of Sales
Loss from Continuing Operations
Amount (Millions)
Per Share
Net Loss
Amount (Millions)
Per Share
2003
19.2
2002
14.7
2001
8.4
$686.8
$ 510.8
$301.5
30.3
18.1
27.9
14.7
25.4
7.8
$ (9.9)
$ (.53)
$ 3.7
$ .25
$(39.4)
$ (4.69)
$ (34.9)
$ (3.40)
$ (66.4)
$ (6.58)
$ (19.5)
$ (1.93)
$ (32.7)
$ (3.19)
$(188.3)
$(18.62)
$ (22.9)
$(2.27)
*The Company also received revenues of $138.3 million, $75.6 million and $17.8 million in
2003, 2002 and 2001, respectively, related to freight and minority interest.
Iron ore pellet sales in 2003 were 19.2 million tons, a 4.5 mil-
lion ton, or 31 percent increase, from the previous record 14.7 million
tons sold in 2002. The sales increase primarily reflects the effect of
new and revised agreements initiated in 2002 and 2003 consistent with
the Company’s increased mine ownerships. Iron ore pellet production
for Cliffs’ account was 18.1 million tons in 2003 versus 14.7 million tons
in 2002. The 3.4 million ton, or 23 percent, increase was largely due to
increased mine ownerships and higher production at all mines except
Tilden.
The Company’s decrease in sales margin from 2002 largely
reflects the impact of higher unit production costs due to increased
energy rates, higher pension and medical costs, ore throughput diffi-
culties at the Michigan mines in 2003, an equipment outage at the
Tilden operation in Michigan in December 2003 and the impact of the
decreased valuation of the U.S. dollar on its Canadian operating results.
Partially offsetting the cost increases was the increase in sales and
production volume.
In July 2003, the Company initiated an action plan to significantly
improve operating results by achieving annualized cost savings in excess
of $35 million from 2003 projected results. The plan incorporated
reduction actions in the areas of employment, energy, services, main-
tenance and supplies costs during the remainder of 2003 and in 2004,
with the impact expected to be fully realized by 2005.
The Company’s business is affected by a number of factors,
which are described in detail below under “Risks Relating to the
Company.” As the Company has increased its role as a merchant of iron
ore to steel company customers, it has become more dependent on
10
Following is a reconciliation of the Company’s EBIT and EBITDA
to its “Net cash from operating activities”:
Net cash from operating activities
(continuing operations)
Changes in operating assets
and liabilities
Other non-cash adjustments
excluding depreciation
and amortization
Income tax (credit) expense
Interest income
Interest expense
EBITDA
Depreciation and amortization
( I N M I L L I O N S )
2003
2002
2001
$ 42.7
$ 40.9
$ 28.9
5.3
(12.9)
(39.6)
(53.9)
(.3)
(10.6)
4.6
(12.2)
(29.0)
(60.5)
9.1
(4.8)
6.6
(21.6)
(33.9)
14.6
(9.2)
(3.8)
8.8
(.3)
(23.4)
EBIT
$(41.2)
$(55.5)
$(23.7)
EBIT and EBITDA are non-GAAP measures utilized by manage-
ment to measure liquidity.
2003 VERSUS 2002
The net loss for the year 2003 was $32.7 million, or $3.19 per
share, including an extraordinary gain of $2.2 million related to the
United Taconite acquisition of the Eveleth mine assets in Minnesota in
December 2003. The net loss in 2002 of $188.3 million, or $18.62 per
share, included a loss of $108.5 million from a discontinued operation,
and a $13.4 million cumulative effect charge related to a change in the
Company’s accounting method for recognizing estimated future mine
closure obligations.
The loss from continuing operations was $34.9 million, or $3.40
per share, in 2003 versus a loss of $66.4 million or $6.58 per share in
2002. The $31.5 million lower loss reflected improved pre-tax results of
$22.1 million and lower income tax expense of $9.4 million principally
due to establishing a deferred tax valuation allowance in 2002. The
improvement in pre-tax results was primarily due to the $52.7 million
charge for the impairment of mining assets in 2002; the impairment
the revenues from its term supply agreements. Because its agree-
ments are largely requirements contracts, those revenues are heavily
dependent on customer consumption of iron ore from the Company’s
mines. Customer requirements may be affected by increased use of
iron ore substitutes, including imported semi-finished steel, customer
rationalization or financial failure, and decreased North American steel
production resulting from increased imports or lower steel consumption.
Further, the Company’s sales are concentrated with a relatively
few number of customers. Unmitigated loss of sales would have a sig-
nificantly greater impact on operating results and cash flow than revenue,
due to the high level of fixed costs in the iron ore mining business in
the near term and the high cost to idle or close mines. In the event of
a venture participant’s failure to perform, remaining solvent venturers,
including the Company, may be required to assume additional fixed costs
and record additional material obligations. The premature closure of a
mine due to the loss of a significant customer or the failure of a venturer
would accelerate substantial employment and mine shutdown costs.
RESULTS OF OPERATIONS
In 2003, the Company had a net loss of $32.7 million, or $3.19
per share, versus a net loss for the year 2002 of $188.3 million, or
$18.62 per share. Following is a summary of results:
Loss from continuing operations*
Loss from discontinued operation**
Loss before extraordinary gain
and cumulative effect of
accounting changes**
Extraordinary gain**
Cumulative effect of
accounting changes***
Net loss
– Amount
( I N M I L L I O N S )
2003
$(34.9)
2002
$ (66.4)
(108.5)
2001
$(19.5)
(12.7)
(34.9)
2.2
(174.9)
(32.2)
(13.4)
9.3
$ (32.7)
$(188.3)
$(22.9)
– Per share basic
$ (3.19)
$(18.62)
$(2.27)
– Per share diluted
$ (3.19)
$(18.62)
$(2.27)
Average number of shares
(in thousands)
– Basic
– Diluted
Earnings (loss) before interest
and taxes (“EBIT”)*
Earnings (loss) before interest,
taxes, depreciation and
amortization (“EBITDA”)*
10,256
10,256
10,117
10,117
10,073
10,073
$(41.2)
$(55.5)
$(23.7)
$(12.2)
$ (21.6)
$ (.3)
***Includes charges for impairments of mining assets of $2.6 million in 2003 and $52.7
million in 2002.
***Net of tax and minority interest
***Net of tax
11
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
charge was $2.6 million in 2003. Partially offsetting the lower impair-
ment charge was a $23.1 million decrease in sales margin, summarized
as follows:
( I N M I L L I O N S )
2003
19.2
2002
14.7
I n c re a s e ( De c re a s e )
Amount Percent
4.5
31%
$686.8
$510.8
$176.0
34%
696.7
507.1
189.6
37
11.1
20.6
(9.5)
(46)
685.6
486.5
199.1
41%
$ (9.9)
$ 3.7
$ (13.6)
N/M
Iron ore pellet sales (tons)
Revenues from iron ore sales
and services*
Cost of goods sold and
operating expenses*
Total
Costs of production
curtailments
Excluding costs of production
curtailments
Sales margin (loss)
Total
Excluding costs of
production curtailments
Amount
While the flooding did not directly damage the mines, the mines were
idled when Wisconsin Energy Corporation, which supplies electricity to
the mines, was forced to shut down its power plant in Marquette,
Michigan. The mines returned to full production by the end of June;
however, approximately 1.0 million tons of production was lost (Company’s
share .8 million tons). The Company’s share of fixed costs related to the
lost production was $11.1 million. The Company is pursuing a business
interruption claim under its property insurance program. Production
curtailments in 2002, due to market conditions, had a $20.6 million
fixed cost effect.
On November 26, 2003, the Tilden mine experienced a crack
in a kiln riding ring that required the shutdown of its Unit #2 furnace
in the pelletizing plant. As a result of the failure, Tilden’s production in
2003 decreased by .3 million tons, resulting in a 2003 loss of approx-
imately $6 million, including the cost of the repair and the cost of
accelerating planned 2004 maintenance into December 2003 to
coincide with the riding ring repair. Year 2004 production is not
expected to be significantly affected by the failure.
$ 1.2
$ 24.3
$(23.1)
(95)%
Sales Margin (Loss)
Percent of revenues
.2%
4.8%
(4.6)%
*The Company also received revenues and expenses of $138.3 million and $75.6 million in
2003 and 2002, respectively, related to freight and minority interest.
Revenues from Iron Ore Sales and Services
Revenues from iron ore sales and services were $686.8 million
in 2003, an increase of $176.0 million, or 34 percent, from revenues of
$510.8 million in 2002. The increase was mainly due to the 4.5 million
ton, or 31 percent, increase in pellet sales volume in 2003. The 19.2
million tons sold in 2003 was a record, surpassing the previous record
of 14.7 million tons sold in 2002. The increase in revenue also reflected
an increase in sales price realization, which resulted from favorable term
supply agreement escalation factors and the mix of agreements.
Cost of Goods Sold and Operating Expenses
Cost of goods sold and operating expenses totaled $696.7 mil-
lion in 2003, an increase of $189.6 million, or 37 percent, from $507.1
million in 2002. Excluding fixed costs related to production curtailments,
2003 costs and expenses were $199.1 million, or 41 percent, higher
than 2002, principally due to increased sales volume and higher unit
costs. The unit cost increase reflected higher energy rates, increased
pension and medical costs, throughput difficulties at the Michigan
mines, an equipment outage at the Tilden operations in Michigan in
December 2003 and the impact of the decreased U.S. exchange rate
with Canada.
On May 15, 2003, the failure of a dam in the Upper Peninsula of
Michigan resulted in flood conditions, which caused production curtail-
ments at the Empire and Tilden mines for approximately five weeks.
Sales margin in 2003 was a loss of $9.9 million versus a sales
margin of $3.7 million in 2002. Excluding fixed costs related to pro-
duction curtailments, the sales margin was $1.2 million in 2003 versus
$24.3 million in 2002. The decrease in sales margin in 2003 reflected
increased unit production costs partially offset by higher production
and sales volume and increased sales realization.
Other Revenues
Royalties and management fees from partners were $10.6 mil-
lion in 2003, a decrease of $1.6 million from 2002. The decrease was
principally due to the whole year effect of the Company’s increased
ownership in mines in 2002, partially offset by increased production.
Interest income of $10.6 million in 2003 was $5.8 million above
2002 income of $4.8 million. The increase primarily reflected interest
on the long-term receivables from Ispat Inland Inc (“Ispat”) and Rouge
Industries Inc. (“Rouge”).
Other income of $11.4 million in 2003 was $2.3 million less than
2002. The decrease reflected two insurance recoveries in 2002 total-
ing $3.5 million, partially offset by higher sales of non-strategic assets
in 2003.
Impairment of Mining Assets
As a result of increasing production costs at Empire mine,
revised economic mine planning studies were completed in the fourth
quarter of 2002 and updated in the fourth quarter of 2003. Based on
the outcome of these studies, the ore reserve estimates at Empire were
reduced from 116 million tons at December 31, 2001 to 63 million tons
at December 31, 2002 and 29 million tons at December 31, 2003. The
12
Company concluded that the assets of Empire were impaired as of
December 31, 2002, based on an undiscounted probability-weighted
cash flow analysis. The Company recorded an impairment charge of
$52.7 million to write off the carrying value of the long-lived assets of
Empire. In 2003, the Company recorded an additional impairment
charge of $2.6 million for current year’s fixed asset additions. Studies
are ongoing to identify the optimum production rate and consequently
the mine life for Empire. An evaluation of satellite mineral resources has
also been initiated for potential addition to Empire’s reserve base.
Administrative, Selling and General Expenses
Administrative, selling and general expenses in 2003 were $25.1
million, an increase of $1.3 million from 2002. The increase primarily
reflects higher professional fees related to financing and business
development activities and higher stock-based compensation partially
offset by lower employment costs and incentive compensation. The
increase in stock-based compensation of $4.3 million principally re-
flected the approximate 157 percent increase in the Company’s common
share price in 2003.
Restructuring Charge
In the third quarter 2003, the Company initiated a salaried
reduction program as part of its cost reduction initiatives. The action
resulted in a reduction of 136 staff employees at its corporate, central
services and various mining operations, which represented an approx-
imate 20 percent decrease in salaried work force at the Company’s
U.S. operations (prior to the acquisition of United Taconite). Accordingly,
the Company recorded a restructuring charge of $8.7 million in 2003.
The charge is principally related to severance, pension and health care
benefits with less than $1.6 million requiring cash funding in 2003.
Provision for Customer Bankruptcy Exposure
As noted in “Risks Relating to the Company,” three of the
Company’s significant customers petitioned for protection under chapter
11 of the U.S. Bankruptcy Code in 2003. As a result, the Company
recorded reserves totaling $7.5 million in the second and third quarters
of 2003 related to its bankruptcy exposures.
Other Expenses
Interest expense was $4.6 million in 2003, a decrease of $2.0
million from 2002 interest expense of $6.6 million. The decrease prin-
cipally reflected lower average borrowing due to the repayment and
cancellation of the Company’s $100 million revolving credit facility in
October 2002 and repayment of a portion of the senior unsecured
notes. The Company made senior unsecured note repayments of $15
million in December 2002, $5 million in June 2003, $25 million in
December 2003 and the $25 million balance early in 2004.
Other expenses were $9.4 million in 2003, an increase of $1.5
million from 2002 expenses of $7.9 million. The increase primarily
reflected coal retiree expense of $2.0 million, an increase in the
Company’s litigation reserves of $.5 million and higher state and local
taxes of $.4 million, partially offset by lower debt restructuring fees.
Income Taxes
In the third quarter of 2002, the Company recorded a valuation
allowance to fully reserve its net deferred tax assets in recognition of
uncertainty regarding their realization. In 2003, the Company
increased its deferred tax valuation allowance by $2.1 million to $122.7
million to offset increases in the deferred tax assets. The Company
recorded an income tax credit of $.3 million, which was attributable to
qualifying for a special refund of taxes paid in prior years, $.9 million,
partially offset by foreign, state and local taxes. The $9.1 million net tax
expense in 2002 reflected the recognition of the valuation allowance
net of a $4.4 million favorable adjustment of prior years’ tax liabilities.
The Company’s deferred tax assets include significant net operating loss
carryforwards, including a $12.3 million loss carryforward for alternative
minimum tax purposes generated in 2003.
If in the future it is determined that it is more likely than not that
some or all of the net deferred tax assets will be realized, a reversal of
the valuation allowance will be made. This reversal would increase
income in the period such determination is made.
Extraordinary Gain
Effective December 1, 2003, United Taconite, a newly formed
company owned 70 percent by a subsidiary of the Company and 30
percent by a subsidiary of Laiwu Steel Group Limited (“Laiwu”) of
China, purchased the assets of Eveleth Mines LLC in Minnesota. The
purchase price was $3.0 million plus the assumption of certain liabilities,
primarily mine closure-related environmental obligations. As a result of
this transaction and in accordance with the provisions of FAS 141, the
Company, after assigning appropriate values to assets acquired and
liabilities assumed, was required to record an “extraordinary gain” of
$2.2 million, net of $.5 million tax and $1.2 million minority interest.
2002 VERSUS 2001
The net loss for the year 2002 was $188.3 million, or $18.62 per
share, including a loss of $108.5 million from a discontinued operation,
a $13.4 million cumulative effect charge related to a change in the
Company’s accounting method for recognizing estimated future mine
closure obligations, and a $52.7 million charge for the impairment of
mining assets. The net loss in 2001 of $22.9 million, or $2.27 per share,
included a loss from the discontinued operation of $12.7 million and an
after-tax credit to income of $9.3 million ($14.3 million pre-tax) related
13
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
to a change in the Company’s accounting method for recognizing gains
and losses on pension investments.
The loss before asset impairment, discontinued operation and
the cumulative effect of accounting changes was $13.7 million in 2002
versus $19.5 million in 2001. The $5.8 million lower loss reflected
improved pre-tax results of $24.1 million partially offset by increased
income tax expense, primarily due to establishing a deferred tax valua-
tion allowance in 2002. The improved pre-tax results largely reflect
higher sales margins, as follows:
( I N M I L L I O N S )
2002
2001
I n c re a s e ( De c re a s e )
Amount Percent
Iron ore pellet sales (tons)
14.7
8.4
6.3
75%
Revenues from iron ore sales
and services*
Cost of goods sold and
operating expenses*
Total
Costs of production
curtailments
Excluding costs of production
curtailments
Sales margin (loss)
Total
Excluding costs of
production curtailments
Amount
$510.8
$301.5
$209.3
69%
507.1
340.9
166.2
49
20.6
48.0
(27.4)
(57)
486.5
292.9
193.6
66%
$ 3.7
$(39.4)
$ 43.1
N/M
$ 24.3
$ 8.6
$ 15.7
182%
Percent of revenues
4.8%
2.9%
1.9%
*The Company also received revenues and expenses of $75.6 million and $17.8 million in
2002 and 2001, respectively, related to freight and minority interest.
Revenues from Iron Ore Sales and Services
Revenues from iron ore sales and services were $510.8 million
in 2002, an increase of $209.3 million or 69 percent, from revenues of
$301.5 million in 2001. The increase was mainly due to the 6.3 million
ton, or 75 percent, increase in pellet sales volume in 2002.
Cost of Goods Sold and Operating Expenses
Cost of goods sold and operating expenses totaled $507.1 million
in 2002, an increase of $166.2 million, or 49 percent, from $340.9 mil-
lion in 2001. Excluding fixed costs related to production curtailments,
2002 costs and expenses were $193.6 million, or 66 percent, higher
than 2001, due to higher sales volume.
Sales Margin
Sales margin in 2002 was $3.7 million compared to a negative
sales margin of $39.4 million in 2001. Excluding fixed costs related to
production curtailments, the sales margin was $24.3 million, or 4.8
percent of revenues in 2002, versus $8.6 million or 2.9 percent of rev-
enues, in 2001. The improved sales margin in 2002 reflected operating
at a higher percent of capacity and lower costs excluding the impact of
production curtailments.
Other Revenues
Royalties and management fees from partners were $12.2 million
in 2002, a decrease of $17.6 million from 2001. The decrease in these
revenues, which results from Cliffs’ strategy of converting mine partners
into customers, was largely attributable to the acquisition of Algoma’s
45 percent interest in the Tilden mine in 2002. The loss of LTV as a
partner in Empire and reduced production at Empire in 2002 also con-
tributed to the decrease.
Interest income of $4.8 million in 2002 was $1.0 million above
2001 income of $3.8 million. The increase reflected higher average cash
balances in 2002 and interest earned on “Long-term receivables.” Partly
offsetting was the impact of lower short-term interest rates in 2002.
Insurance recoveries in 2002 include a $1.8 million insurance
recovery on a 1999 business interruption claim relating to the loss of
more than 1 million tons of pellet sales to Rouge as a result of an
explosion at the power plant that supplied Rouge. This finalized the
claim, resulting in a total recovery of $17.5 million, of which $15.3 million
occurred in 2000 and $.4 million in 2001. Additionally, in 2002 the
Company settled with an insurance provider covering certain environ-
mental sites, resulting in a $1.7 million recovery.
Administrative, Selling and General Expenses
Administrative, selling and general expenses were $23.8 million
in 2002, an increase of $8.6 million from expenses of $15.2 million in
2001. The increase in 2002 expenses was mainly due to higher pension
expense, increased medical and other postretirement benefits, and
higher incentive compensation.
Other Expenses
Interest expense was $6.6 million in 2002, a decrease of $2.2
million from 2001 interest expense of $8.8 million. The decrease was
due to lower interest rates and lower average borrowings under the
revolving credit facility, which was terminated in October 2002. Both
years include $4.9 million of interest expense on the senior unsecured
notes.
Other expenses were $7.9 million in 2002, an increase of $4.5
million from 2001 expenses of $3.4 million. The increase was primarily
due to higher business development costs, primarily expenditures on
the Mesabi Nugget Project and higher debt restructuring fees, in 2002.
14
Discontinued Operation
Following is a summary of key liquidity measures:
In the fourth quarter of 2002, Cliffs exited the ferrous metallics
business and abandoned its 82 percent investment in Cliffs and
Associates Limited (“CAL”), an HBI facility located in Trinidad and
Tobago. For the year 2002, Cliffs reported a loss from discontinued
operation of $108.5 million, consisting of $97.4 million ($95.7 million in
the third quarter) of impairment charges and $11.1 million of idle
expense, compared to a $19.6 million pre-tax ($12.7 million after-tax)
expense in 2001. CAL operated for a portion of the year 2001 and
generated net sales of $11.1 million. No expense was recorded in 2003.
The Company expects CAL to be liquidated and, accordingly, has
reflected no ongoing obligations of CAL.
Cumulative Effect of Accounting Changes
Effective January 1, 2002, the Company implemented State-
ment of Financial Accounting Standards (“SFAS”) No. 143, “Asset Retire-
ment Obligations.” The statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period incurred.
As a result of the change in accounting method, the Company recorded
a cumulative effect non-cash charge of $13.4 million, recognized on
January 1, 2002, to provide for contractual and legal obligations asso-
ciated with the eventual closure of its mining operations.
Effective January 1, 2001, the Company changed its method of
accounting for gains and losses on pension assets for the calculation of
net periodic pension cost. Under the new accounting method, the
market value of plan assets reflects unrealized gains and losses from
current year performance in the succeeding year. Previously, the
Company deferred realized and unrealized gains and losses, recognizing
them over a five-year period. The cumulative effect of the accounting
change was a non-cash credit to income of $9.3 million ($14.3 million
pre-tax) recognized on January 1, 2001.
Cash Flow and Liquidity
At December 31, 2003, the Company had cash and cash equiv-
alents of $67.8 million. Following is a summary of 2003 cash flow
activity:
Net cash flow from operating activities
Repayment of long-term debt
Capital expenditures
Proceeds from sale of assets
Proceeds from stock options
Purchase of EVTAC assets
Other
Increase in cash and cash equivalents
( I N M I L L I O N S )
$ 42.7
(30.0)
(21.6)
8.9
6.0
(2.0)
2.0
$ 6.0
15
Cash and cash equivalents
Debt
Net cash
Working capital
EBIT*
EBITDA*
AT D E C E M B E R 31 ( I N M I L L I O N S )
2003
$ 67.8
(25.0)
$ 42.8
2002
$ 61.8
(55.0)
$ 6.8
2001
$183.8
(170.0)
$ 13.8
$ 87.4
$ 95.7
$ 172.9
$(41.2)
$(55.5)
$(23.7)
$(12.2)
$ (21.6)
$ (.3)
*Includes charges for impairments of mining assets of $2.6 million in 2003 and $52.7 million
in 2002.
The Company made principal repayments on its senior un-
secured notes of $15.0 million in December 2002, $5.0 million in June
2003, $25.0 million in December 2003 and the $25.0 million balance
in early 2004. In October 2002, the Company repaid its $100 million
revolving credit facility and terminated the agreement. During the fourth
quarter of 2003, the Company realized $6.0 million from the exercise
of stock options. A total of 180,000 shares were issued from treasury
stock.
The Company anticipates that its share of capital expenditures
related to the iron ore business, which was $21.6 million in 2003, will
increase to approximately $35 million in 2004. The Company expects to
fund its capital expenditures from available cash and current operations.
Subsequent Event – Issuance of Preferred Stock
In January 2004, the Company completed a private offering of
$172.5 million of redeemable cumulative convertible perpetual pre-
ferred stock. The preferred stock will pay cash dividends at a rate of
3.25 percent per annum. The shares of preferred stock are convertible
into the Company’s common shares at an initial conversion rate of
16.1290 common shares per share of preferred stock, which is equivalent
to an initial conversion price $62.00 per common share, subject to
adjustment in certain circumstances. The Company may also exchange
this preferred stock for convertible subordinated debentures in certain
circumstances. The Company expects the net proceeds after offering
expenses to be approximately $166 million. A portion of the proceeds
was utilized to repay the remaining $25.0 million of the Company’s
senior unsecured notes early in 2004; the Company has used approx-
imately $23 million to fund its underfunded salaried pension plan and
intends to use some additional amounts for other pension obligations
in 2004. The Company expects to use any remaining proceeds of the
offering for working capital and general corporate purposes, including
capital expenditures, increased investments in its existing mines and
additional contributions to its pension plans.
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
OPERATIONS AND CUSTOMERS
Sales
The Company’s pellet sales were a record 19.2 million tons in
2003 versus the previous record of 14.7 million tons in 2002. The
increase in pellet sales in 2003 was due to higher demand by the inte-
grated steel industry and new term supply agreements in 2002 and
2003. The Company ended the year 2003 with 4.1 million tons of iron
ore pellet inventory, an increase of .2 million tons from 2002, reflecting
the Company’s increased sales and mine ownership. The Company
expects pellet sales in 2004 of approximately 22 million tons. The
Company’s sales volume is largely committed under term supply
agreements, which are subject to changes in customer requirements.
Factors impacting the Company’s average price realization under various
term supply agreements include measures of general industrial inflation,
steel prices, and the international pellet price. The price adjustment
provisions are weighted, and some are subject to annual collars, which
may limit the magnitude of the Company’s annual price changes.
Subsequent Event – International Pellet Price Settlement
The major iron ore producers of Brazil and Eastern Canada
annually negotiate and publish the price of their seaborne iron ore
products. On February 6, 2004, Companhia Val do Rio Doce (“CVRD”),
Brazil’s principal iron ore producer, reached settlement on its 2004
price for blast furnace pellets with a major European consumer. The
price represents an increase of 19.0 percent or 20.1 percent for 2004
versus 2003, depending on the point of sale. If the Eastern Canadian
iron ore pellet producers settle for a similar percentage price increase,
the estimated effect of the international pellet price adjustment factor
on the Company’s revenues per ton from iron ore sales and services for
2004 will be an average increase of approximately 5 percent from
2003. This would represent an improvement in operating earnings of
approximately $40 million, based on the 22 million tons of estimated
pellet sales for 2004.
The estimated 2004 impact of the other price adjustment fac-
tors included in the Company’s term supply agreements, including the
adjustments based on general industrial inflation rates and the price of
steel, cannot be determined at this time; however, additional price
increases will be limited by annual collars.
Customers
Rouge, a significant pellet sales customer of the Company, filed
for chapter 11 bankruptcy protection on October 23, 2003, and on
January 30, 2004, sold substantially all of its assets to Severstal North
America, Inc., a U.S. affiliate of OAO Severstal (“Severstal”), Russia’s
second-largest steel producer.
The Company sold 3.0 million tons of pellets to Rouge in 2003
and 1.4 million tons in 2002. At the time of Rouge’s filing, the Company
had no trade receivable exposure to Rouge. On February 19, 2004,
Rouge repaid the outstanding balance of the $10 million secured
loan we had previously made to it. The Company’s term supply agree-
ment with Rouge, which provided that it would be the sole supplier of
pellets to Rouge through 2012, was assumed by Severstal with minor
modifications.
On September 16, 2003, WCI petitioned for protection under
chapter 11 of the U.S. Bankruptcy Code. At the time of the filing, the
Company had a trade receivable exposure of $4.9 million, which was
reserved in the third quarter. WCI purchased 1.5 million tons (.4 million
tons since the filing date) in 2003 and 1.4 million tons of pellets in
2002. The Company’s term supply agreement with WCI expires at the
end of 2004.
On May 19, 2003, Weirton petitioned for protection under
chapter 11 of the U.S. Bankruptcy Code. Weirton purchased 2.8 million
tons, or 14 percent of total tons sold by the Company in 2003, and 2.9
million tons, or 20 percent of total tons sold in 2002. The Company has
modified its term supply agreement with Weirton. Under the modified
agreement, which runs through 2005, the Company will provide the
greater of 67 percent of Weirton’s pellet requirements or 1.9 million tons.
The Company is a 40.6 percent participant in a joint venture
that acquired certain power-related assets from a subsidiary of Weirton
in 2001, in a purchase-leaseback arrangement. The Company’s invest-
ment at December 31, 2003, of $10.4 million, which is included in
“Other investments,” is accounted for utilizing the “equity method.” In
the second quarter of 2003, the Company recorded a provision of $2.6
million for Weirton bankruptcy exposures.
On February 26, 2004, FW Holding Inc., or FW Holding, a sub-
sidiary of Weirton, filed a petition for chapter 11 bankruptcy protection.
As discussed under “Risk Factors – Risks Relating to The Company –
Our sales, margins and profitability may be significantly affected by the
bankruptcy or reorganization of our customers,” we are a participant
in a joint venture that had entered into a purchase-leaseback
arrangement with FW Holding in 2001. In connection with its bank-
ruptcy filing, FW Holding has filed an adversary complaint against
the joint venture for declaratory relief and the return of assets
acquired in the purchase-leaseback transaction. In that complaint,
FW Holding asserts that the lease transaction should be recharacter-
ized as a secured loan. If FW Holding is successful in this action, the
bankruptcy court will determine the value of the assets, which could
be less than the value of the future payments that would have been
due under the lease.
In April 2002, the Company executed a term agreement to
supply iron ore pellets to ISG through 2016. Under the terms of the
agreement, the Company is the sole supplier of pellets purchased by
ISG for its Cleveland and Indiana Harbor Works facilities. Sales, which
are dependent on ISG’s requirements, totaled 5.9 million tons, or 31
16
percent of total tons sold, in 2003 and 3.1 million tons, or 21 percent
of tons sold, in 2002. In 2002, the Company invested $17.4 million in
ISG common stock, which represented 7 percent of ISG’s equity at that
time. Initially, the Company recorded the investment utilizing the “cost
method.” In December 2003 after ISG completed an initial public
offering of its common stock, the Company’s investment value
increased to $196.7 million at December 31, 2003, resulting in an after-
tax credit to “Other comprehensive income” of $144.9 million reflecting
the “marked-to-market” gain of $179.3 million. The investment is clas-
sified as “available for sale.” The Company is restricted from selling its
shares until June 9, 2004.
Production
Following is a summary of 2003, 2002 and 2001 mine production and Company ownership:
M I N E
Empire
Tilden
Hibbing
Northshore
United Taconite*
Wabush
Total Production**
Co m p a n y ’s O w n e r s h i p
D e c e m b e r 31
2003
79.0%
85.0
23.0
100.0
70.0
26.8
2002
79.0%
85.0
23.0
100.0
2001
46.7%
40.0
15.0
100.0
26.8
22.8
P R O D U C T I O N
( M I L L I O N TO N S )
Co m p a n y ’s S h a re
To t a l P ro d u c t i o n
2003
2002
2001
2003
2002
2001
4.0
6.0
1.8
4.8
.1
1.4
18.1
1.1
6.7
1.5
4.2
1.2
14.7
1.7
2.2
.2
2.8
.9
7.8
5.2
7.0
8.0
4.8
1.6
5.2
3.6
7.9
7.7
4.2
4.2
4.5
5.7
6.4
6.1
2.8
4.2
4.4
30.3
27.9
25.4
**Production in 2001 and 2002 and 1.5 million of the tons produced in the first five months of 2003 occurred under the management of the previous mine owners prior to the acquisition
by United Taconite in December 2003.
**Excludes United Taconite production under previous mine ownership.
The increase in the Company’s share of production from 7.8
million tons in 2001 to 14.7 million tons in 2002 to 18.1 million tons in
2003 reflected the Company’s increased ownership in four mines in
2002 and generally higher production to meet increased market
demand. The Company preliminarily expects total mine production in
2004 to be approximately 36 million tons; the Company’s share of
production is currently estimated to be approximately 22 million tons.
The increase in 2004 estimated production reflects the whole year
impact of United Taconite’s acquisition and anticipated higher production
levels at all other mines. Production schedules are subject to change in
pellet demand.
Ownership Increases
United Taconite: Effective December 1, 2003, United Taconite,
a newly formed company owned 70 percent by a subsidiary of the
Company and 30 percent by a subsidiary of Laiwu, purchased the ore
mining and pelletizing assets of Eveleth Mines, LLC. Eveleth Mines had
ceased mining operations in May 2003 after filing for chapter 11 bank-
ruptcy protection on May 1, 2003. Under the terms of the purchase
agreement, United Taconite purchased all of Eveleth Mines’ assets for
$3.0 million in cash and the assumption of certain liabilities, primarily
mine closure-related environmental obligations. As a result of this
transaction, the Company, after assigning appropriate values to assets
acquired and liabilities assumed, was required to record an “extraordinary
gain” of $2.2 million, net of $.5 million tax and $1.2 million minority
17
interest. In conjunction with this transaction, the Company and its
Wabush Mines venture partners entered into pellet sales and trade
agreements with Laiwu to optimize shipping efficiency.
Empire Mine: Effective December 31, 2002, the Company
increased its ownership in Empire from 46.7 percent to 79 percent in
exchange for assumption of all mine liabilities. Under the terms of the
agreement, the Company indemnified Ispat Inland from obligations of
Empire in exchange for certain future payments to Empire and to the
Company by Ispat Inland of $120.0 million, recorded at a present value
of $61.3 million at December 31, 2003 ($58.8 million at December 31,
2002) with $56.3 million classified as “Long-term receivable” with the
balance current, over the 12-year life of the supply agreement. A sub-
sidiary of Ispat Inland has retained a 21 percent ownership in Empire,
which it has a unilateral right to put to the Company in 2008. The
Company is the sole outside supplier of pellets purchased by Ispat
Inland for the term of the supply agreement.
Tilden Mine: On January 31, 2002, the Company increased its
ownership in Tilden from 40 percent to 85 percent with the acquisition
of Algoma’s interest in Tilden for assumption of mine liabilities associ-
ated with the interest. The acquisition increased the Company’s share
of the annual production capacity by 3.5 million tons. Concurrently, a
term supply agreement was executed that made the Company the
sole supplier of iron ore pellets purchased by Algoma for a 15-year
period.
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
Hibbing Mine: In July 2002, the Company acquired (effective
retroactive to January 1, 2002) an 8 percent interest in Hibbing from
Bethlehem for the assumption of mine liabilities associated with the
interest. The acquisition increased the Company’s ownership of Hibbing
from 15 percent to 23 percent. This transaction reduced Bethlehem’s
ownership interest in Hibbing to 62.3 percent. In October 2001,
Bethlehem filed for protection under chapter 11 of the U.S. Bankruptcy
Code. At the time of the filing, the Company had a trade receivable of
approximately $1.0 million, which has been written off. In May 2003,
ISG purchased the assets of Bethlehem, including Bethlehem’s 62.3
percent interest in Hibbing.
Wabush Mines: In August 2002, Acme Steel Company, a wholly
owned subsidiary of Acme Metals Incorporated, which had been under
chapter 11 bankruptcy protection since 1998, rejected its 15.1 percent
interest in Wabush. As a result, the Company’s interest increased to
26.83 percent. Acme had discontinued funding its Wabush obligations
in August 2001.
Subsequent Event – Stelco Restructuring
On January 29, 2004, Stelco applied and obtained bankruptcy-
court protection from creditors in Ontario Superior Court under the
Companies’ Creditors Arrangement Act. Pellet sales to Stelco totaled .1
million tons in 2003 and .3 million tons in 2002. Stelco Inc. is a 44.6
percent participant in Wabush Mines and U.S. subsidiaries of Stelco
(which are not believed to have filed for bankruptcy protection) own
14.7 percent of Hibbing Taconite Company – Joint Venture and 15 per-
cent of Tilden Mining Company L.C. At the time of the filing, the
Company had no trade receivable exposure to Stelco. Additionally,
Stelco has met its cash call requirements at the mining ventures to
date. The Company currently expects Stelco to continue its participation
in the mining ventures.
Effect of Mine Ownership Increases
While none of the increases in mine ownerships during 2002
required cash payments or assumption of debt, the ownership changes
resulted in the Company recognizing net obligations of approximately
$93 million at December 31, 2002. Additional consolidated obligations
assumed totaled approximately $163 million at December 31, 2002,
primarily related to employment and legacy obligations at the Empire
and Tilden mines, partially offset by non-capital long-term assets,
principally the $58.8 million Ispat Inland long-term receivable. United
Taconite’s acquisition of the Eveleth mine assets in December 2003
was for $3.0 million cash and assumption of certain liabilities, primarily
mine-closure related environmental obligations.
Other Related Items
The iron ore industry has been identified by the United States
Environmental Protection Agency (the “EPA”) as an industrial category
that emits pollutants established by the 1990 Clean Air Act Amend-
ments. These pollutants included over 200 substances that are now
classified as hazardous air pollutants (“HAP”). The EPA is required to
develop rules that would require major sources of HAP to utilize
Maximum Achievable Control Technology (“MACT”) standards for their
emissions. Pursuant to this statutory requirement, the EPA published a
final rule on October 30, 2003, imposing emission limitations and
other requirements on taconite iron ore processing operations. We
must comply with the new requirements not later than October 30,
2006. Our projected costs, including capital expenditures, to meet the
proposed MACT standards are approximately $15 million.
The United Steel Workers of America (“USWA”) represents all
hourly employees at our Empire, Hibbing, Tilden and United Taconite
mines, as well as the Wabush mine in Canada. The collective bargaining
agreements for the employees at the Empire, Hibbing, Tilden and
United Taconite mines will expire on August 1, 2004, and the collective
bargaining agreements for the employees at the Wabush mine will
expire on March 1, 2004.
On April 4, 2002, the Company signed an agreement to partic-
ipate in Phase II of the Mesabi Nugget Project. Other participants
include Kobe Steel, Ltd.; Steel Dynamics, Inc.; Ferrometrics, Inc.; and
the State of Minnesota. Construction of a $24 million pilot plant at the
Company’s Northshore Mine, to test and develop Kobe Steel’s technology
for converting iron ore into nearly pure iron in nugget form, was com-
pleted in May 2003. The high-iron-content product could be utilized to
replace steel scrap as a raw material for electric steel furnaces and
blast furnaces or basic oxygen furnaces of integrated steel producers.
All of the participants have recently agreed to enter a second six-month
operating phase of the pilot plant, which is expected to be completed
in May 2004, to explore the commercial viability of this technology. The
Company’s contribution to the project through the pilot plant testing
and development phase was $5.2 million, primarily contributions of in-
kind facilities and services.
STRATEGIC INVESTMENTS
The Company intends to continue to pursue investment and
management opportunities to broaden its scope as a supplier of iron
ore pellets to the integrated steel industry through the acquisition of
additional mining interests to strengthen its market position. The Company
is particularly focused on expanding its international investments to
leverage its expertise in processing low grade ores to capitalize on
global demand for steel and iron ore in areas such as China. The
Company’s innovative United Taconite joint venture with Laiwu is one
18
example of its ability to expand geographically, and the Company intends
to continue to pursue similar opportunities in other regions. In the event
of any future acquisitions or joint venture opportunities, the Company
may consider using available liquidity or other sources of funding to
make investments.
ENVIRONMENTAL AND CLOSURE OBLIGATIONS
At December 31, 2003, the Company had environmental and
closure obligations, including its share of the obligations of ventures, of
$97.8 million ($95.5 million at December 31, 2002), of which $10.2
million is current. Payments in 2003 were $7.5 million ($8.3 million in
2002). The obligations at December 31, 2003, include certain respon-
sibilities for environmental remediation sites, $15.5 million; closure of
LTV Steel Mining Company (“LTVSMC”), $37.1 million; and obligations for
closure of the Company’s six operating mines, $45.2 million, reflecting
implementation of SFAS No. 143, “Asset Retirement Obligations,” effec-
tive January 1, 2002.
The LTVSMC closure obligation resulted from an October 2001
transaction where subsidiaries of the Company and Minnesota Power,
a business of Allete, Inc., acquired LTV’s assets of LTVSMC in Minnesota
for $25.0 million (Company share $12.5 million). As a result of this
transaction the Company received a payment of $62.5 million from
Minnesota Power and assumed environmental and certain facility closure
obligations of $50.0 million.
In September 2002, the Company received a draft of a pro-
posed Administrative Order on Consent (“Consent Order”) from the
EPA, for cleanup and reimbursement of costs associated with the
Milwaukee Solvay coke plant site in Milwaukee, Wisconsin. The plant
was operated by a predecessor of the Company from 1973 to 1983,
which predecessor was acquired by the Company in 1986. In January
2003, the Company completed the sale of the plant site and property
to a third party. Following this sale, a Consent Order was entered into
with the EPA by the Company, the new owner and another third party
who had operated on the site. In connection with the Consent Order,
the new owner agreed to take responsibility for the removal action and
agreed to indemnify the Company for all costs and expenses in con-
nection with the removal action. In the third quarter of 2003, the new
owner, after completing a portion of the removal, experienced financial
difficulties. In an effort to continue progress on the removal action, the
Company expended approximately $.9 million in the third and fourth
quarters. The Company will likely be required to expend additional
amounts of approximately $2 million for the completion of the removal
action, which expenditures were previously provided for in the Company’s
environmental reserve.
SUMMARY OF CONTRACTUAL OBLIGATIONS
Following is a summary of the Company’s contractual obligations at December 31, 2003:
C O N T RA C T UA L O B L I G AT I O N S
Long-term debt
Capital lease obligations
Operating leases
Purchase obligations
Open purchase orders
Minimum “take or pay” purchase commitments(2)
Total purchase obligations
Other long-term liabilities
Pension funding minimums
OPEB claim payments
Mine closure obligations
Coal industry retiree health benefits
Personal injury
Other(3)
Total other long-term liabilities
Total
Pa y m e n t s D u e b y Pe r i o d ( 1 ) ( I N M I L L I O N S )
Less than
1 Year
$ 25.0
3.3
21.6
1-3 Years
3-5 Years
$ 4.1
4.1
25.8
$ 3.4
3.4
11.8
More than
5 Years
$ .6
.6
4.5
15.4
56.7
72.1
4.3
17.6
5.7
1.4
1.5
68.6
68.6
29.0
40.6
11.0
1.6
2.3
52.4
52.4
51.7
45.6
16.1
1.5
1.8
9.9
9.9
55.9
49.6
49.5
3.5
3.9
30.5
$152.5
84.5
$183.0
116.7
$184.3
162.4
$177.4
Total
$ 25.0
11.4
63.7
15.4
187.6
203.0
140.9
153.4
82.3
8.0
9.5
78.8
472.9
$776.0
(1)Includes the Company’s consolidated obligations and the Company’s ownership share of unconsolidated ventures’ obligations.
(2)Includes minimum electric power demand charges, minimum coal and natural gas obligations, and minimum railroad transportation obligations.
(3)Primarily includes deferred income taxes payable (principally related to the ISG “marked-to-market,” other comprehensive income) and other contingent
liabilities for which payment timing is non-determinable.
19
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
MARKET RISK
The Company is subject to a variety of market risks, including
those caused by changes in market value of equity investments, com-
modity prices, foreign currency exchange rates and interest rates. The
Company has established policies and procedures to manage risks;
however, certain risks are beyond the control of the Company.
The Company’s investment policy relating to its short-term
investments (classified as cash equivalents) is to preserve principal and
liquidity while maximizing the return through investment of available
funds. The carrying value of these investments approximates fair value
on the reporting dates.
The value of the Company’s equity investment in common stock
of ISG is subject to changes in market value as reflected in the trading
price. This investment has been classified as an available-for-sale
investment and, accordingly, changes in value have been recorded in
Shareholders’ Equity. If the market price of the stock at December 31,
2003, were to increase or decrease 10 percent, the value of the invest-
ment would change approximately $20 million before taxes.
The Company’s mining ventures enter into forward contracts for
certain commodities, primarily natural gas, as a hedge against price
volatility. Such contracts, which are in quantities expected to be delivered
and used in the production process, are a means to limit exposure to
price fluctuations. At December 31, 2003, the notional amounts of the
outstanding forward contracts were $22.5 million (Company share –
$18.1 million), with an unrecognized fair value gain of $4.2 million
(Company share – $3.4 million) based on December 31, 2003, forward
rates. The contracts mature at various times through October 2004. If
the forward rates were to change 10 percent from the year-end rate,
the value and potential cash flow effect on the contracts would be
approximately $2.7 million (Company share – $2.2 million).
The Company had $25 million of senior unsecured notes out-
standing at December 31, 2003, which were repaid early in 2004.
A portion of the Company’s operating costs related to the
Wabush mine is subject to change in the value of the Canadian dollar;
however, the Company does not hedge its exposure to changes in the
Canadian dollar.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and
results of operations is based on the Company’s consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”).
Preparation of financial statements requires management to make
assumptions, estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, costs and expenses, and the
related disclosures of contingencies. Management bases its estimates
on various assumptions and historical experience that are believed to
be reasonable; however, due to the inherent nature of estimates, actual
results may differ significantly due to changed conditions or assumptions.
Management believes that the following critical accounting policies and
practices incorporate estimates and judgments that have the most
significant impact on the Company’s financial statements.
Iron Ore Reserves: The Company regularly evaluates its eco-
nomic iron ore reserves and updates them as required in accordance
with SEC Industry Guide 7. The estimated ore reserves could be affected
by future industry conditions, geological condition and ongoing mine
planning. Maintenance of effective production capacity or the ore reserve
could require increases in capital and development expenditures.
Generally as mining operations progress, haul lengths and lifts increase.
Alternatively, changes in economic conditions or the expected quality
of ore reserves could decrease capacity or ore reserves. Technological
progress could alleviate such factors or increase capacity or ore
reserves. Remaining Empire mine ore reserves were decreased to 29
million tons at December 31, 2003, from 63 million tons at December
31, 2002, and 116 million tons at December 31, 2001. The reduction in
ore reserves reflected increasing production and processing costs in
recent years as the Empire mine approaches the latter portion of its
economic life. Additionally, economic ore reserves at the Wabush mine
were reduced in the last two years to 61 million tons at December 31,
2003, from 94 million tons at December 31, 2002, and 244 million tons
at December 31, 2001. The decrease in ore reserves at the Wabush
mine reflects increased operating costs, the impact of currency
exchange rates and a reduction in the maximum mining depth in one
critical mining area due to assessment of dewatering capabilities based
on a recently completed hydrologic evaluation. The Company uses its
ore reserve estimates to determine the mine closure dates utilized in
recording the fair value liability for asset retirement obligations. See
Note 5 – “Environmental and Mine Closure Obligations” (Mine Closure)
in the Notes to Consolidated Financial Statements. Since the liability
represents the present value of the expected future obligation, a
significant change in ore reserves would have a substantial effect on
the recorded obligation. The Company also utilizes economic ore
reserves for evaluating potential impairments of mine assets and in
determining maximum useful lives utilized to calculate depreciation
and amortization of long-lived mine assets. Decreases in ore reserves
could significantly affect these items.
Asset Retirement Obligations: The accrued mine closure obli-
gations for the Company’s active mining operations reflect the adoption
of SFAS No. 143, effective January 1, 2002, to provide for contractual
and legal obligations associated with the eventual closure of the mining
operations. The Company’s obligations are determined based on detailed
estimates adjusted for factors that an outside party would consider (i.e.,
20
to measure the benefit obligations, the expected long-term rate of
return on plan assets and the medical care cost trend are reviewed
annually. At December 31, 2003, the Company reduced its discount
rate to 6.25 percent from 6.90 percent at December 31, 2002. The
Company also reduced its expected return on plan assets utilized for
calculating 2004 pension and OPEB expense by .5 percent to 8.5
percent. Additionally, the Company increased its medical care cost
trend assumption to 10 percent in 2004, decreasing to 5 percent in
2009 and thereafter; previously, the Company utilized a medical trend
rate assumption of 9 percent in 2004, decreasing to 5 percent in 2008
and thereafter. Following are sensitivities on estimated 2004 pension and
OPEB expense of potential further changes in these key assumptions:
Decrease discount rate .25 percent
Decrease return on assets 1 percent
Increase medical trend rate 1 percent
I n c re a s e i n 20 04 E x p e n s e
( I N M I L L I O N S )
Pension
OPEB
$ 1.2
4.0
N/A
$1.9
.5
3.4
Changes in actuarial assumptions, including discount rates,
employee retirement rates, mortality, compensation levels, plan asset
investment performance and health care costs, are determined in con-
junction with outside actuaries. Changes in actuarial assumptions
and/or investment performance of plan assets can have a significant
impact on the Company’s financial condition due to the magnitude of
the Company’s retirement obligations. See Note 8 – “Retirement Related
Benefits” in the Notes to Consolidated Financial Statements.
Income Taxes: Income taxes are based on income (loss) for
financial reporting purposes and reflect a current tax liability (asset) for
the estimated taxes payable (recoverable) in the current year tax return
and changes in deferred taxes. Deferred tax assets or liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using enacted tax laws
and rates. The Company recorded a valuation allowance in 2002 for its
net deferred tax assets and net loss carryforwards in recognition of the
uncertainty of their realization. In making the determination to record
the valuation allowance, management considered the likelihood of
future taxable income and feasible and prudent tax planning strategies
to realize deferred tax assets. In the future, if the Company determines
that it expects to realize more or less of the deferred tax assets, an
adjustment to the valuation allowance will affect income in the period
such determination is made. See Note 9 – “Income Taxes” in the Notes
to Consolidated Financial Statements.
inflation, overhead and profit), which were escalated (at an assumed 3
percent) to the estimated closure dates, and then discounted using a
credit adjusted risk free interest rate (12.0 percent for United Taconite
and 10.25 percent for all others). The closure date for each location
was determined based on the exhaustion date of the remaining iron
ore reserves. The estimated obligations are particularly sensitive to the
impact of changes in mine lives given the difference between the infla-
tion and discount rates. Changes in the base estimates of legal and
contractual closure costs due to changed legal or contractual require-
ments, available technology, inflation, overhead or profit rates would
also have a significant impact on the recorded obligations. See Note 5
– “Environmental and Mine Closure Obligations” (Mine Closure) in the
Notes to Consolidated Financial Statements.
Asset Impairment: The Company monitors conditions that
indicate that the carrying value of an asset or asset group may be
impaired. The Company determines impairment based on the asset’s
ability to generate cash flow greater than its carrying value, utilizing an
undiscounted probability-weighted analysis. If the analysis indicates the
asset is impaired, the carrying value is adjusted to fair value. The im-
pairment analysis and fair value determination can result in significantly
different outcomes based on critical assumptions and estimates including
the quantity and quality of remaining economic ore reserves, and future
iron ore prices and production costs. See Note 1 – “Operations and
Customers” (Empire Mine) and Note 3 – “Discontinued Operation” in
the Notes to Consolidated Financial Statements.
Environmental Remediation Costs: The Company has a formal
code of environmental protection and restoration. The Company’s obli-
gations for known environmental problems at active and closed mining
operations and other sites have been recognized based on estimates
of the cost of investigation and remediation at each site. If the estimate
can only be estimated as a range of possible amounts, with no specific
amount being most likely, the minimum of the range is accrued.
Management reviews its environmental remediation sites quarterly to
determine if additional cost adjustments or disclosures are required.
The characteristics of environmental remediation obligations, where
information concerning the nature and extent of cleanup activities is
not immediately available, or changes in regulatory requirements, result
in a significant risk of increase to the obligations as they mature. Expected
future expenditures are not discounted to present value. Potential
insurance recoveries are not recognized until realized.
Employee Retirement Benefit Obligations: Assumptions used
in determining the benefit obligations and the value of plan assets for
defined benefit pension plans and postretirement benefit plans (pri-
marily retiree health care benefits) offered by the Company and its
ventures are evaluated periodically by management in conjunction with
outside actuaries. Critical assumptions, such as the discount rate used
21
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
RISKS RELATING TO THE COMPANY
Excess global capacity and the availability of competitive substitute
materials have resulted in intense competition in the steel industry,
which may further reduce steel prices and decrease steel production
and our customers’ demand for iron ore products.
More than 95 percent of our revenues are derived from the
North American integrated steel industry, which is highly competitive.
From time to time, global overcapacity in steel manufacturing has a
negative impact on North American steel sales and reduces the pro-
duction of steel and consequently the demand for iron ore. Further,
production of steel by North American integrated steel manufacturers
may be replaced to a certain extent by production of substitute materials
by other manufacturers. In the case of certain product applications,
North American steel manufacturers compete with manufacturers of
other materials, including plastic, aluminum, graphite composites,
ceramics, glass, wood and concrete. Most of our term supply agreements
for the sale of iron ore products are requirements-based or provide for
flexibility of volume above a minimum level. Reduced demand for and
consumption of iron ore products by North American integrated steel
producers have had and may continue to have a significant negative
impact on our sales, margins and profitability.
Increased imports of steel into the United States could adversely
impact North American steel sales, which could adversely affect
demand for our products and our sales, margins and profitability.
From time to time, global overcapacity in steel manufacturing
and a weakening of certain foreign economies, particularly in Eastern
Europe, Asia and Latin America, may negatively impact steel prices in
those foreign economies and result in high levels of steel imports from
those countries into the United States at depressed prices. Based on
the American Iron and Steel Institute’s Apparent Steel Supply (excluding
semi-finished steel products), imports of steel into the United States
constituted 20.4 percent, 20.2 percent and 22.3 percent of the
domestic steel market supply for 2002, 2001 and 2000, respectively.
Significant imports of steel into the United States have substantially
reduced sales, margins and profitability of North American steel produc-
ers and, therefore, have reduced demand for iron ore. The purchase by
North American steel producers of semi-finished steel products from
foreign suppliers also will decrease demand for our iron ore products.
The U.S. government established various protective actions during
2001 and 2002, including the enactment of various steel import quotas
and tariffs, which contributed to a decrease of some steel imports during
2002. However, these protective measures were only temporary and
many foreign steel manufacturers were granted exemptions from appli-
cations of these measures. Furthermore, some products (including iron
ore and some semi-finished steel products) and some countries were
not covered by these protective measures. On November 10, 2003, the
highest trade court of the World Trade Organization issued a final decision
declaring that the tariffs imposed by the United States on hot-rolled
and cold-rolled finished steel imports violated global trade rules. Shortly
after this decision was announced, a number of countries threatened
to impose retaliatory tariffs on various products produced in the United
States if the United States did not terminate its steel tariffs. On
December 4, 2003, President Bush announced that the steel import
quotas and tariffs would be lifted, effective at midnight on that day. At
this time it is uncertain how the lifting of these measures will affect the
North American steel industry, but the removal of these measures may
lead to an increase of steel imports and result in a reduction of North
American steel sales. The decreased North American steel sales could
decrease demand for iron ore products and have a substantial nega-
tive impact on our sales, margins and profitability.
The North American steel industry is undergoing a restructuring
process that has resulted in industry consolidation and is likely to
result in a reduction of integrated steelmaking capacity over time,
and thereby reduce iron ore consumption.
The North American steel industry has undergone consolidation,
and that consolidation is likely to continue. Consolidation of the North
American steel industry will result in fewer customers for iron ore. The
restructuring process may reduce integrated steelmaking capacity,
which would reduce demand for our iron ore products and may
adversely affect our sales. Further, if the steel producers that have cap-
tive iron ore mines obtain a larger share of the North American steel
production, they may obtain their iron ore from their own mines, if they
have excess capacity, rather than from us. These factors could adversely
affect our sales, margins and profitability.
Our sales and earnings are subject to significant fluctuations as a
result of the cyclical nature of the North American steel industry.
In 2002 and 2003, 14.5 million and 18.6 million tons, respectively,
of the iron ore pellets we produced were sold to North American steel
manufacturers, while only .2 million and .6 million tons, respectively, of
our pellets were sold outside North America. The North American steel
industry has been highly cyclical in nature, influenced by a combination
of factors, including periods of economic growth or recession, strength
or weakness of the U.S. dollar, worldwide production capacity, the
strength of the U.S. automotive industry, levels of steel imports and
applicable tariffs. The demand for steel products is generally affected
by macroeconomic fluctuations in North America and the global
economies in which steel companies sell their products. For example,
future economic downturns, stagnant economies or currency fluctua-
tions in the United States or globally could decrease the demand for
steel products or increase the amount of imports of steel or iron ore
into the United States.
22
In addition, a disruption or downturn in the oil and gas, gas
transmission, construction, commercial equipment, rail transportation,
appliance, agricultural, automotive or durable goods industries, all of
which are significant markets for steel products and are highly cyclical,
could negatively impact sales of steel by North American producers.
These trends could decrease the demand for iron ore products and
significantly adversely affect our sales, margins and profitability.
If North American steelmakers use methods other than blast furnace
production to produce steel, or if their blast furnaces shutdown or
otherwise reduce production, the demand for our iron ore products
may decrease, which would adversely affect our sales, margins and
profitability.
Demand for our iron ore products is determined by the operating
rates for the blast furnaces of North American steel companies.
However, not all finished steel is produced by blast furnaces; finished
steel also may be produced by other methods that do not require iron
ore products. For example, steel “mini-mills,” which are steel recyclers,
generally produce steel by using scrap steel, not iron ore pellets, in their
electric furnaces. Production of steel by steel “mini-mills” was approx-
imately 50 percent of North American total finished steel production in
2003. 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 cus-
tomers may choose not to maintain their blast furnaces, and some of
our customers may not have the resources necessary to adequately
maintain their blast furnaces. If our customers use methods to produce
steel that do not use iron ore products, demand for our iron ore
products will decrease, which could adversely affect our sales, margins
and profitability.
Natural disasters, equipment failures and other unexpected events
may lead our steel industry customers to curtail production or shut
down their operations.
Operating levels at our steel industry customers are subject to
conditions beyond their control, including raw material shortages,
weather conditions, natural disasters, interruptions in electrical power
or other energy services, equipment failures and other unexpected
events. Any of those events could also affect other suppliers to the
North American steel industry. In either case, those events could cause
our steel industry customers to curtail production or shutdown a portion
or all of their operations, which could reduce their demand for our iron
ore products. For example, in late 2003, a fire occurred in a mine of a
major coal supplier to U.S. Steel, which supplies a majority of the coke,
a processed form of coal, used by our steel industry customers to
operate their blast furnaces. The fire caused U.S. Steel to curtail its
production of coke, and to reduce its coke shipments to at least two
of our steel industry customers. As a result, one of our steel industry
customers had to curtail its steel production, and its demand for our
iron ore products decreased. Accordingly, as discussed below, that
customer invoked the force majeure provision of its term supply agree-
ment with us and reduced its requirements for our iron ore products in
the first quarter of 2004 by 180,000 long tons. Another of our steel
industry customers announced that it is exploring alternatives, including
temporary curtailments of some of its steelmaking operations, in order
to deal with the coke shortage. Production of steel by our other steel
industry customers may also be adversely affected by the failure of U.S.
Steel to ship adequate supplies of coke to them. Decreased demand
for our iron ore products could adversely affect our sales, margins and
profitability.
If the rate of steel consumption in China slows, the demand for iron
ore could decrease.
Although we do not have significant international sales, the price
of iron ore is strongly influenced by international demand. The current
growing level of international demand for iron ore and steel is largely
due to the rapid industrial growth in China. A large quantity of steel is
currently being used in China to build roads, bridges, railroads and fac-
tories. If the economic growth rate in China slows, which may be difficult
to forecast, less steel will be used in construction and manufacturing,
which would decrease demand for iron ore. This could adversely impact
the world iron ore market, which would impact the North American
iron ore market, and could also adversely impact our United Taconite
joint venture with Laiwu.
We operate in a very competitive industry.
Iron ore resources are in abundant supply worldwide, and the
iron mining business is highly competitive, with producers in all iron-
producing regions. Some of our competitors may have greater finan-
cial resources than we have and may be better able to withstand
changes in conditions within the North American steel industry than we
are. In the future, we may face increasing competition. As a result, we
may face pressures on sales prices and volumes of our products from
competitors and large customers.
Our sales and competitive position depend on our ability to transport
our products to our customers at competitive rates and in a timely
manner.
Our competitive position is largely dependent on the ability to
transport iron ore to our markets at competitive rates. Disruption of the
lake freighter and rail transportation services because of weather-
related problems, including ice and winter weather conditions on the
Great Lakes, strikes, lock-outs or other events, could impair our ability
to supply iron ore pellets to our customers at competitive rates or in a
23
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
timely manner and, thus, could adversely affect our sales and profit-
ability. Further, increases in transportation costs, or changes in such costs
relative to transportation costs incurred by our competitors, could make
our products less competitive, restrict our access to certain markets
and have an adverse effect on our sales, margins and profitability.
If a substantial portion of our term supply agreements terminate and
are not renewed, and we are unable to find alternate buyers willing
to purchase our products on terms comparable to those in our existing
term supply agreements, our sales, margins and profitability will suffer.
A substantial majority of our sales are made under term supply
agreements, which are important to the stability and profitability of our
operations. In 2003 and 2002, more than 94 percent of our sales vol-
ume was sold under term supply agreements. If a substantial portion
of our term supply agreements were modified or terminated, we could
be materially adversely affected to the extent that we are unable to
renew the agreements or find alternate buyers for our iron ore at the
same level of profitability. We cannot assure you that we will be able to
renew or replace existing term supply agreements at the same prices
or with similar profit margins when they expire. A loss of sales to our
existing customers could have a substantial negative impact on our
sales, margins and profitability.
We depend on a limited number of customers, and the loss of, or
significant reduction in, purchases by our largest customers could
adversely affect our sales.
The following six customers together accounted for a total of 93
percent and 79 percent of our total sales revenues in the years ended
2003 and 2002, respectively:
C U S TO M E R
ISG
Algoma
Rouge
Weirton
Ispat Inland
WCI
Total
Pe rc e n t o f S a l e s R e ve n u e s
Ye a r E n d e d D e c e m b e r 31,
2003
2002
30%
17
16
15
8
7
93%
21%
19
9
21
1
8
79%
If one or more of these customers were to significantly reduce
their purchases of iron ore products from us, or if we were unable to
sell iron ore products to them on terms as favorable to us as the terms
under our current term supply agreements, our sales, margins and
profitability could suffer materially due to the high level of fixed costs in
the near term and the high costs to idle or close mines. We are a mer-
chant mine producer of iron ore products, not a “captive” producer
owned by a steel manufacturer, and therefore we rely on sales to our
joint venture partners and other third-party customers for our revenues.
In addition, Weirton, WCI and Stelco have petitioned for protection
under bankruptcy or similar laws, as discussed below, and the bank-
ruptcy or reorganization of our customers could affect our sales, margins
and profitability.
Changes in demand for our products by our customers could cause
our sales, margins and profitability to fluctuate.
Our term supply agreements generally are requirements con-
tracts, the majority of which have no minimum requirement provisions,
and some of which provide for flexibility of volume above minimum levels.
A decrease in one or more of our customers’ requirements could cause
our sales to decline, as we may not be able to find other customers to
purchase our iron ore pellets. In addition, if our customers’ requirements
decline, since many of our production costs are fixed, our production
costs per ton may rise, which may affect our margins and profitability.
Unmitigated loss of revenues would have a greater impact on margins
and profitability than sales, due to the high level of fixed costs in the
iron ore mining business in the near term and the high cost to idle or
close mines.
The provisions of our term supply agreements could cause our sales,
margins and profitability to fluctuate.
Our term supply agreements typically contain force majeure
provisions allowing temporary suspension of performance by the cus-
tomer during specified events beyond the customer’s control, including
raw material shortages, power failures, equipment failures, adverse
weather conditions and other events. For example, as noted above,
one of our large customers notified us in January 2004 that it was
reducing its requirements for iron ore pellets in the first quarter of
2004 by 180,000 long tons pursuant to the force majeure provisions
of its term supply agreement with us. That customer invoked the force
majeure provision due to a failure of U.S. Steel to ship the quantity of
coke that the customer had ordered due to shortages caused by a fire at
a mine that supplied coal to U.S. Steel. If the coke shortages continue,
other customers may seek to reduce their iron ore supply requirements.
Price escalators in our term supply agreements also expose us
to short-term price volatility, which can adversely affect our margins
and profitability. Our term supply agreements also contain provisions
requiring us to deliver iron ore pellets meeting quality thresholds for
certain characteristics, such as chemical makeup. Failure to meet these
specifications could result in economic penalties. All of these contractual
provisions could adversely affect our sales, margins and profitability.
Mine closures entail substantial costs, and if we close one or more of
our mines sooner than anticipated, our results of operations and
financial condition may be significantly and adversely affected.
If we close any of our mines, our revenues would be reduced
unless we were able to increase production at any of our other mines,
which may not be possible. The closure of an open pit mine involves
24
significant fixed closure costs, including accelerated employment legacy
costs, severance-related obligations, reclamation and other environ-
mental costs, and the costs of terminating long-term obligations,
including energy contracts and equipment leases. We base our
assumptions regarding the life of our mines on detailed studies we
perform from time to time, but those studies and assumptions do not
always prove to be accurate. We accrue for the costs of reclaiming
open pits, stockpiles, tailings ponds, roads and other mining support
areas over the estimated mining life of our property. If we were to
reduce the estimated life of any of our mines, the fixed mine closure
costs would be applied to a shorter period of production, which would
increase production costs per ton produced and could significantly and
adversely affect our results of operations and financial condition.
Further, if we were to close one or more of our mines prematurely,
we would incur significant accelerated employment legacy costs,
severance-related obligations, reclamation and other environmental
costs, as well as asset impairment charges, which could materially and
adversely affect our financial condition.
A mine closure would significantly increase employment legacy
costs, including our expense and funding costs for pension and other
postretirement benefit obligations. First, retirement-eligible employees
would be eligible for enhanced pension benefits under certain pension
plans upon a mine closure. Second, the number of employees who are
eligible for retirement under the pension plans would increase under
special eligibility rules that apply upon a mine closure. Third, all
employees eligible for retirement under the pension plans at the time
of the mine closure also would be eligible for postretirement health and
life insurance benefits, thereby accelerating our obligation to provide these
benefits. Fourth, a closure of the Empire mine would likely terminate
the status of the pension plan covering hourly employees at the Empire
and Tilden mines as a multiemployer pension plan, causing more stringent
minimum funding requirements to apply to that plan. Fifth, a closure of
the Empire or Tilden mine likely would trigger withdrawal liability to the
pension plan covering hourly employees at the Empire and Tilden
mines. Finally, a mine closure could trigger significant severance-related
obligations, which could adversely affect our financial condition and
results of operations.
Applicable statutes and regulations require that mining property
be reclaimed following a mine closure in accordance with specified
standards and an approved reclamation plan. The plan addresses matters
such as removal of facilities and equipment, regrading, prevention of
erosion and other forms of water pollution, revegetation and postmining
land use. We may be required to post a surety bond or other form of
financial assurance equal to the cost of reclamation as set forth in the
approved reclamation plan. The establishment of the final mine closure
reclamation liability is based upon permit requirements and requires
various estimates and assumptions, principally associated with recla-
mation costs and production levels. Although our management believes,
based on currently available information, we are making adequate pro-
visions for all expected reclamation and other costs associated with
mine closures for which we will be responsible, our business, results of
operations and financial condition would be adversely affected if such
accruals were later determined to be insufficient.
We have significantly reduced our ore reserve estimates for the
Empire mine and may close the Empire mine sooner than we had
anticipated, which could materially and adversely affect our results
of operations and financial condition.
We significantly decreased our ore reserve estimates for the
Empire mine from 116 million tons in 2002 to 63 million tons in 2003
and further to 29 million tons in 2004. The 2004 reductions were due
to our inability to develop effective mine plans to produce cost-effective
combinations of production volume, ore quality and stripping require-
ments. We may reduce the annual production at the Empire mine as a
result of these decreased ore reserve estimates. If the ore reserves at
Empire are insufficient to sustain our operations there, we may be
required to close the mine. We have taken significant asset impairment
charges relating to the Empire mine.
If we were to close the Empire mine, we would incur significant
mine closure costs, employment legacy costs, severance-related
obligations, reclamation and other environmental costs and the costs
of terminating long-term obligations, including energy contracts and
equipment leases. A closure of the Empire mine sooner than we antici-
pate could materially and adversely affect our results of operations and
financial condition.
We rely on the estimates of our recoverable reserves, and if those
estimates are inaccurate, our financial condition may be adversely
affected.
We regularly evaluate our economic iron ore reserves based on
expectations of revenues and costs and update them as required in
accordance with Industry Guide 7 promulgated by the SEC. There are
numerous uncertainties inherent in estimating quantities of reserves of
our mines, many of which have been in operation for several decades,
including many factors beyond our control. Estimates of reserves and
future net cash flows necessarily depend upon a number of variable
factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions con-
cerning future prices for iron ore, assumptions regarding future industry
conditions and operating costs, severance and excise taxes, development
costs and costs of extraction and reclamation costs, all of which may in
fact vary considerably from actual results. For these reasons, estimates
of the economically recoverable quantities of reserves attributable to
25
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
any particular group of properties, classifications of such reserves
based on risk of recovery and estimates of future net cash flows
expected therefrom prepared by different engineers or by the same
engineers at different times may vary substantially. Estimated reserves
could be affected by future industry conditions, geological conditions and
ongoing mine planning. Actual production, revenues and expenditures
with respect to our reserves will likely vary from estimates, and if such
variances are material, our sales and profitability could be adversely
affected. For example, based on revised economic mine planning
studies that we completed in the fourth quarter of 2002, we reduced
the estimates of the ore reserves at the Empire mine from 116 million
tons to 63 million tons due to increasing mining and processing costs.
Based on an update to those studies completed in the fourth quarter
of 2003, we further significantly reduced the ore reserve estimates to
29 million tons. The reduction is due to the inability to develop effective
mine plans to produce cost-effective combinations of production volume,
ore quality and stripping requirements with the 2003 reserve base.
Studies are ongoing to identify the optimum production rate, and con-
sequently mine life, for Empire. The evaluation of satellite mineral
resources has also been initiated for potential additions to Empire’s
reserve base.
We also completed revised economic mine planning studies in
the fourth quarter of 2002 for our Wabush mine, and we reduced our
estimate of ore reserves at the Wabush mine from 244 million tons to
94 million tons due to increasing mining and processing costs. Based
on an update to those studies completed in the fourth quarter of
2003, we further significantly reduced the Wabush mine ore reserve
estimate to 61 million tons. The revised Wabush estimate is largely a
reflection of increased operating costs, the impact of currency exchange
rates and a reduction in maximum mining depth due to dewatering
capabilities based on a recently completed hydrologic evaluation.
The price adjustment provisions of our term supply agreements may
prevent us from increasing our prices to match international ore contract
prices or to pass increased costs of production on to our customers.
Our term supply agreements contain a number of price adjust-
ment provisions, or price escalators, including adjustments based on
general industrial inflation rates, the price of steel and the international
price of iron ore pellets, among other factors, that allow us to adjust the
prices under those agreements generally on an annual basis. Our price
adjustment provisions are weighted and some are subject to annual
collars, which limit our ability to raise prices to match international levels
and fully capitalize on strong demand for iron ore. Most of our term
supply agreements do not allow us to increase our prices and to directly
pass through higher production costs to our customers. An inability to
increase prices or pass along increased costs could adversely affect our
margins and profitability.
Our sales, margins and profitability may be significantly affected by
the bankruptcy or reorganization of our customers.
The volatility, fluctuating prices, level of imports and low demand
affecting the North American steel industry have severely impacted the
ability of many North American steelmakers to generate profits. Many
North American steelmakers, particularly large integrated steel producers,
have been hampered with significant “legacy” costs, particularly under-
funded pension obligations and significant retiree health obligations.
Since 1997, approximately 49 North American steelmakers have filed
for bankruptcy, reorganization, restructuring or similar protection
including Acme Steel, Algoma, Bethlehem Steel, Geneva Steel
Holdings Corp., Gulf States Steel, LTV Steel, National Steel Corporation,
Slater Steel Inc. and Wheeling-Pittsburgh Steel Corporation. Since May
2003, four of our North American steel industry customers, WCI,
Weirton, Rouge and Stelco, petitioned for protection under bankruptcy
or other similar laws.
Financially distressed customers may be unable to perform
under their agreements with us and, if they file for protection under
bankruptcy or other similar laws, they may be able to reject their
agreements with us pursuant to the operation of those laws. Such laws
may enable a customer under bankruptcy protection to reject its existing
term supply agreement with us, which may adversely affect our sales
and profitability. In effect, such laws may allow the customer (or a party
that might acquire the customer’s business through the bankruptcy
process) to renegotiate the customer’s existing term supply agreement
with us or to pursue arrangements with another pellet supplier without
penalty.
We cannot assure that WCI, Weirton and Stelco will successfully
emerge from bankruptcy or restructuring or that they will continue to
meet their obligations under their agreements with us. We currently
have trade receivable exposure of $4.9 million to WCI (which was
reserved against in the third quarter of 2003). We currently have an
agreement to sell iron ore pellets to Weirton, but we cannot assess
whether Weirton will successfully emerge from bankruptcy. We invested
$10.4 million for a 40.6 percent interest in a joint venture that acquired
certain steam generating and power-related assets from a subsidiary of
Weirton in 2001 and leased such assets back to an affiliate of Weirton
with a guaranty of such lease by Weirton in a purchase-leaseback
arrangement. Subsequent to its filing, Weirton has continued to meet
its obligations under the lease agreement, which extends through
2012. We sold Rouge 1.4 million tons of pellets in fiscal 2002 and 3.0
million tons in 2003. At the time of Rouge’s bankruptcy petition, we
had no trade receivable exposure to Rouge; however, we have a $10.0
million secured loan to Rouge that will mature in 2007. As of
December 31, 2003, the loan had a balance of $11.5 million, including
accrued interest. At this time, we cannot assess the impact of Rouge’s
26
bankruptcy and subsequent sale on our loan with Rouge. The bank-
ruptcy or reorganization of our largest customers could have a significant
impact on our sales, margins and profitability.
Our ability to collect payments from our customers depends on their
creditworthiness.
Our ability to receive payment for iron ore products sold and
delivered to our customers depends on the creditworthiness of our
customers. Generally, we deliver iron ore products to our customers in
advance of payment for those products, and title and risk of loss with
respect to those products does not pass to the customer until payment
for the pellets is received. Accordingly, there is typically a period of time
in which pellets, as to which we have reserved title, are within our cus-
tomers’ control. As discussed above, several of our customers have
petitioned for protection under bankruptcy or other similar laws, and
most of our North American customers have below-investment-grade
or no credit rating. Failure to receive payment from our customers for
products that we have delivered could adversely affect our results of
operations.
Our change in strategy from a manager of iron ore mines on behalf
of steel company owners to primarily a merchant of iron ore to steel
company customers has increased our obligations with respect to
those mines and has made our revenues, earnings and profit margins
more dependent on sales of iron ore products and more susceptible
to product demand and pricing fluctuations.
Historically, we have acted as a manager of iron ore mines on
behalf of steel company owners, and in that capacity have been gen-
erally entitled to management fees, royalties on reserves that we have
leased or subleased to the Empire and Tilden mines, and income from
our sales of iron ore products to our customers, including the other
mine owners. Our revised business strategy is to increase our owner-
ship in our co-owned mines. In accordance with that revised strategy,
in fiscal year 2002 we increased our ownership in (1) the Empire mine
from 47 percent to 79 percent, (2) the Tilden mine from 40 percent to
85 percent, (3) the Hibbing mine from 15 percent to 23 percent and
(4) the Wabush mine from 23 percent to 27 percent. While we have
gained greater control of the mines we operate, we have also increased
our share of the operating costs, employment legacy costs and financial
obligations associated with those mines. Our increased ownership of
those mines has caused the management fees and royalties due to us
from our partners in the mines to decline from $29.8 million in 2001 to
$10.6 million in 2003. The decline in royalties and management fees has
made our revenues, earnings and profit margins more volatile and more
dependent on sales of our iron ore products to third party customers.
We rely on our joint venture partners in our mines to meet their
payment obligations, and the inability of a joint venture partner to do
so could significantly affect our operating costs.
We co-own five of our six mines with various joint venture partners
that are integrated steel producers or their subsidiaries, including
Dofasco, ISG, Ispat Inland, Laiwu and Stelco. While we are the manager
of each of the mines we co-own, we rely on our joint venture partners
to make their required capital contributions and to pay for their share
of the iron ore pellets that we produce. Most of our venture partners
are also our customers and are subject to the creditworthiness risks
described above. If one or more of our venture partners fail to perform
their obligations, the remaining venturers, including ourselves, may be
required to assume additional material obligations, including significant
pension and postretirement health and life insurance benefit obligations.
On January 29, 2004, Stelco applied and obtained bankruptcy-court
protection from creditors in Ontario Superior Court under the Companies’
Creditors Arrangement Act. Stelco is a 44.6 percent participant in the
Wabush Mines joint venture, and U.S. subsidiaries of Stelco (which are
not believed to have filed for bankruptcy protection) own 14.7 percent
of Hibbing Taconite Company – Joint Venture and 15 percent of Tilden
Mining Company L.C. Stelco has met its cash call requirements at the
mining ventures to date. The Company currently expects Stelco to con-
tinue its participation in the mining ventures. The premature closure of a
mine due to the failure of a joint venture partner to perform its obligations
could result in significant fixed mine closure costs, including severance,
employment legacy costs and other employment costs, reclamation
and other environmental costs, and the costs of terminating long-term
obligations, including energy contracts and equipment leases.
Unanticipated geological conditions and natural disasters could
increase the cost of operating our business.
A portion of our production costs are fixed regardless of current
operating levels. Our operating levels are subject to conditions beyond
our control that can delay deliveries or increase the cost of mining at
particular mines for varying lengths of time. These conditions include
weather conditions (for example, extreme winter weather, floods and
availability of process water due to drought) and natural disasters, pit
wall failures, unanticipated geological conditions, including variations in
the amount of rock and soil overlying the deposits of iron ore, variations
in rock and other natural materials and variations in geologic conditions
and ore processing changes. These conditions could impair our ability
to fulfill our plan to operate all of our mines at full capacity, which could
materially adversely affect our ability to meet the expected demand for
our iron ore products.
In the second and third quarters of 2003, pellet production at
the Tilden mine was adversely affected by approximately .3 million tons
as a result of unexpected variations in the composition of the iron ore
in one area of the mining pit, which made the ore difficult to process,
causing low throughput and recovery rates.
27
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
Many of our mines are dependent on a single-source energy supplier,
and interruption in energy services may have a significant adverse
effect on our sales, margins and profitability.
Many of our mines are dependent on one source for electric
power and for natural gas. For example, Minnesota Power is the sole
supplier of electric power to our Hibbing and United Taconite mines;
Wisconsin Energy Company is the sole supplier of electric power to our
Tilden and Empire mines; and our Northshore mine is largely dependent
on its wholly owned power facility for its electrical supply. A significant
interruption in service from our energy suppliers due to terrorism or
any other cause can result in substantial losses that may not be fully
covered by our business interruption insurance. For example, in May
2003, we incurred approximately $11.1 million in fixed costs relating to
lost production when our Empire and Tilden mines were idled for
approximately five weeks due to loss of power stemming from the failure
of a dam in the Upper Peninsula of Michigan. One natural gas pipeline
serves all of our Minnesota and Michigan mines, and a pipeline failure
may idle those operations. Any substantial unmitigated interruption of
our business due to these conditions could materially adversely affect
our sales, margins and profitability.
Equipment failures and other unexpected events at our facilities may
lead to production curtailments or shutdowns.
Interruptions in production capabilities will inevitably increase
our production costs and reduce our profitability. We do not have
meaningful excess capacity for current production needs, and we are
not able to quickly increase production at one mine to offset an inter-
ruption in production at another mine. In addition to equipment failures,
our facilities are also subject to the risk of loss due to unanticipated
events such as fires, explosions or adverse weather conditions. The
manufacturing processes that take place in our mining operations, as
well as in our crushing, concentrating and pelletizing facilities, depend
on critical pieces of equipment, such as drilling and blasting equipment,
crushers, grinding mills, pebble mills, thickeners, separators, filters,
mixers, furnaces, kilns and rolling equipment, as well as electrical
equipment, such as transformers. This equipment may, on occasion, be
out of service because of unanticipated failures. In addition, many of
our mines and processing facilities have been in operation for several
decades, and the equipment is aged. For example, in November 2003,
our Tilden facility experienced a crack in a kiln riding ring that required
the shutdown of that kiln in its pelletizing plant, resulting in a production
loss of approximately .3 million tons. In the future, we may experience
additional material plant shutdowns or periods of reduced production
because of equipment failures. Material plant shutdowns or reductions
in operations could materially adversely affect our sales, margins and
profitability. Further, remediation of any interruption in production
capability may require us to make large capital expenditures that could
have a negative effect on our profitability and cash flows. Our business
interruption insurance would not cover all of the lost revenues associated
with equipment failures. Further, longer-term business disruptions
could result in a loss of customers, which could adversely affect our
future sales levels, and therefore our profitability.
We are subject to extensive governmental regulation, which imposes,
and will continue to impose, significant costs and liabilities on us, and
future regulation could increase those costs and liabilities or limit our
ability to produce iron ore products.
We are subject to various federal, provincial, state and local laws
and regulations on matters such as employee health and safety, air
quality, water pollution, plant and wildlife protection, reclamation and
restoration of mining properties, the discharge of materials into the
environment, and the effects that mining has on groundwater quality
and availability. Numerous governmental permits and approvals are
required for our operations. We cannot assure you that we have been or
will be at all times in complete compliance with such laws, regulations
and permits. If we violate or fail to comply with these laws, regulations
or permits, we could be fined or otherwise sanctioned by regulators.
Prior to commencement of mining, we must submit to, and
obtain approval from, the appropriate regulatory authority of plans
showing where and how mining and reclamation operations are to
occur. These plans must include information such as the location of
mining areas, stockpiles, surface waters, haul roads, tailings basins and
drainage from mining operations. All requirements imposed by any
such authority may be costly and time-consuming and may delay
commencement or continuation of exploration or production operations.
See “Item 2. Properties. – Environment.”
In addition, new legislation and/or regulations and orders,
including proposals related to the protection of the environment, to
which we would be subject or that would further regulate and/or tax
our customers, namely the North American integrated steel producer
customers, may also require us or our customers to reduce or other-
wise change operations significantly or incur costs. Such new legislation,
regulations or orders (if enacted) could have a material adverse effect
on our business, results of operations, financial condition or profitability.
In particular, we are subject to the new rules promulgated by the EPA
that will require us to utilize MACT standards for our air emissions by
2006. The costs, including capital expenditures, that we will incur in
order to meet the new MACT standards may be substantial. See “Item 2.
Properties. – Environment.”
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
28
waste disposal sites. While we believe our liability at sites where claims
have been asserted will not have a material adverse effect on our
financial condition, liquidity or results of operations, we may be named
as a responsible party at other sites in the future, and we cannot assure
you that the costs associated with these additional sites will not be
material. See “Item 2. Properties. – Environment.”
We could also be held liable for any and all consequences
arising out of human exposure to hazardous substances used, released
or disposed of by us or other environmental damage, including damage
to natural resources. In particular, we and certain of our subsidiaries are
involved in various claims relating to the exposure of asbestos and silica
to seamen who sailed on the Great Lakes vessels formerly owned and
operated by certain of our subsidiaries. The full impact of these claims,
as well as whether insurance coverage will be sufficient and whether
other defendants named in these claims will be able to fund any costs
arising out of these claims, continues to be unknown. Based on currently
available information, however, we believe the resolution of currently
pending claims in the aggregate would not reasonably be expected to
have a material adverse effect on our financial position. See “Item 3.
Legal Proceedings.”
Our expenditures for 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 benefits to
eligible union and nonunion employees, including our share of expense
and funding obligations with respect to unconsolidated ventures. Our
pension expense and our required contributions to our pension plans are
directly affected by the value of plan assets, the projected rate of return
on plan assets, the rate of return on plan assets and the actuarial
assumptions we use to measure our defined benefit pension plan obli-
gations, including the rate that future obligations are discounted to a
present value (“discount rate”). We decreased the discount rate to 6.25
percent at December 31, 2003, from 6.90 percent at December 31,
2002, 7.50 percent at December 31, 2001, and 7.75 percent at
December 31, 2000. For pension accounting purposes, we assumed a
9 percent rate of return on pension plan assets for all periods, although
we decreased the return on asset assumption to 8.50 percent at
December 31, 2003, which will increase our 2004 pension expense.
Based on these assumptions, our actual funding levels and pension
expense for 2001, 2002 and 2003 and our estimated minimum fund-
ing obligations and pension expense (based on our making only our
minimum required contributions) for 2004, including our share of
expense and funding obligations with respect to unconsolidated ventures
are as follows:
Pension
( I N M I L L I O N S )
Y E A R
2001
2002
2003
2004 (estimate)
M i n i m u m
Fu n d i n g
O b l i g a t i o n
$5.4
1.1
6.4
4.3
E x p e n s e
$24.4
7.2
32.0
22.9
We cannot predict whether changing market or economic con-
ditions, regulatory changes or other factors will increase our pension
expenses or our funding obligations, diverting funds we would otherwise
apply to other uses.
Further, our funding projections for our pension plans assume
that the pension plan covering hourly employees at the Empire and
Tilden mines remains a multiemployer pension plan. If that plan loses
its multiemployer plan status, we estimate that our minimum funding
obligations for that plan would increase by approximately $25.6 million
through 2004.
We calculate our total accumulated postretirement benefit
obligation (“APBO”) for our OPEB benefits under Statement of
Financial Accounting Standards No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions.” The unfunded APBO
obligation had a present value of $317.2 million at December 31, 2003.
We have calculated the unfunded obligation based on a number of
assumptions. Discount rate and return on plan asset assumptions parallel
those utilized for pensions. We increased our assumed rate of annual
increase in the cost of health care benefits to 10 percent in 2003 (from
7.50 percent in 2002) and assumed a 1 percent decrease per year for
the following five years to 5 percent in 2008 and thereafter. We
increased the assumed rate of annual increase in the cost of health care
benefits again to 10 percent in 2004 and again assume a 1 percent
decrease per year for the following five years, thereby delaying the
decrease to 5 percent until 2009. We also contribute annually to trusts
for certain mining ventures that are available to fund these liabilities,
and we assume a 9 percent (decreasing to 8.50 percent for 2004
expense) rate of return on the assets held in these trusts. We expect
to contribute approximately $3.7 million to these trusts in 2004, based
on production at the Empire, Hibbing and Tilden mines in 2003. We
also implemented a cap on the amounts that we would pay per retiree
annually for existing and future U.S. salaried retirees. Based on these
assumptions and plan provisions, our actual expenses and funding for
these benefits for 2001, 2002 and 2003 and estimated expense and
29
Management’s Discussion & Analysis O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E RAT I O N S
funding requirements for 2004, including our share of expense and
funding obligations with respect to unconsolidated ventures are as follows:
OPEB
Y E A R
2001
2002
2003
2004 (estimate)
( I N M I L L I O N S )
E x p e n s e
$ 15.8
21.5
29.1
27.4
Fu n d i n g
O b l i g a t i o n
$27.7
16.8
17.0
21.3
If our assumptions do not materialize as expected, cash expend-
itures and costs that we incur could be materially higher. Moreover, we
cannot assure that regulatory changes will not increase our obligations
to provide these or additional benefits. These obligations also may
increase substantially in the event of adverse medical cost trends or
unexpected rates of early retirement, particularly for bargaining unit
employees for whom there is no retiree health care cost cap. Early
retirement rates likely would increase substantially in the event of a
mine closure.
Additionally, our pension and postretirement health and life
insurance benefits obligations, expenses and funding costs would
increase significantly if one or more of the mines in which we have
invested is closed, or if one or more of our joint venturers at one or
more mines is unable to perform its obligations. A mine closure would
trigger accelerated pension and OPEB obligations, and the failure of a
joint venturer to perform its obligations could shift additional pension
and OPEB liabilities to us. Any of these events could significantly
adversely affect our financial condition and results of operations.
We are a related person to certain companies that were operators
and are required under the Coal Industry Retiree Health Benefit Act
of 1992 (the “Coal Retiree Act”) to make premium payments to the
United Mine Workers Association Combined Benefit Fund (the
“Combined Fund”), and our obligations to the Combined Fund could
increase if other coal mine operators file for bankruptcy protection
or become insolvent.
We are a related party to certain companies that were coal mine
operators. As a result we are subject to the Coal Retiree Act and are
obligated to make premium payments to the Combined Fund for health
and death benefits paid by the Combined Fund to retired coal miners.
At December 31, 2003, the net present value of our estimated liability
to the Combined Fund was $7.0 million. We are assessed premiums for
unassigned or “orphan” retirees on a pro rata basis with other coal
mine operators and related parties. If other coal mine operators and
related parties file for bankruptcy protection or become insolvent, our
pro rata portion of the liability to the Combined Fund could increase,
which could have an adverse effect on our results of operation and
financial condition, sales, margins and profitability.
We cannot sell or transfer our ISG shares until June 2004, and we
cannot predict the value of those shares if we sell them after that time.
We currently own approximately 5.5 million shares of ISG’s
common stock (5.0 million owned directly and .5 million through pen-
sion fund investments), which currently represents approximately 5.7
percent of the outstanding ISG shares. As of January 30, 2004, the
trading price for the ISG common stock was $35.10 per share.
In connection with ISG’s recent initial public offering, we and other
significant ISG stockholders agreed not to sell or otherwise transfer our
ISG shares before June 9, 2004. We cannot predict the trading price
of the ISG shares following the expiration of the lock-up period.
Further, our ability to sell our ISG shares may continue to be restricted
following the expiration of the lock-up period by applicable federal
securities laws. We cannot assure you that we will sell our ISG shares
or that any sale of our ISG shares after the expiration of the lock-up
period will result in a gain to us. If we do sell our ISG shares, we may
sell only limited quantities of the shares.
Our profitability could be negatively affected if we fail to maintain
satisfactory labor relations.
The USWA represents all hourly employees at our Empire,
Hibbing, Tilden and United Taconite mines, as well as the Wabush mine
in Canada. The collective bargaining agreements for the employees at
the Empire, Hibbing, Tilden and United Taconite mines will expire on
August 1, 2004, and the collective bargaining agreements for the
employees at the Wabush mine will expire on March 1, 2004. 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 are not successfully renegotiated in a
timely manner, we could face work stoppages or labor strikes.
The work force at our Northshore mine is currently not repre-
sented by a union. If our Northshore operations were to become
unionized, we would incur an increased risk of work stoppages, reduced
productivity and higher labor costs.
Our cost reduction efforts may not be successful.
In an effort to improve our marginal sales profitability, we imple-
mented a cost reduction strategy in 2003 designed to decrease annual
costs by the end of 2004 by $35.0 million. We cannot assure you that
our cost savings program will be successful. If we fail to successfully
complete our cost reduction programs, our margins and profitability
would be adversely affected.
30
Our operating expenses could increase significantly if the price of
electrical power, fuel or other energy sources increases.
Operating expenses at our mining locations are sensitive to
changes in electricity prices and fuel prices, including diesel fuel and
natural gas prices. Prices for electricity, natural gas and fuel oils can
fluctuate widely with availability and demand levels from other users.
During periods of peak usage, supplies of energy may be curtailed and
we may not be able to purchase them at historical market rates. While
we have some long-term contracts with electrical suppliers, we are
exposed to fluctuations in energy costs that can affect our production
costs. Although we enter into forward fixed price supply contracts for
natural gas for use in our operations, those contracts are of limited
duration and do not cover all of our fuel needs, and price increases in
fuel costs could cause our profitability to decrease significantly.
Forward-Looking Statements
This report contains statements that constitute “forward-looking
statements.” These forward-looking statements may be identified by
the use of predictive, future-tense or forward-looking terminology, such
as “believes,” “anticipates,” “expects,” “estimates,” “intends,” “may,” “will”
or similar terms. These statements speak only as of the date of this
report, and we undertake no ongoing obligation, other than that
imposed by law, to update these statements. These statements appear
in a number of places in this report and include statements regarding
our intent, belief or current expectations of our directors or our officers
with respect to, among other things:
> trends affecting our financial condition, results of operations or
future prospects;
> estimates of our economic iron ore reserves;
> our business and growth strategies; and
> our financing plans and forecasts.
You are cautioned that any such forward-looking statements are
not guarantees of future performance and involve significant risks and
uncertainties, and that actual results may differ materially from those
contained in the forward-looking statements as a result of various factors,
some of which are unknown. The factors that could adversely affect
our actual results and performance include, without limitation:
> decreased steel production in North America caused by global
overcapacity of steel, intense competition in the steel industry,
increased imports of steel, consolidation in the steel industry,
cyclicality in the North American steel market and other factors, all
of which could result in decreased demand for iron ore products;
> use by North American steelmakers of products other than
domestic iron ore in the production of steel;
> uncertainty about the continued demand for steel to support
rapid industrial growth in China;
> the highly competitive nature of the iron ore mining industry;
> our dependence on our term supply agreements with a limited
number of customers;
> changes in demand for our products under the requirements
contracts we have with our customers;
> the provisions of our term supply agreements, including price
adjustment provisions that may not allow us to match interna-
tional prices for iron ore products;
> the substantial costs of mine closures, and the uncertainties
regarding mine life and estimates of ore reserves;
> uncertainty relating to several of our customers’ pending bank-
ruptcy or reorganization proceedings, and the creditworthiness
of our customers;
> our change in strategy from a manager of iron ore mines to
primarily a merchant of iron ore to steel company customers;
> our reliance on our joint venture partners to meet their obligations;
> unanticipated geological conditions, natural disasters, interrup-
tions in electrical or other power sources and equipment failures,
which could cause shutdowns or production curtailments for us
or our steel industry customers;
> increases in our costs of electrical power, fuel or other energy
sources;
> uncertainties relating to governmental regulation of our mines
and our processing facilities, including under environmental
laws;
> uncertainties relating to our pension plans;
> restrictions on our sale of our ISG shares;
> uncertainties relating to labor relations;
> the success of our cost reduction efforts.
You are urged to carefully consider these factors and the
“Risks Relating to the Company” above. All forward-looking statements
attributable to us are expressly qualified in their entirety by the foregoing
cautionary statements.
31
STATEMENT OF CONSOLIDATED
OPERATIONS C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
REVENUES
Product sales and services
Iron ore
Freight and minority interest
Total product sales and services
Royalties and management fees
Interest income
Insurance recoveries
Other income
Total Revenues
COSTS AND EXPENSES
Cost of goods sold and operating expenses
Administrative, selling and general expenses
Restructuring charge
Provision for customer bankruptcy exposures
Interest expense
Impairment of mining assets
Other expenses
Total Costs and Expenses
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
INCOME TAXES (CREDIT)
LOSS FROM CONTINUING OPERATIONS
LOSS FROM DISCONTINUED OPERATION (Net of tax $6.9 – 2001)
LOSS BEFORE EXTRAORDINARY GAIN AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
EXTRAORDINARY GAIN (Net of: tax $.5; minority interest $1.2)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (Net of tax $5.0 – 2001)
NET LOSS
NET LOSS PER COMMON SHARE – BASIC
Continuing operations
Discontinued operation
Extraordinary gain
Cumulative effect of accounting changes
NET LOSS
NET LOSS PER COMMON SHARE – DILUTED
Continuing operations
Discontinued operation
Extraordinary gain
Cumulative effect of accounting changes
NET LOSS
AVERAGE NUMBER OF SHARES (In thousands)
Basic
Diluted
See notes to consolidated financial statements.
32
Ye a r E n d e d D e c e m b e r 31
( I N M I L L I O N S , E XC E P T P E R S H A R E A M O U N T S )
2003
2002
2001
$686.8
138.3
825.1
10.6
10.6
11.4
857.7
835.0
25.1
8.7
7.5
4.6
2.6
9.4
892.9
(35.2)
(.3)
(34.9)
(34.9)
2.2
$ 510.8
75.6
586.4
12.2
4.8
3.5
10.2
617.1
582.7
23.8
.7
6.6
52.7
7.9
674.4
(57.3)
9.1
(66.4)
(108.5)
(174.9)
(13.4)
$ (32.7)
$ (188.3)
$ (3.40)
.21
$ (3.19)
$ (3.40)
.21
$ (3.19)
$ (6.58)
(10.72)
(1.32)
$(18.62)
$ (6.58)
(10.72)
(1.32)
$(18.62)
$301.5
17.8
319.3
29.8
3.8
.4
9.8
363.1
358.7
15.2
4.2
1.5
8.8
3.4
391.8
(28.7)
(9.2)
(19.5)
(12.7)
(32.2)
9.3
$ (22.9)
$ (1.93)
(1.26)
.92
$ (2.27)
$ (1.93)
(1.26)
.92
$ (2.27)
10,256
10,256
10,117
10,117
10,073
10,073
STATEMENT OF CONSOLIDATED
CASH FLOWS C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
CASH FLOW FROM CONTINUING OPERATIONS
OPERATING ACTIVITIES
Loss from continuing operations
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization:
Consolidated
Share of associated companies
Pensions and other post-retirement benefits
Provision for customer bankruptcy exposures
Accretion of asset retirement obligation
Impairment of mining assets
Deferred income taxes
Gain on sale of assets
Other
Total before changes in operating assets and liabilities
Changes in operating assets and liabilities:
Inventories and prepaid expenses
Receivables
Payables and accrued expenses
Total changes in operating assets and liabilities
Net cash from operating activities
INVESTING ACTIVITIES
Purchase of property, plant and equipment:
Consolidated
Share of associated companies
Purchase of EVTAC assets
Proceeds from sale of assets
Investment in steel companies’ equity and debt
Investment in power-related joint venture
Other
Net cash (used by) from investing activities
FINANCING ACTIVITIES
Repayment of long-term debt
Proceeds from stock options exercised
Contributions by minority shareholder
Borrowings (repayments) under revolving credit facility
Proceeds from LTVSMC transaction
Dividends
Net cash (used by) from financing activities
CASH FROM (USED BY) CONTINUING OPERATIONS
CASH USED BY DISCONTINUED OPERATION
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
Taxes paid on income
Interest paid on debt obligations
See notes to consolidated financial statements.
33
Ye a r E n d e d D e c e m b e r 31
( I N M I L L I O N S , B RAC K E T S I N D I C AT E C A S H D E C R E A S E )
2003
2002
2001
$(34.9)
$ (66.4)
$ (19.5)
26.7
2.3
42.1
7.5
3.6
2.6
.5
(7.1)
4.7
48.0
(12.0)
(2.1)
8.8
(5.3)
42.7
(20.1)
(1.5)
(2.0)
8.9
25.5
8.4
10.8
1.8
52.7
13.9
(6.2)
(12.5)
28.0
(15.2)
21.6
6.5
12.9
40.9
(8.6)
(2.0)
8.2
(27.4)
(6.0)
(14.7)
(35.8)
(30.0)
6.0
2.0
(22.0)
6.0
6.0
61.8
$ 67.8
$ 2.7
$ 3.6
(15.0)
.3
(100.0)
(114.7)
(109.6)
(12.4)
(122.0)
183.8
$ 61.8
$ .5
$ 6.7
12.6
10.8
12.1
1.5
(12.8)
(5.6)
(9.8)
(10.7)
(13.1)
37.4
15.3
39.6
28.9
(3.2)
(4.0)
11.0
(3.0)
(.7)
.1
100.0
50.0
(4.1)
145.9
174.9
(21.0)
153.9
29.9
$183.8
$ 6.2
$ 9.0
STATEMENT OF CONSOLIDATED
FINANCIAL POSITION C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Trade accounts receivable – net
Receivables from associated companies
Product inventories
Supplies and other inventories
Other
TOTAL CURRENT ASSETS
PROPERTIES
Plant and equipment
Minerals
Allowances for depreciation and depletion
TOTAL PROPERTIES
OTHER ASSETS
Marketable securities
Long-term receivables
Deposits and miscellaneous
Intangible pension asset
Other investments
TOTAL OTHER ASSETS
D e c e m b e r 31
( I N M I L L I O N S )
2003
2002
$ 67.8
$ 61.8
9.5
5.9
116.4
86.4
27.3
313.3
386.5
21.3
407.8
(137.3)
270.5
196.7
63.8
23.5
15.6
11.8
311.4
14.1
9.0
111.2
73.2
31.2
300.5
368.6
22.2
390.8
(111.9)
278.9
17.4
63.9
25.8
31.7
11.9
150.7
TOTAL ASSETS
$895.2
$730.1
34
D e c e m b e r 31
( I N M I L L I O N S )
2003
2002
$ 25.0
$ 20.0
64.7
61.4
18.0
16.1
12.6
10.2
17.9
225.9
135.2
124.2
259.4
86.6
34.5
40.5
646.9
20.2
16.8
74.3
255.7
(173.6)
56.4
(1.5)
228.1
$895.2
54.8
60.1
17.6
14.1
13.2
9.8
15.2
204.8
35.0
151.3
109.1
260.4
84.7
46.0
630.9
19.9
16.8
69.7
288.4
(182.2)
(110.7)
(2.7)
79.3
$730.1
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term debt
Accounts payable
Accrued employment cost
Accrued expenses
Payables to associated companies
State and local taxes
Environmental and mine closure obligations
Other
TOTAL CURRENT LIABILITIES
LONG-TERM DEBT
POSTEMPLOYMENT BENEFIT LIABILITIES
Pensions, including minimum pension liability
Other postretirement benefits
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
DEFERRED INCOME TAXES
OTHER LIABILITIES
TOTAL LIABILITIES
MINORITY INTEREST
SHAREHOLDERS’ EQUITY
Preferred Stock – no par value
Class A – 3,000,000 shares authorized and unissued
Class B – 4,000,000 shares authorized and unissued
Common Shares – par value $1 a share
Authorized – 28,000,000 shares;
Issued – 16,827,941 shares
Capital in excess of par value of shares
Retained income
Cost of 6,329,926 Common Shares in
treasury (2002 – 6,643,730 shares)
Accumulated other comprehensive income (loss)
Unearned compensation
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements.
35
STATEMENT OF CONSOLIDATED
SHAREHOLDERS’ EQUITY C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
January 1, 2001
Comprehensive loss
Net loss
Other comprehensive loss
Minimum pension liability
Total comprehensive loss
Cash dividends – $.40 a share
Stock and other incentive plans
Other
December 31, 2001
Comprehensive loss
Net loss
Other comprehensive loss
Minimum pension liability
Total comprehensive loss
Stock and other incentive plans
December 31, 2002
Comprehensive income
Net loss
Other comprehensive income
Unrealized gain on securities
Minimum pension liability
Total comprehensive income
Stock options exercised
Stock and other incentive plans
( I N M I L L I O N S )
Ca p i ta l I n
E xc e s s o f
Pa r Va l u e
o f Sh a re s
Co m m o n
Sh a re s
Re ta i n e d
I n c o m e
Co m m o n
Sh a re s I n
Tre a s u r y
Ot h e r
Comprehensive
Income (Loss) Compensation
Un e a r n e d
To ta l
$16.8
$67.3
$503.7
$(183.8)
$ (1.0)
$(2.0)
$402.0
(22.9)
(4.1)
(1.0)
(.9)
(.2)
.5
.8
(22.9)
(1.0)
(23.9)
(4.1)
.4
(.2)
16.8
66.2
476.7
(183.3)
(1.0)
(1.2)
374.2
3.5
69.7
16.8
(188.3)
(109.7)
1.1
288.4
(182.2)
(110.7)
(32.7)
144.9
22.2
1.1
3.5
4.9
3.7
(188.3)
(109.7)
(298.0)
3.1
79.3
(32.7)
144.9
22.2
134.4
6.0
8.4
(1.5)
(2.7)
1.2
December 31, 2003
$16.8
$74.3
$255.7
$(173.6)
$ 56.4
$(1.5)
$228.1
See notes to consolidated financial statements.
36
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
ACCOUNTING POLICIES
Business: The Company is the largest supplier of iron ore pellets
to integrated steel companies in North America. The Company man-
ages and owns interests in North American mines and owns ancillary
companies providing transportation and other services to the mines.
Basis of Consolidation: The consolidated financial statements
include the accounts of the Company and its majority-owned
subsidiaries (“Company”), including:
> Tilden Mining Company L.C. (“Tilden”) in Michigan; consolidated
since January 31, 2002, when the Company increased its own-
ership from 40 percent to 85 percent;
> Empire Iron Mining Partnership (“Empire”) in Michigan; consoli-
dated effective December 31, 2002, when the Company
increased its ownership from 46.7 percent to 79 percent;
> 100 percent of Wabush Iron Co. Limited (“Wabush Iron”);
consolidated since August 29, 2002 when Acme Steel
Company rejected its interest in Wabush Iron; Wabush Iron owns
26.83 percent interest in the Wabush Mines Joint Venture
(“Wabush”) in Canada; and
> United Taconite LLC (“United Taconite”) in Minnesota; consoli-
dated since December 1, 2003, when the Company acquired a
70 percent ownership interest; (see Note 1 – Operations and
Customers – United Taconite).
Intercompany accounts are eliminated in consolidation. “Other
Investments” includes Wabush Iron’s equity interest in certain Wabush
Mines related entities, which the Company does not control. The
Company’s equity interest in Hibbing Taconite Company (“Hibbing”), an
unincorporated joint venture in Minnesota, which the Company does
not control, was a net liability, and accordingly, was classified as
“Payables to associated companies.” Cliffs and Associates Limited (“CAL”)
results are included in “Discontinued Operation” in the Statement of
Consolidated Operations. See Note 3 – “Discontinued Operation.”
Revenue Recognition: Revenue is recognized on sales of
products when title has transferred, and on services when performed.
Revenue from product sales includes reimbursement for freight charges
($59.2 million – 2003; $38.7 million – 2002; $17.8 million – 2001)
paid on behalf of customers and cost reimbursement of $79.1 million
in 2003 and $36.9 million in 2002 from minority interest partners for
their contractual share of mine costs. Royalties and management fees
revenue from venture participants is recognized on production.
Business Risk: The major business risk faced by the Company,
as it increases its merchant position, is lower customer consumption of
iron ore from the Company’s mines which may result from competition
from other iron ore suppliers; increased use of iron ore substitutes,
including imported semi-finished steel; customers rationalization or
financial failure; or decreased North American steel production, resulting
from increased imports or lower steel consumption. The Company’s
sales are concentrated with a relatively few number of customers.
Unmitigated loss of sales would have a greater impact on operating
results and cash flow than revenue, due to the high level of fixed costs
in the iron ore mining business in the near term and the high cost to
idle or close mines. In the event of a venture participant’s failure to
perform, remaining solvent venturers, including the Company, may be
required to assume and record additional material obligations. The pre-
mature closure of a mine due to the loss of a significant customer or
the failure of a venturer would accelerate substantial employment and
mine shutdown costs. See Note 1 – “Operations and Customers.”
Use of Estimates: The preparation of financial statements, in
conformity with accounting principles generally accepted in the United
States, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from estimates.
Cash Equivalents: The Company considers investments in
highly liquid debt instruments with an initial maturity of three months
or less to be cash equivalents.
Derivative Financial Instruments: In the normal course of
business, the Company enters into forward contracts for the purchase
of commodities, primarily natural gas, which are used in its operations.
Such contracts are in quantities expected to be delivered and used in
the production process and are not intended for resale or speculative
purposes.
Inventories: Product inventories are stated at the lower of cost
or market. Cost of iron ore inventories is determined using the last-in,
first-out (“LIFO”) method. The excess of current cost over LIFO cost of
iron ore inventories was $13.1 million and $6.5 million at December 31,
2003 and 2002, respectively. At December 31, 2003 and 2002, the
Company had approximately 2.3 million tons and 2.5 million tons,
respectively, at the lower lakes to service customers. The Company
maintains ownership until title has transferred, usually when payment is
made. The Company tracks the movement of the inventory and has the
right to verify the quantities on hand. Supplies and other inventories
reflect the average cost method.
Iron Ore Reserves: The Company reviews the iron ore reserves
based on current expectations of revenues and costs, which are subject
to change. Iron ore reserves include only proven and probable quantities
of ore which can be economically mined and processed utilizing existing
technology. Asset retirement obligations reflect remaining economic
iron ore reserves.
Properties: Properties are stated at cost. Depreciation of plant
and equipment is computed principally by straight-line methods based
37
Notes to Consolidated Financial Statements C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
on estimated useful lives, not to exceed the estimated economic iron
ore reserves. Depreciation is provided over the following estimated
useful lives:
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . .45 Years
Mining Equipment . . . . . . . . . . . . . . . . .10 to 20 Years
Processing Equipment . . . . . . . . . . . . .15 to 45 Years
Information Technology . . . . . . . . . . . .2 to 7 Years
Depreciation is not adjusted when operations are temporarily idled.
Asset Impairment: The Company monitors conditions that may
affect the carrying value of its long-lived and intangible assets when
events and circumstances indicate that the carrying value of the assets
may be impaired. The Company determines impairment based on the
asset’s ability to generate cash flow greater than the carrying value
of the asset, using an undiscounted probability-weighted analysis. If
projected undiscounted cash flows are less than the carrying value of
the asset, the asset is adjusted to its fair value. See Note 1 – “Operations
and Customers” and Note 3 – “Discontinued Operation.”
Repairs and Maintenance: The cost of power plant major over-
hauls is amortized over the estimated useful life, which is the period
until the next scheduled overhaul, generally 5 years. All other planned
and unplanned repairs and maintenance costs are expensed during
the year incurred.
Income Taxes: Income taxes are based on income (loss) for
financial reporting purposes and reflect a current tax liability (asset) for
the estimated taxes payable (recoverable) in the current year tax return
and changes in deferred taxes. Deferred tax assets or liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using enacted tax laws
and rates. A valuation allowance is provided on deferred tax assets if it
is determined that it is more likely than not that the asset will not be
realized.
Environmental Remediation Costs: The Company has a formal
code of environmental protection and restoration. The Company’s
obligations for known environmental problems at active and closed
mining operations, and other sites have been recognized based on
estimates of the cost of investigation and remediation at each site. If
the cost can only be estimated as a range of possible amounts with no
specific amount being most likely, the minimum of the range is accrued.
Costs of future expenditures are not discounted to their present value.
Potential insurance recoveries have not been reflected in the determi-
nation of the liabilities.
Stock Compensation: Effective January 1, 2003, the Company
adopted the fair value method, which is considered the preferable
accounting method, of recording stock-based employee compensation
as contained in Statement of Financial Accounting Standards (“SFAS”)
No. 123, “Accounting for Stock-Based Compensation.” As prescribed in
SFAS No. 148, “Accounting for Stock-Based Compensation – Transition
and Disclosure,” the Company elected to use the “prospective method.”
The prospective method requires expense to be recognized for all
awards granted, modified or settled beginning in the year of adoption.
Historically, the Company applied the intrinsic method as provided in
Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” and related interpretations and accordingly, no
compensation cost had been recognized for stock options in prior years.
As a result of adopting the fair value method for stock compen-
sation, all future awards will be expensed over the stock options vesting
period. The adoption did not have a significant financial effect in 2003.
The following illustrates the pro forma effect on net income and
earnings per share as if the Company had applied the fair value recog-
nition provisions of SFAS No. 123 to all awards unvested in each period:
Net loss as reported
Stock-based employee
compensation:
Plus expense included in
reported results
Less fair value-based expense
P ro F o r m a
( I N M I L L I O N S )
2003
2002
2001
$(32.7)
$(188.3)
$(22.9)
6.0
(3.8)
2.0
(2.7)
.1
(1.0)
Pro forma net loss
$(30.5)
$(189.0)
$(23.8)
Loss per share:
Basic – as reported
$(3.19)
$(18.62)
$ (2.27)
Basic – pro forma
$(2.97)
$(18.69)
$(2.36)
Diluted – as reported
$(3.19)
$(18.62)
$ (2.27)
Diluted – pro forma
$(2.97)
$(18.69)
$(2.36)
The market value of restricted stock awards and performance
shares is charged to expense over the vesting period.
Research and Development Costs: Research and develop-
ment costs, principally relating to the Mesabi Nugget project at the
Northshore mine in Minnesota, are expensed as incurred. Mesabi
Nugget project costs of $1.6 million, $1.9 million and $.1 million in 2003,
2002 and 2001, respectively, were included in “Other expenses.”
Income Per Common Share: Basic income per common share
is calculated on the average number of common shares outstanding
during each period. Diluted income per common share is based on the
average number of common shares outstanding during each period,
adjusted for the effect of outstanding stock options, restricted stock
and performance shares.
Reclassifications: Certain prior year amounts have been
reclassified to conform to current year classifications.
38
Accounting and Disclosure Changes: In December 2003, the
FASB modified SFAS Statement No. 132 (originally issued in February
1998), “Employers’ Disclosures about Pensions and Other Post-
retirement Benefits,” to improve financial statement disclosures for
defined benefit plans. The change replaces the existing SFAS dis-
closure requirements for pensions. The standard requires that companies
provide more details about their plan assets, benefit obligations, cash
flows, benefit costs and other relevant information. The guidance is
effective for fiscal years ending after December 15, 2003. Accordingly,
the Company’s December 31, 2003, footnote disclosure regarding its
pension and other postretirement benefits has been updated to con-
form to the requirements of SFAS No. 132R. See Note 8 – “Retirement
Related Benefits.”
In May 2003, the FASB issued SFAS No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity,” to establish standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires an issuer to classify a financial instrument
that is within its scope as a liability, or an asset, which may have previ-
ously been classified as equity. The Company adopted SFAS No. 150
effective June 30, 2003, as required. The adoption of this Statement did
not have an impact on the Company’s consolidated financial statements.
In January 2003 (as revised December 2003), the FASB issued
Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN
46”). FIN 46 clarifies the application of Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” for certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from
other parties. FIN 46 requires that variable interest entities, as defined,
should be consolidated by the primary beneficiary, which is defined as
the entity that is expected to absorb the majority of the expected losses,
receive the majority of the gains or both. FIN 46 requires that companies
disclose certain information about a variable interest entity created
prior to February 1, 2003 if it is reasonably possible that the enterprise
will be required to consolidate that entity. The application of FIN 46,
which was previously required on July 1, 2003 for entities created prior
to February 1, 2003 and immediately for any variable interest entities
created subsequent to January 31, 2003, has been deferred until years
ending after December 31, 2003, except for those companies which
previously issued financial statements implementing the provisions of
FIN 46. The Company has evaluated its unconsolidated entities and
does not believe that any entity in which it has an interest, but does not
currently consolidate, meets the requirements for a variable interest
entity to be consolidated.
In June 2002, the FASB issued SFAS No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities,” when the liability is
incurred and not as a result of an entity’s commitment to an exit plan.
The statement is effective for exit or disposal activities initiated after
December 31, 2002. In 2003, and in accordance with SFAS No. 146
provisions, the Company recorded a charge of $8.7 million relating to
the Company’s staff reduction program. See Note 2 – “Restructuring.”
Effective January 1, 2002, the Company implemented SFAS No.
143, “Accounting for Asset Retirement Obligations” which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the related asset retire-
ment costs. The statement requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred and capitalized as part of the carrying amount of the long-
lived asset. When a liability is initially recorded, the entity capitalizes the
cost by increasing the carrying value of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, a gain or loss is recorded. The
cumulative effect of this accounting change related to prior years was
a one-time non-cash charge to income of $13.4 million (net of $3.3
million recorded under the Company’s previous mine closure accrual
method) recognized as of January 1, 2002. The net effect of the
change was $1.9 million of additional expense in year 2002 results. The
pro forma effect of this change, as if it had been made for 2001, would
be to decrease net income by $.8 million. See Note 5 – “Environmental
and Mine Closure Obligations.”
In October 2001, the FASB issued SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” which super-
sedes SFAS No. 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.” Although retaining
many of the provisions of SFAS No. 121, SFAS No. 144 establishes a
uniform accounting model for long-lived assets to be disposed. The
Company’s adoption of this statement in the first quarter of 2002 did
not have a significant impact.
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other
Intangible Assets.” SFAS No. 142 requires testing of goodwill and intan-
gible assets with indefinite lives for impairment rather than amortizing
them. The adoption of this statement in the first quarter of 2002 did
not have a significant impact on the Company’s financial results.
Effective January 1, 2001, the Company changed its method of
accounting for investment gains and losses on pension assets for the
calculation of net periodic pension cost. Previously, the Company
utilized a method that deferred and amortized realized and unrealized
gains and losses over five years for most pension plans. Under the new
accounting method, the market value of plan assets reflects realized
and unrealized gains and losses from current year performance in the
following year. The Company believes the new method results in
improved financial reporting because the method more closely reflects
39
Notes to Consolidated Financial Statements C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
the fair value of its pension assets at the date of reporting. The cumu-
lative effect of this accounting change related to prior years was a one-
time non-cash credit to income of $9.3 million ($14.3 million pre-tax)
recognized as of January 1, 2001.
NOTE 1 – OPERATIONS AND CUSTOMERS
United Taconite
Effective December 1, 2003, United Taconite, a newly formed
company owned 70 percent by a subsidiary of the Company and 30
percent by a subsidiary of Laiwu Steel Group Limited (“Laiwu”) of
China, purchased the ore mining and pelletizing assets of Eveleth
Mines LLC. Eveleth Mines had ceased mining operations in May 2003
after filing for chapter 11 bankruptcy protection on May 1, 2003. Under
the terms of the purchase agreement, United Taconite purchased all of
Eveleth Mines’ assets for $3 million in cash and the assumption of certain
liabilities, primarily mine closure-related environmental obligations. As
a result of this transaction, the Company, after assigning appropriate
values to assets acquired and liabilities assumed, was required to record
an extraordinary gain of $2.2 million, net of $.5 million tax and $1.2
million minority interest. The mine began production in late-December
2003 and produced approximately 80,000 tons. When fully opera-
tional, the annual capacity will be 4.3 million tons. In conjunction with
this transaction, the Company and its Wabush Mines venture partners
entered into pellet sales and trade agreements with Laiwu to optimize
shipping efficiency.
During 2002, the Company increased its ownership in four iron
ore mines and entered into significant term supply agreements with
several integrated steel company customers.
Empire Mine
Effective December 31, 2002, the Company increased its owner-
ship in Empire from 46.7 percent to 79 percent for assumption of mine
liabilities. Under terms of the agreement, the Company has indemnified
Ispat Inland Inc. (“Ispat Inland”), a subsidiary of Ispat International N.V.,
from obligations of Empire in exchange for certain future payments to
Empire and to the Company by Ispat Inland of $120.0 million, recorded at
a present value, including interest, of $61.3 million at December 31, 2003
($58.8 million at December 31, 2002) with $56.3 million classified as
“Long-term receivable” and the balance current, over the 12-year life of
the supply agreement. A subsidiary of Ispat Inland retained a 21 per-
cent ownership in Empire, for which it has the unilateral right to put the
interest to the Company in 2008. The Company is the sole supplier of
pellets purchased by Ispat Inland for the term of the supply agreement.
Prior to the foregoing agreement, Ispat Inland and the Company
funded total fixed obligations of Empire in proportion to their 40 percent
and 46.7 percent respective ownerships under an interim agreement
after a subsidiary of LTV Corporation (“LTV”) discontinued meeting its
25 percent Empire ownership obligations in November 2001. LTV, which
had filed for protection under chapter 11 of the U.S. Bankruptcy Code
on December 29, 2000, rejected its Empire ownership in March 2002.
As a result of increasing production costs at the Empire mine,
revised economic mine planning studies were completed in the fourth
quarter of 2002 and updated in the fourth quarter of 2003. Based on
the outcome of these studies, the ore reserve estimates at Empire were
reduced from 116 million tons at December 31, 2001 to 63 million tons
at December 31, 2002 and 29 million tons at December 31, 2003. The
Company concluded that the assets of Empire were impaired as of
December 31, 2002, based on an undiscounted probability-weighted
cash flow analysis. The Company recorded an impairment charge of
$52.7 million to write off the carrying value of the long-lived assets of
Empire. In 2003, the Company recorded an additional impairment
charge of $2.6 million for current year’s fixed asset additions. Studies
are ongoing to identify the optimum production rate and consequently
the mine life for Empire. An evaluation of satellite mineral resources has
also been initiated for potential addition to Empire’s reserve base. The
Company expects to continue to operate the Empire mine.
Tilden Mine
On January 31, 2002, the Company increased its ownership in
Tilden from 40 percent to 85 percent with the acquisition of Algoma
Steel Inc.’s (“Algoma”) interest in Tilden for assumption of mine liabilities
associated with the interest. The acquisition increased the Company’s
annual production capacity by 3.5 million tons. Concurrently, a term
supply agreement was executed that made the Company the sole sup-
plier of iron ore pellets purchased by Algoma for a 15-year period.
Hibbing Mine
In July 2002, the Company acquired (effective retroactive to
January 1, 2002) an 8 percent interest in Hibbing from Bethlehem
Steel Corporation (“Bethlehem”) for the assumption of mine liabilities
associated with the interest. The acquisition increased the Company’s
ownership of Hibbing from 15 percent to 23 percent. This transaction
reduced Bethlehem’s ownership interest in Hibbing to 62.3 percent. In
October 2001, Bethlehem filed for protection under chapter 11 of the
U.S. Bankruptcy Code. At the time of the filing, the Company had a
trade receivable of approximately $1.0 million, which has been
reserved. In May 2003, International Steel Group Inc. (“ISG”) purchased
the assets of Bethlehem, including Bethlehem’s 62.3 percent interest
in Hibbing.
Wabush Mines
In August 2002, Acme Steel Company, a wholly-owned sub-
sidiary of Acme Metals Incorporated, which had been under chapter 11
bankruptcy protection since 1998, rejected its 15.1 percent interest in
Wabush. As a result, the Company’s interest increased from 22.78
percent to 26.83 percent.
40
Economic ore reserves at Wabush were reduced to 61 million
tons at December 31, 2003 from 94 million tons at December 31,
2002. The decrease in ore reserves at Wabush reflected increased
operating costs, the impact of currency exchange rates, and a reduction
in the maximum mining depth in one critical mining area due to
assessment of dewatering capabilities based on a recently completed
hydrologic evaluation.
Effect of Mine Ownership Increases
While none of the increases in mine ownerships during 2002
required cash payments or assumption of debt, the ownership changes
resulted in the Company recognizing net obligations of approximately
$93 million at December 31, 2002. Additional consolidated obligations
assumed totaled approximately $163 million at December 31, 2002,
primarily related to employment and legacy obligations at Empire and
Tilden mines, partially offset by non-capital long-term assets, principally
the $58.8 million Ispat Inland long-term receivable. United Taconite’s
acquisition of the Eveleth mine assets in Minnesota in December 2003
was for $3.0 million cash and assumption of certain liabilities, primarily
mine closure-related environmental expenses.
Customers
Rouge, a significant pellet sales customer of the Company, filed
for chapter 11 bankruptcy protection on October 23, 2003, and has
since reached agreement to sell substantially all of its assets to OAO
Severstal, Russia’s second largest steel producer. Rouge continued to
manufacture and ship steel products and provide uninterrupted service
to its customers during the bankruptcy process.
The Company sold 3.0 million tons of pellets to Rouge in 2003
and 1.4 million tons in 2002. At the time of Rouge’s filing, the Company
had no trade receivable exposure to Rouge; however, the Company has
a $10 million secured loan to Rouge with a final maturity in 2007. As of
December 31, 2003, the loan had a balance of $11.5 million including
accrued interest. Rouge failed to make an interest payment of $1.4 million
on December 15, 2003. Management will continue to assess events as
they occur pertaining to collectability of the loan and interest. The
Company’s term supply agreement with Rouge provided that it would
be the sole supplier of pellets to Rouge through 2012. See Note 15 –
“Subsequent Events.”
On September 16, 2003, WCI Steel Inc. (“WCI”) petitioned for
protection under chapter 11 of the U.S. Bankruptcy Code. At the time of
the filing, the Company had a trade receivable exposure of $4.9 million,
which was reserved in the third quarter. WCI purchased 1.5 million tons
(.4 million tons since the filing date) in 2003 and 1.4 million tons of
pellets in 2002. The Company’s term supply agreement with WCI
expires at the end of 2004.
On May 19, 2003, Weirton Steel Corporation (“Weirton”) petitioned
for protection under chapter 11 of the U.S. Bankruptcy Code. Weirton
purchased 2.8 million tons, or 14 percent of total tons sold by the
Company in 2003, and 2.9 million tons, or 20 percent of total tons sold
in 2002. The Company has modified its term supply agreement with
Weirton. Under the modified agreement which runs through 2005, the
Company will provide the greater of 67 percent of Weirton’s annual
requirements or 1.9 million tons.
The Company is a 40.6 percent participant in a joint venture that
acquired certain power-related assets from a subsidiary of Weirton in
2001, in a purchase-leaseback arrangement. The Company’s investment
at December 31, 2003 of $10.4 million, included in “Other investments,”
is accounted for utilizing the “equity method.” Subsequent to its filing,
Weirton has continued to meet its obligations under the lease agree-
ment which extends through 2012. In the second quarter of 2003, the
Company recorded a provision of $2.6 million for Weirton bankruptcy
exposures.
NOTE 2 – RESTRUCTURING
In the third quarter 2003, the Company initiated a salaried
employee reduction program that affected its corporate and central
services staffs and various mining operations. The action resulted in a
reduction of 136 staff employees at its corporate, central services and
various mining operations, which represented an approximate 20 percent
decrease in salaried workforce at the Company’s U.S. operations (prior
to the acquisition of United Taconite). Accordingly, the Company recorded
a restructuring charge of $8.7 million in 2003. The restructuring charge
is principally related to severance, pension and health care benefits,
with less than $1.6 million requiring cash funding in 2003. Included in
the restructuring charge was an OPEB plan curtailment credit of $1.5
million.
NOTE 3 – DISCONTINUED OPERATION
In the fourth quarter of 2002, the Company exited the ferrous
metallics business and abandoned its 82 percent investment in CAL,
an HBI facility located in Trinidad and Tobago. For the year 2002,
the Company reported a loss from discontinued operation of $108.5
million, consisting of $97.4 million ($95.7 million in the third quarter) of
impairment charges, due to uncertainties concerning the HBI market,
operating costs and volume, and startup timing, when the Company
determined that its investment in CAL was impaired, and $11.1 million of
idle expense compared to a $19.6 million pre-tax ($12.7 million after-tax)
expense in 2001. CAL operated for a portion of the year 2001 and
generated net sales of $11.1 million. No expense was recorded in 2003.
The Company expects CAL to be liquidated, and accordingly, has
reflected no on-going obligations of CAL.
41
Notes to Consolidated Financial Statements C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
NOTE 4 – SEGMENT REPORTING
In 2003, the Company operated in one reportable segment
offering iron products and services to the steel industry. The ferrous
metallics segment, which included the Company’s CAL operations, was
discontinued in 2002.
Included in the consolidated financial statements are the fol-
lowing amounts relating to geographic locations:
NOTE 5 – ENVIRONMENTAL AND
MINE CLOSURE OBLIGATIONS
At December 31, 2003, the Company, including its share of
unconsolidated ventures, had environmental and mine closure liabili-
ties of $97.8 million, of which $10.2 million was classified as current.
Payments in 2003 were $7.5 million (2002 – $8.3 million; 2001 –
$5.6 million). Following is a summary of the obligations:
Revenue(1)
United States
Canada
Other Countries
Total from continuing operations
Discontinued operation
Long-Lived Assets(2)
United States
Canada
Total from continuing operations
Discontinued operation
( I N M I L L I O N S )
2003
2002
2001
$654.0
162.5
19.2
835.7
$448.3
145.5
4.8
598.6
$328.7
14.1
6.3
349.1
11.1
$835.7
$598.6
$360.2
$255.0
15.5
270.5
$266.0
12.9
278.9
$ 272.9
15.5
288.4
122.9
$ 270.5
$ 278.9
$ 411.3
(1)Revenue is attributed to countries based on the location of the customer and includes
both “Product sales and services” and “Royalties and management fees” revenues.
(2)Net properties include Company’s share of unconsolidated ventures.
Following is a summary of the Company’s significant customers
measured as a percent of “Product sales and services” and “Royalties
and management fees” revenues from continuing operations:
C U S TO M E R
ISG
Weirton
Algoma
Rouge
Ispat Inland
Stelco
WCI
AK Steel
LTV
Others
P E R C E N T O F R E V E N U E S
2003
2002
2001
27%
14
14
13
12
6
5
9
20%
19%
16%
9%
5%
8%
7%
7%
%
9%
25%
25%
5%
10%
6%
2%
10%
14%
11%
17%
100%
100%
100%
Environmental
Mine closure
LTV Steel Mining Company
Operating Mines
Total mine closure
Total environmental and mine closure
( I N M I L L I O N S )
2003
$15.5
37.1
45.2
82.3
$97.8
2002
$ 18.3
41.1
36.1
77.2
$95.5
Environmental
Included in the obligation are environmental liabilities of $15.5
million. The Company’s obligations for known environmental remediation
exposures at active and closed mining operations, and other sites have
been recognized based on the estimated cost of investigation and
remediation at each site. If the cost can only be estimated as a range
of possible amounts with no specific amount being most likely, the min-
imum of the range is accrued in accordance with SFAS No. 5. Future
expenditures are not discounted, and potential insurance recoveries
have not been reflected. Additional environmental exposures could be
incurred, the extent of which cannot be assessed.
The environmental liability includes the Company’s obligations
related to six sites that are independent of the Company’s iron mining
operations, seven former iron ore-related sites, eight leased land sites
where the Company is lessor and miscellaneous remediation obliga-
tions at the Company’s operating units. Included in the obligation are
Federal and State sites where the Company is named as a potentially
responsible party, the Rio Tinto mine site in Nevada, where significant
site cleanup activities have taken place, and the Kipling, Deer Lake and
Pellestar sites in Michigan.
In September 2002, the Company received a draft of a pro-
posed Administrative Order on Consent (“Consent Order”) from the
United States Environmental Protection Agency (“EPA”), for cleanup
and reimbursement of costs associated with the Milwaukee Solvay
coke plant site in Milwaukee, Wisconsin. The plant was operated by a
predecessor of the Company from 1973 to 1983, which predecessor
was acquired by the Company in 1986. In January 2003, the Company
completed the sale of the plant site and property to a third party.
Following this sale, a Consent Order was entered into with the EPA by
the Company, the new owner and another third party that had operated
on the site. In connection with the Consent Order, the new owner
42
agreed to take responsibility for the removal action and agreed to
indemnify the Company for all costs and expenses in connection with
the removal action. In the third quarter 2003, the new owner, after
completing a portion of the removal, experienced financial difficulties.
In an effort to continue progress on the removal action, the Company
expended approximately $.9 million in the third and fourth quarter
2003. The Company will likely be required to expend additional
amounts of approximately $2 million, for the completion of the
removal action, which expenditures were previously provided for in the
Company’s environmental reserve.
Mine Closure
The mine closure obligation of $82.3 million represents the
accrued obligation at December 31, 2003 for the closed operation
formerly known as the LTV Steel Mining Company (“LTVSMC”), $37.1
million, and for the Company’s six operating mines. The LTVSMC closure
obligation results from an October 2001 transaction where subsidiaries
of the Company and Minnesota Power, a business of Allete, Inc.,
acquired LTV’s assets of LTVSMC in Minnesota for $25 million
(Company’s share $12.5 million). As a result of this transaction, the
Company received a payment of $62.5 million from Minnesota Power
and assumed environmental and certain facility closure obligations of
$50.0 million, which at December 31, 2003 have declined to $37.1
million reflecting activity to date.
The accrued closure obligation for the Company’s active mining
operations of $45.2 million reflects the adoption of SFAS No. 143,
“Accounting for Asset Retirement Obligations,” which was effective
January 1, 2002, to provide for contractual and legal obligations
associated with the eventual closure of the mining operations and the
effects of mine ownership increases in 2002. The Company deter-
mined the obligations, based on detailed estimates, adjusted for factors
that an outside third party would consider (i.e., inflation, overhead and
profit), escalated to the estimated closure dates and then discounted
using a credit adjusted risk-free interest rate of 10.25 percent. The closure
date for each location was determined based on the exhaustion date of
the remaining economic iron ore reserves. The accretion of the liability
and amortization of the property and equipment will be recognized
over the estimated mine lives for each location. Upon adoption on
January 1, 2002, the Company’s share of the obligation, including its
unconsolidated ventures, was a present value liability, $17.1 million, a net
increase to plant and equipment, $.4 million, and net cumulative effect
charge, $13.4 million. The net cumulative effect charge reflected the
offset of $3.3 million of accruals made under the Company’s previous
mine closure accrual method.
The following summarizes the Company’s asset retirement obli-
gation liability at December 31:
Asset retirement obligation at
beginning of year
Liabilities incurred
Accretion expense
Additional ownership
Minority interest
Revision in estimated cash flows
( I N M I L L I O N S )
2003
2002
$36.1
3.6
2.4
1.0
2.1
$36.1
17.1
1.8
16.9
.3
Asset retirement obligation at end of year
$45.2
$36.1
The pro forma effect, as if it had been made for 2001 would
have been a charge of $.8 million or $.08 per share.
NOTE 6 – DEBT
In 2003, the Company amended its senior unsecured note
agreement, which carried an interest rate of 9.5 percent, at December
31, 2003 to provide modifications to its financial covenants adjusting
the required minimum levels of EBITDA and fixed charge ratios. The
Company was in compliance with the amended covenants at
December 31, 2003, the most restrictive of which is a minimum EBITDA
requirement. The Company made principal payments of $5.0 million
on June 30, 2003 and $25.0 million on December 15, 2003 reducing
the outstanding balance at December 31, 2003 to $25.0 million.
Additionally, an amendment allowed the Company to repay the debt
prior to its December 15, 2004 maturity date without penalty. In early
2004, the Company will repay the remaining $25.0 million principal
balance. In June 2003, the Company cancelled a 364-day unsecured
revolving credit facility in the amount of $20.0 million. In October
2002, the Company repaid $100 million outstanding on its previous
revolving credit facility and terminated the agreement.
NOTE 7 – LEASE OBLIGATIONS
The Company and its unconsolidated ventures lease certain
mining, production, and other equipment under operating leases. The
Company’s operating lease expense, including its share of unconsoli-
dated ventures, was $24.6 million in 2003, $25.3 million in 2002 and
$13.1 million in 2001.
Assets acquired under capital leases by the Company, including
its share of unconsolidated ventures, were $15.0 million and $22.4 mil-
lion, respectively, at December 31, 2003 and 2002. Corresponding
accumulated amortization of capital leases included in respective
allowances for depreciation was $8.4 million and $8.8 million at
December 31, 2003 and 2002, respectively.
43
Notes to Consolidated Financial Statements C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
Future minimum payments under capital leases and noncan-
cellable operating leases, at December 31, 2003 were:
( I N M I L L I O N S )
Company’s Share
Total
Year Ending
December 31,
2004
2005
2006
2007
2008
2009 and thereafter
Total minimum lease
payments
Amounts representing interest
Present value of net
Capital
Leases
$ 3.3
2.1
2.0
2.8
.6
.6
11.4
1.9
minimum lease payments
$ 9.5
Operating
Leases
$ 21.6
15.4
10.4
6.6
5.2
4.5
$63.7
Capital
Leases
$ 5.6
3.2
2.7
3.1
.6
.6
15.8
2.2
$13.6
Operating
Leases
$35.8
24.8
16.7
9.3
5.8
4.5
$96.9
The Company’s share of total minimum lease payments, $75.1
million, is comprised of the Company’s consolidated obligation of
$66.4 million and the Company’s ownership share of unconsolidated
ventures’ obligations of $8.7 million, principally related to Hibbing.
NOTE 8 – RETIREMENT RELATED BENEFITS
The Company and its unconsolidated ventures offer defined
benefit pension plans, defined contribution pension plans and other
postretirement benefit plans, primarily consisting of retiree health care
benefits, as part of a total compensation and benefits program.
The defined benefit pension plans are largely noncontributory,
and except for U.S. salaried employees, benefits are generally based on
employees’ years of service and average earnings for a defined period
prior to retirement or a minimum formula. Effective July 1, 2003, the
pension benefits for certain U.S. salaried employees were frozen under
the prior benefit formula and a cash balance pension formula was
implemented for service after June 30, 2003. The cash balance
formula provides benefits based on employees’ years of service and
average earnings.
In addition, the Company and its unconsolidated ventures cur-
rently provide various levels of retirement health care and life insurance
benefits (“Other Benefits”) to most full-time employees who meet
certain length of service and age requirements (a portion of which are
pursuant to collective bargaining agreements). Most plans require
retiree contributions and have deductibles, co-pay requirements, and
benefit limits. Most bargaining unit plans require retiree contributions
and co-pays for major medical and prescription drug coverage.
Effective July 1, 2003, the Company imposed an annual limit on its cost
for medical coverage under the U.S. salaried plans, except for the plans
covering participants at the Northshore and Lake Superior and
Ishpeming (“LS&I”) Railroad Company operations. A similar type of limit
was previously implemented at Northshore. The annual limit applies to
each covered participant and equals $7,000 for coverage prior to age
65 and $3,000 for coverage after age 65, with the limits adjusted
based on the retiree’s age at which benefits commence. The covered
participant pays an amount for coverage equal to the excess of (i) the
average cost of coverage for all covered participants, over (ii) the par-
ticipant’s individual limit, but in no event will the participant’s cost be
less than 15 percent of the average cost of coverage for all covered
participants. Currently, the average cost for coverage prior to age 65
and after age 65 are below the respective limits of $7,000 and $3,000.
The Company does not provide Other Benefits for most U.S. salaried
employees hired after January 1, 1993. Other Benefits are provided
through programs administered by insurance companies whose
charges are based on benefits paid.
During 2003, the Company terminated certain U.S. salaried
employees. Enhanced benefits were provided to most of these
employees under the defined benefit pension and postretirement
benefit plans. Such employees who were within 3 years (4 years for
employees at LS&I) of meeting retirement eligibility under the plans
were granted an additional 3 years (4 years for employees at LS&I) of
age and service for purposes of satisfying such eligibility requirements.
In addition, such employees covered under the Pension Plan for
Employees of Cleveland-Cliffs Inc and Its Associated Employers were
granted a special credit under their cash balance account, generally
equal to 2 weeks of base pay per year of service up to 52 weeks of
such pay, increased by 11 percent to reflect certain tax liabilities.
The following table summarizes the annual costs for the plans.
Defined benefit pension plans
Defined contribution pension plans
Other postretirement benefits
Total
( I N M I L L I O N S )
2003
$32.0
1.9
29.1
$63.0
2002
$ 7.2
1.9
21.5
$30.6
2001
$ 4.4
2.2
15.8
$22.4
The following one-time loss (gain) recognized in 2003 due to
the special termination benefits and curtailment under the plans asso-
ciated with the involuntary terminations in the U.S. during 2003 are
included in the annual costs shown above.
Defined benefit pension plans
Other postretirement benefits
Total
( I N M I L L I O N S )
Special
Termination Curtailment
(Gain)/Loss
Benefits
$ 7.1
1.5
$8.6
$(1.5)
$(1.5)
$(1.5)
Total
$ 7.1
$ 7.1
44
The reductions in 2003 projected benefit obligations (“PBO”),
accumulated postretirement benefit obligations (“APBO”), and annual
costs as a result of the changes made to the plans for certain U.S.
salaried employees, effective July 1, 2003 are:
( I N M I L L I O N S )
$ 3.8
3.4
$ 7.2
$20.7
23.4
$44.1
Reduction in Annual Cost
Defined benefit pension plans
Other postretirement benefits
Total
Reduction in PBO or APBO
Defined benefit pension plans (PBO)
Other postretirement benefits (APBO)
Total
OBLIGATIONS AND FUNDED STATUS
Change in Benefit Obligations
Benefit obligations – beginning of year
Service cost (excluding expenses)
Interest cost
Effect of change in mine ownership share
Plan amendments
Actuarial loss
Benefits paid
Effect of curtailment
Effect of special termination benefits
Benefit obligations – end of year
Change in Plan Assets
Fair value of plan assets – beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Asset transfers/refund
Effect of change in mine ownership share
Fair value of plan assets – end of year
Funded Status at December 31
Fair value of plan assets
Benefit obligations
Funded status (plan assets less benefit obligations)
Amounts not recognized:
Unrecognized net loss
Unrecognized prior service cost (benefit)
Unrecognized net obligation (asset) at date of adoption
Net amount recognized
Net prepaid benefit cost (liability)
Intangible asset
Accumulated other comprehensive income
Effect of change in mine ownership & minority interest
Net amount recognized
45
The Company utilized December 31 as its measurement date
for determining pension and other benefits obligations and assets.
The following tables and information provide additional disclo-
sures for the Company’s plans, including its proportionate share of
plans of its unconsolidated ventures.
( I N M I L L I O N S )
Pe n s i o n B e n e f i t s
O t h e r B e n e f i t s
2003
2002
2003
2002
$ 613.3
11.6
39.0
(20.7)
37.8
(45.5)
$ 319.1
8.4
31.3
249.1
.3
35.0
(30.4)
7.1
.5
$ 175.7
3.4
15.0
128.5
(13.9)
28.2
(14.1)
$ 322.8
4.4
21.6
(23.4)
65.4
(17.0)
(1.5)
1.5
$ 642.6
$ 613.3
$ 373.8
$ 322.8
$ 424.3
86.3
6.4
(45.5)
(.1)
$ 471.4
$ 317.9
(27.2)
1.1
(30.4)
162.9
$ 424.3
$ 471.4
642.6
$ 424.3
613.3
(171.2)
(189.0)
175.4
11.6
(10.2)
200.4
33.4
(14.0)
$ 48.7
7.9
3.4
(3.4)
$ 23.2
(4.0)
2.7
26.8
$ 56.6
$ 48.7
$ 56.6
373.8
(317.2)
193.4
(29.6)
$ 48.7
322.8
(274.1)
145.3
(10.7)
$ 5.6
$ 30.8
$(153.4)
$(139.5)
$(140.9)
15.6
89.1
41.8
$ 5.6
$(155.0)
33.1
111.3
41.4
$ 30.8
Notes to Consolidated Financial Statements C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
ADDITIONAL INFORMATION ON PENSION BENEFIT OBLIGATIONS AS OF DECEMBER 31, 2003
Projected benefit obligation
Accumulated benefit obligation (ABO)
Fair value of plan assets
Unfunded ABO
Net amount recognized
Additional minimum liability
Intangible asset
Effect of change in mine ownership & minority interest
( I N M I L L I O N S )
U. S . Pe n s i o n P l a n s
Ca n a d i a n Pe n s i o n P l a n s
Sa l a r i e d
Ho u r l y
$204.3
194.6
179.4
$355.1
340.7
223.9
15.2
21.7
36.9
12.7
116.8
(18.4)
98.4
14.3
28.9
Mi n i n g
$38.5
34.1
28.4
5.7
.4
6.1
.1
Sa l a r i e d
$16.1
11.7
17.1
2.5
LS & I
$6.0
5.7
3.8
1.9
(.4)
1.5
Ho u r l y
$22.6
22.6
18.8
3.8
(.2)
3.6
1.3
.1
To ta l
$642.6
609.4
471.4
143.4
5.6
146.5
15.6
41.8
Accumulated other comprehensive income
$ 24.2
$ 55.2
$ 6.0
$ 1.5
$ 2.2
$ 89.1
The Company’s net pension liability of $140.9 million at
December 31, 2003 is primarily recorded as $133.9 million of $135.2
million in “Pensions, including minimum pension liability” and $5.3 million
of accrued employment costs, with minor amounts reflected as equity
investments.
The $153.4 million liability for Other Benefits at December 31,
2003 is recorded as $124.2 million of long-term “Other postretirement
benefits,” and $22.3 million of “Accrued employment costs,” with the
remainder reflected in equity investments.
The accumulated benefit obligation for all defined benefit pen-
sion plans was $609.4 million and $613.3 million at December 31,
2003 and 2002, respectively.
The projected benefit obligation, accumulated benefit obligation,
and fair value of plan assets for the pension plans with an accumulated
benefit obligation in excess of plan assets were $626.5 million, $597.7
million, and $454.3 million, respectively, as of December 31, 2003, and
$600.5 million, $567.7 million, and $411.0 million, respectively, as of
December 31, 2002.
COMPONENTS OF NET PERIODIC BENEFIT COST
( I N M I L L I O N S )
Pe n s i o n Be n e fi t s
Ot h e r Be n e fi t s
Service cost
Interest cost
Expected return on plan assets
Amortizations, curtailment and
special termination benefits
2003
$ 11.6
39.0
(36.2)
2002
$ 8.4
31.3
(35.0)
2003
$ 4.4
22.0
(4.3)
17.6
2.5
7.0
Net periodic benefit cost
$32.0
$ 7.2
$29.1
2002
$ 3.4
15.0
(3.0)
6.1
$21.5
ADDITIONAL INFORMATION
( I N M I L L I O N S )
Pe n s i o n Be n e fi t s
Ot h e r Be n e fi t s
2003
2002
2003
2002
Effect of change in mine
ownership & minority interest
$41.8
$41.4
Minimum liability included in
other comprehensive income
89.1
111.3
N/A
N/A
N/A
N/A
Actual return (loss) on
plan assets
86.3
(27.2)
$7.9
$(4.0)
46
( I N M I L L I O N S )
I n c re a s e D e c re a s e
$ 3.4
37.5
$ (2.8)
(30.9)
ASSUMPTIONS
Weighted-average assumptions used to determine benefit obli-
gations at December 31:
Pe n s i o n Be n e fi t s
Ot h e r Be n e fi t s
2003
2002
2003
2002
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A one-percentage-
point change in assumed health care cost trend rates would have the
following effects:
U.S.
Discount rate
Rate of compensation increase
Canada
Discount rate
Rate of compensation increase
6.25% 6.90% 6.25%
4.19
4.19
N/A
6.90%
N/A
Effect on total of service and interest cost
Effect on postretirement benefit obligation
6.00% 6.50% 6.00% 6.50%
4.00
4.00
N/A
N/A
Plan Assets
Pension
Weighted-average assumptions used to determine net benefit
cost for years ended December 31:
The pension plans asset allocation at December 31, 2003, and
2002, and target allocation for 2004 are as follows:
U.S.
Discount rate
Expected return on plan assets
Rate of compensation increase
Canada
Discount rate
Expected return on plan assets
Rate of compensation increase
Pe n s i o n Be n e fi t s
Ot h e r Be n e fi t s
2003
2002
2003
2002
6.90% 7.50%
9.00
4.19
9.00
4.25
6.90%
8.35
4.19
7.50%
8.64
4.25
6.00% 6.75%
8.00
4.00
8.00
4.00
6.00% 6.75%
6.00
6.50
ASSUMED HEALTH CARE COST TREND RATES AT DECEMBER 31:
U.S.
Health care cost trend rate assumed for next year
Ultimate health care cost trend rate
Year that the ultimate rate is reached
Canada
Health care cost trend rate assumed for next year
Ultimate health care cost trend rate
Year that the ultimate rate is reached
2003
2002
10.0%
5.0
2009
10.0%
5.0
2009
10.0%
5.0
2008
7.5%
5.0
2008
A SS E T C AT E G O RY
Equity securities
Debt securities
Real estate
Total
A SS E T C AT E G O RY
Equity securities
Debt securities
Real estate
Total
Pe rc e n t a g e o f
P l a n A s s e t s a t
D e c e m b e r 31
2003
2002
72.0%
20.0
8.0
67.7%
31.9
.4
20 04 Ta rg e t
A l l o c a t i o n
62.5%
30.0
7.5
100.0%
100.0% 100.0%
( I N M I L L I O N S )
A s s e t s a t
D e c e m b e r 31
2003
2002
$339.4
94.3
37.7
$ 287.4
135.2
1.7
$ 471.4
$424.3
The expected return on plan assets represents the weighted-
average of expected returns for each asset category. Expected returns
are determined based on historical performance, adjusted for current
trends. The expected return is net of benefit plan expenses of approx-
imately .45 percentage points in each year.
47
Notes to Consolidated Financial Statements C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
VEBA & CLIR Contracts
Assets for other benefits include deposits relating to insurance
contracts and Voluntary Employee Benefit Association (“VEBA”) Trusts
pursuant to bargaining agreements that are available to fund retired
employees’ life insurance obligations and medical benefits. The other
benefit plan asset allocation at December 31, 2002, and 2003, and
target allocation for 2004 are as follows:
All of the $3.7 million expected to be contributed to the other
postretirement benefit plans during 2004 is based on production and
is expected to be in the form of cash. The plans are not subject to any
minimum regulatory funding requirements.
Contributions by participants to the other benefit plans were
$2.5 million and $1.7 million for the years ending December 31, 2003
and 2002, respectively.
ESTIMATED COST FOR 2004
For 2004, the Company, including its share of the plans of its
unconsolidated ventures, estimates net periodic benefit cost for the
U.S. and Canadian plans as follows:
Defined benefit pension plans
Defined contribution plans
Other postretirement benefits
Total
( I N M I L L I O N S )
$22.9
1.8
27.4
$52.1
In December 2003, the Medicare Prescription Drug, Improve-
ment and Modernization Act of 2003 (“the Act”) was enacted into law.
The Act provides a prescription drug benefit as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide
certain benefits. As provided by FASB Staff Position, No. FAS 106-1, the
Company has elected to defer recognizing the effects of the Act until
authoritative guidance on the accounting for the federal subsidy is
issued. As a result, the 2004 estimates relating to “other postretirement
benefits” do not include any measures of the impact on the accumu-
lated postretirement benefit obligation or net periodic costs. When
issued, the authoritative guidance on the accounting for the federal
subsidy could change the above estimates provided.
OTHER POTENTIAL BENEFIT OBLIGATIONS
While the foregoing reflects the Company’s obligation, including
its proportionate share of unconsolidated ventures, total Company
exposure in the event of non-performance of other venturers (at Hibbing
A SS E T C AT E G O RY
Equity securities
Debt securities
Total
A SS E T C AT E G O RY
Equity securities
Debt securities
Total
Pe rc e n t a g e o f
P l a n A s s e t s a t
D e c e m b e r 31
2003
2002
67.1%
32.9
52.6%
47.4
20 04 Ta rg e t
A l l o c a t i o n
65.0%
35.0
100.0%
100.0% 100.0%
( I N M I L L I O N S )
A s s e t s a t
D e c e m b e r 31
2003
$38.0
18.6
$56.6
2002
$25.6
23.1
$48.7
The expected return on plan assets represents the weighted-
average of expected returns for each asset category. Expected returns
are determined based on historical performance, adjusted for current
trends. The expected return is net of benefit plan expenses of approx-
imately .17 percentage points in each year.
PARTICIPANT AND COMPANY CONTRIBUTIONS
( I N M I L L I O N S )
Ot h e r Be n e fi t s
CO M PA N Y C O N T R I B U T I O N S
2002
2003
2004 (expected)
Pe n s i o n
Be n e fi t s
$ 1.1
6.4
4.3*
V E BA
$2.7
3.4
3.7
Di re c t
Pay m e n t s
$ 14.1
13.6
17.6
To ta l
$ 16.8
17.0
21.3
*The Company is currently considering various options for the amount to be contributed to
the pension plans during 2004. The amount reflected represents minimum funding
requirements.
Annual contributions to the pension plans are made within
income tax deductibility restrictions in accordance with statutory regu-
lations. In the event of plan termination, the plan sponsors could be
required to fund additional shutdown and early retirement obligations
that are not included in the pension obligations.
48
and Wabush) is potentially greater. Following is a summary comparison
of the total obligation including other venturers’ proportionate shares
versus the Company’s share:
The deferred amounts are classified on the balance sheet as
current or long-term in accordance with the asset or liability to which
they relate.
During 2002, the Company recorded a minimum pension
obligation pursuant to SFAS No. 87 and asset retirement obligations
pursuant to its adoption of SFAS No. 143. The Company also recorded
impairment of its investments in CAL and Empire. The recording of
these items caused the Company’s net deferred tax asset position to
increase to a level that required a deferred tax valuation allowance. A
valuation allowance reduces the Company’s deferred tax asset in
recognition of uncertainty regarding full realization. A portion of the
2002 charge to establish the Company’s valuation allowance, $82.2
million, was recorded through the tax provision in the statement of
operations. The balance, $38.4 million, was recorded directly to share-
holders’ equity for the valuation allowance related to the future tax
benefit on the other comprehensive loss from the minimum pension
obligation.
During 2003, the Company was able to reduce the minimum
pension obligation it had recorded in 2002 pursuant to SFAS No. 87.
Further, the Company has continued to maintain a valuation allowance
to reduce its deferred tax asset in recognition of uncertainty regarding
full realization. Due to these developments and the Company’s 2003
results, its deferred tax asset valuation allowance increased to $122.7
million from $120.6 million. This $2.1 million increase is the result of a
charge of $.8 million recorded through the tax provision in the statement
of operations, a $9.0 million increase recorded directly to the balance
sheet to adjust the 2002 Wabush Iron acquisition accounting, and a
benefit of $7.7 million recorded directly to shareholders’ equity. This
credit relates to the decline in the future tax benefit on the other com-
prehensive income realized by the reduction to the minimum pension
obligation.
D e c e m b e r 31, 2 0 03
( I N M I L L I O N S )
Company’s Share
Total
Defined
Benefit
Pensions
Other
Benefits
Defined
Benefit
Pensions
Other
Benefits
Fair value of plan assets
Benefit obligation
$ 471.4 $ 56.6
373.8
642.6
$ 640.5 $ 72.6
452.4
842.9
Underfunded status of plan
$(171.2) $(317.2) $(202.4) $(379.8)
Additional shutdown and
early retirement benefits
$ 133.0 $ 65.6
$ 183.8 $ 94.3
NOTE 9 – INCOME TAXES
Significant components of the Company’s deferred tax assets
and liabilities as of December 31, 2003 and 2002 are as follows:
Deferred tax assets:
Pensions, including minimum
pension liability
Loss carryforwards
Postretirement benefits other
than pensions
Alternative minimum tax credit
carryforwards
Asset retirement obligation
Product inventories
Investment in ventures
Other liabilities
Total deferred tax assets
before valuation allowance
Deferred tax asset valuation
allowance
Net deferred tax assets
Deferred tax liabilities:
ISG marked-to-market
Properties
CAL properties
Investment in ventures
Total deferred tax liabilities
( I N M I L L I O N S )
2003
2002
$ 36.3
23.5
$ 41.9
22.7
23.3
11.5
7.0
4.5
3.3
30.7
140.1
122.7
17.4
34.5
17.4
51.9
22.5
11.8
4.7
6.5
27.3
137.4
120.6
16.8
10.0
4.6
2.2
16.8
Net deferred tax liabilities
$(34.5)
$120.6
49
Notes to Consolidated Financial Statements C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
During 2003, the Company recorded a net of tax marked-to-
market adjustment in shareholders’ equity with respect to its investment
in ISG, a net of tax extraordinary gain related to its participation in United
Taconite, and a net of tax charge in shareholders’ equity associated with
the exercise of stock options. A charge of $34.5 million was recorded
to reflect the tax impact of these items as realized and was allocated
among each component. Further, the $34.5 million charge reflects the
net liability that would occur after utilization of $29.1 million of deferred
tax assets, and corresponding valuation allowance, noted above.
In the future, if the Company determines, based on the existence
of sufficient evidence, that it should realize more or less of its net deferred
tax assets, an adjustment to the valuation allowance will affect income
in the period such determination is made. At December 31, 2003,
deferred tax assets before valuation allowance include net operating
loss carryforwards of $67 million that begin to expire in 2022.
The components and allocation of the Company’s income taxes
are as follows:
Income taxes from continuing
operations:
Current
Deferred
Cumulative effect of
accounting change
Income tax expense (credit)
Other comprehensive loss
( I N M I L L I O N S )
2003
2002
2001
$ (.8)
.5
(.3)
$ (4.8)
13.9
9.1
(.3)
9.1
$ (3.5)
(12.8)
(16.3)
5.0
(11.3)
(.6)
Total
$ (.3)
$ 9.1
$(11.9)
The Company’s current credit provision is the net result of
refund claims filed for recovery of U.S. federal income taxes paid in
prior years, $1.4 million, and expense of $.6 million for foreign and state
taxes. The Company’s deferred provision reflects adjustments to prior
tax periods.
Reconciliation of the Company’s income tax attributable to con-
tinuing operations computed at the United States federal statutory rate
is as follows:
Tax at statutory rate
of 35 percent
Increase (decrease) due to:
Percentage depletion
in excess of cost depletion
Non-deductible expense
Effect of state and foreign taxes
Prior years’ tax adjustments
Valuation allowance
Other items – net
( I N M I L L I O N S )
2003
2002
2001
$(11.6)
$(62.7)
$(12.0)
(2.3)
.6
.6
12.7
.8
(1.1)
(7.7)
.2
(3.6)
82.2
.7
(2.6)
1.7
.5
.1
1.0
Income tax expense (credit)
$ (.3)
$ 9.1
$ (11.3)
NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and fair value of the Company’s financial
instruments at December 31, 2003 and 2002 were as follows:
( I N M I L L I O N S )
2003
2002
Carrying
Amount
$ 67.8
196.7
61.3
10.0
25.0
Fair
Value
$ 67.8
196.7
61.3
10.0
25.0
Carrying
Amount
$61.8
17.4
58.8
10.0
55.0
Fair
Value
$61.8
17.4
58.8
10.0
55.0
Cash and cash equivalents
ISG Common Stock
Long-term receivable*
Long-term note receivable*
Long-term debt*
*Includes current portion
The carrying amount of cash and cash equivalents approxi-
mates fair value due to the short maturity of instruments included in
this category.
50
The 1996 Nonemployee Directors’ Compensation Plan, as
amended in 2001, authorizes the Company to issue up to 100,000
Common Shares to nonemployee Directors. The Plan was amended
effective in 1999 to provide for the grant of 2,000 Restricted Shares to
nonemployee Directors first elected on or after January 1, 1999, and also
provides that nonemployee Directors must take at least 40 percent of
their annual retainer in Common Shares. The Restricted Shares vest
five years from the date of award.
The Company recorded expense of $6.0 million in 2003, $2.0
million in 2002, and $.1 million in 2001 relating to other stock-based
compensation, primarily the Performance Share program.
SFAS No. 123 requires pro forma disclosure of net income and
earnings per share as if the fair value method for valuing stock options
had been applied. The Company’s pro forma information follows:
Net loss (millions)
Loss per share:
Basic
Diluted
2003
2002
2001
$(30.5)
$(189.0)
$(23.8)
$(2.97)
$(2.97)
$(18.69)
$(18.69)
$(2.36)
$(2.36)
The fair value of these options was estimated at the date of
grant for 2002 and 2001 (no options were issued in 2003) using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
Risk-free interest rate
Dividend yield
Volatility factor – market price
of Company’s common shares
Expected life of options – years
Weighted-average fair value of
options granted during the year
2002
4.51%
3.40%
.339
4.31
2001
4.95%
3.88%
.277
4.81
$7.20
$3.77
Compensation costs included in the pro forma information
reflect fair values associated with options granted after January 1, 1995.
Pro forma information may not be indicative of future pro forma infor-
mation applicable to future outstanding awards.
In 2002, the Company invested $17.4 million in ISG common
stock, which at the time represented approximately 7 percent of ISG’s
equity. In December 2003, after ISG completed an initial public offering
for its common stock, the Company’s investment increased to $196.7
million based on the December 31, 2003 closing price. The investment,
which has trading restrictions through June 8, 2004, has been treated
as an “available-for-sale” security and accordingly the $179.3 million
($144.9 million after-tax) increase in value has been recorded in “Other
comprehensive income.” Prior to the public offering, the investment
was accounted for by the “cost method.”
The fair value of the long-term receivable from Ispat Inland of
$61.3 million and $58.8 million at December 31, 2003 and December
31, 2002, respectively, is based on the discount rate utilized by the
Company, which represents an approximate credit-adjusted rate for
unsecured obligations. The fair value of the long-term note receivable
from Rouge of $10.0 million is based on the estimated credit-adjusted
rate for a secured loan.
The fair value of the Company’s long-term debt was determined
based on a discounted cash flow analysis and estimated current bor-
rowing rates.
At December 31, 2003 and 2002, the Company’s U.S. mining
ventures had in place forward contracts for the purchase of natural gas
in the notional amount of $22.5 million (Company share – $18.1 million)
and $4.6 million (Company share – $3.7 million), respectively. The
unrecognized fair value gain on the contracts at December 31, 2003,
which mature at various times through October 2004 was estimated
to be $4.2 million (Company share – $3.4 million) based on December
31, 2003 forward rates.
NOTE 11 – STOCK PLANS
The 1992 Incentive Equity Plan, as amended in 1999, authorizes
the Company to issue up to 1,700,000 Common Shares to employees
upon the exercise of Options Rights, as Restricted Shares, in payment
of Performance Shares or Performance Units that have been earned,
as Deferred Shares, or in payment of dividend equivalents paid on
awards made under the Plan. Such shares may be shares of original
issuance, treasury shares, or a combination of both. Stock options may
be granted at a price not less than the fair market value of the stock on
the date the option is granted, generally are not subject to repricing, and
must be exercisable not later than ten years and one day after the date
of grant. Common Shares may be awarded or sold to certain employees
with disposition restrictions over specified periods.
51
Notes to Consolidated Financial Statements C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
Stock option, restricted stock award, deferred stock allocation, and performance share activities under the Company’s Incentive Equity Plans,
and the Nonemployee Directors’ Compensation Plan are summarized as follows:
Stock options:
Options outstanding at beginning of year
Granted during the year
Exercised
Cancelled or expired
Options outstanding at end of year
Options exercisable at end of year
Restricted awards:
Awarded and restricted at beginning of year
Awarded during the year
Vested
Cancelled
Awarded and restricted at end of year
Performance shares:
Allocated at beginning of year
Allocated during the year
Issued
Forfeited/cancelled
Allocated at end of year
Directors’ retainer and voluntary shares:
Awarded at beginning of year
Awarded during the year
Issued
Awarded at end of year
Reserved for future grants
or awards at end of year:
Employee plans
Directors’ plans
Total
2003
2002
2001
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Exercise
Price
Shares
Shares
813,728
$47.94
810,029
25,000
$48.24
28.80
872,697
25,000
$48.81
17.88
37.01
47.94
40.84
33.38
49.85
52.81
52.81
(180,532)
(154,730)
478,466
478,466
64,757
25,685
(42,385)
(4,000)
44,057
352,218
157,105
(43,246)
(81,471)
384,606
7,812
9,342
(7,812)
9,342
269,311
28,992
298,303
(21,301)
813,728
430,135
66,588
4,106
(5,937)
64,757
278,200
160,900
(86,882)
352,218
10,471
7,811
(10,470)
7,812
211,900
38,334
250,234
45.25
48.24
41.91
(87,668)
810,029
369,591
89,414
9,821
(30,350)
(2,297)
66,588
212,450
126,600
(17,788)
(43,062)
278,200
9,394
10,867
(9,790)
10,471
289,619
50,145
339,764
Exercise prices for stock options outstanding as of December 31,
NOTE 12 – OTHER COMPREHENSIVE INCOME
2003 ranged from $28.80 to $75.80, summarized as follows:
Components of Other Comprehensive Income (Loss) and related
RA N G E O F E X E R C I S E PR I C E S
$20 – $30
$30 – $40
$40 – $50
Over $50
O u t s t a n d i n g a n d E xe rc i s a b l e
Number of
Shares
Underlying
Options
44,366
5,000
195,100
234,000
478,466
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
7.3
.9
3.8
5.0
4.7
$29.13
37.63
43.99
64.97
$52.81
tax effects allocated to each are shown below:
( I N M I L L I O N S )
Pre-tax
Amount
Tax
Benefit
After-tax
Amount
$ (1.6)
$ .6
$ (1.0)
Year Ended December 31, 2001
Minimum pension liability
Year Ended December 31, 2002
Minimum pension liability
$ (111.3)
$ .6
$(110.7)
Year Ended December 31, 2003
Minimum pension liability
Unrealized gain on securities
$(89.1)
179.3
$ 90.2
$ .6
(34.4)
$(33.8)
$(88.5)
144.9
$ 56.4
52
Other Comprehensive Income (Loss) balances are as follows:
Balance December 31, 2000
Change during 2001
Balance December 31, 2001
Change during 2002
Balance December 31, 2002
Change during 2003
Minimum
Pension
Liability
$ (1.0)
(1.0)
(1.0)
(109.7)
(110.7)
22.2
Balance December 31, 2003
$(88.5)
( I N M I L L I O N S )
Unrealized
Accumulated
Other
Gain on Comprehensive
Securities
Gain (Loss)
$ (1.0
144.9
$144.9
$ (1.0)
(1.0)
(1.0)
(109.7)
(110.7)
167.1
$ 56.4
NOTE 13 – SHAREHOLDERS’ EQUITY
Under the Company’s share purchase rights plan, a right is
attached to each of the Company’s Common Shares outstanding or
subsequently issued, which entitles the holder to buy from the
Company one-hundredth of one (.01) Common Share at an exercise
price per whole share of $160. The rights expire on September 19,
2007 and are not exercisable until the occurrence of certain triggering
events, which include the acquisition of, or tender or exchange offer for,
20 percent or more of the Company’s Common Shares. There are
approximately 168,000 Common Shares reserved for these rights. The
Company is entitled to redeem the rights at one cent per right upon
the occurrence of certain events.
NOTE 14 – CONTINGENCIES
The Company and its ventures are periodically involved in litigation
incidental to their operations. Management believes that any pending
litigation will not result in a material liability in relation to the Company’s
consolidated financial statements.
NOTE 15 – SUBSEQUENT EVENTS (UNAUDITED)
Issuance of Preferred Stock
In January 2004, the Company completed a private offering of
$172.5 million of redeemable cumulative convertible perpetual pre-
ferred stock, without par, issued at $1,000 per share. The preferred
stock will pay cash dividends at a rate of 3.25 percent per annum and
is convertible into the Company’s common shares at a rate of 16.1290
common shares per share of preferred stock, which is equivalent to an
initial conversion price of $62.00 per share, subject to adjustment in
certain circumstances. The Company may also exchange the preferred
stock for convertible subordinated debentures in certain circumstances.
The Company has reserved approximately 2.8 million common treasury
shares for possible future issuance for the conversion of the preferred
shares. The shares have not been registered under the Securities Act
and may not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements of the
Securities Act. The Company expects the net proceeds after offering
expenses to be approximately $166 million. A portion of the proceeds
was utilized to repay the remaining $25.0 million of the Company’s
senior unsecured notes early in 2004; the Company has used approx-
imately $23 million to fund its underfunded pension salaried plan and
intends to use some additional amounts for other pension funding
obligations in 2004.
Rouge
On January 30, 2004, Rouge sold substantially all of its assets
to Severstal North America, Inc., a U.S. affiliate of OAO Severstal. The
Company’s term supply agreement with Rouge was assumed by
Severstal with minor modifications.
Stelco
On January 29, 2004, Stelco applied and obtained bankruptcy-
court protection from creditors in Ontario Superior Court under the
Companies’ Creditors Arrangement Act. Pellet sales to Stelco totaled
100,000 tons in 2003 and 255,000 tons in 2002. Stelco is a 44.6
percent participant in Wabush, and U.S. subsidiaries of Stelco (which
are not believed to have filed for bankruptcy protection) own 14.7 per-
cent of Hibbing and 15 percent of Tilden. At the time of the filing, the
Company had no trade receivable exposure to Stelco. Additionally,
Stelco has met its cash call requirements at the mining ventures to
date. The Company currently expects Stelco to continue its participation
in the mining ventures.
53
REPORT OF INDEPENDENT AUDITORS C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
SHAREHOLDERS AND BOARD OF DIRECTORS
CLEVELAND-CLIFFS INC
We have audited the accompanying statements of consolidated
financial position of Cleveland-Cliffs Inc and consolidated subsidiaries
(the “Company”) as of December 31, 2003 and 2002, and the related
statements of consolidated operations, shareholders’ equity and cash
flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above pres-
ent fairly, in all material respects, the consolidated financial position of
Cleveland-Cliffs Inc and consolidated subsidiaries at December 31,
2003 and 2002, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally
accepted in the United States.
As discussed in the Accounting Policy Note to the financial
statements, in 2003 the Company changed its method of accounting
for stock-based compensation, in 2002 the Company changed its
method of accounting for obligations associated with the retirement of
tangible long-lived assets and related asset retirement costs, and in
2001 the Company changed its method of accounting for investment
gains and losses on pension assets for the calculation of net periodic
pension cost.
Cleveland, Ohio
January 28, 2004
54
REPORT OF MANAGEMENT C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
Management has prepared the accompanying consolidated
financial statements appearing in this Annual Report and is responsible
for their integrity and objectivity. The consolidated financial statements,
including amounts that are based on management’s best estimates
and judgment, have been prepared in conformity with generally
accepted accounting principles and are free of material misstatement.
Management also prepared other information in this Annual Report and
is responsible for its accuracy and consistency with the consolidated
financial statements.
Management maintains a system of internal accounting controls
and procedures over financial reporting designed to provide reasonable
assurance, at an appropriate cost/benefit relationship, that assets are
safeguarded and that transactions are authorized, recorded, and
reported properly. The internal accounting control system is augmented
by a program of internal audits, written policies and guidelines, careful
selection and training of qualified personnel, and a written code of
conduct. Our code of conduct requires employees to maintain a high
level of ethical standards in the conduct of our business. Management
believes that our internal accounting controls provide reasonable
assurance (i) that assets are safeguarded against material loss from
unauthorized use or disposition, and (ii) that the financial records are
reliable for preparing consolidated financial statements and other data
and maintaining accountability for assets.
The Audit Committee of the Board of Directors, composed solely
of directors who are independent of us, meets periodically with the
independent auditors, management, and the Chief Internal Auditor to
discuss internal accounting control, auditing, and financial reporting
matters and to ensure that each is meeting its responsibilities regarding
the objectivity and integrity of our financial statements. The Committee
also meets directly with the independent auditors and our Chief Internal
Auditor without management present, to ensure that the independent
auditors and our Chief Internal Auditor have free access to the
Committee.
The independent auditors, Ernst & Young LLP, are retained by
the Audit Committee of the Board of Directors. Ernst & Young LLP is
engaged to audit our consolidated financial statements and conduct
such tests and related procedures as Ernst & Young LLP deems
necessary in conformity with generally accepted auditing standards.
The opinion of the independent auditors, based upon their audit of the
consolidated financial statements, is contained in this Annual Report.
J.S. Brinzo
Chairman, President and Chief Executive Officer
Donald J. Gallagher
Senior Vice President,
Chief Financial Officer and Treasurer
R.J. Leroux
Vice President and Controller
and Principal Accounting Officer
55
QUARTERLY RESULTS OF
OPERATIONS (UNAUDITED) I N M I L L I O N S , E XC E P T P E R S H A R E A M O U N T S
Total revenues
Gross profit (loss)*
Income (loss) from continuing operations
Extraordinary gain, net of $.5 tax
Net income (loss)
Net income (loss) per share – basic/diluted
Average number of shares – basic/diluted
Q u a r t e r s
F i r s t
$161.5
2.4
2.2
$ 2.2
$ .21
10.2
S e c o n d
$213.7
(15.6)
(21.2)
$ (21.2)
$(2.07)
10.2
2003
T h i r d
$234.2
10.4
(4.8)
$ (4.8)
$ (.47)
10.2
F o u r t h
$248.3
.9
(11.1)
2.2
$ (8.9)
$ (.86)
10.3
Ye a r
$857.7
(1.9)
(34.9)
2.2
$(32.7)
$ (3.19)
10.3
*From continuing operations (including $2.6 million charge for impairment of mining assets in the fourth quarter from gross profit).
Second quarter results included $11.1 million of pre-tax fixed
costs related to production curtailments and $2.6 million for customer
bankruptcy exposure. Third quarter results included restructuring charges
of $6.2 million and $4.9 million of bankruptcy exposure. Fourth quarter
results included an impairment charge of $2.6 million and restructuring
charges of $2.5 million.
Total revenues
Gross profit (loss)*
Income (loss) from continuing operations
Discontinued operation
Cumulative effect of accounting change
Net income (loss)
Net income (loss) per share – basic/diluted
Average number of shares – basic/diluted
F i r s t
$ 60.7
(12.8)
(8.9)
(2.6)
(13.4)
$ (24.9)
$(2.44)
10.2
S e c o n d
$159.4
2.9
2.0
(1.9)
$ .1
$ .01
10.2
Q u a r t e r s
2002
T h i rd
$207.7
8.9
6.1
(98.8)
$ (92.7)
$(9.18)
10.1
F o u r t h
$189.3
(35.8)
(65.6)
(5.2)
$(70.8)
$ (7.01)
10.1
Ye a r
$ 617.1
(36.8)
(66.4)
(108.5)
(13.4)
$(188.3)
$ (18.62)
10.1
*From continuing operations (including $52.7 million charge for impairment of mining assets in the fourth quarter from gross profit).
Quarterly results included $13.8 million, $3.4 million, $3.4 million
and zero, respectively, of pre-tax fixed costs related to production
curtailments. First quarter results have been restated to include $13.4
million, or $1.32 per share for the cumulative effect of SFAS No. 143.
Quarterly results were restated by approximately $.5 million, or $.05
per share, in each of the first three quarters for additional current year
charges related to adoption. Third quarter reflects $95.7 million and
fourth quarter $52.7 million for impairment charges relating to discon-
tinued operation and impairment of mining assets, respectively.
COMMON SHARE PRICE PERFORMANCE AND DIVIDENDS (UNAUDITED)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
2003
2002
H i g h
$21.61
19.90
27.30
54.40
54.40
L o w
$18.56
14.75
17.35
25.60
14.75
H i g h
$22.06
32.25
28.74
25.35
32.25
L o w
$15.80
22.00
21.70
15.70
15.70
No dividends were paid in 2003 or in 2002.
56
CLIFFS’ MINING OPERATIONS
Location
Michigan
Michigan
Minnesota Minnesota
Michigan
Minnesota
Canada
Empire
Empire
and Tilden
Hibbing
Northshore
Tilden
United
Wabush
Other
Total
Gross Tons in Millions
Total Mine
Annual Capacity
Production
2004 E
2003
2002
2001
2000
1999
Cliffs’ Share
Annual Capacity
Production
2004 E
2003
2002
2001
2000
1999
Mineral Reserves – Pellets
Total Mine
Cliffs’ Share
Exhaustion Year at Capacity
Operating Continuously Since
Number of Employees (e)
Salaried
Represented
Total
Ownership Percentage (g)
Cleveland-Cliffs Inc
Dofasco Inc.
ISG
Ispat International N.V.
Laiwu Steel Group Ltd.
Stelco Inc.
Total
6.0
5.5
5.2
3.6
5.7
7.6
7.1
4.7
4.3
4.0
1.1
1.7
1.8
1.2
29
23
2008
1963
1
79.0
21.0
100.0
8.0
8.1
8.0
7.7
6.1
8.2
6.8
1.8
1.9
1.8
1.5
.2
1.2
1.0
174
40
4.8
4.9
4.8
4.2
2.8
4.3
3.9
4.8
4.9
4.8
4.2
2.8
4.3
3.9
320
320
7.8
7.8
7.0
7.9
6.4
7.2
6.2
6.6
6.7
6.0
6.7
2.2
3.1
1.5
288
245
2025
2070
2040
1976
(b)1989(d)
1974
3,184
1,184
1,368
128
605
733
485
485
4.3
4.3
1.6(a)
4.2(a)
4.2(a)
3.9(a)
4.4(a)
3.0
3.0
.1
112
78
2029
1965
250
320
370
23.0
100.0
85.0
70.0
7.8(c)
7.0(c)
36.9
36.6
30.3(b)
27.9(b)
25.4(b)
41.0(b)
36.2(b)
22.5
22.4
18.1
14.7
7.8
11.8
8.8
984
722
116(f)
128(f)
244(f)
1,120
2,836
3,956
6.0
6.0
5.2
4.5
4.4
5.9
5.2
1.6
1.6
1.4
1.2
.9
1.4
1.2
61
16
2014
1965
157
599
756
26.8
28.6
62.3
14.7
100.0
15.0
100.0
100.0
30.0
100.0
44.6
100.0
(a) Total production at United Taconite prior to 2003 and 1.5 million of the tons produced in 2003 represents production at Eveleth before it was acquired by
United Taconite in the fourth quarter of 2003.
(b) Excludes production at United Taconite prior to 2003 and 1.5 million tons in 2003 produced by Eveleth prior to its acquisition by United Taconite in the
fourth quarter of 2003.
(c) Production at LTV Steel Mining Company, permanently closed at end of 2000.
(d) Commenced pellet production in 1955, but was idle from mid-1986 until late 1989 due to bankruptcy of a former owner.
(e) As of December 31, 2003. Includes employees on layoff status. Represented employees are USWA at the mines and various unions at the LS&I Railroad.
(f) LS&I Railroad, corporate and other support services.
(g) Ownership as of February 13, 2004, which may be held through subsidiaries.
57
11-YEAR SUMMARY OF FINANCIAL AND
OTHER STATISTICAL DATA C L E V E L A N D - C L I F F S I N C A N D C O N S O L I DAT E D S U B S I D I A R I E S
Financial Data ( I N M I L L I O N S , E XC E P T P E R S H A R E A M O U N T S A N D E M P LOY E E S )
For The Year
Operating Earnings (Loss) From Continuing Operations
– Product Sales and Services
– Royalties and Management Fees
– Total Operating Revenues
Cost of Goods Sold and Operating Expenses and AS&G Expenses
Operating Earnings (Loss)
Income (Loss) From Continuing Operations
Loss From Discontinued Operation
Income (Loss) Before Extraordinary Gain and Cumulative Effect of Accounting Changes
Extraordinary Gain
Cumulative Effect of Accounting Changes Income (Loss) (a)
Net Income (Loss)
Net Income (Loss) Per Common Share – Basic
– From Continuing Operations
– From Discontinued Operation
– Cumulative Effect of Accounting Changes and Extraordinary Gain
– Net Income (Loss) (b)
Net Income (Loss) Per Common Share – Diluted
– From Continuing Operations
– From Discontinued Operation
– Cumulative Effect of Accounting Changes and Extraordinary Gain
– Net Income (Loss) (b)
Distributions to Common Shareholders
Regular Cash Dividends – Per Share
– Total
Special Dividends – Per Share
Repurchases of Common Shares
– Total
At Year-End
Cash and Cash Equivalents
Total Assets
Debt Obligations Effectively Serviced (d)
Net Cash From (Used By) Continuing Operating Activities
Shareholders’ Equity
Book Value Per Common Share
Market Value Per Common Share
Iron Ore Production and Sales Statistics (Millions of Gross Tons)
Production From Iron Ore Mines Managed By The Company
Company’s Share of Iron Ore Production
Company’s Sales Tons
Other Information
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (e)
Earnings Before Interest and Taxes (EBIT) (e)
Common Shares Outstanding (Millions) – Average For Year
– At Year-End
Common Shares Price Range – High
– Low
2003
2002
2001
$825.1
10.6
835.7
860.1
(24.4)
(34.9)
(34.9)
2.2
(32.7)
(3.40)
0.21
(3.19)
(3.40)
0.21
(3.19)
67.8
895.2
34.6
42.7
228.1
21.73
50.95
30.3
18.1
19.2
$586.4
12.2
598.6
606.5
(7.9)
(66.4)
(108.5)
(174.9)
(13.4)
(188.3)
(6.58)
(10.72)
(1.32)
(18.62)
(6.58)
(10.72)
(1.32)
(18.62)
61.8
730.1
67.4
40.9
79.3
7.79
19.85
27.9
14.7
14.7
$319.3
29.8
349.1
373.9
(24.8)
(19.5)
(12.7)
(32.2)
9.3
(22.9)
(1.93)
(1.26)
.92
(2.27)
(1.93)
(1.26)
.92
(2.27)
.40
4.1
183.8
825.0
173.9
28.9
374.2
36.90
18.30
25.4
7.8
8.4
(12.2)
(41.2)
10.3
10.5
$54.40
14.75
3,956
(21.6)
(55.5)
10.1
10.1
$32.25
15.70
3,858
(0.3)
(23.7)
10.1
10.1
$22.45
13.65
4,302
Employees at Year-End (f)
(a) Effective January 1, 2002, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations;” effective January 1, 2001, the Company changed its method of accounting for
investment gains and losses on pension assets for the recognition of pension expense; and effective January 1, 1992, the Company adopted SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions.”
(b) In 2003 the Company recognized a $2.2 million extraordinary gain in the acquisition of the former Eveleth Taconite Company; $3.3 million acquisition and startup costs for this same
mine, renamed United Taconite Company and $8.7 million of restructuring charges related to a salaried employee reduction program. Results for 2002 include impairments of $95.7
million and $52.7 million (combined $14.67 per share) for impairment charges relating to discontinued operation and impairment of mining assets, respectively. Results for 2000 include
an after-tax $9.9 million recovery on an insurance claim, a $5.2 million federal income tax credit, and a $7.1 million charge relating to a common stock investment (combined $.77 per
share); 1999 includes a $4.4 million ($.39 per share) recovery relating primarily to prior years’ state tax refunds; in 1998 a federal income tax credit of $3.5 million ($.31 per share); in 1997
58
2000
1999
1998
1997
1996
1995
1994
1993
$379.4
36.5
415.9
384.7
31.2
26.7
(8.6)
18.1
18.1
2.57
(.83)
1.74
2.55
(.82)
1.73
1.50
15.7
15.6
29.9
727.8
74.0
31.6
402.0
39.73
21.56
41.0
11.8
10.4
$316.1
40.9
357.0
337.8
19.2
10.5
(5.7)
4.8
4.8
.95
(.52)
.43
.95
(.52)
.43
1.50
16.7
17.2
67.6
679.7
74.7
(4.8)
407.3
38.27
31.13
36.2
8.8
8.9
$465.7
36.4
502.1
425.0
77.1
58.9
(1.5)
57.4
57.4
5.23
(.13)
5.10
5.19
(.13)
5.06
1.45
16.3
11.5
130.3
723.8
75.4
89.8
437.6
39.25
40.31
40.3
11.4
12.1
$406.1
35.7
441.8
374.9
66.9
55.9
(1.0)
54.9
54.9
4.92
(.09)
4.83
4.89
(.09)
4.80
1.30
14.8
4.9
115.9
694.3
74.9
40.8
407.4
36.02
45.81
39.6
10.9
10.7
$470.1
37.1
507.2
413.6
93.6
61.0
$424.8
35.8
460.6
371.4
89.2
57.8
$348.5
32.0
380.5
316.8
63.7
42.8
61.0
57.8
42.8
61.0
5.26
5.26
5.23
5.23
1.30
15.1
19.5
169.4
673.7
72.9
87.6
370.6
32.59
45.38
41.5
12.0
12.7
57.8
4.84
4.84
4.82
4.82
1.30
15.5
10.8
148.8
644.6
76.3
61.3
342.6
28.96
41.00
41.1
11.3
11.9
42.8
3.54
3.54
3.53
3.53
1.23
14.8
141.4
608.6
84.2
75.6
311.4
25.74
37.00
36.7
8.3
9.7
$280.4
29.0
309.4
270.1
39.3
54.6
54.6
54.6
4.55
4.55
4.53
4.53
1.20
14.4
2.70 (c)
32.4 (c)
161.0
549.1
88.6
70.3
280.4
23.25
37.38
33.8
6.8
7.8
57.3
31.9
10.4
10.1
$31.38
19.69
5,645
after-tax credits of $8.8 million ($.77 per share); net contributions from non-recurring items and extraordinary charge of $2.4 million ($.20 per share) in 1995; and in 1993 recoveries
on bankruptcy claims of $23.2 million ($1.92 per share). Operating results reflect the acquisition of Northshore in the fourth quarter of 1994.
108.2
90.6
11.6
11.4
$46.88
36.25
6,251
70.6
56.2
12.1
12.1
$45.50
34.00
6,504
33.8
11.3
11.1
10.6
$43.56
26.81
5,947
85.6
68.8
11.9
11.8
$46.75
36.13
6,411
88.6
68.3
11.3
11.2
$57.69
36.06
6,029
88.8
69.9
11.4
11.3
$47.13
40.00
5,951
86.7
73.2
12.0
12.1
$37.50
28.75
6,173
(c) Includes securities at market value on distribution date.
(d) Includes the Company’s share of unconsolidated mining ventures and equipment acquired on capital leases.
(e) EBITDA and EBIT, which include mining asset impairment charges of $2.6 million in 2003 and $52.7 million in 2002, are not presented as substitute measures of operating results or
cash flow from operations, but because they are standards utilized by management to measure liquidity. For a reconciliation of EBITDA and EBIT to “Net cash from operating activities,”
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”
(f) Includes employees of unconsolidated mining ventures.
At December 31, 2003, the Company had 2,185 shareholders of record; at February 29, 2004, the Company had 2,037 shareholders of record.
59
CLEVELAND-CLIFFS INC
INVESTOR AND CORPORATE INFORMATION
Corporate Office
Cleveland-Cliffs Inc
1100 Superior Avenue
Cleveland, OH 44114-2589
Telephone: 216.694.5700
Fax: 216.694.4880
Stock Exchange Information
The principal market for Cleveland-Cliffs
Inc common shares (ticker symbol CLF)
is the New York Stock Exchange. The
shares are also listed on the Chicago
Stock Exchange.
Transfer Agent and Registrar
EquiServe Trust Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
Telephone: 800.446.2617
Annual Meeting
Date: May 11, 2004
Time: 11:30 a.m.
Place: Forum Conference Center
1375 East 9th Street
Cleveland, Ohio
ORGANIZATION CHANGES
Donald J. Gallagher, formerly Vice
President-Sales, was named Senior Vice
President, Chief Financial Officer and
Treasurer.
Cynthia B. Bezik, formerly Senior Vice
President-Finance, left the Company.
Robert Emmet, formerly Vice President-
Financial Planning and Treasurer, retired
from the Company after 27 years of
service.
Cliffs on the Internet
Cliffs’ Web site – www.cleveland-
cliffs.com – has current information
about Cliffs, including news releases and
filings with the Securities and Exchange
Commission (SEC). Quarterly conference
calls are broadcast live on the Web site
and archived for 30 days. Visitors to the
Web site can register to receive e-mail
alerts for notification of news releases
and filings with the SEC.
Additional Information
Cliffs’ Annual Report to the SEC
(Form 10-K) and proxy statement are
available on Cliffs’ Web site. Copies
of these reports and other Company
publications may also be obtained
by sending requests to Investor Relations,
at the corporate office, or telephone
800.214.0739 or 216.694.5459.
E-mail: ir@cleveland-cliffs.com
Thomas J. O’Neil, formerly President and
Chief Operating Officer, moved to a non-
officer position, President, Cliffs
International Division, in preparation for
retirement in July 2004.
James A. Trethewey, formerly Senior
Vice President-Business Development,
was named Senior Vice President-
Operations Improvement.
OFFICERS
Years with
Company
Age
34
3
31
6
22
3
31
35
28
John S. Brinzo, 62
Chairman, President and Chief Executive Officer
David H. Gunning, 61
Vice Chairman
William R. Calfee, 57
Executive Vice President-Commercial
Edward C. Dowling, Jr., 48
Executive Vice President-Operations
Donald J. Gallagher, 51
Senior Vice President, Chief Financial Officer
and Treasurer
Randy L. Kummer, 47
Senior Vice President-Human Resources
James A. Trethewey, 59
Senior Vice President-Operations Improvement
John E. Lenhard, 64
Vice President, Secretary and
General Counsel
Robert J. Leroux, 53
Vice President and Controller
OPERATING UNIT MANAGEMENT
34
26
1
8
15
37
Damien Lebel, 59
General Manager, Wabush Mines-Pointe Noire
Michael P. Mlinar, 50
General Manager, Cliffs Michigan Mines
Donald R. Prahl, 57
General Manager, Northshore Mine
Todd D. Roth, 37
Site Manager, United Taconite Mine
John N. Tuomi, 54
General Manager, Hibbing Taconite Mine
and United Taconite Mine
Richard M. Tuthill, 60
General Manager, Wabush Mines-Scully
(Age and service at March 1, 2004)
60
Recycled Paper
Designed by Dix & Eaton
ETHICS & CORPORATE GOVERNANCE
Cliffs promotes the highest level of ethical conduct from
all employees and has established corporate governance
practices that are designed to give the Board of Directors
the tools to oversee management and enhance long-term
shareholder value. Following are several key examples
of Cliffs’ corporate governance process:
> Nine of Cliffs’ 11 Directors are independent.
> There is no family relationship among any
of Cliffs’ Directors and officers.
> All Directors are elected annually, and
shareholders have cumulative voting rights.
> Independent Directors have designated a lead
Director and meet at regularly scheduled
executive sessions without management.
> Audit, compensation and organization, and
nominating committees are composed entirely
of independent Directors.
> Independent Directors must take a portion
of their annual retainer in Company stock,
in accordance with stock ownership guidelines.
> All Directors attended at least 80 percent of
the meetings of the Board of Directors and
Board Committees of which they were a
member in 2003.
> Average service of independent Directors
is eight years.
> Average age of independent Directors is 63.
> There is no retirement plan for independent
Directors elected to the Board subsequent
to 1998.
> A formal code of ethics provides guidance
to Cliffs’ Directors and employees.
Good corporate governance is more than a process;
it is values lived. It is reflected in a commitment
to integrity, one of Cliffs’ core values. Ethical standards
are not simply a set of rules, but rather the way we live
and work day to day. Rules and regulations are important,
but ultimately it is people of integrity committed to
doing the right thing.
DIRECTORS
Director
Since
1997
1996
Committees Served
John S. Brinzo (5)
Chairman, President and Chief Executive Officer
of the Company
Ronald C. Cambre (2,3,5)
Former Chairman and Chief Executive Officer
Newmont Mining Corporation
International mining company
1999
Ranko Cucuz (2,4)
Former Chairman and Chief Executive Officer
Hayes Lemmerz International, Inc.
International supplier of wheels to the auto industry
2001
1986
1996
David H. Gunning (5)
Vice Chairman of the Company
James D. Ireland III (1,3,5)
Managing Director
Capital One Partners, Inc.
Private equity investment firm
Francis R. McAllister (2,3,5)
Chairman and Chief Executive Officer
Stillwater Mining Company
Palladium and platinum producer
1995
John C. Morley (1, 4,5)
President/Evergreen Ventures Ltd., LLC.
a family office, and
Retired President and Chief Executive Officer
Reliance Electric Company
Major industrial manufacturer
1991
Stephen B. Oresman (1,3,5)
President
Saltash Ltd.
Management consultants
Chief Executive Officer
Technology Solutions Company
Systems integration and business consulting firm
2002
Roger Phillips (2,4)
Former President and Chief Executive Officer
IPSCO Inc.
International steel producing company
2002
Richard K. Riederer (1,3)
Former President and Chief Executive Officer
Weirton Steel Corporation
Steel producing company
1991
Alan Schwartz (2,4)
Professor, Yale Law School
and Yale School of Management
COMMITTEES:
(1) Audit
(2) Board Affairs
(3) Compensation and Organization
(4) Finance
(5) Strategic Advisory
61
Cleveland-Cliffs Inc > 1100 Superior Avenue > Cleveland, OH 44114-2589 > www.cleveland-cliffs.com