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2017 A NNUA L REPORT
Message from the CEO
Dear Fellow Shareholder,
Once again, in 2017 we significantly increased revenues and profits when compared with the previous year, with
revenues of $2.3 billion and net income of $367 million, corresponding to earnings of $1.26 per diluted share.
Adjusted EBITDA was $505 million, which was 35 percent higher than in 2016 and the Company’s second
consecutive year of Adjusted EBITDA growth exceeding 25 percent.
We also continued to aggressively reduce debt and optimize our capital structure. Even after acquiring strategic
iron ore reserves in Nashwauk, Minnesota, and buying out our minority partners in the Empire and Tilden mines in
Michigan, we still finished the year with net debt of $1.3 billion, along with a vastly extended maturity debt profile and
a much lower average cost of capital. We directed our capital toward sustaining ongoing operations at our core U.S.
Iron Ore business, including the development and production of a new type of pellet for our largest customer at our
United Taconite mine in Minnesota.
In order to implement our plans to become
the sole producer of customized iron units
to the growing electric arc furnace (EAF)
steel industry by 2020, we completed the
significant step of raising the entire amount
of $700 million needed to fully fund the Hot
Briquetted Iron (HBI) project in Toledo, Ohio,
at a very attractive rate of 3.4 percent. We
are excited about the future of Cleveland-
Cliffs as we expand our reach into the EAF
market, while continuing to serve our core
blast furnace customers with customized
iron ore pellets.
Going forward, Cleveland-Cliffs will do what
we do best: supplying iron units to the North
American steel mills. No distractions; no
side businesses; no distant geographies;
no pipe dreams. The new strategy has
been implemented, and our results are
Lourenco Goncalves Chairman, President and Chief Executive Officer
undeniable. Our success in raising the capital for the HBI plant at a low – and, very important, fixed – interest rate is
a clear demonstration that the capital markets have already acknowledged our success and are starting to reward
our effort.
On behalf of the Board of Directors, I extend my sincere gratitude to our shareholders for your continued support and
long-term investment in our great Company. As long as you believe that the United States of America will continue to
be a vibrant manufacturing country, and that steel will continue to be produced in our country, then you and I share
the belief that Cleveland-Cliffs has a very important role to play. And, if that’s the case, we will do very well.
Sincerely yours,
C. Lourenco Goncalves
Chairman, President and Chief Executive Officer
1
With a corporate heritage dating back 170 years, Cliffs is a leading supplier of world-class raw materials
to iron and steel producers in the U.S. Pioneers in developing the beneficiation and pelletizing processes,
the Company is a major supplier of iron ore pellets in North America, as well as one of the lowest-cost
producers in the world. Cliffs’ technical knowledge and expertise has helped the Company foster strong
relationships with steel producers throughout the years.
Revenues
$ in billions
Adjusted EBITDA
$ in millions
2.3
2.1
2.0
505
374
293
2015
2016
2017
2015
2016
2017
2
Cliffs celebrated its 170th anniversary
by ringing the Closing Bell at the New
York Stock Exchange on May 1, 2017.
Headquartered in Cleveland, Ohio
since 1847, Cliffs went public on the
NYSE in 1960.
The development of its first hot briquetted iron (HBI) production plant
in Toledo, Ohio marks a very important strategic milestone for Cliffs.
By 2020, Cliffs expects to be the only reliable supplier of high-quality
HBI for the domestic steel market in the Great Lakes region.
3
2018 Board of Directors
LOURENCO GONCALVES
Chairman, President and
Chief Executive Officer
JOHN T. BALDWIN
Former Chief Financial Officer
Worthington Industries
ROBERT P. FISHER, JR.
Former Managing Director
The Goldman Sachs Group, Inc.
SUSAN M. GREEN
Former Deputy General Counsel
U. S. Congress Office of Compliance
JOSEPH A. RUTKOWSKI, JR.
Former Executive Vice President
Nucor Corporation
ERIC M. RYCHEL
Executive Vice President, CFO and
Treasurer
Aleris Corporation
MICHAEL D. SIEGAL
Chairman and Chief Executive Officer
Olympic Steel, Inc.
GABRIEL STOLIAR
Former Executive Vice President
Vale SA
DOUGL AS C. TAYLOR
Former Managing Partner
Casablanca Capital LP
2018 Executive Leadership
LOURENCO GONCALVES
Chairman, President and
Chief Executive Officer
TIMOTHY FL ANAGAN
Executive Vice President,
Chief Financial Officer
CLIFFORD T. SMITH
Executive Vice President,
Business Development
TERRY G. FEDOR
Executive Vice President,
United States Iron Ore
TERRENCE R. MEE
Executive Vice President,
Global Commercial
JAMES D. GRAHAM
Executive Vice President,
Chief Legal Officer and Secretary
MAURICE D. HARAPIAK
Executive Vice President,
Human Resources and
Chief Administration Officer
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
OR
For the transition period from to .
Commission File Number: 1-8944
CLEVELAND-CLIFFS INC.
(Exact Name of Registrant as Specified in Its Charter)
Ohio
(State or Other Jurisdiction of
Incorporation or Organization)
200 Public Square, Suite 3300, Cleveland, Ohio
(Address of Principal Executive Offices)
34-1464672
(I.R.S. Employer
Identification No.)
44114-2315
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (216) 694-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Shares, par value $0.125 per share
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
As of June 30, 2017, the aggregate market value of the voting and non-voting common shares held by non-affiliates of the registrant, based on the closing
price of $6.92 per share as reported on the New York Stock Exchange — Composite Index, was $2,039,925,087 (excluded from this figure is the voting stock
beneficially owned by the registrant’s officers and directors).
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 297,400,968 as of February 12, 2018.
Portions of the registrant’s proxy statement for its 2018 annual meeting of shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Page Number
DEFINITIONS
PART I
Item 1.
Business
Executive Officers of the Registrant
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
SIGNATURES
1
3
16
17
30
31
36
38
39
42
45
79
80
166
166
167
168
168
168
168
168
169
175
175
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are
to Cleveland-Cliffs Inc. and subsidiaries, collectively. References to “A$” or “AUD” refer to Australian currency, “C$” to Canadian currency and “$” to
United States currency.
DEFINITIONS
Abbreviation or acronym Term
ABL Facility
Adjusted EBITDA
AG
AK Steel
Algoma
Amended 2015 Equity
Plan
APBO
ArcelorMittal
ArcelorMittal USA
ALJ
AMT
ASC
ASU
Syndicated Facility Agreement by and among Bank of America, N.A., as Administrative Agent and Australian
Security Trustee, the Lenders that are parties hereto, Cleveland-Cliffs Inc., as Parent and a Borrower, and the
Subsidiaries of Parent party hereto, as Borrowers dated as of March 30, 2015, as amended
EBITDA excluding certain items such as extinguishment/restructuring of debt, impacts of discontinued operations,
foreign currency exchange remeasurement, severance and contractor termination costs, certain supplies inventory
write-offs, impairment of other long-lived assets and intersegment corporate allocations of SG&A costs
Autogenous Grinding
AK Steel Corporation (including its facilities in Ashland, Ohio, Middletown, Ohio and Dearborn, Michigan)
Essar Steel Algoma Inc.
Cliffs Natural Resources Inc. Amended and Restated 2015 Equity and Incentive Compensation Plan
Accumulated Postretirement Benefit Obligation
ArcelorMittal (as the parent company of ArcelorMittal Mines Canada, ArcelorMittal USA and ArcelorMittal Dofasco
GP, as well as, many other subsidiaries)
ArcelorMittal USA LLC (including many of its United States affiliates, subsidiaries and representatives. References
to ArcelorMittal USA comprise all such relationships unless a specific ArcelorMittal USA entity is referenced)
Administrative Law Judge
Alternative Minimum Tax
Accounting Standards Codification
Accounting Standards Updates
Bloom Lake
The Bloom Lake Iron Ore Mine Limited Partnership
Bloom Lake Group
Bloom Lake General Partner Limited and certain of its affiliates, including Cliffs Quebec Iron Mining ULC
BNSF
Burlington Northern Santa Fe, LLC
Canadian Entities
Bloom Lake Group, Wabush Group and certain other wholly-owned subsidiaries
CCAA
CERCLA
CFR
CLCC
Companies' Creditors Arrangement Act (Canada)
Comprehensive Environmental Response, Compensation and Liability Act of 1980
Cost and freight
Cliffs Logan County Coal LLC
Clean Water Act
Federal Water Pollution Control Act
CN
CO2
Canadian National Railway Company
Carbon Dioxide
Codification
FASB Accounting Standards Codification
Compensation Committee
Compensation and Organization Committee of Cliffs' Board of Directors
CPP
Directors’ Plan
Dodd-Frank Act
Clean Power Plan
Cliffs Natural Resources Inc. Amended and Restated 2014 Nonemployee Directors’ Compensation Plan
Dodd-Frank Wall Street Reform and Consumer Protection Act
DR-grade pellets
Direct Reduction pellets
EAF
EBITDA
Empire
EPA
EPS
ERM
Electric Arc Furnace
Earnings before interest, taxes, depreciation and amortization
Empire Iron Mining Partnership
U.S. Environmental Protection Agency
Earnings per share
Enterprise Risk Management
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Fe
FERC
FeT
FIP
FMSH Act
GAAP
GHG
Financial Accounting Standards Board
Iron
Federal Energy Regulatory Commission
Total Iron
Federal Implementation Plan
U.S. Federal Mine Safety and Health Act 1977, as amended
Accounting principles generally accepted in the U.S.
Greenhouse gas
1
Abbreviation or acronym Term
HBI
Hibbing
Hot Briquetted Iron
Hibbing Taconite Company, an unincorporated joint venture
Koolyanobbing
Collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling
LIBOR
LIFO
Long ton
LS&I
LTVSMC
Metric ton
MISO
MMBtu
MPCA
MPSC
Monitor
NAAQS
Net ton
NO2
NOx
Northshore
NPDES
NYSE
Oak Grove
OPEB
OPEB cap
PBO
Pinnacle
Platts 62% Price
Preferred Share
ROA
S&P
SEC
SG&A
Seneca
London Interbank Offered Rate
Last-in, first-out
2,240 pounds
Lake Superior & Ishpeming Railroad Company
LTV Steel Mining Company
2,205 pounds
Midcontinent Independent System Operator, Inc.
Million British Thermal Units
Minnesota Pollution Control Agency
Michigan Public Service Commission
FTI Consulting Canada Inc.
National Ambient Air Quality Standards
2,000 pounds
Nitrogen dioxide
Nitrogen oxide
Northshore Mining Company
National Pollutant Discharge Elimination System, authorized by the U.S. Clean Water Act
New York Stock Exchange
Oak Grove Resources, LLC
Other postretirement employment benefits
Medical premium maximums
Projected benefit obligation
Pinnacle Mining Company, LLC
Platts IODEX 62% Fe Fines Spot Price
7.00% Series A Mandatory Convertible Preferred Stock, Class A, without par value
Return on asset
Standard & Poor's Rating Services, a division of Standard & Poor's Financial Services LLC, a subsidiary of The
McGraw-Hill Companies, Inc., and its successors
U.S. Securities and Exchange Commission
Selling, general and administrative
Seneca Coal Resources, LLC
Silver Bay Power
Silver Bay Power Company
SIP
SO2
SSR
STRIPS
Tilden
TMDL
TSR
State Implementation Plan
Sulfur dioxide
System Support Resource
Separate Trading of Registered Interest and Principal of Securities
Tilden Mining Company L.C.
Total Maximum Daily Load
Total Shareholder Return
United Taconite
United Taconite LLC
U.S.
U.S. Steel
USW
VEBA
VWAP
Wabush
Wabush Group
2012 Equity Plan
2015 Equity Plan
United States of America
United States Steel Corporation and all subsidiaries
United Steelworkers
Voluntary Employee Benefit Association trusts
Volume Weighted Average Price
Wabush Mines Joint Venture
Wabush Iron Co. Limited and Wabush Resources Inc., and certain of their affiliates, including Wabush Mines (an
unincorporated joint venture of Wabush Iron Co. Limited and Wabush Resources Inc.), Arnaud Railway Company
and Wabush Lake Railway Company
Cliffs Natural Resources Inc. Amended and Restated 2012 Incentive Equity Plan
Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan
2
PART I
Item 1.
Business
Introduction
Founded in 1847, Cleveland-Cliffs Inc. is the largest and oldest independent iron ore mining company in the
United States. We are a major supplier of iron ore pellets to the North American steel industry from our mines and pellet
plants located in Michigan and Minnesota. Additionally, we operate an iron ore mining complex in Western Australia.
By 2020, we expect to be the sole producer of HBI in the Great Lakes region with the development of our first production
plant in Toledo, Ohio. Driven by the core values of safety, social, environmental and capital stewardship, our employees
endeavor to provide all stakeholders with operating and financial transparency.
We are organized through a global commercial group responsible for sales and delivery of our products and
operations groups responsible for the production of the iron ore that we market. Our continuing operations are organized
according to geographic location: U.S. Iron Ore and Asia Pacific Iron Ore.
In the U.S., we currently own or co-own four operational iron ore mines plus one indefinitely idled mine. We
are currently operating one iron ore mine in Michigan and three iron ore mines in Minnesota. All four mines are currently
operating at or near full capacity. The Empire mine located in Michigan was indefinitely idled beginning in August 2016.
Our Asia Pacific operations consist solely of our Koolyanobbing iron ore mining complex in Western Australia.
Koolyanobbing is currently operating at a level appropriate for the current price discounting environment for low-grade
iron ore products containing less than 62% Fe, and we expect mining operations to cease during 2018.
We are Focused on Protecting our Core U.S. Iron Ore Business
We are the market-leading iron ore producer in the U.S., supplying differentiated iron ore pellets under long-
term contracts to major North American blast furnace steel producers. We have the unique advantage of being a low-
cost, high-quality producer of iron ore pellets in the Great Lakes market with significant transportation and logistics
advantages to serve the Great Lakes steel market effectively. The pricing structure and long-term nature of our existing
contracts, along with our low-cost operating profile, position U.S. Iron Ore as a strong cash flow generator in most
commodity pricing environments. Since instituting our strategy in 2014 of focusing on this core business, we have
achieved significant accomplishments, including providing volume certainty by signing a ten-year supply agreement
with our largest customer; substantially reducing operating costs by making operational improvements; and developing
new pellet products to meet ever-evolving market demands.
We recognize the importance of our strength in the U.S. Iron Ore business, and our top strategic priority is to
protect and enhance our market position. This involves continuing to deliver high-quality, custom-made pellets that
allow our customers to remain competitive in the quality, production efficiency, and environmental friendliness of their
steel products. Protecting the core business also involves continually evaluating opportunities to expand both our
production capacity and ore reserve life. In 2017, we achieved key accomplishments toward these goals by acquiring
the remaining minority stake in our Tilden and Empire mines as well as additional real estate interests in Minnesota.
Expanding our Customer Base
While we hold a strong market position in supplying iron ore to Great Lakes blast furnaces, we cannot ignore
the ongoing shift of steelmaking share in the U.S. away from our core blast furnace customers to EAF steelmakers.
Over the past 25 years, the market share of EAFs has nearly doubled. However, as EAFs have moved to higher value
steel products, they require more high-quality iron ore-based metallics instead of scrap as raw material feedstock. As
a result of this trend, one of our top strategic priorities is to become a critical supplier of the EAF market by providing
these specialized metallics. In June 2017, we announced the planned construction of an HBI production plant in Toledo,
Ohio. HBI is a specialized high-quality iron alternative to scrap that, when used as a feedstock, allows the EAF to
produce more valuable grades of steel. We expect our HBI to partially replace the over 3 million metric tons of ore-
based metallics that are imported into the Great Lakes every year from Russia, Ukraine, Brazil and Venezuela.
Our Toledo plant is expected to produce HBI at a rate of 1.6 million metric tons per year when brought to
production in 2020. We expect that this will create additional demand for our DR-grade pellets of 2.5 million long tons.
Not only does this production plant create another outlet for our high-margin pellets, but it also presents an attractive
economic opportunity for us. As the only producer of DR-grade pellets in the Great Lakes and with access to abundant,
low-cost natural gas, we will be in a unique position to serve clients in the region. In addition, the Toledo site is in close
proximity to over 20 EAFs, giving us a natural competitive freight advantage over import competitors.
3
Business Segments
Our Company’s continuing operations are organized and managed according to geographic location: U.S. Iron
Ore and Asia Pacific Iron Ore.
Segment information reflects our business units, which are organized to meet customer requirements and global
competition. Financial information about our segments, including financial information about geographic areas, is
included in Management's Discussion and Analysis of Financial Condition and Results of Operations and NOTE 2 -
SEGMENT REPORTING.
U.S. Iron Ore
We are a major producer of iron ore pellets, primarily selling production from U.S. Iron Ore to integrated steel
companies in the U.S. and Canada. We operate four iron ore mines: the Tilden mine in Michigan and the Northshore,
United Taconite and Hibbing mines in Minnesota. The U.S.-based mines currently have an annual rated capacity of
27.4 million long tons of iron ore pellet production, representing 55% of total U.S. pellet production capacity. Based on
our equity ownership in these mines, our share of the annual rated production capacity is currently 21.2 million long
tons, representing 42% of total U.S. annual pellet capacity. The Empire mine located in Michigan, which historically
had annual rated capacity of 5.5 million long tons, was indefinitely idled beginning in August 2016. During 2017, we
acquired the remaining noncontrolling interest of the Empire and Tilden mines from ArcelorMittal and U.S. Steel,
respectively.
The following chart summarizes the estimated annual pellet production capacity and percentage of total U.S.
pellet production capacity for each of the respective iron ore producers as of December 31, 2017:
U.S. Iron Ore Pellet
Annual Rated Capacity Tonnage
Current Estimated Capacity
(Long Tons in Millions)1
Percent of Total
U.S. Capacity
All Cliffs’ managed mines
Other U.S. mines
U.S. Steel’s Minnesota ore operations
Minnesota Taconite
Keewatin Taconite
Total U.S. Steel
ArcelorMittal USA Minorca mine
Total other U.S. mines
Total U.S. mines
27.4
14.3
5.4
19.7
2.8
22.5
49.9
54.9%
28.7
10.8
39.5
5.6
45.1
100.0%
1 Empire mine was excluded from the estimated capacity calculation as it is indefinitely idled.
Our U.S. Iron Ore production generally is sold pursuant to long-term supply agreements with various price
adjustment provisions. For the year ended December 31, 2017, we produced a total of 25.5 million long tons of iron
ore pellets. The 2017 U.S. Iron Ore production included 18.8 million long tons for our account and 6.7 million long tons
on behalf of current and previous steel company partners of the mines. During 2016 and 2015, we produced a total of
23.4 million and 26.1 million long tons, respectively.
We produce various grades of iron ore pellets, including standard, fluxed and DR-grade, for use in our customers’
operations as part of the steelmaking process. The variation in grades of iron ore pellets results from the specific
chemical and metallurgical properties of the ores at each mine, the requirements of end user's steelmaking process
and whether or not fluxstone is added in the process. Although the grade or grades of pellets currently delivered to
each customer are based on that customer’s preferences, which depend in part on the characteristics of the customer’s
steelmaking operation, in certain cases our iron ore pellets can be used interchangeably. Standard pellets require less
processing, are generally the least costly pellets to produce and are called “standard” because no ground fluxstone,
such as limestone or dolomite, is added to the iron ore concentrate before turning the concentrate into pellets. In the
case of fluxed pellets, fluxstone is added to the concentrate, which produces pellets that can perform at higher productivity
levels in the customer’s specific blast furnace and will minimize the amount of fluxstone the customer may be required
4
to add to the blast furnace. DR-grade pellets require additional processing to make a pellet that contains higher iron
and lower silica content than a standard pellet. Unlike standard or fluxed pellets, DR-grade pellets are fed into a direct
reduced iron facility, which then are converted into DRI or HBI, a high-quality raw material used to feed an EAF.
Additionally, as the EAF steel market continues to grow in the U.S., there is an opportunity for our iron ore to
serve this market by providing pellets to the alternative metallics market to produce DRI, HBI and/or pig iron. In 2016
and 2017, we produced and shipped industrial trials of low-silica DR-grade pellets, which were successfully processed
in two customers' DRI reactors to produce a high-quality DRI product. By 2020, we expect to sell these low-silica DR-
grade pellets to our own HBI facility in Toledo, Ohio.
Each of our U.S. Iron Ore mines is located near the Great Lakes. The majority of our iron ore pellets are
transported via railroads to loading ports for shipment via vessel to blast furnace steelmakers in North America.
Our U.S. Iron Ore sales are influenced by seasonal factors in the first half of the year as shipments and sales
are restricted due to closure of the Soo Locks and the Welland Canal on the Great Lakes because of winter weather.
During the first quarter, we continue to produce our products, but we cannot ship most of those products via lake vessel
until the conditions on the Great Lakes are navigable, which causes our first and second quarter inventory levels to
rise. Our limited practice of shipping product to ports on the lower Great Lakes or to customers’ facilities prior to the
transfer of title has somewhat mitigated the seasonal effect on first and second quarter inventories and sales under our
current accounting policies, as shipment from this point to the customers’ operations is not limited by weather-related
shipping constraints. At December 31, 2017 and 2016, we had 1.5 million long tons of pellets in inventory in the lower
Great Lakes or at customers’ facilities.
Upon adoption of ASC 606 on January 1, 2018, the timing and pattern of revenue recognition will change for
our U.S. Iron Ore segment. Due to the closure of the Soo Locks and the Welland Canal during the winter months, our
revenues will be lower than historical levels during the first quarter and higher than historical levels during the remaining
three quarters in future years. However, the total amount of revenue recognized during the year should remain
substantially the same as under current GAAP. There will not be a material change in the pattern or timing of revenue
recognition for Asia Pacific Iron Ore.
U.S. Iron Ore Customers
Our U.S. Iron Ore revenues primarily are derived from sales of iron ore pellets to the North American integrated
steel industry, consisting primarily of three major customers. Generally, we have multi-year supply agreements with
our customers. Sales volume under these agreements largely is dependent on customer requirements, and in certain
cases, we are the sole supplier of iron ore to the customer. Historically, each agreement has contained a base price
that is adjusted annually using one or more adjustment factors. Factors that could result in a price adjustment include
changes in the Platts 62% Price, along with pellet premiums, published Platts international indexed freight rates and
changes in specified Producer Price Indices, including those for industrial commodities, fuel and steel.
During 2017, 2016 and 2015, we sold 18.7 million, 18.2 million and 17.3 million long tons of iron ore product,
respectively, from our share of production from our U.S. Iron Ore mines. Refer to Concentration of Customers below
for additional information regarding our major customers.
Asia Pacific Iron Ore
Our Asia Pacific Iron Ore operations are located in Western Australia and consist solely of our wholly-owned
Koolyanobbing operation.
The Koolyanobbing operation serves the Asian iron ore markets with direct-shipped fines and lump ore. The
lump products are fed directly to blast furnaces, while the fines products are used as sinter feed. The variation in the
two export product grades reflects the inherent chemical and physical characteristics of the ore bodies mined as well
as the supply requirements of our customers. During 2017, 2016 and 2015, we produced 10.1 million, 11.8 million and
11.7 million metric tons, respectively.
Koolyanobbing is a collective term for the ore deposits at Koolyanobbing, Mount Jackson and Windarling. There
are approximately 70 miles separating the three mining areas. Banded iron formations host the mineralization, which
is predominately hematite and goethite. Each deposit is characterized with different chemical and physical attributes
and, in order to achieve customer product quality, ore in varying quantities from each deposit must be blended together.
5
Crushing and blending are undertaken at Koolyanobbing, where the crushing and screening plant is located.
Once the blended ore has been crushed and screened into a direct lump and fines shipping product, it is transported
by rail approximately 360 miles south to the Port of Esperance, via Kalgoorlie, for shipment to our customers in Asia.
Asia Pacific Iron Ore Customers
Asia Pacific Iron Ore’s production is under contract with steel companies primarily in China, Japan and South
Korea. In March 2017, we extended the majority of our supply agreements with steel producers in China for one year.
These contracts will expire in March 2018, and we will only renew contracts if it can be done in an economically viable
manner. Our supply agreement with our client in South Korea expired in December 2017. We renewed that agreement
for 2018; however, it is at a lower committed quantity than our previous agreement. Our supply agreements with our
customers in Japan expire in March 2018. These contracts could be renewed for additional volume. Pricing for our
Asia Pacific Iron Ore Chinese customers consists of shorter-term pricing mechanisms of various durations up to three
months based on the average of daily spot prices that are generally associated with the time of unloading of each
shipment. Pricing with our Japanese and South Korean customers is generally similar to the inputs used with our
Chinese customers, but the pricing inputs are fixed before shipment.
During 2017, 2016 and 2015, we sold 9.8 million, 11.6 million and 11.6 million metric tons of iron ore, respectively,
from our Koolyanobbing operation. No Asia Pacific Iron Ore customer comprised more than 10% of our consolidated
sales in 2017, 2016 or 2015. The segment’s five largest customers together accounted for a total of 57%, 56% and
47% of Asia Pacific Iron Ore product revenues for the years 2017, 2016 and 2015, respectively.
Discontinued Operations
Prior to late March 2014, we operated two iron ore mines in Eastern Canada, the Bloom Lake mine and the
Wabush Scully mine. In late March 2014, we idled our Wabush Scully mine in Newfoundland and Labrador and in
November 2014, we began to implement the permanent closure plan for the mine. The idle and ultimate closure was
driven by the unsustainable high-cost structure. In January 2015, we ceased active production at the Bloom Lake mine
and the mine transitioned to "care-and-maintenance" mode. Together, the shutdown of the Wabush Scully mine and
the cessation of operations at our Bloom Lake mine represented a complete curtailment of our Eastern Canadian Iron
Ore operations.
Restructuring proceedings with respect to the Bloom Lake Group were commenced under the CCAA in the first
quarter of 2015. During the second quarter of 2015, the CCAA protection granted to the Bloom Lake Group was extended
to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. As of December
31, 2017, CCAA proceedings are still ongoing. The Monitor appointed by the court in the CCAA proceedings for the
Bloom Lake Group and the Wabush Group has conducted a claims process pursuant to which creditors have filed
claims against the Bloom Lake Group and the Wabush Group. The Monitor is reviewing all claims filed as part of this
claims process. Currently, there is uncertainty as to the amount of the distribution that will be made to the creditors of
the Bloom Lake Group and the Wabush Group, including, if any, to us, and whether we could be held liable for claims
that may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group or by their respective representatives
against non-debtor affiliates of the Bloom Lake Group and the Wabush Group. During 2017, we became aware that it
was probable the Monitor will assert a preference claim against us and/or certain of our affiliates. Given that it is probable
the claim will be asserted by the Monitor, we have recorded an estimated liability of $55.6 million, which includes the
value of our related-party claims against the Bloom Lake Group and the Wabush Group. Should the Monitor proceed
to assert the claim, we believe the Monitor will demand an amount in excess of the value of our related-party claims
against the estate. Thus, it is possible that a change in the estimated liability may occur in the future. We deny liability
for any amount and will vigorously defend such claim.
Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush Groups and subsequent
expenses directly associated with the Canadian Entities are included in our financial statements and classified within
discontinued operations. Refer to NOTE 14 - DISCONTINUED OPERATIONS for further discussion of the Eastern
Canadian Iron Ore segment discontinued operations and the status of the CCAA proceedings.
Unless otherwise noted, discussion of our business and results of operations in this Annual Report on Form
10-K refers to our continuing operations.
Applied Technology, Research and Development
We have been a leader in iron ore mining and process technology since inception and have been in operation
for over 170 years. We operated some of the first mines on Michigan’s Marquette Iron Range and pioneered early
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open-pit and underground mining methods. From the first application of electrical power in Michigan’s underground
mines to the use of today’s sophisticated computers and global positioning satellite systems, we have been a leader in
the application of new technology to the centuries-old business of mineral extraction. Today, our engineering and
technical staffs are engaged in full-time technical support of our operations, improvement of existing products and
development of new products.
We are a pioneer in iron ore pelletizing with over 60 years of experience. We are able to produce customized
pellets to meet each customer’s blast furnace specifications and produce both standard and fluxed pellets. Using our
technical expertise and strong market position in the United States to increase our product offering, we have started
producing DR-grade pellets. In 2017 and 2016, we shipped low silica DR-grade pellets, which were successfully
processed in multiple DRI reactors to produce a high-quality direct reduced iron product.
With our experienced technical professionals and unsurpassed reputation for our pelletizing technology, we
continue to deliver a world-class quality product to our customers. We are a pioneer in the development of emerging
reduction technologies, a leader in the extraction of value from challenging resources and a front runner in the
implementation of safe and sustainable technology. Our technical experts are dedicated to excellence and deliver
superior technical solutions tailored to our customer base. We will continue to use this pioneering mentality in the
development of our HBI facility in Toledo, Ohio. Similar to the market shift to pellets over 60 years ago, we recognize
the need to serve the growing EAF market.
Concentration of Customers
In 2017 and 2016, two customers individually accounted for more than 10% of our consolidated product revenue
and in 2015, three customers individually accounted for more than 10% of our consolidated product revenue. Product
revenue from those customers represented in the chart below totaled $1.3 billion, $1.1 billion and $1.3 billion of our
total consolidated product revenue in 2017, 2016 and 2015, respectively, and is attributable to our U.S. Iron Ore business
segment. The following represents sales revenue from each of these customers as a percentage of our total consolidated
product revenue, as well as the portion of product sales for U.S. Iron Ore that is attributable to each of these customers
for those years:
Customer1
ArcelorMittal
AK Steel
Algoma2
Percentage of Total
Product Revenue
2016
2015
2017
Percentage of U.S. Iron Ore
Product Revenue
2016
2015
2017
38%
23%
9%
37%
19%
4%
37%
21%
12%
48%
29%
11%
51%
27%
5%
49%
29%
15%
1 Includes subsidiaries.
2 On October 5, 2015, we terminated the long-term agreement with Algoma; however, we entered into certain short-
term contracts with Algoma throughout 2016. On May 16, 2016, we reinstated our agreement with Algoma, which
took effect in January 2017.
ArcelorMittal
Historically, our pellet supply agreements with ArcelorMittal USA were based on customer requirements, except
for the Indiana Harbor East facility, which is based on customer contract obligations. The legacy agreements with
ArcelorMittal USA expired at the end of December 2016 and January 2017. The parties executed a new long-term
agreement, which became effective October 31, 2016, for the sale and delivery of ArcelorMittal USA’s annual tonnage
requirements that fall within a specific range of volume. This latest agreement expires at the end of December 2026.
ArcelorMittal USA is a 62.3% equity participant in Hibbing. During 2017, we acquired the 21% ownership interest
of ArcelorMittal USA in Empire as part of an agreement to distribute the noncontrolling interest net assets of the mine.
In 2017, 2016 and 2015, our U.S. Iron Ore pellet sales to ArcelorMittal were 8.4 million, 9.7 million and 9.7
million long tons, respectively.
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AK Steel
In August 2013, we entered into a new agreement with AK Steel to provide iron ore pellets to AK Steel for use
in its Middletown, Ohio and Ashland, Kentucky blast furnace facilities. This contract includes minimum and maximum
tonnage requirements for each year between 2014 and 2023.
In 2015 we entered into an amended and restated agreement with AK Steel after it acquired Severstal Dearborn,
LLC, under which we supply all of the Dearborn, Michigan facility’s blast furnace pellet requirements through 2022,
subject to specified minimum and maximum requirements in certain years.
In 2017, 2016 and 2015, our U.S. Iron Ore pellet sales to AK Steel were 5.6 million, 4.5 million and 4.3 million
long tons, respectively.
Algoma
Algoma is a Canadian steelmaker whose common shares are owned by Essar Steel Holdings Limited. We
had a long-term supply agreement under which we were Algoma’s sole supplier of iron ore pellets through the end of
2016. Under the terms of a 2016 settlement and through Algoma's CCAA proceedings, Algoma agreed to assume the
long-term supply agreement that runs through 2024. Additionally, we entered into agreements with Algoma to purchase
from us incremental tonnage that equates to Algoma's 2015 through 2017 annual iron ore pellet consumption. These
agreements began in 2017 and 2018 and run through December 2020.
In 2017, 2016 and 2015, our U.S. Iron Ore pellet sales to Algoma were 2.5 million, 1.2 million and 2.5 million
long tons, respectively.
Competition
Throughout the world, we compete with major and junior mining companies, as well as steel companies, both
of which produce steelmaking raw materials, including iron ore.
North America
In our U.S. Iron Ore business segment, we primarily sell our product to steel producers with operations in North
America. We compete directly with steel companies that own interests in iron ore mines in the United States and/or
Canada, including ArcelorMittal and U.S. Steel, and with major iron ore pellet exporters from Eastern Canada and Brazil.
A number of factors beyond our control affect the markets in which we sell our iron ore. Continued demand for
our iron ore and the prices obtained by us primarily depend on the consumption patterns of the steel industry in the
U.S., China and elsewhere around the world, as well as the availability, location, cost of transportation and competing
prices.
Asia Pacific
In our Asia Pacific Iron Ore business segment, we export iron ore products to the Asia Pacific markets, including
China, Japan, and South Korea. In the Asia Pacific marketplace, we compete with major iron ore exporters primarily
from Australia and Brazil. These include BHP Billiton, Fortescue Metals Group Ltd., Rio Tinto plc and Vale SA, among
others.
Competition in steelmaking raw materials is predicated upon the usual competitive factors of price, availability
of supply, product quality and performance, service and transportation cost to the consumer of the raw materials.
Environment
Our mining activities are subject to various laws and regulations governing the protection of the environment.
We conduct our operations in a manner that is protective of public health and the environment and believe our operations
are in compliance with applicable laws and regulations in all material respects.
Environmental issues and their management continued to be an important focus at each of our operations
throughout 2017. In the construction of our facilities and in their operation, substantial costs have been incurred and
will continue to be incurred to comply with regulatory requirements and avoid undue effect on the environment. Our
capital expenditures relating to environmental matters totaled approximately $21 million, $15 million and $17 million,
in 2017, 2016 and 2015, respectively. Approximately $5 million of the 2015 capital expenditures relating to environmental
matters was attributable to the North American Coal operations that were sold during December 2015. It is estimated
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that capital expenditures for environmental improvements will total approximately $11 million in 2018, which is related
to our U.S. Iron Ore operations for various water treatment, air quality, dust control, tailings management, selenium
management and other miscellaneous environmental projects.
Regulatory Developments
Various governmental bodies continually promulgate new or amended laws and regulations that affect us, our
customers and our suppliers in many areas, including waste discharge and disposal, the classification of materials and
products, air and water discharges and many other environmental, health and safety matters. Although we believe that
our environmental policies and practices are sound and do not expect that the application of any current laws or
regulations reasonably would be expected to result in a material adverse effect on our business or financial condition,
we cannot predict the collective adverse impact of the expanding body of laws and regulations.
Specifically, there are several notable proposed or potential rulemakings or activities that could have a material
adverse impact on our facilities in the future depending on their ultimate outcome: Minnesota's proposed amendments
to the sulfate wild rice water quality standard; evolving water quality standards for sulfate, selenium, and conductivity;
scope of the Clean Water Act and the definition of “Waters of the United States”; Minnesota's Mercury TMDL and
associated rules governing mercury air emission reductions; Climate Change and GHG Regulation; Regional Haze FIP
Rule; NO2 and SO2 NAAQS; and increased administrative and legislative initiatives related to financial assurance
obligations for CERCLA, mining and reclamation obligations.
Minnesota’s Proposed Amendments to the Sulfate Wild Rice Water Quality Standard
The Minnesota Legislature provided $1.5 million in 2011 for a study to gather additional information about the
effects of sulfate and other substances on the growth of wild rice and to support an update to the sulfate wild rice water
quality standard originally adopted in 1973 by the MPCA. The MPCA contracted with the University of Minnesota to
conduct several research projects as part of this study. Concurrently, the Minnesota Chamber of Commerce contracted
an independent lab to conduct companion research on the impacts of sulfate on wild rice. In August 2017, MPCA
released proposed amendments of the sulfate water quality standard applicable to wild rice and identification of wild
rice waters, which included a proposed sulfate wild rice water quality standard, a proposed list of waters where the
standard would apply, and criteria for adding waters to that list. The proposed wild rice water quality standard is an
equation that utilizes measured sediment parameters to calculate a sulfate water quality standard protective of wild rice
unique to each water body where the standard applies. The independent research conducted by the independent lab
contracted by the Minnesota Chamber of Commerce does not directly support the validity of the MPCA’s proposed
approach. On January 11, 2018, the proposed rule was substantially disapproved by an ALJ and included a
recommendation for MPCA to retain the existing 10 mg/L sulfate standard until MPCA addresses concerns identified
in the ALJ report. These findings are not binding on the MPCA. The rulemaking has a legislated deadline for completion
of January 15, 2019. Due to the proposed standard being based on measured sediment parameters, uncertainty
regarding to which waters the standard will apply, and the non-binding disapproval from the ALJ, the impact of the
proposed wild rice water quality standard to us is not estimable at this time but it could have an adverse material impact
if we are required to significantly reduce sulfate in our discharges.
Conductivity
Conductivity, the measurement of water’s ability to conduct electricity, is a surrogate parameter that generally
increases as the amount of dissolved minerals in water increases. In 2011, the EPA issued A Field-Based Aquatic Life
Benchmark for Conductivity in Central Appalachian Streams, which established a recommended conductivity benchmark
of 300 µS/cm for the region. The issuance of a benchmark outside of the established rulemaking process was
subsequently the subject of litigation in 2012 where the court ruled the benchmark is nothing more than a non-binding
suggestion. Three years later in Ohio Valley Environmental Coalition, et al. v. Elk Run Coal Co., et al., 3:12-cv-00785
(S.D. W. Va.), a judicial decision held that levels of conductivity higher than the EPA’s benchmark constituted a violation
of the state’s narrative water quality standards, were unsupported by science and contrary to decisions previously made
by the West Virginia Department of Environmental Protection and the West Virginia Supreme Court. In 2015, a group
filed a petition with EPA Region 5 alleging that Minnesota was failing to implement properly the state NPDES program,
and one of the various allegations asserts that MPCA should be assessing compliance with the state’s narrative water
quality standard against the EPA’s conductivity benchmark for the Central Appalachian region. On December 30, 2015,
the EPA provided MPCA a draft of the Protocol for Responding to Issues Related to Permitting and Enforcement which
indicates that EPA staff will be reviewing available scientific basis in peer reviewed literature as well as promulgated
standards. In February 2016, EPA's Office of Research and Development endorsed use of the Field-Based Conductivity
Benchmark in northeast Minnesota indicating that a value of 320 µS/cm was appropriate to protect aquatic life. On
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December 23, 2016, EPA issued a notice soliciting public comments on its draft document, Field-Based Methods for
Developing Aquatic Life Criteria for Specific Conductivity. According to EPA, once this document is final, states and
authorized tribes located in any region of the country may use the methods to develop field-based specific conductivity
criteria for adoption into water quality standards. In April 2017, comments were submitted by our trade associations
providing objective evidence indicating the draft methodology was scientifically flawed and unfit for promulgation.
Adoption of this methodology is not certain due to significant concerns with respect to the scientific validity of the
proposed method which is now under intense review by scientists working for various trade associations. Because the
outcome of the Region 5 Petition is uncertain and the proposed Field-Based Methods for Developing Aquatic Life Criteria
for Specific Conductivity is only draft guidance at this time, the exact nature and certainty of the potential risk to us
cannot be predicted; however, direct application of the 320 µS/cm benchmark to our Minnesota-based assets may have
a material adverse impact if the conductivity benchmark is applied to our NPDES permits.
Definition of “Waters of the United States” Under the Clean Water Act
In June 2015, the EPA and Army Corps of Engineers promulgated the rule, “Definition of ‘Waters of the United
States’ Under the Clean Water Act,” which attempted to add clarity to which waters are jurisdictional under the federal
Clean Water Act, and will apply to all Clean Water Act programs, including certain permitting programs, spill prevention
programs and a state certification process. It is unclear how the federal and state agencies will implement and enforce
the final rule, and how the courts will interpret it going forward. The regulation may expand EPA’s authority under the
Clean Water Act to many traditionally unregulated mine features such as mine pits, pit lakes, on-site ditches, water
retention structures, and tailings basins creating a new burden on our U.S. facilities. This could be further interpreted
to add questionable regulatory authority over the groundwater connections between these features and nearby
traditionally navigable waters. In October 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide stay
of this rule while the jurisdiction and legality of the rule are decided in court. In January 2017, the U.S. Supreme Court
granted certiorari to reconsider the Sixth Circuit's decision that it has jurisdiction to hear challenges. We are actively
participating in the rulemaking development and assessing the potential impacts to our operations. Any impacts to us
are not estimable at this time as the rule is being litigated, and the impacts will not be known until the rule is finally
implemented.
The “Executive Order on Restoring the Rule of Law, Federalism, and Economic Growth by Reviewing the
‘Waters of the United States’ Rule” ("Executive Order") was signed by the President on February 28, 2017. This Executive
Order instructs EPA and the Army Corps of Engineers to review the Clean Water Rule and “publish for notice and
comment a proposed rule rescinding or revising the rule.” The Executive Order further directs that they “shall consider
interpreting the term ‘navigable waters’” in a manner “consistent with Justice Scalia’s opinion” in Rapanos v. United
States (2006). The EPA and Army Corps of Engineers are in the process of conducting rulemaking, soliciting comments,
and holding public meetings in accordance with the Executive Order. Any impacts to us are not estimable at this time
as the EPA and Army Corps of Engineers have only begun to implement the Executive Order.
Selenium Discharge Regulation
In Michigan, Empire and Tilden have implemented compliance plans to manage selenium according to the
permit conditions. Empire and Tilden submitted the first permit-required Selenium Storm Water Management Plan to
the Michigan Department of Environmental Quality ("MDEQ") in December 2011 and have updated it annually as
required. The Selenium Storm Water Management Plans have outlined the activities that have been undertaken to
address selenium in storm water discharges from our Michigan operations including an assessment of potential impacts
to surface and groundwater. The remaining infrastructure needed for implementation of the storm water collection and
conveyance system was completed in 2017 and cost approximately $8 million. A storm water treatment system for
both facilities is anticipated sometime before 2028. The cost of the future treatment systems could be significant,
although we are continuing to assess and develop cost effective and sustainable treatment technologies.
Tilden's NPDES permit contains a compliance schedule for selenium with a final effluent limit of 5.1 µg/l that
became effective as of November 1, 2017, at Tilden's Gribben Tailings Basin outfall. Tilden's 2017 expenditures totaled
approximately $3 million for infrastructure necessary to meet the selenium effluent limit.
In July 2016, the EPA published new selenium fish tissue limits and lower lentic and lotic water column
concentration criteria, which may someday increase the cost for treatment should MDEQ adopt these new standards
in lieu of the existing limits established under the Great Lakes Initiative. Accordingly, we cannot reasonably estimate
the timing or long-term impact of the water quality criteria to our business.
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Mercury TMDL and Minnesota Taconite Mercury Reduction Strategy
Since the 1990’s the taconite industry has voluntarily reduced and removed mercury products and supported
development of mercury emission reduction technology. While TMDL regulations are contained in the Clean Water Act,
in 2007, Minnesota developed a Statewide Mercury TMDL which set an objective for 93% mercury air emission reductions
from 1990 levels for sources within Minnesota. The State of Minnesota has acknowledged that approximately 90% of
the mercury entering the state’s airshed is from other national and international sources.
In September 2014, Minnesota promulgated the Mercury Air Emissions Reporting and Reduction Rule
mandating mercury air emissions reporting and reductions from certain sources. The rule is applicable to all of our
Minnesota operations and requires submittal of a Mercury Reduction Plan to reduce mercury emissions from taconite
furnaces by 72% by January 2025. The Mercury Reduction Plans must be submitted by December 31, 2018. One of
the main tenets agreed upon for evaluating potential mercury reduction technologies during TMDL implementation and
2014 rule development proceedings was that the selected technology would meet the following “Adaptive Management
Criteria”: the technology must be technically feasible; must be economically feasible; must not impact pellet quality; and
must not cause excessive corrosion in pellet furnaces, associated duct work and existing wet scrubbers on the furnaces.
However, the final 2014 rule does not explicitly include all four Adaptive Management Criteria for evaluating mercury
reduction technologies, which were agreed upon in Minnesota’s October 2009 Mercury TMDL Implementation Plan.
There is currently no proven technology to cost effectively reduce mercury emissions from taconite furnaces
to the target level of 72% that would meet all four Adaptive Management Criteria. We remain concerned about the
technical and economic feasibility to reduce taconite mercury emissions by 72% without impacting existing operations
or other environmental permit obligations. We are in the process of conducting detailed engineering analysis and
potential technology testing to determine the impact of the regulations on each unique taconite furnace affected by this
rule. The results of this analysis will guide further dialogue with the MPCA regarding development of the 2018 Mercury
Reduction Plans. Potential impacts to us are not estimable at this time as the development of potential mercury reduction
technology remains in its early stages.
Climate Change and GHG Regulation
With the complexities and uncertainties associated with the U.S. and global navigation of the climate change
issue as a whole, one of our potentially significant risks for the future is mandatory carbon pricing obligations.
Policymakers are in the design process of carbon regulation at the state, regional, national and international levels.
The current regulatory patchwork of carbon compliance schemes presents a challenge for multi-facility entities to identify
their near-term risks. Amplifying the uncertainty, the dynamic forward outlook for carbon pricing obligations presents a
challenge to large industrial companies to assess the long-term net impacts of carbon compliance costs on their
operations. Our exposure on this issue includes both the direct and indirect financial risks associated with the regulation
of GHG emissions, as well as potential physical risks associated with climate change. We are continuing to review the
physical risks related to climate change utilizing our formal ERM process. As an energy-intensive business, our GHG
emissions inventory includes a broad range of emissions sources, such as iron ore furnaces and kilns, diesel mining
equipment and our wholly owned Silver Bay power generation plant, among others. As such, our most significant
regulatory risks are: (1) the costs associated with on-site emissions levels (direct impacts), and (2) indirect costs passed
through to us from electrical and fuel suppliers (indirect impacts).
Internationally, mechanisms to reduce emissions are being implemented in various countries, with differing
designs and stringency, according to resources, economic structure and politics. We expect that momentum to extend
carbon regulation will continue with implementation of the Paris climate agreement that was adopted in 2015, the aim
of which is to keep the increase in global average temperature to below two degrees Celsius. Continued political
attention to issues concerning climate change, the role of human activity in it and potential mitigation through regulation
may have a material impact on our customer base, operations and financial results in the future.
In the U.S., federal carbon regulation potentially presents a significantly greater impact to our operations. To
date, the U.S. Congress has not legislated carbon constraints. In the absence of comprehensive federal carbon
legislation, numerous state, regional, and federal regulatory initiatives are under development or are becoming effective,
thereby creating a disjointed approach to GHG control and potential carbon pricing impacts. In May 2010, the EPA
promulgated the GHG Tailoring Rule establishing a mechanism for regulating GHG emissions from facilities through
the Prevention of Significant Deterioration permitting program under the Clean Air Act. Under the GHG Tailoring Rule,
as modified by a 2014 U.S. Supreme Court decision upholding some components of the rule, new projects that increase
GHG emissions by a significant amount (generally more than 75,000 long tons of CO2 emissions per year) and
significantly increase emissions of at least one non-GHG criteria pollutant are subject to the Prevention of Significant
11
Deterioration requirements, including the installation of best available control technology. We do not expect the Tailoring
Rule provision to have a material adverse effect on our business in the near term and we cannot reliably estimate the
long-term impact of the regulation.
In June 2013, President Obama issued a memorandum directing EPA to develop carbon emission standards
for both new and existing power plants under the Clean Air Act's New Source Performance Standards ("NSPS"). In
October 2015, EPA promulgated a CPP which consists of NSPS regulating carbon dioxide from existing power plants
at a level of approximately 32% below 2005 levels by 2030. The CPP would not regulate combined heat and power
generating facilities such as at Northshore's Silver Bay Power. The CPP directed states to submit SIPs to EPA by
September 2016, but on February 9, 2016, the U.S. Supreme Court stayed the CPP immediately halting implementation.
In March 2017, President Trump signed the Energy Independence Executive Order which called for, among other things,
a review of the CPP and, if appropriate, reconsideration proceedings to suspend, revise, or rescind the rule. On the
same day, Administrator Pruitt signed a notice indicating EPA’s intent to review and, if appropriate, to propose to revise
or rescind the CPP. The U.S. Court of Appeals for the D.C. Circuit has been holding CPP litigation in abeyance since
April 2017. On October 10, 2017, following a review as directed by President Trump’s Energy Independence Executive
Order, the EPA proposed a rule to repeal the CPP and accepted comments on the proposed rule until January 16, 2018.
The ultimate outcome of these carbon emission standards is not expected in the near term.
Due to the EPA's Tailoring Rule and potential patchwork state or regional carbon restriction schemes, our
business and customer base could suffer negative financial impacts over time as a result of increased energy,
environmental and other costs to comply with the limitations that would be imposed on GHG emissions. We believe
our exposure can be reduced substantially by numerous factors, including currently contemplated regulatory flexibility
mechanisms, such as allowance allocations, fixed process emissions exemptions, offsets and international provisions;
emissions reduction opportunities, including energy efficiency, biofuels, fuel flexibility, emerging shale gas, coal mine
methane offset reduction; and business opportunities associated with pursuing combined heat and power partnerships
and new products, including DR-grade pellets, fluxed pellets and other efficiency-improving technologies.
We have worked proactively to develop a comprehensive, enterprise-wide GHG management strategy aimed
at considering all significant aspects associated with GHG initiatives to plan effectively for and manage climate change
issues, including risks and opportunities as they relate to the environment; stakeholders, including shareholders and
the public; legislative and regulatory developments; operations; products and markets.
Regional Haze FIP Rule
In June 2005, the EPA finalized amendments to its regional haze rules. The rules require states to establish
goals and emission reduction strategies for improving visibility in all Class I national parks and wilderness areas to
natural background levels by 2064. Among the states with Class I areas are Michigan and Minnesota, in which we
currently own and manage mining operations. The first phase of the regional haze rule required analysis and installation
of Best Available Retrofit Technology ("BART") on eligible emission sources and incorporation of BART and associated
emission limits into SIPs.
EPA disapproved Minnesota's and Michigan's SIPs for taconite furnaces and instead promulgated a Taconite
Regional Haze FIP in February 2013. We, along with other stakeholders, petitioned the Eighth Circuit Court of Appeals
for a review of the FIP, and in May 2013, we filed a joint motion for stay of the 2013 FIP, which was granted in June
2013. We, along with the other stakeholders, reached a settlement agreement with EPA to resolve certain items in the
2013 FIP. The settlement agreement, which was published in the Federal Register in January 2015 and fully executed
in April 2015, prompted EPA to grant partial reconsideration of the 2013 FIP in July 2015. Subsequently, EPA published
a FIP revision final rule to implement components of the settlement agreement in April 2016, with an effective date of
May 12, 2016. We believe the 2016 Regional Haze FIP reflects progress toward a more technically and economically
feasible regional haze implementation plan. In November 2016, the Eighth Circuit Court of Appeals terminated the June
2013 stay and extended the deadlines in the original 2013 FIP. Cost estimates associated with implementation of the
2013 and 2016 FIPs are reflected in our five-year capital plan.
Due to inconsistencies in language describing the procedures for calculating NOx emission limits between the
settlement agreement and the 2016 FIP final rule, we jointly filed a Petition for Reconsideration and Petition for Judicial
Review in June 2016. We have been working toward a settlement agreement with EPA to resolve the outstanding issue
with the emission limit calculation method and anticipate resolution of the issue in 2018. The outcome of this proceeding
is not expected to have a material adverse impact to the business.
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NO2 and SO2 NAAQS
During the first half of 2010, EPA promulgated rules that required each state to use a combination of air quality
monitoring and computer modeling to determine each state's attainment classification status against new one-hour NO2
and SO2 NAAQS. During the third quarter of 2011, the EPA issued guidance to the regulated community on conducting
refined air quality dispersion modeling and implementing the new NO2 and SO2 standards. In 2012, Minnesota issued
Administrative Orders ("AOs") requiring taconite facilities to conduct modeling to demonstrate compliance with the NO2
and SO2 NAAQS pursuant to the Taconite Regional Haze SIP Long Term Strategy ("LTS"). Compliance with the LTS
modeling demonstrations was originally set for June 30, 2017, but Minnesota has not advanced work on its 2012 AOs
and is expected to remove NAAQS modeling obligations under the LTS in light of reduction in haze emissions associated
with implementation of the taconite Regional Haze FIP regulations.
All of our operations in Minnesota and Michigan are expected to be in attainment for NO2 and SO2 NAAQS
without incurring additional capital investment. While we will continue to monitor these developments and assess
potential impacts, we do not anticipate further capital investments will be necessary to address NO2 and SO2 NAAQS
requirements at this time.
CERCLA 108(b)
In December 2016, EPA published a proposed amendment to CERCLA section 108(b) which is focused on
developing financial assurance for managing hazardous substances in the hardrock mining industry. EPA had a court-
mandated deadline for publication of the final rule by December 1, 2017. The proposed rule would have required
hardrock mining facilities to calculate their level of financial responsibility based on a formula included in the rule, secure
an instrument or otherwise self-insure for the calculated amount, demonstrate to EPA the proof of the security, and
maintain the security until EPA releases facilities from the CERCLA 108(b) regulations. The iron mining industry notified
EPA of several errors upon which EPA drafted the rule, including a mistaken reliance on reporting data from a wholly
different industry sector (iron and steel toxic release inventory reporting). We also participated in developing industry
specific and national trade association comments and advocating directly with EPA and the White House Office of
Management & Budget to address this and other errors with goals of exempting iron ore mining from CERCLA 108(b)
applicability and correcting other deficiencies with the proposed rule. On December 1, 2017 EPA signed a federal
register notice of EPA's decision not to issue final regulations for financial responsibility requirements for the hardrock
mining industry under section 108(b) of CERCLA because EPA determined that the risks associated with these facilities'
operations are addressed by existing federal and state programs and regulations and modern industry practices.
Energy
Electricity
As of February 2015, Wisconsin Electric Power Company is the sole supplier of electric power to our Tilden
mine. During April 2015, the Tilden mine executed a special electricity contract with Wisconsin Electric Power Company.
The term of the contract is through 2019. Wisconsin Electric Power Company provides 170 megawatts of electricity to
Tilden at special rates that are regulated by the MPSC. The pricing under these contracts is generally fixed except
Tilden is subject to frequent changes in Wisconsin Electric Power Company's power supply adjustment factor. During
August 2016, Tilden executed a new 20-year special contract with Wisconsin Electric that is anticipated to start on
January 1, 2020.
Tilden and Empire may also incur additional liabilities depending on the outcome of various proceedings
concerning MISO's revised cost allocation methodology for continued operation of the Presque Isle Power Plant in
Michigan. If FERC's award of SSR costs based on a revised cost allocation methodology applied retroactively is affirmed
by the U.S. Court of Appeals for the District of Columbia Circuit, this could result in a cash payment of $12.3 million
related to our Tilden mine and our indefinitely-idled Empire mine. As of December 31, 2017, this liability is included in
our Statements of Consolidated Financial Position as part of Accrued expenses. Refer to NOTE 20 - COMMITMENTS
AND CONTINGENCIES for further discussion of the Michigan Electricity Matters.
Minnesota Power supplies electric power to the Hibbing and United Taconite mines. During September 2008,
Hibbing finalized an agreement with terms from November 2008 through December 2015. The agreement was approved
by the Minnesota Public Utilities Commission ("MPUC") in 2009. The terms of the agreement included an automatic
five-year extension that began January 2016. The United Taconite mine executed a new ten-year agreement with
Minnesota Power that also included the Babbitt Mine. This agreement was finalized in May 2016 and was approved by
the MPUC in November 2016.
13
Silver Bay Power, a wholly-owned subsidiary with a 115 megawatt power plant, is able to provide the majority
of Northshore’s electrical energy requirements. Silver Bay Power has an interconnection agreement with Minnesota
Power for backup power when excess generation is necessary. In May 2016, Silver Bay Power entered into an agreement
with Minnesota Power to purchase roughly half of Northshore's electricity needs from Minnesota Power through 2019.
On January 1, 2020, Silver Bay Power will purchase 100% of the electricity requirements of Northshore from Minnesota
Power and Silver Bay Power plans to idle both of its generating units except under certain circumstances.
Koolyanobbing and its associated satellite mine deposits draw power from independent diesel-fueled power
stations and generators. Diesel power generation capacity has been installed at the Koolyanobbing operations.
Process and Diesel Fuel
We have a long-term contract providing for the transport of natural gas on the Northern Natural Gas Pipeline
for our U.S. Iron Ore operations. Tilden has the capability of burning natural gas, coal or, to a lesser extent, oil. Hibbing
and Northshore have the capability to burn natural gas and oil. United Taconite has the ability to burn coal, natural gas
and petroleum coke. Consistent with 2017, we expect during 2018 our U.S. Iron Ore operations will utilize both natural
gas and coal to heat furnaces and produce power at our Silver Bay Power facility.
All of our mines utilize diesel fuel mainly for our mobile fleet. Thompson Gas supplies diesel fuel to all of our
U.S. Iron Ore locations from the Husky refinery in Superior, Wisconsin. Our U.S. Iron Ore locations are contracted with
Thompson Gas through the end of 2018.
Employees
As of December 31, 2017, we had a total of 2,938 employees.
U.S. Iron Ore - Salaried1
U.S. Iron Ore - Hourly1,3
Asia Pacific Iron Ore - Salaried2
Discontinued Operations - Salaried2
Discontinued Operations - Hourly2
Corporate & Support Services - Salaried4
Total
2017
2016
2015
537
2,171
78
—
—
152
2,938
523
2,178
82
4
—
140
2,927
509
1,813
90
32
41
153
2,638
1 Includes our employees and the employees of the U.S. Iron Ore joint venture.
2 Excludes contracted mining employees.
3 Excludes employees considered on lay-off status as a result of an indefinite or temporary idle.
4 Includes employees of our HBI project.
Hourly employees at our Michigan and Minnesota iron ore mining operations, excluding Northshore, are
represented by the USW and are covered by labor agreements between the USW and our various operating entities.
These labor agreements that cover approximately 1,800 active USW-represented employees at our Empire and Tilden
mines in Michigan, and our United Taconite and Hibbing mines in Minnesota are valid through September 30, 2018.
Employees at our Northshore operations are not represented by a union and are not, therefore, covered by a collective
bargaining agreement.
Hourly employees at our LS&I railroads are represented by seven unions covering approximately 100
employees. The labor agreements that cover these employees reopened for bargaining on December 31, 2014 and
we are actively bargaining for successor agreements. These employees negotiate under the Railway Labor Act, which
provides that labor agreements remain in force until replaced by a successor agreement. Under the Railway Labor Act
work stoppages cannot occur until the parties have engaged in substantial negotiations, have mediated any disputes
and have received a release from the National Mediation Board.
Salaried employees at our U.S. Iron Ore, Asia Pacific Iron Ore, Corporate and Support Services are not
represented by a union and are not, therefore, covered by collective bargaining agreements.
14
Safety
Safety is our primary core value as we continue toward a zero injury culture at all of our facilities. We continuously
monitor, measure and track our safety performance and make frequent improvements to affect change. Best practices
and incident learnings are shared globally to ensure each mine site can effectively administer our policies and procedures
for enhanced workplace safety. Progress toward achieving our objectives is accomplished through a focus on proactive
initiatives and results measured against established industry and company benchmarks, including our company-wide
Total Reportable Incident Rate ("TRIR"). During 2017, our TRIR (including contractors) was 1.32 per 200,000 man-
hours worked.
Refer to Exhibit 95 Mine Safety Disclosures (filed herewith) for mine safety information required in accordance
with Section 1503(a) of the Dodd-Frank Act.
Available Information
Our headquarters are located at 200 Public Square, Suite 3300, Cleveland, Ohio 44114-2315, and our telephone
number is (216) 694-5700. We are subject to the reporting requirements of the Exchange Act and its rules and
regulations. The Exchange Act requires us to file reports, proxy statements and other information with the SEC. Copies
of these reports and other information can be read and copied at:
SEC Public Reference Room
100 F Street N.E.
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-
SEC-0330.
The SEC maintains a website that contains reports, proxy statements and other information regarding issuers
that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s home
page at www.sec.gov.
We use our website, www.clevelandcliffs.com, as a channel for routine distribution of important information,
including news releases, investor presentations and financial information. We also make available, free of charge on
our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. In addition, our
website allows investors and other interested persons to sign up to receive automatic email alerts when we post news
releases and financial information on our website.
We also make available, free of charge on our website, the charters of the Audit Committee, Governance and
Nominating Committee and Compensation and Organization Committee as well as the Corporate Governance
Guidelines and the Code of Business Conduct and Ethics adopted by our Board of Directors. These documents are
available through our investor relations page on our website at www.clevelandcliffs.com. The SEC filings are available
by selecting “Financial Information” and then “SEC Filings,” and corporate governance materials are available by
selecting “Corporate Governance” for the Board Committee Charters, operational governance guidelines and the Code
of Business Conduct and Ethics.
References to our website or the SEC’s website do not constitute incorporation by reference of the information
contained on such websites, and such information is not part of this Annual Report on Form 10-K.
Copies of the above-referenced information are also available, free of charge, by calling (216) 694-5700 or
upon written request to:
Cleveland-Cliffs Inc.
Investor Relations
200 Public Square, Suite 3300
Cleveland, OH 44114-2315
15
EXECUTIVE OFFICERS OF THE REGISTRANT
Following are the names, ages and positions of the executive officers of the Company as of February 14, 2018.
Unless otherwise noted, all positions indicated are or were held with Cleveland-Cliffs Inc.
Name
Lourenco Goncalves
Age Position(s) Held
60
Chairman, President and Chief Executive Officer (August 2014 - present); and
Chairman, President and Chief Executive Officer of Metals USA Holdings Corp.,
an American manufacturer and processor of steel and other metals (May 2006 -
April 2013).
Terry G. Fedor
Timothy K. Flanagan
53
40
James D. Graham
52
Maurice D. Harapiak
56
Terrence R. Mee
Clifford T. Smith
48
58
R. Christopher Cebula
47
Executive Vice President, U.S. Iron Ore (January 2014 - present); and Vice President,
U.S. Iron Ore Operations (February 2011 - January 2014).
Executive Vice President, Chief Financial Officer (January 2017 - present); Treasurer
(March 2016 - December 2017); Vice President, Corporate Controller and Chief
Accounting Officer (March 2012 - December 2016); and Assistant Controller
(February 2010 - March 2012).
Executive Vice President (November 2014 - present); Chief Legal Officer (March 2013
- present); Secretary (March 2014 - present); Vice President (January 2011 - October
2014); and General Counsel - Global Operations (January 2011 - March 2013).
Executive Vice President, Human Resources (March 2014 - present); Chief
Administration Officer (January 2018 - present); and Regional Director, Human
Resources - Barrick Gold of North America, a gold mining company (November 2011
- March 2014).
Executive Vice President, Global Commercial (October 2014 - present); Vice
President, Global Iron Ore Sales (February 2014 - October 2014); Senior Vice
President, Global Iron Ore Sales (March 2012 - February 2014); and Senior Vice
President, Global Iron Ore and Metallic Sales (January 2011 - March 2012).
Executive Vice President, Business Development (April 2015 - present); Executive
Vice President, Seaborne Iron Ore (January 2014 - April 2015); Executive Vice
President, Global Operations (July 2013 - January 2014); Executive Vice President,
Global Business Development (March 2013 - July 2013); and Senior Vice President,
Global Business Development (January 2011 - March 2013).
Vice President, Corporate Controller & Chief Accounting Officer (February 2017 -
present); Senior Director, Corporate Financial Planning & Analysis (April 2013 -
February 2017); Senior Director, Enterprise Risk Management (April 2010 - March
2013).
All executive officers serve at the pleasure of the Board. There are no arrangements or understandings between
any executive officer and any other person pursuant to which an executive officer was selected to be an officer of the
Company. There is no family relationship between any of our executive officers, or between any of our executive officers
and any of our directors.
16
Item 1A.
Risk Factors
An investment in our common shares or other securities is subject to risk inherent to our business and our
industry. Described below are certain risks and uncertainties, the occurrences of which could have a material adverse
effect on us. Before making an investment decision, you should consider carefully all of the risks described below together
with the other information included in this report. The risks and uncertainties described below include known material
risks that we face currently. Although we have extensive risk management policies, practices and procedures aimed to
mitigate these risks, uncertainties may nevertheless impair our business operation. This report is qualified in its entirety
by these factors.
Our ERM function provides a framework for management's consideration of risk when making strategic, financial,
operational and/or project decisions. The framework is based on ISO 31000, an internationally recognized risk
management standard. Management uses a consistent methodology to identify and assess risks, determine and
implement risk mitigation actions, and monitor and communicate information about the Company's key risks. Through
these processes, we have identified six categories of risk that we are subject to: (I) economic and market, (II) regulatory,
(III) financial, (IV) operational, (V) development and sustainability and (VI) human capital. The following risk factors are
presented according to these key risk categories.
I. ECONOMIC AND MARKET RISKS
The volatility of commodity prices, namely iron ore and steel, affects our ability to generate revenue, maintain
stable cash flow and fund our operations, including growth and expansion projects.
As a mining company, our profitability is dependent upon the price of the commodities that we sell to our customers
and the price of the products our customers sell, namely iron ore and steel prices. The price of iron ore has fluctuated
significantly in the past and is affected by factors beyond our control, including: steel inventories; international demand
for raw materials used in steel production; rates of global economic growth, especially construction and infrastructure
activity that requires significant amounts of steel; changes in the levels of economic activity in the U.S., China, India,
Europe and other industrialized or developing countries; uncertainties or weaknesses in global economic conditions such
as the U.S. debt ceiling; changes in production capacity of other iron ore suppliers, especially as additional supply comes
online or where there is a significant increase in imports of steel into the U.S. or Europe; changes in trade laws; weather-
related disruptions or natural disasters that may impact the global supply of iron ore; and the proximity, capacity and cost
of infrastructure and transportation.
Our earnings, therefore, may fluctuate with the prices of the commodities we sell. To the extent that the prices
of iron ore and steel, including the average hot-rolled coil steel price, significantly decline for an extended period of time,
we may have to revise our operating plans, including curtailing production, reducing operating costs and capital
expenditures and discontinuing certain exploration and development programs. We also may have to take impairments
on our long-lived assets and/or inventory. Sustained lower prices also could cause us to further reduce existing reserves
if certain reserves no longer can be economically mined or processed at prevailing prices. We may be unable to decrease
our costs in an amount sufficient to offset reductions in revenues and may incur losses. These events could have a
material adverse effect on us.
Uncertainty or weaknesses in global economic conditions, reduced economic growth in China and oversupply
of iron ore and excess steel or imported products could affect adversely our business.
The world price of iron ore is influenced strongly by global economic conditions, including international demand
and supply for iron ore products. In particular, the current level of international demand for raw materials used in steel
production is driven largely by industrial growth in China. Uncertainties or weaknesses in global economic conditions,
including the slowing economic growth rate in China, has resulted, and could in the future result, in decreased demand
for our products and, together with oversupply of imported products, has and may continue to lead to decreased prices,
resulting in lower revenue levels and decreasing margins, which have in the past and may in the future affect adversely
our business and negatively impact our financial results. We are not able to predict whether the global economic conditions
will improve or worsen and the impact it may have on our operations and the industry in general going forward.
17
Capacity expansions and limited rationalization of supply capacity within the mining industry could lead to lower
or more volatile global iron ore prices, impacting our profitability.
Global growth of iron ore demand, particularly from China, resulted in iron ore suppliers expanding their production
capacity over the past few years. The supply of iron ore increased due to these expansions. The previous increases in
our competitors’ capacity along with actual reduced demand resulted in excess supply of iron ore continue to cause
downward pressure on prices. The limited rationalization of supply capacity has led to volatile pricing which can have
an adverse impact on our sales, margins and profitability. We do not have control over corporate strategies implemented
by other iron ore producers that may result in volatility of global iron ore prices.
If steelmakers use methods other than blast furnace production to produce steel or use other inputs, or if their
blast furnaces shut down or otherwise reduce production, the demand for our current iron ore products may
decrease.
Demand for our iron ore products in North America is determined by the operating rates for the blast furnaces
of steel companies. However, not all finished steel is produced by blast furnaces; finished steel also may be produced
by other methods that use scrap steel, pig iron, hot briquetted iron and direct reduced iron. North American steel producers
also can produce steel using imported iron ore, semi-finished steel products or other lighter-weight steel alternatives,
which eliminates the need for domestic iron ore. Future environmental restrictions on the use of blast furnaces in North
America also may reduce our customers’ use of their blast furnaces. Maintenance of blast furnaces may require substantial
capital expenditures and may cause prolonged outages, which may reduce demand for our pellets. Our customers may
choose not to maintain, or may not have the resources necessary to maintain, their blast furnaces. If our customers use
methods to produce steel that do not use iron ore pellets or if environmental or maintenance issues occur, demand for
our current iron ore products will decrease, which would affect adversely our sales, margins, profitability and cash flows.
Due to economic conditions and volatility in commodity prices, or otherwise, our customers could approach
us about modification of their supply agreements or fail to perform under such agreements, which could impact
adversely our sales, margins, profitability and cash flows.
Although we have long-term contractual commitments for a majority of the sales in our U.S. Iron Ore business,
uncertainty in global economic conditions may impact adversely the ability of our customers to meet their obligations.
As a result of such market volatility, our customers could approach us about modifying their supply agreements or fail
to perform under such agreements. Considering our limited base of current and potential customers, any modifications
to our sales agreements or customers' failures to perform under such agreements could impact adversely our sales,
margins, profitability and cash flows. For example, of the potential customers in the North American integrated steel
industry, one is in reorganization proceedings, and certain others have experienced financial difficulties. A loss of sales
to our existing customers could have a substantial negative impact on our sales, margins, profitability and cash flows.
Other potential actions by our customers could result in additional contractual disputes and could ultimately require
arbitration or litigation, either of which could be time consuming and costly. Any such disputes and/or failure to renew
existing contracts on favorable terms could impact adversely our sales, margins, profitability and cash flows.
II. REGULATORY RISKS
We are subject to extensive governmental regulation, which imposes, and will continue to impose, potential
significant costs and liabilities on us. Future laws and regulations or the manner in which they are interpreted
and enforced could increase these costs and liabilities or limit our ability to produce iron ore products.
New laws or regulations, or changes in existing laws or regulations, or the manner of their interpretation or
enforcement, could increase our cost of doing business and restrict our ability to operate our business or execute our
strategies. This includes, among other things, the possible taxation under U.S. law of certain income from foreign
operations, compliance costs and enforcement under the Dodd-Frank Act, and costs associated with complying with the
Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 and the
regulations promulgated thereunder and any replacement or amendments thereof. In addition, we are subject to various
federal, provincial, state and local laws and regulations in each jurisdiction in which we have operations for human health
and safety, air quality, water pollution, plant, wetlands, natural resources and wildlife protection, reclamation and
restoration of mining properties, the discharge of materials into the environment, the effects that mining has on
groundwater quality, conductivity and availability, and related matters. Numerous governmental permits and approvals
are required for our operations.
We cannot be certain that we have been or will be at all times in complete compliance with such laws, regulations,
permits and approvals. If we violate or fail to comply with these laws, regulations, permits or approvals, we could be
fined or otherwise sanctioned by regulators. Compliance with the complex and extensive laws and regulations to which
18
we are subject imposes substantial costs, which could increase over time because of increased regulatory oversight,
adoption of increasingly stringent environmental standards, and increased demand for remediation services leading to
shortages of equipment, supplies and labor, as well as other factors.
Specifically, there are several notable proposed or recently enacted rulemakings or activities to which we would be
subject or that would further regulate and/or tax our customers, namely the North American integrated steel producer
customers, that may also require us or our customers to reduce or otherwise change operations significantly or incur
significant additional costs, depending on their ultimate outcome. These emerging or recently enacted rules, regulations
and policy guidance include, but are not limited to: trade regulations, such as possible changes to the North American
Free Trade Agreement; numerous air regulations, such as climate change and greenhouse gas regulation, NAAQS
including but not limited to those for NO2 and SO2, and Minnesota’s Mercury Air Emissions Reporting and Reduction
Rule; Mercury Total Maximum Daily Load requirements and Taconite Mercury Reduction Strategy; selenium discharge
regulation; conductivity water quality standards for aquatic life; expansion of federal jurisdictional authority to regulate
groundwater and various other water quality regulations. Such new or more stringent legislation, regulations,
interpretations or orders, when enacted and enforced, could have a material adverse effect on our business, results of
operations, financial condition or profitability.
Although the numerous regulations, operating permits and our management systems mitigate potential impacts
to the environment, our operations inadvertently may impact the environment or cause exposure to hazardous
substances, which could result in material liabilities to us.
Our operations currently use and have used in the past, hazardous materials, and, from time to time, we have
generated solid and hazardous waste. We have been, and may in the future be, subject to claims under federal, provincial,
state and local laws and regulations for toxic torts, natural resource damages and other damages as well as for the
investigation and clean-up of soil, surface water, sediments, groundwater and other natural resources and reclamation
of properties. Such claims for damages and reclamation may arise out of current or former conditions at sites that we
own, lease or operate currently, as well as sites that we or our acquired companies have owned, leased or operated,
and at contaminated sites that have been owned, leased or operated by our joint venture partners. Our liability for these
claims may be strict, and/or joint and several, such that we may be held responsible for more than our share of the
contamination or other damages, or even for the entire share regardless of fault. We are subject to a variety of potential
liability exposures arising, or otherwise involved in investigation and remediation activities, at certain sites. In addition
to sites currently owned, leased or operated, these include sites where we formerly conducted iron ore and/or coal mining
or processing or other operations, inactive sites that we currently own, predecessor sites, acquired sites, leased land
sites and third-party waste disposal sites. We may be named as a responsible party at other sites in the future and we
cannot be certain that the costs associated with these additional sites will not be material.
We also could be subject to litigation for alleged bodily injuries arising from claimed exposure to hazardous
substances allegedly used, released, or disposed of by us. In particular, we and certain of our subsidiaries were involved
in various claims relating to the exposure of asbestos and silica to seamen who sailed until the mid-1980s on the Great
Lakes vessels formerly owned and operated by certain of our subsidiaries. While several hundred of these claims against
us had been combined in a multidistrict litigation docket and have since been dismissed and/or settled for non-material
amounts, there remains a possibility that similar types of claims could be filed in the future.
Environmental impacts as a result of our operations, including exposures to hazardous substances or wastes
associated with our operations, could result in costs and liabilities that could materially and adversely affect our margins,
cash flow or profitability.
We may be unable to obtain and/or renew permits necessary for our operations or be required to provide
additional financial assurance, which could reduce our production, cash flows, profitability and available
liquidity. We also could face significant permit and approval requirements that could delay our commencement
or continuation of new or existing production operations which, in turn, could affect materially our cash flows,
profitability and available liquidity.
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.
19
Mining companies must obtain numerous permits that impose strict conditions on various environmental and
safety matters in connection with iron ore mining. These include permits issued by various federal, state and local
agencies and regulatory bodies. The permitting rules are complex and may change over time, making our ability to
comply with the applicable requirements more difficult or impractical and costly, possibly precluding the continuance of
ongoing operations or the development of future mining operations. Interpretations of rules may also change over time
and may lead to requirements, such as additional financial assurance, making it more costly to comply. The public,
including special interest groups and individuals, have certain rights under various statutes to comment upon, submit
objections to, and otherwise engage in the permitting process, including bringing citizens’ lawsuits to challenge such
permits or mining activities. Accordingly, required permits may not be issued or renewed in a timely fashion (or at all),
or permits issued or renewed may be conditioned in a manner that may restrict our ability to conduct our mining and
production activities efficiently, including the requirement for additional financial assurances that we may not be able to
provide on commercially reasonable terms or at all and which would further limit our borrowing base under our ABL
Facility. Such inefficiencies could reduce our production, cash flows, profitability and available liquidity.
III.
FINANCIAL RISKS
A substantial majority of our sales are made under supply agreements with specified duration to a low number
of customers that contain price-adjustment clauses that could affect adversely the stability and profitability of
our operations.
A majority of our U.S. Iron Ore sales and our Asia Pacific Iron Ore sales are made under supply agreements
with specified durations to a limited number of customers. For the year ended December 31, 2017, approximately 74%
of our revenues from product sales and services was derived from the North American integrated steel industry and three
customers together accounted for 88% of our U.S. Iron Ore product sales revenues (representing 70% of our consolidated
revenues). Our legacy agreements with ArcelorMittal USA expired at the end of December 2016 and January 2017.
The parties executed a long-term agreement, which became effective October 31, 2016 and expires at the end of
December 2026. Our average remaining duration of our U.S. Iron Ore contracts as of December 31, 2017 is approximately
seven years. Pricing under our contract with ArcelorMittal is adjusted by the price of hot-rolled coil steel in the U.S.
domestic market, and iron ore and general inflation indices. As a result of this and other pricing constructs contained in
our customer contracts and those anticipated in future periods, our financial results have increased sensitivity to changes
in iron ore and steel prices. Our Asia Pacific Iron Ore annually-negotiated contracts are with steel companies primarily
in China, Japan and South Korea. In March 2017, we extended the majority of our supply agreements with steel producers
in China for one year. These contracts will expire in March 2018, and we will only renew contracts if it can be done in
an economically viable manner. Our supply agreement with our client in South Korea expired in December 2017. We
renewed that agreement for 2018; however, it is at a lower committed quantity than our previous agreement. Our supply
agreements with our customers in Japan expire in March 2018. These contracts could be renewed for an additional
term. Pricing for our Asia Pacific Iron Ore Chinese customers consists of shorter-term pricing mechanisms of various
durations up to three months based on the average of daily spot prices that are generally associated with the time of
unloading of each shipment. Pricing with our Japanese and South Korean customers is generally similar to the inputs
used with our Chinese customers, but the pricing inputs are fixed before shipment.
Our existing and future indebtedness may limit cash flow available to invest in the ongoing needs of our business,
which could prevent us from fulfilling our obligations under our senior notes and ABL Facility.
As of December 31, 2017, we had an aggregate principal amount of $2,439.4 million of long-term debt, $400.0
million of which was secured (excluding $46.5 million of outstanding letters of credit and $47.8 million of capital leases),
and $1,007.7 million of cash on our balance sheet. As of December 31, 2017, no loans were drawn under the ABL
Facility and we had total availability of $273.2 million as a result of borrowing base limitations. As of December 31, 2017,
the principal amount of letters of credit obligations and other commitments totaled $46.5 million, thereby further reducing
available borrowing capacity on our ABL Facility to $226.7 million.
Our substantial level of indebtedness requires us to dedicate a significant portion of our cash flow from operations
to the payment of debt service, reducing the availability of our cash flow to fund capital expenditures, acquisitions or
strategic development initiatives, and other general corporate purposes. Moreover, our level of indebtedness could have
further consequences, including, increasing our vulnerability to adverse economic or industry conditions, limiting our
ability to obtain additional financing in the future to enable us to react to changes in our business, or placing us at a
competitive disadvantage compared to businesses in our industry that have less indebtedness.
Our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms or
at all for working capital, capital expenditures, acquisitions or strategic development initiatives, and general corporate
purposes. Our liquidity needs could vary significantly and may be affected by general economic conditions, industry
20
trends, performance and many other factors not within our control. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may be required to refinance all or a portion of our existing debt. Although
we were successful in financing our HBI project, we may not be able to obtain any such new or additional debt on favorable
terms or at all.
Any failure to comply with covenants in the instruments governing our debt could result in an event of default
which, if not cured or waived, would have a material adverse effect on us.
We may not be able to generate sufficient cash to service all of our debt, and may be forced to take other actions
to satisfy our obligations under our debt, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our ability to generate
cash in the future and our financial condition and operating performance, which are subject to prevailing economic and
competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you
that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium,
if any, and interest on our debt.
We also have significant capital requirements, including interest payments to service our debt. If we incur
significant losses in future periods, we may be unable to continue as a going concern. If we are unable to continue as
a going concern, we may consider, among other options, restructuring our debt; however, there can be no assurance
that these options will be undertaken and, if so undertaken, whether these efforts will succeed.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to
reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, including additional
secured or unsecured debt, or restructure or refinance our debt. Any refinancing of our debt could be at higher interest
rates and may require us to comply with more onerous covenants, making it more difficult to obtain surety bonds, letters
of credit or other financing, particularly during periods in which credit markets are weak; causing a change in our credit
ratings; limiting our ability to compete with companies that are not as leveraged and that may be better positioned to
withstand economic downturns; and limiting our flexibility in planning for, or reacting to, and increasing our vulnerability
to, changes in our business, the industry in which we compete and general economic and market conditions. These
measures may not be successful and may not permit us to meet our scheduled debt service obligations.
If our operating results and available cash are insufficient to meet our debt service obligations, we could face
substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service
and other obligations. We may not be able to consummate those dispositions or recover the carrying value of these
assets or obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any
debt service obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity,
and we may not be able to refinance any of our debt on commercially reasonable terms or at all. Furthermore, additional
or new financial assurances may be demanded by our vendors or regulatory agencies that we may not be able to provide
on commercially reasonable terms or at all.
Any of these examples potentially could have a material adverse impact on our results of operations, profitability,
shareholders' equity and capital structure. Also, if we are to sell a percentage of a business, there are inherent risks
relating to joint venture relationships, as noted in the risk factor below.
We rely on our joint venture partners to meet their payment obligations and we are subject to risks involving
the acts or omissions of our joint venture partners.
We co-own and manage one of our four operating U.S. Iron Ore mines with ArcelorMittal and U.S. Steel. We
rely on our joint venture partners to make their required capital contributions and to pay for their share of the iron ore
produced. One of our U.S. Iron Ore joint venture partners is also our customer. If one or both of our joint venture partners
fail to perform their obligations, the remaining joint venture partners, including ourselves, may be required to assume
additional material obligations, including significant capital contribution, costs of environmental remediation, pension and
postretirement health and life insurance benefit obligations. For example, a 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 and transportation contracts and equipment leases.
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We cannot control the actions of our joint venture partners because we have a minority interest in such joint
venture. Further, in spite of performing customary due diligence prior to entering into a joint venture, we cannot guarantee
full disclosure of prior acts or omissions of the sellers or those with whom we may in the future enter into joint ventures.
Such risks could have a material adverse effect on the business, results of operations or financial condition of our existing
or future joint venture interests.
Our ability to collect payments from our customers depends on their creditworthiness.
Our ability to receive payment for products sold and delivered to our customers depends on the creditworthiness
of our customers. With respect to our Asia Pacific business unit, payment typically is received as the products are shipped
and much of the product is secured by bank letters of credit. By contrast, in our U.S. Iron Ore business unit, generally,
we deliver iron ore products to our customers’ facilities in advance of payment for those products. Under this practice
for our U.S. customers, title and risk of loss with respect to U.S. Iron Ore products does not pass to the customer until
payment for the pellets is received; however, there is typically a period of time in which pellets, for which we have reserved
title, are within our customers’ control. Where we have identified credit risk with certain customers, we have put in place
alternate payment terms from time to time.
Consolidation in some of the industries in which our customers operate have created larger customers. These
factors have caused some customers to be less profitable and increased our exposure to credit risk. Customers in other
countries may be subject to other pressures and uncertainties that may affect their ability to pay, including trade barriers,
exchange controls, and local, economic and political conditions. Downturns in the economy and disruptions in the global
financial markets have affected the creditworthiness of our customers from time to time. Some of our customers are
highly leveraged. If economic conditions worsen or prolonged global, national or regional economic recession conditions
return, it is likely to impact significantly the creditworthiness of our customers and could, in turn, increase the risk we
bear on payment default for the credit we provide to our customers and could limit our ability to collect receivables.
Failure to receive payment from our customers for products that we have delivered could affect adversely our results of
operations, financial condition and liquidity.
Our operating expenses could increase significantly if the price of electrical power, fuel or other energy sources
increases.
Our mining operations require significant use of energy. Energy expenses, which make up approximately 20%
to 25% in the aggregate of our operating costs in our U.S. Iron Ore 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 rates. A disruption in the transmission of energy,
inadequate energy transmission infrastructure, or the termination of any of our energy supply contracts could interrupt
our energy supply and affect adversely our operations. While we have some long-term contracts with electrical suppliers,
we are exposed to fluctuations in energy costs that can affect our production costs. As an example, our mines in Minnesota
are subject to changes in Minnesota Power’s rates, such as periodic rate changes that are reviewed and approved by
the state public utilities commission in response to an application filed by Minnesota Power. We also enter into market-
based pricing supply contracts for natural gas and diesel fuel for use in our operations. Those contracts expose us to
price increases in energy costs, which could cause our profitability to decrease significantly.
In addition, U.S. public utilities are expected to pass through additional capital and operating cost increases to
their customers related to new or pending U.S. environmental regulations that are expected to require significant capital
investment and use of cleaner fuels in the future and which may impact U.S. coal-fired generation capacity. Our mines
in Michigan rely on electricity supplied from the Presque Isle Power Plant, which is coal-fired. In 2016, we entered into
a twenty-year power purchase agreement that contemplates the capital investment by the power company to construct
two natural gas power plants in Michigan. Should the power company fail to build the new power plants or experience
significant construction delays, we may be subject to increased operational risk from continued reliance on the existing
power plant or increased costs in pursuing alternatives, which could also decrease our profitability.
We are subject to a variety of financial market risks.
Financial market risks include those caused by changes in the value of investments, changes in commodity
prices, interest rates and foreign currency exchange rates. We have established policies and procedures to manage
such risks; however, certain risks are beyond our control and our efforts to mitigate such risks may not be effective.
These factors could have a material adverse effect on our results of operations.
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We are subject to bankruptcy or insolvency risks relating to our former Canadian operations.
As previously disclosed, the Bloom Lake Group commenced restructuring proceedings under the CCAA in
January 2015 to address the Bloom Lake Group's immediate liquidity issues and to preserve and protect its assets for
the benefit of all stakeholders while restructuring and/or sale options were explored. In May 2015, the Wabush Group
also commenced restructuring proceedings under the CCAA. It is possible that (a) as part of the CCAA process (i) claims
may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group or by their respective representatives
against us and/or non-debtor affiliates of the Bloom Lake Group and the Wabush Group and/or (ii) our claims and non-
debtor affiliate claims against the Bloom Lake Group or the Wabush Group may be challenged; and (b) creditors of the
Bloom Lake Group, the Wabush Group or their respective representatives may assert claims which may impact adversely
non-debtor affiliates of the Bloom Lake Group and the Wabush Group. While we anticipate the proceeds of the sale of
the Bloom Lake Group and the Wabush Group assets may mitigate these risks, to the extent that any such claims are
successful, we could be held liable for certain claims or be limited in the amount of recovery on account of its claims
against the Bloom Lake Group and the Wabush Group.
A court or regulatory body could find that we are responsible, in whole or in part, for liabilities we transferred
to third party purchasers.
As part of our strategy to focus on our U.S. Iron Ore operations, we have sold or otherwise disposed of several
non-core assets, such as our North American Coal assets. Some of the transactions under which we sold or otherwise
disposed of our non-core assets included provisions transferring certain liabilities to the purchasers or acquirers of those
non-core assets. While we believe that all such transfers were completed properly and are legally binding, if the purchaser
fails to fulfill its obligations, we may be at risk that some court or regulatory body could disagree and determine that we
remain responsible for liabilities we intended to and did transfer.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect
our cost of financing and the market price of our securities.
Credit rating agencies could downgrade our ratings either due to factors specific to our business, a prolonged
cyclical downturn in the mining industry, or macroeconomic trends (such as global or regional recessions) and trends in
credit and capital markets more generally. Any decline in our credit ratings may result in an increase to our cost of future
financing and limit our access to the capital markets, which would harm our financial condition and results of operations,
hinder our ability to refinance existing indebtedness on acceptable terms, have an adverse effect on the market price of
our securities and may affect adversely the terms under which we purchase goods and services.
Our actual operating results may differ significantly from our guidance.
From time to time, we release guidance, including that set forth under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations-Outlook” in our Annual Reports on Form 10-K and our Quarterly Reports
on Form 10-Q, regarding our future performance. This guidance, which consists of forward-looking statements, is prepared
by our management and is qualified by, and subject to, the assumptions and the other information included in our Annual
Reports on Form 10-K and our Quarterly Reports on Form 10-Q. Our guidance is not prepared with a view toward
compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our
independent registered public accounting firm nor any other independent or outside party compiles or examines the
guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity,
are inherently subject to business, economic and competitive uncertainties and contingencies, many of which are beyond
our control and are based upon specific assumptions with respect to future business decisions, some of which will change.
The principal reason that we release such data is to provide a basis for our management to discuss our business outlook
with analysts and investors. We do not accept any responsibility for any projections or reports published by any such
persons.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the
guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is
only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the
guidance. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in
the future that the data are forecast. In light of the foregoing, investors are urged to put the guidance in context and not
to place undue reliance on it.
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Any failure to successfully implement our operating strategy or the occurrence of any of the events or
circumstances set forth in our Annual Reports on Form 10-K or our Quarterly Reports on Form 10-Q could result in actual
operating results being different than the guidance, and such differences may be adverse and material.
IV. OPERATIONAL RISKS
We incur certain costs when production capacity is idled, including increased costs to resume production at
idled facilities and costs to idle facilities.
Our decisions concerning which mines to operate and at what capacity levels are made based upon our customers'
orders for products, the quality of and cost to mine and process the remaining ore body, as well as the capabilities and
cost performance of our mines. During depressed market conditions, we may concentrate production at certain mines
and not operate others in response to customer demand and as a result we will incur idle facility costs. In 2016, two of
our Minnesota mines were temporarily idled for a portion of the year, and we indefinitely idled the Empire mine in Michigan
in August 2016.
When we restart idled facilities, we incur certain costs to replenish inventories, prepare the previously idled
facilities for operation, perform the required repair and maintenance activities and prepare employees to return to work
safely and to resume production responsibilities. The amount of any such costs can be material, depending on a variety
of factors, such as the period of idle time, necessary repairs and available employees, and is difficult to project.
Faced with overcapacity in the iron ore market, we may seek to rationalize assets through asset sales, temporary
shutdowns, indefinite idles or closures of facilities.
Mine closures entail substantial costs. If we prematurely close one or more of our mines, our results of operations
and financial condition would likely be affected adversely.
If we prematurely close any of our mines, our revenues would be reduced unless we were able to increase
production at our other mines, which may not be possible. The closure of a mining operation involves significant fixed
closure costs, including accelerated employment legacy costs, severance-related obligations, reclamation and other
environmental costs, and the costs of terminating long-term obligations, including customer, energy and transportation
contracts and equipment leases. A review of these types of potential costs is currently underway with respect to our Asia
Pacific Iron Ore operations. We base our assumptions regarding the life of our mines on detailed studies we perform
from time to time, but those studies and assumptions are subject to uncertainties and estimates that may not be accurate.
We recognize the costs of reclaiming open pits, stockpiles, tailings ponds, roads and other mining support areas based
on the estimated mining life of our property. If we were to significantly reduce the estimated life of any of our mines, the
mine-closure costs would be applied to a shorter period of production, which would increase costs per ton produced and
could significantly and adversely affect our results of operations and financial condition.
A U.S. mine permanent closure could accelerate and significantly increase employment legacy costs, including
our expense and funding costs for pension and other postretirement benefit obligations. A number of employees would
be eligible for immediate retirement under special eligibility rules that apply upon a mine closure. All employees eligible
for immediate retirement under the pension plans at the time of the permanent mine closure also could be eligible for
postretirement health and life insurance benefits, thereby accelerating our obligation to provide these benefits. Certain
mine closures would precipitate a pension closure liability significantly greater than an ongoing operation liability. Finally,
a permanent mine closure could trigger severance-related obligations, which can equal up to sixteen weeks of pay per
employee in some jurisdictions, depending on length of service. As a result, the closure of one or more of our mines
could affect adversely our financial condition and results of operations.
Our sales and competitive position depend on the ability to transport our products to our customers at
competitive rates and in a timely manner.
In our U.S. Iron Ore operations, disruption of the lake and rail transportation services because of weather-related
problems, including ice and winter weather conditions on the Great Lakes or St. Lawrence Seaway, climate change,
strikes, lock-outs, or other events and lack of alternative transportation options, could impair our ability to supply iron ore
to our customers at competitive rates or in a timely manner and, thus, could adversely affect our sales, margins and
profitability. Further, reduced dredging and environmental changes, particularly at Great Lakes ports, could impact
negatively our ability to move our iron ore products because lower water levels restrict the tonnage that vessels can haul,
resulting in higher freight rates.
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Our Asia Pacific Iron Ore operations also are dependent upon rail and port capacity. Disruptions in rail service
or availability of dock capacity could similarly impair our ability to supply iron ore to our customers, thereby adversely
affecting our sales and profitability. In addition, our Asia Pacific Iron Ore operations are also in direct competition with
the major world seaborne exporters of iron ore and our customers face higher transportation costs than the customers
of most other Australian producers to ship our products to the Asian markets because of the location of our major
shipping port on the southwest coast of Australia. Further, increases in transportation costs, including volatile fuel rates,
decreased availability of ocean vessels or changes in such costs relative to transportation costs incurred by our
competitors could make our products less competitive, restrict our access to certain markets and have an adverse
effect on our sales, margins and profitability.
Natural disasters, weather conditions, disruption of energy, unanticipated geological conditions, equipment
failures, and other unexpected events may lead our customers, our suppliers or our facilities to curtail production
or shut down operations.
Operating levels within the mining industry are subject to unexpected conditions and events that are beyond the
industry’s control. Those events could cause industry members or their suppliers to curtail production or shut down a
portion or all of their operations, which could reduce the demand for our iron ore products, and could affect adversely
our sales, margins and profitability.
Interruptions in production capabilities inevitably will 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 or re-start production at one mine to offset an interruption in production at another mine. Additionally, re-start
production costs can be even higher if required to be taken during extremely cold weather conditions.
A portion of our production costs are fixed regardless of current operating levels. As noted, our operating levels
are subject to conditions beyond our control that can delay deliveries or increase the cost of mining at particular mines
for varying lengths of time. These include weather conditions (for example, extreme winter weather, tornadoes, floods,
and the lack of availability of process water due to drought) and natural and man-made disasters, tailings dam failures,
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.
The manufacturing processes that take place in our mining operations, as well as in our processing facilities,
depend on critical pieces of equipment. This equipment may, on occasion, be out of service because of unanticipated
failures. In addition, all of our mines and processing facilities have been in operation for several decades, and the
equipment is aged. In the future, we may experience additional material plant shutdowns or periods of reduced production
because of equipment failures. Further, remediation of any interruption in production capability may require us to make
large capital expenditures that could have a negative effect on our profitability and cash flows. Our business interruption
insurance would not cover all of the lost revenues associated with equipment failures. Longer-term business disruptions
could result in a loss of customers, which adversely could affect our future sales levels and, therefore, our profitability.
Regarding the impact of unexpected events happening to our suppliers, many of our mines are dependent on
one source for electric power and for natural gas. A significant interruption in service from our energy suppliers due to
terrorism or sabotage, weather conditions, natural disasters, or any other cause can result in substantial losses that
may not be fully recoverable, either from our business interruption insurance or responsible third parties.
We may not have adequate insurance coverage for some business risks.
As noted above, our operations are generally subject to a number of hazards and risks, which could result in
damage to, or destruction of, equipment, properties or facilities. The insurance that we maintain to address risks that
are typical in our business may not provide adequate coverage. Insurance against some risks, such as liabilities for
environmental pollution, tailings basin breaches, or certain hazards or interruption of certain business activities, may
not be available at an economically reasonable cost, or at all. Even if available, we may self-insure where we determine
it is most cost-effective to do so. As a result, accidents or other negative developments involving our mining, production
or transportation activities could have a material adverse effect on our operations.
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A disruption in, or failure of our information technology systems, including those related to cybersecurity, could
adversely affect our business operations and financial performance.
We rely on the accuracy, capacity and security of our information technology (“IT”) systems for the operations
of many of our business processes and to comply with regulatory, legal, and tax requirements. While we maintain some
of our critical information technology systems, we are also dependent on third parties to provide important IT services
relating to, among other things, human resources, electronic communications and certain finance functions. Despite the
security measures that we have implemented, including those related to cybersecurity, our systems could be breached
or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic
access. Though we have controls in place, we cannot provide assurance that a cyber-attack will not occur. Furthermore,
we may have little or no oversight with respect to security measures employed by third-party service providers, which
may ultimately prove to be ineffective at countering threats. Failures of our IT systems, whether caused maliciously or
inadvertently, may result in the disruption of our business processes, or in the unauthorized release of sensitive,
confidential or otherwise protected information or result in the corruption of data, which could adversely affect our business
operations and financial performance. In addition, we may be required to incur significant costs to protect against and,
if required, remediate the damage caused by such disruptions or system failures in the future.
We are subject to risks involving operations and sales in multiple countries.
We supply raw materials to the global integrated steel industry with substantial assets located outside of the
U.S. We conduct operations in the U.S. and Australia. As such, we are subject to additional risks beyond those relating
to our U.S. operations, such as fluctuations in currency exchange rates; potentially adverse tax consequences due to
overlapping or differing tax structures; burdens to comply with multiple and potentially conflicting foreign laws and
regulations, including export requirements, tariffs, economic sanctions and other barriers, environmental health and
safety requirements, and unexpected changes in any of these laws and regulations; the imposition of duties, tariffs,
import and export controls and other trade barriers impacting the seaborne iron ore markets; difficulties in staffing and
managing multi-national operations; political and economic instability and disruptions, including terrorist attacks;
disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including
the Foreign Corrupt Practices Act; and uncertainties in the enforcement of legal rights and remedies in multiple
jurisdictions.
With the finalization of the Organization for Economic Cooperation and Development's ("OECD"), Base Erosion
and Profit Shifting study, referred to as the Actions, many OECD countries have acknowledged their intent to implement
the Actions and update their local tax regulations. The extent (if any) to which countries in which we operate adopt and
implement the Actions could affect our effective tax rate and our future results from non-U.S. operations.
Compliance with the laws and regulations described above or with other applicable foreign, federal, state,
provincial and local laws and regulations currently in effect or that may be adopted in the future could expose us to
additional risks. If we are unable to manage successfully the risks associated with operating our global business, these
risks could have a material adverse effect on our business, results of operations or financial condition.
Our profitability could be affected adversely by the failure of outside contractors and/or suppliers to perform.
Asia Pacific Iron Ore uses contractors to handle many of the operational phases of its mining and processing
operations and, therefore, we are subject to the performance of outside companies on key production areas. We use
contractors to help complete certain capital projects, such as upgrades to our existing U.S. Iron Ore facilities, and a
contractor's or supplier's failure to perform could affect adversely our production, sales, and our ability to fulfill customer
requirements. Such failure to perform in a significant way would result in additional costs for us, which also could affect
adversely our production rates, sales and results of operations.
V.
DEVELOPMENT AND SUSTAINABILITY RISKS
The cost and time to implement a strategic capital project may prove to be greater than originally anticipated.
We undertake strategic capital projects, such as the HBI project, in order to enhance, expand or upgrade our
mines, production capabilities and diversify our customer base. Our ability to achieve the anticipated volumes of
production, revenues or otherwise realize acceptable returns on strategic capital projects that we may undertake is
subject to a number of risks, many of which are beyond our control, including a variety of market (such as a volatile
pricing environment for iron ore), operational, permitting and labor-related factors. Further, the cost to implement any
given strategic capital project ultimately may prove to be greater and may take more time than originally anticipated.
Inability to achieve the anticipated results from the implementation of our strategic capital projects, or the incurring of
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unanticipated implementation costs, penalties or inability to meet contractual obligations could affect adversely our results
of operations and future earnings and cash flow generation.
We continually must replace reserves depleted by production. Exploration activities may not result in additional
discoveries.
Our ability to replenish our ore reserves is important to our long-term viability. Depleted ore reserves must be
replaced by further delineation of existing ore bodies or by locating new deposits in order to maintain production levels
over the long term. For example, in 2017 we made investments in our Tilden and Empire mines and in land in Minnesota
to provide future potential ore reserves. Resource exploration and development are highly speculative in nature.
Exploration projects involve many risks, require substantial expenditures and may not result in the discovery of sufficient
additional mineral deposits that can be mined profitably. Once a site with mineralization is discovered, it may take several
years from the initial phases of drilling until production is possible, during which time the economic feasibility of production
may change. Substantial expenditures are required to establish recoverable proven and probable reserves and to
construct mining and processing facilities. As a result, there is no assurance that current or future exploration programs
will be successful and there is a risk that depletion of reserves will not be offset by discoveries or acquisitions.
We rely on estimates of our recoverable reserves, which is complex due to geological characteristics of the
properties and the number of assumptions made.
We regularly evaluate our U.S. Iron Ore reserves based on revenues and costs and update them as required in
accordance with SEC Industry Guide 7. Our Asia Pacific Iron Ore business segment has published reserves that follow
the Joint Ore Reserve Code in Australia, with certain changes to our Western Australian reserve values to make them
comply with SEC requirements. There are numerous uncertainties inherent in estimating quantities of reserves of our
mines, including many factors beyond our control.
Estimates of reserves and future net cash flows necessarily depend upon a number of variable factors and
assumptions, such as production capacity, effects of regulations by governmental agencies, future prices for iron ore,
future industry conditions and operating costs, severance and excise taxes, development costs and costs of extraction
and reclamation, all of which may vary considerably from actual results. Estimating the quantity and grade of reserves
requires us to determine the size, shape and depth of our mineral bodies by analyzing geological data, such as samplings
of drill holes. In addition to the geology assumptions of our mines, assumptions are also required to determine the
economic feasibility of mining these reserves, including estimates of future commodity prices and demand, the mining
methods we use, and the related costs incurred to develop and mine our reserves. For these reasons, estimates of the
economically recoverable quantities of mineralized deposits attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of future net cash flows prepared by different
engineers or by the same engineers at different times may vary substantially as the criteria change. Estimated ore
reserves could be affected by future industry conditions, future changes in the SEC's mining property disclosure
requirements, geological conditions and ongoing mine planning. Actual volume and grade of reserves recovered,
production rates, 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 affected adversely.
Defects in title or loss of any leasehold interests in our properties could limit our ability to mine these properties
or result in significant unanticipated costs.
A portion of our mining operations are conducted on properties we lease, license or as to which we have easements
or other possessory interests, which we refer to as "leased properties." Consistent with industry practice, title to most
of these leased properties and mineral rights are not usually verified until we make a commitment to develop a property,
which may not occur until after we have obtained necessary permits and completed exploration of the leased property.
In some cases, title with respect to leased properties is not verified at all because we instead rely on title information or
representations and warranties provided by lessors or grantors. We do not maintain title insurance on our owned or
leased mining properties. A title defect or the loss of any lease, license or easement for any leased mining property
could affect adversely our ability to mine any associated reserves. In addition, from time to time the rights of third parties
for competing uses of adjacent, overlying, or underlying lands such as for roads, easements and public facilities may
affect our ability to operate as planned if our title is not superior or arrangements cannot be negotiated.
Any challenge to our title could delay the exploration and development of some reserves, deposits or surface
rights, cause us to incur unanticipated costs and could ultimately result in the loss of some or all of our interest in those
reserves or surface rights. In the event we lose reserves, deposits or surface rights, we may have to shut down or
significantly alter the sequence of our mining operations, which may affect adversely our future production, revenues
and cash flows. Additionally, if we lose any leasehold interests relating to any of our pellet plants or loadout facilities,
we may need to find an alternative location to process our iron ore and load it for delivery to customers, which could
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result in significant unanticipated costs. Finally, we could incur significant liability if we inadvertently mine on property
we do not own or lease.
In order to continue to foster growth in our business and maintain stability of our earnings, we must maintain
our social license to operate with our stakeholders.
As a mining company, maintaining a strong reputation and consistent operational and safety history is vital in
order to continue to foster growth and maintain stability in our earnings. As sustainability expectations increase and
regulatory requirements continue to evolve, maintaining our social license to operate becomes increasingly important.
We incorporate social license expectations in our ERM program. Our ability to maintain our reputation and strong
operating history could be threatened, including by circumstances outside of our control, such as disasters caused or
suffered by other mining companies. If we are not able to respond effectively to these and other challenges to our social
license to operate, our reputation could be damaged significantly. Damage to our reputation could affect adversely our
operations and ability to foster growth in our company.
Estimates and timelines relating to new development projects are uncertain and we may incur higher costs and
lower economic returns than estimated.
Mining industry development projects typically require a number of years and significant expenditures before
production is possible. Such projects could experience unexpected problems and delays during development,
construction and start-up.
Our decision to develop a project typically is based on the results of feasibility studies, which estimate the
anticipated economic returns of a project. The actual project profitability or economic feasibility may differ from such
estimates as a result of any of the following factors, among others: changes in tonnage, grades and metallurgical
characteristics of ore or other raw materials to be mined and processed; estimated future prices of the relevant product;
changes in customer demand; higher construction and infrastructure costs; the quality of the data on which engineering
assumptions were made; higher production costs; adverse geotechnical conditions; availability of adequate labor force;
availability and cost of water and energy; availability and cost of transportation; fluctuations in inflation and currency
exchange rates; availability and terms of financing; delays in obtaining environmental or other government permits or
changes in laws and regulations including environmental laws and regulations; weather or severe climate impacts; and
potential delays relating to social and community issues.
The production of hot briquetted iron is a capital-intensive business and our ongoing efforts with respect to our
HBI project will require the commitment of substantial resources. Any unanticipated costs or delays associated
with our HBI project could have a material adverse effect on our financial condition or results of operations.
Our ongoing efforts with respect to our HBI project require the commitment of substantial resources for operating
expenses and capital expenditures. We currently expect to incur total capital expenditures through 2020 on the HBI
project of approximately $700 million on the development of the HBI production plant in Toledo, Ohio and $80 million for
upgrades at the Northshore plant to enable it to produce significantly increased levels of DR-grade pellets that could be
used as feedstock for the HBI production plant and/or sold commercially. Each of these estimates are exclusive of
construction-related contingencies and capitalized interest. Our estimated expenses may increase as personnel and
equipment associated with advancing development and commercial production are added. The progress of our HBI
project and the amounts and timing of expenditures will depend in part on the following:
•
•
•
•
•
receiving and maintaining required federal, state and local permits;
completing infrastructure and construction work and the completion of commissioning and integration
of all of the systems comprising our HBI production plant;
negotiating sales contracts for our planned production;
the execution of any joint venture agreements or similar arrangements with strategic partners; and
other factors, many of which are beyond our control.
Most of these activities require significant lead times and must be advanced concurrently.
Any unanticipated costs or other delays associated with our HBI project could have a material adverse effect on
our financial condition or results of operations and could require us to seek additional capital, which may not be available
on commercially acceptable terms or at all.
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Our ability to realize the benefits of any potential acquisitions is uncertain.
Should we determine to pursue any acquisitions, the success of the same is subject to risks and uncertainties,
including our ability to realize operating efficiencies expected from an acquisition; the size or quality of the mineral
potential; delays in realizing the benefits of an acquisition; difficulties in retaining key employees, customers or suppliers
of the acquired business; the risks associated with the assumption of contingent or undisclosed liabilities of acquisition
targets; the impact of changes to our allocation of purchase price; and the ability to generate future cash flows or the
availability of financing.
Moreover, any acquisition opportunities we pursue could affect materially our liquidity and capital resources and
may require us to incur indebtedness, seek equity capital or both. Future acquisitions could also result in us assuming
more long-term liabilities relative to the value of the acquired assets than we may have assumed in previous acquisitions.
VI. HUMAN CAPITAL RISKS
Our profitability could be affected adversely if we fail to maintain satisfactory labor relations.
Production in our mines is dependent upon the efforts of our employees. We are party to labor agreements with
various labor unions that represent employees at our operations. Such labor agreements are negotiated periodically,
and, therefore, we are subject to the risk that these agreements may not be able to be renewed on reasonably satisfactory
terms. It is difficult to predict what issues may arise as part of the collective bargaining process, and whether negotiations
concerning these issues will be successful. Due to union activities or other employee actions, we could experience labor
disputes, work stoppages, or other disruptions in our production of iron ore that could affect us adversely. The USW
represents all labor employees at our U.S. Iron Ore operations owned and/or managed by Cliffs or its subsidiary companies
except for Northshore. Our labor agreements with the USW at four of our U.S. Iron Ore operations were ratified in
September 2016 and extend for a three-year term, effective as of October 1, 2015.
If we enter into a new labor agreement with any union that significantly increases our labor costs relative to our
competitors or fail to come to an agreement upon expiry, our ability to compete may be materially and adversely affected.
We may encounter labor shortages for critical operational positions, which could affect adversely our ability to
produce our products.
We are predicting a long-term shortage of skilled workers for the mining industry and competition for the available
workers limits our ability to attract and retain employees. Additionally, at our U.S. mining locations, many of our mining
operational employees are approaching retirement age. As these experienced employees retire, we may have difficulty
replacing them at competitive wages.
Our expenditures for post-retirement benefit and pension obligations could be materially higher than we have
predicted if our underlying assumptions differ from actual outcomes, there are mine closures, or our joint venture
partners fail to perform their obligations that relate to employee pension plans.
We provide defined benefit pension plans and OPEB to certain eligible union and non-union employees in the
U.S., including our share of expense and funding obligations with respect to our unconsolidated joint venture. Our
pension and OPEB expenses and our required contributions to our pension and OPEB plans are affected directly by the
value of plan assets, the projected and actual rate of return on plan assets, and the actuarial assumptions we use to
measure our defined benefit pension plan obligations, including the rate at which future obligations are discounted.
We cannot predict whether changing market or economic conditions, regulatory changes or other factors will
increase our pension and OPEB expenses or our funding obligations, diverting funds we would otherwise apply to other
uses.
We have calculated our unfunded pension and OPEB obligations based on a number of assumptions, including
our joint venture partners satisfying their funding obligations. If our assumptions do not materialize as expected, cash
expenditures and costs that we incur could be materially higher. Moreover, we cannot be certain that regulatory changes
will not increase our obligations to provide these or additional benefits. These obligations also may increase substantially
in the event of adverse medical cost trends or unexpected rates of early retirement, particularly for bargaining unit retirees.
29
We depend on our senior management team and other key employees, and the loss of these employees could
adversely affect our business.
Our success depends in part on our ability to attract and motivate our senior management and key employees.
Achieving this objective may be difficult due to a variety of factors, including fluctuations in the global economic and
industry conditions, competitors’ hiring practices, cost reduction activities, and the effectiveness of our compensation
programs. Competition for qualified personnel can be intense. We must continue to recruit, retain, and motivate our
senior management and key personnel in order to maintain our business and support our projects. A loss of senior
management and key personnel could prevent us from capitalizing on business opportunities, and our operating results
could be adversely affected.
Item 1B.
Unresolved Staff Comments
We have no unresolved comments from the SEC.
30
Item 2.
Properties
The following map shows the locations of our operations and offices as of December 31, 2017:
General Information about the Mines
All of our iron ore mining operations are open-pit mines. Additional pit development is underway as required by
long-range mine plans. At our U.S. Iron Ore and Asia Pacific Iron Ore mines, drilling programs are conducted periodically
to collect modeling data and for refining ongoing operations.
Geologic models are developed for all mines to define the major ore and waste rock types. Computerized block
models for iron ore are constructed that include all relevant geologic and metallurgical data. These are used to generate
grade and tonnage estimates, followed by detailed mine design and life of mine operating schedules.
U.S. Iron Ore
The following map shows the locations of our U.S. Iron Ore operations:
We currently own or co-own four operating iron ore mines in Michigan and Minnesota, as well as one indefinitely
idled mine in Michigan. We produced 18.8 million, 16.0 million and 19.3 million long tons of iron ore pellets in 2017,
2016 and 2015, respectively, at those mines for our account. We produced 6.7 million, 7.4 million and 6.8 million long
tons, respectively, on behalf of current and previous steel company partners of the mines.
31
Our U.S. Iron Ore mines produce from deposits located within the Biwabik and Negaunee Iron Formation, which
are classified as Lake Superior type iron formations that formed under similar sedimentary conditions in shallow marine
basins approximately two billion years ago. Magnetite and hematite are the predominant iron oxide ore minerals present,
with lesser amounts of goethite and limonite. Quartz is the predominant waste mineral present, with lesser amounts of
other chiefly iron bearing silicate and carbonate minerals. The ore minerals liberate from the waste minerals upon fine
grinding.
Mine
Cliffs
Ownership
Empire3,4
100%
Tilden4
100%
Hibbing
23%
Northshore
100%
United
Taconite
100%
Infrastructure Mineralization
Operating
Since
Current
Annual
Capacity1,2
2017
Production1,2
Mineral
Owned
Rights
Leased
Mine,
Concentrator,
Pelletizer
Mine,
Concentrator,
Pelletizer,
Railroad
Mine,
Concentrator,
Pelletizer
Mine,
Concentrator,
Pelletizer,
Railroad
Mine,
Concentrator,
Pelletizer
Magnetite
1963
*
—
53%
47%
Hematite &
Magnetite
1974
Magnetite
1976
Magnetite
1990
Magnetite
1965
8.0
8.0
6.0
5.4
7.7
100%
—%
7.7
5.3
4.8
3%
97%
—%
100%
—%
100%
1 Reported on a wet basis in millions of long tons, equivalent to 2,240 pounds.
2 Figures reported on 100% basis.
3 Empire was indefinitely idled beginning on August 3, 2016.
4 During 2017, our ownership interest in Tilden and Empire increased to 100%.
* Historically, Empire had an annual capacity of 5.5 million long tons; currently indefinitely idled.
Empire Mine
The Empire mine is located on the Marquette Iron Range in Michigan’s Upper Peninsula approximately 15 miles
southwest of Marquette, Michigan. As a result of the indefinite idle that began in August 2016, the Empire mine had no
production in 2017 compared to its highest annual production over the last five years of 4.3 million long tons of iron ore
pellets.
During 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the
noncontrolling interest net assets to ArcelorMittal, in exchange for its interest in Empire. Prior to the indefinite idle, each
partner took its share of production pro rata; however, provisions in the partnership agreement allowed additional or
reduced production to be delivered under certain circumstances. Prior to the indefinite idle, operations consisted of an
open pit truck and shovel mine, a concentrator that utilizes single stage crushing, AG mills, magnetic separation and
floatation to produce a magnetite concentrate that was then supplied to the on-site pellet plant. From the site, pellets
were transported by CN rail to a ship loading port at Escanaba, Michigan, operated by CN.
Tilden Mine
The Tilden mine is located on the Marquette Iron Range in Michigan’s Upper Peninsula approximately five miles
south of Ishpeming, Michigan. Over the past five years, the Tilden mine has produced between 7.5 million and 7.7 million
long tons of iron ore pellets annually. During 2017, we acquired the remaining 15% equity interest in Tilden owned by
U.S. Steel. With the closing of this transaction, we now have 100% ownership of the mine. We own all of the ore reserves
at the Tilden mine. Operations consist of an open pit truck and shovel mine, a concentrator that utilizes single stage
crushing, AG mills, magnetite separation and floatation to produce hematite and magnetite concentrates that are then
supplied to the on-site pellet plant. From the site, pellets are transported by our LS&I rail to a ship loading port at
Marquette, Michigan, operated by LS&I.
32
Hibbing Mine
The Hibbing mine is located in the center of Minnesota’s Mesabi Iron Range and is approximately ten miles north
of Hibbing, Minnesota, and five miles west of Chisholm, Minnesota. Over the past five years, the Hibbing mine has
produced between 7.7 million and 8.2 million long tons of iron ore pellets annually. We own 23% of Hibbing, a subsidiary
of ArcelorMittal has a 62.3% interest and a subsidiary of U.S. Steel has a 14.7% interest. Each partner takes its share
of production pro rata; however, provisions in the joint venture agreement allow additional or reduced production to be
delivered under certain circumstances. Mining is conducted on multiple mineral leases having varying expiration dates.
Mining leases routinely are renegotiated and renewed as they approach their respective expiration dates. Hibbing
operations consist of an open pit truck and shovel mine, a concentrator that utilizes single stage crushing, AG mills and
magnetic separation to produce a magnetite concentrate, which is then delivered to an on-site pellet plant. From the
site, pellets are transported by BNSF rail to a ship loading port at Superior, Wisconsin, operated by BNSF.
Northshore Mine
The Northshore mine is located in northeastern Minnesota, approximately two miles south of Babbitt, Minnesota,
on the northeastern end of the Mesabi Iron Range. Northshore’s processing facilities are located in Silver Bay, Minnesota,
near Lake Superior. Over the past five years, the Northshore mine has produced between 3.2 million and 5.3 million
long tons of iron ore pellets annually. We ran a three furnace operation throughout 2015 until the complete idle of the
Northshore mine in late November 2015 through May 2016. We restarted all four furnaces in May 2016. The temporary
idle was a result of historic levels of steel imports into the U.S. and reduced demand from our steel-producing customers.
Throughout 2017 the Northshore mine was substantially at full production levels.
The Northshore mine began production under our management and ownership in October 1994. We own 100%
of the mine. Mining is conducted on multiple mineral leases having varying expiration dates. Mining leases routinely
are renegotiated and renewed as they approach their respective expiration dates. Northshore operations consist of an
open pit truck and shovel mine where two stages of crushing occur before the ore is transported along a wholly owned
47-mile rail line to the plant site in Silver Bay. At the plant site, two additional stages of crushing occur before the ore is
sent to the concentrator. The concentrator utilizes rod mills and magnetic separation to produce a magnetite concentrate,
which is delivered to the pellet plant located on-site. The plant site has its own ship loading port located on Lake Superior.
United Taconite Mine
The United Taconite mine is located on Minnesota’s Mesabi Iron Range in and around the city of Eveleth,
Minnesota. The United Taconite concentrator and pelletizing facilities are located ten miles south of the mine, near the
town of Forbes, Minnesota. Over the past five years, the United Taconite mine has produced between 1.5 million and
5.2 million long tons of iron ore pellets annually. United Taconite was temporarily idled beginning in August 2015. We
restarted the United Taconite operation in August 2016. The temporary idle was a result of historic levels of steel imports
into the U.S. and reduced demand from our steel-producing customers. Throughout 2017 the United Taconite mine was
substantially at full production levels.
We own 100% of the United Taconite mine. Mining is conducted on multiple mineral leases having varying
expiration dates. Mining leases routinely are renegotiated and renewed as they approach their respective expiration
dates. United Taconite operations consist of an open pit truck and shovel mine where two stages of crushing occur
before the ore is transported by rail, operated by CN, to the plant site. At the plant site an additional stage of crushing
occurs before the ore is sent to the concentrator. The concentrator utilizes rod mills and magnetic separation to produce
a magnetite concentrate, which is delivered to the pellet plant. From the site, pellets are transported by CN rail to a ship
loading port at Duluth, Minnesota, operated by CN.
33
Asia Pacific Iron Ore
The following map shows the location of our Asia Pacific Iron Ore operation:
In Australia, we own and operate the Koolyanobbing operations. We produced 10.1 million, 11.8 million and
11.7 million metric tons of iron ore products in 2017, 2016 and 2015, respectively.
The mineralization at the Koolyanobbing operations is predominantly hematite and goethite replacements in
greenstone-hosted banded iron formations. Individual deposits tend to be small with complex ore-waste contact
relationships. The reserves at the Koolyanobbing operations are derived from 10 separate mineral deposits distributed
over a 70 mile operating radius.
Mine
Koolyanobbing
Cliffs
Ownership Infrastructure Mineralization
100%
Mine, Road
Haulage,
Crushing-
Screening
Plant
Hematite &
Goethite
Operating
Since
1994
Current
Annual
Capacity1
11.0
2017
Production1
10.1
Mineral
Owned
—%
Rights
Leased
100%
1 Reported on a wet basis in millions of metric tons, equivalent to 2,205 pounds.
Koolyanobbing
The Koolyanobbing operations are located 250 miles east of Perth and approximately 30 miles northeast of the
town of Southern Cross. Koolyanobbing produces lump and fines iron ore. Mining is conducted on multiple mineral
leases having varying expiration dates. Mining leases routinely are renewed as they approach their respective expiration
dates.
Over the past five years, the Koolyanobbing operation has produced between 10.1 million and 11.8 million metric
tons of iron ore products annually. During 2017, ore material was sourced from ten separate open pit mines and was
delivered by typical production trucks or road trains to a crushing and screening facility located at Koolyanobbing. All of
the ore from the Koolyanobbing operations is transported by rail to the Port of Esperance, 360 miles to the south, for
shipment to Asian customers.
34
Mineral Policy
We have a corporate policy prescribing internal controls and procedures with respect to auditing and estimating
of minerals. The procedures contained in the policy include the calculation of mineral estimates at each property by our
engineers, geologists and accountants, as well as third-party consultants. Management compiles and reviews the
calculations, and once finalized, such information is used to prepare the disclosures for our annual and quarterly reports.
The disclosures are reviewed and approved by management, including our chief executive officer and chief financial
officer. Additionally, the long-range mine planning and mineral estimates are reviewed annually by our Audit Committee.
Furthermore, all changes to mineral estimates, other than those due to production, are adequately documented and
submitted to senior operations officers for review and approval. Finally, periodic reviews of long-range mine plans and
mineral reserve estimates are conducted at mine staff meetings, senior management meetings and by independent
experts.
Mineral Reserves
Reserves are defined by SEC Industry Standard Guide 7 as that part of a mineral deposit that could be
economically and legally extracted and produced at the time of the reserve determination. All reserves are classified as
proven or probable and are supported by life-of-mine plans.
Reserve estimates are based on pricing that does not exceed the three-year trailing average index price of iron
ore adjusted to our realized price. We evaluate and analyze mineral reserve estimates in accordance with our mineral
policy and SEC requirements. The table below identifies the year in which the latest reserve estimate was completed.
Property
Date of Latest Economic
Reserve Analysis
U.S. Iron Ore
Tilden
Hibbing
Northshore
United Taconite
Asia Pacific Iron Ore
Koolyanobbing
2015
2015
2015
2016
2013
Ore reserve estimates for our iron ore mines as of December 31, 2017 were estimated from fully designed open
pits developed using three-dimensional modeling techniques. These fully designed pits incorporate design slopes,
practical mining shapes and access ramps to assure the accuracy of our reserve estimates. With the life of mine of the
Koolyanobbing complex nearing an end, we are only reporting reserves at Asia Pacific Iron Ore that are planned to be
extracted. All operations' reserves have been adjusted net of 2017 production.
35
U.S. Iron Ore
All tonnages reported for our U.S. Iron Ore operating segment are in long tons of 2,240 pounds, have been
rounded to the nearest 100,000 and are reported on a 100% basis.
U.S. Iron Ore Mineral Reserves
as of December 31, 2017
(In Millions of Long Tons)
Proven
Probable
Proven & Probable
Saleable Product2,3
Previous Year
Cliffs
Share
Tonnage % Grade
Tonnage % Grade
Tonnage
%
Grade5
Process
Recovery4 Tonnage
Proven
&
Probable
Crude
Ore
Saleable
Product
Property
Tilden1
Hibbing
100%
263.6
23%
154.0
34.7
19.6
24.9
82.7
24.7
557.4
33.9
19.6
24.2
346.3
178.7
793.2
34.5
19.6
24.4
37%
26%
32%
129.2
367.8
136.3
47.2
233.0
61.7
255.9
808.0
261.1
Northshore
100%
235.8
United
Taconite
Totals
100%
413.6
22.6
415.5
21.9
829.1
22.2
32%
264.6
842.8
269.3
1,067.0
1,080.3
2,147.3
696.9
2,251.6
728.4
1 Tilden hematite reported grade is percent FeT; all other properties are percent magnetic iron. During 2017, our ownership interest
in Tilden increased to 100%.
2 Saleable product is a standard pellet containing 60% to 66% Fe calculated from both proven and probable mineral reserves.
3 Saleable product is reported on a dry basis; shipped products typically contain 1% to 4% moisture.
4 Process recovery includes all factors for converting crude ore tonnage to saleable product.
5 Cutoff grades are 15% magnetic iron for Hibbing, 17% for United Taconite, 19% for Northshore. Cutoff for Tilden hematite is 25%
FeT.
Asia Pacific Iron Ore
All tonnages reported for our Asia Pacific Iron Ore operating segment are in metric tons of 2,205 pounds, have
been rounded to the nearest 100,000 and are reported on a 100% basis.
Asia Pacific Iron Ore Mineral Reserves
as of December 31, 2017
(In Millions of Metric Tons)1
Probable
Proven
Proven & Probable
Previous Year Total
Property
Koolyanobbing
Cliffs
Share
100%
Tonnage
% Fe
Tonnage3
1.7
56.5
8.0
% Fe
59.6
Tonnage
9.7
% Fe2
59.1
Tonnage
42.7
1 Tonnages reported are saleable product reported on a dry basis; shipped products contain approximately 5% moisture.
2 Cutoff grade is 54% FeT.
3 Tonnage decreased due to low grade pellet discount increase which reduced the amount of economic tonnage available.
Item 3.
Legal Proceedings
Bluestone Litigation. On April 7, 2017, the Company was served with an Amended Complaint adding Cliffs,
among others, as a defendant to a lawsuit brought by Bluestone Coal Corporation and Double-Bonus Mining Company
against Pinnacle Mining Company, LLC and Target Drilling, Inc. in the U.S. District Court for the Southern District of West
Virginia. The Amended Complaint alleges that the defendants deviated from plans authorized by plaintiffs and U.S. Mine
Safety and Health Administration in the drilling of a borehole in 2013 and 2014 at the Pinnacle mine and through an
inactive portion of plaintiffs’ mine. Plaintiffs further allege negligence and trespass in the drilling of the borehole and
claim compensatory and punitive damages due to flooding. Cliffs denies it has any liability in connection with plaintiffs'
claims and intends to vigorously defend the lawsuit.
36
CCAA Proceedings. Refer to NOTE 20 - COMMITMENTS AND CONTINGENCIES for a description of the CCAA
Proceedings underway with respect to the Bloom Lake Group and the Wabush Group. Such description is incorporated
by reference into this Item 3.
ERISA Litigation. On May 14, 2015, a lawsuit was filed in the U.S. District Court for the Northern District of Ohio
captioned Paul Saumer, individually and on behalf of all others similarly situated, v. Cleveland-Cliffs Inc., et al., No. 1:15-
CV-00954. This action was purportedly brought on behalf of the Northshore and Silver Bay Power Company Retirement
Savings Plan (the "Plan") and certain participants and beneficiaries of the Plan during the class period, defined in the
complaint as April 2, 2012 to the present, against Cleveland-Cliffs Inc., its investment committee, Northshore, the
Employee Benefits Administration Department of Northshore, and certain current and former officers. Plaintiff amended
the complaint to name as defendants additional current and former employees who served on the investment committee.
The suit alleged that the defendants breached their duties to the plaintiffs and the Plan in violation of ERISA fiduciary
rules by, among other things, continuing to offer and hold Cleveland-Cliffs Inc. stock as a Plan investment option during
the class period. The relief sought included a request for a judgment ordering the defendants to make good to the Plan
all losses to the Plan resulting from the alleged breaches of fiduciary duties. On April 1, 2016, the Court granted defendants'
motion to dismiss the lawsuit, which dismissal the Sixth Circuit Court of Appeals affirmed on April 1, 2017. All deadlines
for further appeals have passed and this matter is closed.
Exchange Offer Litigation. On March 14, 2016, a putative class action was filed in the U.S. District Court for the
Southern District of New York captioned Waxman, et al. v. Cleveland-Cliffs Inc., No. 1:16-cv-01899. Generally, the lawsuit
alleged that the exchange offers for certain of our existing senior notes announced on January 27, 2016 violated the
Trust Indenture Act of 1939 (the "TIA") and breached the indentures governing the senior notes subject to the exchange
offers because the exchange offers were offered only to certain noteholders that were qualified institutional buyers
("QIBs") and not to non-QIBs. The suit sought class certification with respect to non-QIB noteholders of the 5.90% 2020
Senior Notes and the 6.25% 2040 Senior Notes (collectively, the “Class Notes”), which QIBs were permitted to exchange
for newly-issued 1.5 Lien Notes. Plaintiffs alleged that the exchange offers had the effect of subordinating their Class
Notes to those of the QIBs who elected to exchange their notes and also impaired the Plaintiffs’ rights to receive payment
of the principal and interest under the Class Notes and to institute suit to compel such payment. In addition to alleged
violation of the TIA and breach of contract, Plaintiffs sought unspecified damages for breach of the implied covenant of
good faith and fair dealing and unjust enrichment, and also sought declaratory judgment that the exchange offers were
null and void. On May 16, 2016, we filed a motion to dismiss this lawsuit, which was granted on December 6, 2016. All
deadlines for further appeals have passed and this matter is closed.
Mesabi Metallics Adversary Proceeding. On September 7, 2017, Mesabi Metallics Company LLC (f/k/a Essar
Steel Minnesota LLC) filed a complaint against Cleveland-Cliffs Inc. in the Essar Steel Minnesota LLC and ESML Holdings
Inc. bankruptcy proceeding that is pending in the United States Bankruptcy Court, District of Delaware. Mesabi Metallics
alleges tortious interference with its contractual rights and business relations involving certain vendors, suppliers and
contractors, violations of federal and Minnesota antitrust laws through monopolization, attempted monopolization and
restraint of trade, violation of the automatic stay, and civil conspiracy with unnamed defendants. Mesabi Metallics
amended the complaint to add additional defendants Cleveland-Cliffs Minnesota Land Development Company ("Cliffs
Minnesota Land") and Glacier Park Iron Ore Properties LLC ("GPIOP") and has asserted various claims relating to Cliffs
Minnesota Land's acquisition of a combination of GPIOP's undivided and whole fee interests as well as mineral and
surface leases, a portion of which were formerly leased by GPIOP to Mesabi Metallics. The amended complaint also
includes claims related to avoidance and recovery of unauthorized post-petition transfers, claims disallowance, civil
contempt and civil conspiracy. Mesabi Metallics seeks, among other things, unspecified damages, declaratory judgment,
and injunctive relief. We believe the claims are unmeritorious and intend to vigorously defend the lawsuit.
Michigan Electricity Matters. See NOTE 20 - COMMITMENTS AND CONTINGENCIES for a description of the
FERC proceedings to determine, among other things, allocation of SSR costs, whether retroactive surcharges are
permissible and the total amount of SSR compensation, all of which are currently subject to appeal. Such description is
incorporated by reference into this Item 3.
Taconite MACT Compliance Review. EPA Region 5 issued Notices of Violation during the first quarter of 2014
to Empire, Tilden and United Taconite related to alleged historical violations of the Taconite MACT rule and certain
elements of the respective state-issued Title V operating permits. For issues not already resolved, the facilities continue
to implement actions that mitigate any future exposures. EPA has proposed, and Cliffs has agreed to, a tolling agreement
which targeted a completion of the enforcement action by June 6, 2018. Based on current information, Cliffs anticipates
the final settlement for alleged exceedances at United Taconite to be resolved by consent decree with a total penalty of
no more than $0.3 million to be comprised of a combination of cash penalty and a supplemental environmental project.
EPA has not yet shared draft settlement documents for Empire or Tilden, but Cliffs anticipates receiving them early in
2018. This enforcement matter is not anticipated currently to have a material adverse impact on our business.
37
Wabush Pensioners Matter. A complaint time-stamped May 31, 2017 was filed in the Supreme Court of
Newfoundland and Labrador, Trial Division (General) captioned Johnson, et al. v. Cliffs Mining Company, et al. against
Cliffs Natural Resources Inc., Cliffs Mining Company, and certain former and current officers, directors and employees,
on behalf of all non-union employees and retirees of Wabush Mines, seeking, among other things, various declarations
and damages relating to the “Contributory Salaried Plan for Salaried Employees of Wabush Mines, Cliffs Mining Company,
Managing Agent, Arnaud Railway Company and Wabush Lake Railway Company, Limited”. A separate complaint
captioned Skinner, et al. v. Cliffs Mining Company, et al. was apparently filed on or about June 23, 2017 in the same
court against the same defendants alleging substantially the same allegations on behalf of certain USW union employees
and retirees of Wabush Mines, seeking similar relief. We object to the validity of these claims and will vigorously defend
as necessary.
Item 4.
Mine Safety Disclosures
We are committed to protecting the occupational health and well-being of each of our employees. Safety is one
of our core values, and we strive to ensure that safe production is the first priority for all employees. Our internal objective
is to achieve zero injuries and incidents across the Company by focusing on proactively identifying needed prevention
activities, establishing standards and evaluating performance to mitigate any potential loss to people, equipment,
production and the environment. We have implemented intensive employee training that is geared toward maintaining
a high level of awareness and knowledge of safety and health issues in the work environment through the development
and coordination of requisite information, skills and attitudes. We believe that through these policies, we have developed
an effective safety management system.
Under the Dodd-Frank Act, each operator of a coal or other mine is required to include certain mine safety results
within its periodic reports filed with the SEC. As required by the reporting requirements included in §1503(a) of the Dodd-
Frank Act and Item 104 of Regulation S-K, the required mine safety results regarding certain mining safety and health
matters for each of our mine locations that are covered under the scope of the Dodd-Frank Act are included in Exhibit
95 of Item 15. Exhibits and Financial Statement Schedules of this Annual Report on Form 10-K.
38
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
PART II
Stock Exchange Information
Our common shares (ticker symbol CLF) are listed on the NYSE.
Common Share Price Performance and Dividends
The following table sets forth, for the periods indicated, the high and low sales prices per common share as
reported on the NYSE:
2017
2016
High
Low
High
Low
First Quarter
$
Second Quarter
Third Quarter
Fourth Quarter
Year
$
12.37
9.06
8.77
7.73
12.37
$
7.70
5.56
6.45
5.60
5.56
$
3.75
5.83
8.45
10.90
10.90
1.20
2.77
5.19
4.91
1.20
At February 12, 2018, we had 1,210 shareholders of record.
We did not declare or pay any cash dividends on our common shares during the years ended December 31, 2017
or 2016. Any determination to pay dividends on our common shares in the future will be at the discretion of our Board
of Directors and dependent upon then-existing conditions, including our operating results and financial condition, capital
requirements, contractual restrictions, business prospects and other factors that our Board of Directors may deem
relevant. Additionally, the agreement governing our ABL Facility contains, and agreements governing any of our future
debt may contain, covenants and other restrictions that, in certain circumstances, could limit the level of dividends that
we are able to pay on our common shares. There can be no assurance that we will pay a dividend in the future.
39
Shareholder Return Performance
The following graph shows changes over the past five-year period in the value of $100 invested in: (1) Cliffs'
common shares; (2) S&P 500 Stock Index; (3) S&P Total Market Index; and (4) S&P Metals and Mining Select Industry
Index. The values of each investment are based on price change plus reinvestment of all dividends reported to
shareholders, based on monthly granularity.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2017
250.00
200.00
150.00
100.00
50.00
0.00
2012
2013
2014
2015
2016
2017
Cleveland-Cliffs Inc.
S&P 500 Index
S&P Total Market Index
S&P Metals and Mining Select Industry Index
Cleveland-Cliffs Inc.
Return %
Cum $
S&P 500 Index - Total Returns Return %
S&P Total Market Index
S&P Metals and Mining
Cum $
Return %
Cum $
Return %
Cum $
2012
—
100.00
—
100.00
—
100.00
—
100.00
2013
(30.17)
69.83
32.36
132.36
33.37
133.37
(5.35)
94.65
2014
(71.56)
19.86
13.65
150.43
12.43
149.95
(25.63)
70.39
2015
(77.87)
4.39
1.38
152.50
0.46
150.64
(50.76)
34.66
2016
432.28
23.39
11.93
170.70
12.62
169.65
105.09
71.09
2017
(14.27)
20.06
21.80
207.91
21.13
205.49
20.61
85.74
40
Issuer Purchases of Equity Securities
The following table presents information with respect to repurchases by us of our common shares during the
periods indicated:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Shares
(or Units)
Purchased1
Average Price
Paid per Share
(or Unit)
1,259 $
— $
735,387 $
736,646 $
7.15
—
6.71
6.71
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
—
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet be
Purchased Under the
Plans or Programs
—
—
—
—
—
—
—
Period
October 1 - 31, 2017
November 1 - 30, 2017
December 1 - 31, 2017
Total
1 These shares were delivered to us to satisfy tax withholding obligations due upon the vesting or payment of stock awards.
41
Item 6.
Selected Financial Data
Summary of Financial and Other Statistical Data - Cleveland-Cliffs Inc. and Subsidiaries
Financial data (in millions, except per share amounts) *
Revenue from product sales and services
$
2,330.2
$
2,109.0
$
2,013.3
$ 3,373.2
$ 3,890.8
Cost of goods sold and operating expenses
(1,828.5)
(1,719.7)
(1,776.8)
(2,487.5)
(2,406.4)
2017 (a)
2016 (b)
2015 (c)
2014 (d)
2013 (e)
Other operating expense
Operating income
Income from continuing operations
Loss from discontinued operations, net of tax
Net income (loss)
Loss (income) attributable to noncontrolling interest
Net income (loss) attributable to Cliffs shareholders
Preferred stock dividends
Income (loss) attributable to Cliffs common shareholders
Earnings (loss) per common share attributable to
Cliffs common shareholders - basic
Continuing operations
Discontinued operations
Earnings (loss) per common share attributable to
Cliffs common shareholders - basic
Earnings (loss) per common share attributable to
Cliffs common shareholders - diluted
Continuing operations
Discontinued operations
Earnings (loss) per common share attributable to
Cliffs common shareholders - diluted
Total assets
Long-term debt obligations (including capital leases)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Distributions to preferred shareholders cash dividends (f)
- Per depositary share
- Total
Distributions to common shareholders cash dividends (g)
- Per share
- Total
Common shares outstanding - basic (millions)
- Average for year
- At year-end
(78.1)
423.6
381.8
(18.7)
363.1
3.9
367.0
—
367.0
1.34
(0.06)
1.28
1.32
(0.06)
1.26
2,953.4
2,335.1
338.1
(156.0)
498.9
(148.5)
240.8
219.2
(19.9)
199.3
(25.2)
174.1
—
174.1
0.98
(0.10)
0.88
0.97
(0.10)
0.87
1,923.9
2,213.5
303.0
(57.9)
(206.4)
$
$
$
$
$
$
$
$
$
$
— $
— $
— $
— $
—
—
—
—
288.4
297.4
197.7
233.1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Iron ore production and sales statistics
(long tons in millions - U.S. Iron Ore; metric tons in millions - Asia Pacific Iron Ore)
Production tonnage - U.S. Iron Ore
- U.S. Iron Ore (Cliffs' share)
- Asia Pacific Iron Ore
Sales tonnage - U.S. Iron Ore
- Asia Pacific Iron Ore
25.5
18.8
10.1
18.7
9.8
23.4
16.0
11.8
18.2
11.6
(85.2)
151.3
143.7
(892.1)
(748.4)
(0.9)
(749.3)
(38.4)
(755.6)
130.1
56.4
(8,368.0)
(8,311.6)
1,087.4
(7,224.2)
(51.2)
(104.1)
1,380.3
878.9
(517.1)
361.8
51.7
413.5
(48.7)
(787.7)
$ (7,275.4)
$
364.8
0.63
$
(0.14)
(5.77)
(47.38)
(5.14)
$
(47.52)
0.63
$
(0.14)
(5.76)
(47.38)
(5.13)
$
(47.52)
$
$
$
$
5.37
(2.97)
2.40
4.95
(2.58)
2.37
2,135.5
2,755.6
37.9
(103.2)
61.0
1.32
38.4
—
—
153.2
153.6
26.1
19.3
11.7
17.3
11.6
$ 3,147.2
$ 13,102.9
$ 2,911.5
$ 2,968.4
$
$
$
$
$
$
$
358.9
$ 1,145.9
(103.6)
(288.3)
1.76
51.2
0.60
92.5
153.1
153.2
29.7
22.4
11.4
21.8
11.5
$
$
$
$
$
$
(811.3)
(171.9)
1.66
48.7
0.60
91.9
151.7
153.1
27.2
20.3
11.1
21.3
11.0
42
* Management determined as of March 31, 2015, that our North American Coal operating segment met the criteria to be classified as held for sale
under ASC 205, Presentation of Financial Statements. The North American Coal segment continued to meet the criteria throughout 2015 until
we sold our North American Coal operations during the fourth quarter of 2015. As such, all current and historical North American Coal operating
segment results are included in our financial statements and classified within discontinued operations. On January 27, 2015, we announced that
Bloom Lake General Partner Limited and certain of its affiliates, including Cliffs Quebec Iron Mining ULC, which we refer to collectively as the
Bloom Lake Group, commenced restructuring proceedings, in Montreal, Quebec under the CCAA to address the Bloom Lake Group's immediate
liquidity issues and to preserve and protect its assets for the benefit of all stakeholders while restructuring and/or sale options were explored. At
that time, the Bloom Lake Group was no longer generating revenues and was not able to meet its obligations as they came due. As part of the
CCAA process, the court approved the appointment of a Monitor and certain other financial advisors. Additionally, on May 20, 2015, the Wabush
Iron Co. Limited and Wabush Resources Inc., and certain of their affiliates, including Wabush Mines (an unincorporated joint venture of Wabush
Iron Co. Limited and Wabush Resources Inc.), Arnaud Railway Company and Wabush Lake Railway Company, which we refer to collectively as
the Wabush Group, commenced restructuring proceedings in Montreal, Quebec under the CCAA. The Wabush Group was no longer generating
revenues and was not able to meet its obligations as they came due. As a result of this action, the protection granted to the Bloom Lake Group
was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. The Monitor appointed
by the court in the CCAA proceeding for the Bloom Lake Group has also been appointed by the court as the Monitor in the CCAA proceeding
for the Wabush Group. Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush Groups and subsequent
expenses directly associated with the Bloom Lake and Wabush Groups and certain other wholly-owned Canadian subsidiaries are included in
our financial statements and classified within discontinued operations.
(a) During 2017, we issued 63.25 million common shares in an underwritten public offering. We received net proceeds of $661.3 million at a public
offering price of $10.75 per common share. The net proceeds from the issuance of our common shares and the net proceeds from the issuance
of $1.075 billion 5.75% 2025 Senior Notes were used to redeem in full all of our outstanding 8.25% 2020 First Lien Notes, 8.00% 2020 1.5 Lien
Notes and 7.75% 2020 Second Lien Notes. Additionally, through tender offers, we purchased certain of our 5.90% 2020 Senior Notes, our 4.80%
2020 Senior Notes and our 4.875% 2021 Senior Notes. The aggregate principal amount outstanding of debt redeemed was $1.611 billion, which
resulted in a loss on extinguishment of $165.4 million. During 2017, our ownership interest in Empire increased to 100% as we reached an
agreement to distribute the noncontrolling interest net assets of $132.7 million to ArcelorMittal, in exchange for its interest in Empire. We also
acquired the remaining 15% equity interest in Tilden Mining Company L.C. owned by United States Steel Corporation for $105.0 million. Prior
to the end of the year Public Law 115–97, commonly known as the “Tax Cuts and Jobs Act”, was signed into law and among other items repeals
the corporate AMT and will reduce the federal corporate tax rate to 21% for tax years beginning January 1, 2018. Along with the repeal of AMT,
Public Law 115–97 provides that existing AMT credit carryovers are refundable beginning with the filing of the calendar year 2018 tax return. We
have $235.3 million of AMT credit carryovers that are expected to be fully refunded between 2019 and 2022.
(b) During 2016, we recorded a net gain of $166.3 million related to debt restructuring activities that occurred throughout the year, including the
issuance of $218.5 million aggregate principal of 8.00% 2020 1.5 Lien Notes in exchange for $512.2 of our existing senior notes, the issuance
of an aggregate of 8.2 million common shares in exchange for $56.9 million aggregate principal amount of our existing senior notes and a loss
on the redemption of the full $283.6 million outstanding of our 3.95% 2018 Senior Notes at a total redemption price of $301.0 million. We also
issued 44.4 million common shares in an underwritten public offering. We received net proceeds of $287.6 million at a public offering price of
$6.75 per common share.
(c) On January 27, 2015, we announced the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec under the CCAA.
Additionally, on May 20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. As a result of
this action, the CCAA protections granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization
of each of their businesses and operations. Consistent with our strategy to extract maximum value from our current assets, on December 22,
2015, we sold our equity interests in all the remaining North American Coal operations to Seneca. The sale included the Pinnacle mine in West
Virginia and the Oak Grove mine in Alabama. Additionally, Seneca may pay Cliffs an earn-out of up to $50 million contingent upon the terms of
a revenue sharing agreement, which extends through the year 2020. As noted above, all current and historical North American Coal operating
segment results are included in our financial statements and classified within discontinued operations.
(d) During 2014, we recorded an impairment of goodwill and other long-lived assets of $635.5 million. The goodwill impairment charge of $73.5
million related to our Asia Pacific Iron Ore reporting unit. There were also other long-lived asset impairment charges of $562.0 million related to
our continuing operations including the Asia Pacific Iron Ore operating segment and our Other reportable segments. The other long-lived asset
impairment charges which related to our discontinued operations were $8,394.4 million related to our Wabush operation and Bloom Lake operation
within our Eastern Canadian Iron Ore operating segment, and our CLCC thermal operation, Oak Grove operation and Pinnacle operation within
our North American Coal operating segment, along with impairments charged to reporting units within our other reportable segments. The
impairment charges were primarily a result of changes in life-of-mine cash flows due to declining pricing for both global iron ore and low-volatile
metallurgical coal, which impacts our estimate of long-term pricing, along with changes in strategic focus including exploratory phases of possible
divestiture of the operations as the new Chief Operating Decision Maker viewed Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American
Coal and Ferroalloys as non-core assets. The CLCC assets were sold in the fourth quarter of 2014 on December 31, 2014, resulting in a loss
on sale of $419.6 million. As noted above, all current and historical North American Coal operating segment results are included in our financial
statements and classified within discontinued operations.
(e) Upon performing our annual goodwill impairment test in the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded
for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. We also recorded other
long-lived asset impairment charges of $169.9 million, of which $154.6 million relates to our Wabush reporting unit within our Eastern Canadian
Iron Ore operating segment to reduce those assets to their estimated fair value as of December 31, 2013. These reporting units were included
within the entities under the CCAA filing. As noted above, financial results prior to the respective deconsolidations of the Bloom Lake and Wabush
Groups and subsequent expenses directly associated with the Canadian Entities are included in our financial statements and classified within
discontinued operations.
(f) On March 20, 2013, our Board of Directors declared a cash dividend of $13.6111 per preferred share, which is equivalent to $0.34 per depositary
share. The cash dividend was paid on May 1, 2013, to our preferred shareholders of record as of the close of business on April 15, 2013. On
May 7, 2013, September 9, 2013, and November 11, 2013, our Board of Directors declared a quarterly cash dividend of $17.50 per preferred
share, which is equivalent to $0.44 per depositary share. The cash dividends were paid on August 1, 2013, November 1, 2013, and February 3,
2014 to our preferred shareholders of record as of the close of business on July 15, 2013, October 15, 2013, and January 15, 2014, respectively.
On February 11, 2014, May 13, 2014, September 8, 2014, and November 19, 2014, our Board of Directors declared a quarterly cash dividend
of $17.50 per preferred share, which is equivalent to $0.44 per depositary share. The cash dividends were paid on May 1, 2014, August 1, 2014,
November 3, 2014, and February 2, 2015, to our preferred shareholders of record as of the close of business on April 15, 2014, July 15, 2014,
October 15, 2014, and January 15, 2015, respectively. On March 27, 2015, July 1, 2015, and September 10, 2015, our Board of Directors declared
the quarterly cash dividend of $17.50 per preferred share, which is equivalent to $0.44 per depositary share. The cash dividend was paid on May
1, 2015, August 3, 2015, and November 2, 2015 to our shareholders of record as of the close of business on April 15, 2015, July 15, 2015, and
October 15, 2015, respectively. On January 4, 2016, we announced that our Board of Directors determined the final quarterly dividend of our
preferred shares would not be paid in cash, but instead, pursuant to the terms of the preferred shares, the conversion rate was increased such
that holders of the preferred shares received additional common shares in lieu of the accrued dividend at the time of the mandatory conversion
of the preferred shares on February 1, 2016. The number of our common shares in the aggregate issued in lieu of the dividend was 1.3 million.
This resulted in an effective conversion rate of 0.9052 common shares, rather than 0.8621 common shares, per depositary share, each representing
1/40th of a preferred share. Upon conversion on February 1, 2016, an aggregate of 26.5 million common shares were issued, representing 25.2
million common shares issuable upon conversion and 1.3 million that were issued in lieu of a final cash dividend.
43
(g) On February 11, 2013, our Board of Directors approved a reduction to our quarterly cash dividend rate by 76% to $0.15 per share. The decreased
dividend of $0.15 per share was paid on March 1, 2013, June 3, 2013, September 3, 2013, and December 2, 2013 to our common shareholders
of record as of the close of business on February 22, 2013, May 17, 2013, August 15, 2013, and November 22, 2013, respectively. Additionally,
in 2014, the dividend of $0.15 per share was paid on March 3, 2014, June 3, 2014, September 2, 2014 and December 1, 2014 to our common
shareholders of record as of the close of business on February 21, 2014, May 23, 2014, August 15, 2014, and November 15, 2014, respectively.
On January 26, 2015, we announced that our Board of Directors had decided to eliminate the quarterly dividend of $0.15 per share on our
common shares. The decision was applicable to the first quarter of 2015 and all subsequent quarters.
44
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed
to provide a reader of our financial statements with a narrative from the perspective of management on our financial
condition, results of operations, liquidity and other factors that may affect our future results. The following discussion
should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this
document.
Industry Overview
The key driver of our business is demand for steelmaking raw materials from U.S. steelmakers. During 2017,
the U.S. produced approximately 82 million metric tons of crude steel, which is up 4% when compared to 2016, or about
5% of total global crude steel production. U.S. total steel capacity utilization was approximately 74% during 2017, which
is an approximate 3% increase from 2016. Additionally, during 2017, China produced approximately 832 million metric
tons of crude steel, or approximately 50% of total global crude steel production. These figures represent an approximate
6% increase in Chinese crude steel production when compared to 2016. Throughout 2017, global crude steel production
increased about 5% compared to 2016.
The Platts 62% Price increased 22% to an average price of $71 per metric ton for the year ended December 31,
2017 compared to 2016. Volatility in the iron ore price impacts our realized revenue rates at each of our segments to
varying extents, but our revenue realizations are not fully correlated. Pricing mechanisms in our U.S. Iron Ore contracts
reference this metric, but build in reasonable protection from swings in volatility. Asia Pacific Iron Ore revenue rates do
not see a full correlation to the Platts 62% Price due to the discounts on the lower iron content of the ore sold there.
We recognize the volatility of iron ore supply-demand dynamics and that changes in behaviors of the major iron
ore producers and/or Chinese steelmakers could either lift or put pressure on iron ore prices in the near term. During
2017, we were generally pleased with both the signs of supply discipline from the major iron ore mining companies and
record levels of Chinese steel production. We expect the healthy dynamics to continue through at least the beginning
of 2018.
We have also noticed vastly improved demand for higher grade iron ore products, typically those of benchmark
grade (62% iron content) and above, as Chinese mills put more emphasis on the productive and environmentally friendly
nature of these ores. Assuming the margins at Chinese mills remain strong and the government continues to crack down
on pollution, we believe that the mills will favor benchmark quality ore, placing additional pricing pressure on lower quality
ore. This flight to quality has also manifested itself in increased pellet premiums throughout the world during 2017. The
Atlantic Basin pellet premium, another important pricing factor in our U.S. Iron Ore contracts, averaged $45 per metric
ton in 2017, a 42% increase compared to 2016. We believe this market will remain tight during 2018, thus supporting
multi-year high premiums for pellet products.
The price for domestic hot-rolled coil steel, which is an important attribute in the calculation of supplemental
revenue in one of our customer supply agreements, averaged $620 per net ton in 2017, 18% higher compared to last
year. Despite the decrease in U.S. automobile demand this year, the domestic price environment has recovered due to
supply-side discipline and improved U.S. manufacturing output. In addition, steel market reform in China has kept foreign
steel prices high, thus making imports of hot-rolled coil steel into the U.S. less attractive. As a result, we remain positive
on our outlook for this market.
Our consolidated revenues were $2.3 billion and $2.1 billion for the years ended December 31, 2017 and 2016,
respectively, with net income from continuing operations per diluted share of $1.32 and $0.97, respectively. Net income
from continuing operations for 2017 was positively impacted by an income tax benefit of $252.4 million primarily as a
result of tax reform legislation. In addition, sales margin increased by $112.4 million in the year ended December 31,
2017 when compared to 2016, primarily driven by the increase in revenue from higher overall average realized product
revenue rates and higher sales volumes at our U.S. Iron Ore operations. Net income from continuing operations was
negatively impacted as a result of losses on extinguishment of debt of $165.4 million in the year ended December 31,
2017, while the year ended December 31, 2016 was positively impacted as a result of gains on extinguishment/
restructuring of debt of $166.3 million.
45
Strategy
We are Focused on Protecting our Core U.S. Iron Ore Business
We are the market-leading iron ore producer in the U.S., supplying differentiated iron ore pellets under long-
term contracts to major North American blast furnace steel producers. We have the unique advantage of being a low-
cost, high-quality producer of iron ore pellets in the Great Lakes market with significant transportation and logistics
advantages to serve the Great Lakes steel market effectively. The pricing structure and long-term nature of our existing
contracts, along with our low-cost operating profile, position U.S. Iron Ore as a strong cash flow generator in most
commodity pricing environments. Since instituting our strategy in 2014 of focusing on this core business, we have achieved
significant accomplishments, including providing volume certainty by signing a ten-year supply agreement with our largest
customer; substantially reducing operating costs by making operational improvements; and developing new pellet
products to meet ever-evolving market demands.
We recognize the importance of our strength in the U.S. Iron Ore business, and our top strategic priority is to
protect and enhance our market position. This involves continuing to deliver high-quality, custom-made pellets that allow
our customers to remain competitive in the quality, production efficiency, and environmental friendliness of their steel
products. Protecting the core business also involves continually evaluating opportunities to expand both our production
capacity and ore reserve life. In 2017, we achieved key accomplishments toward these goals by acquiring the remaining
minority stake in our Tilden and Empire mines as well as additional real estate interests in Minnesota.
Expanding our Customer Base
While we hold a strong market position in supplying iron ore to Great Lakes blast furnaces, we cannot ignore
the ongoing shift of steelmaking share in the U.S. away from our core blast furnace customers to EAF steelmakers. Over
the past 25 years, the market share of EAFs has nearly doubled. However, as EAFs have moved to higher value steel
products, they require more high-quality iron ore-based metallics instead of scrap as raw material feedstock. As a result
of this trend, one of our top strategic priorities is to become a critical supplier of the EAF market by providing these
specialized metallics. In June 2017, we announced the planned construction of an HBI production plant in Toledo, Ohio.
HBI is a specialized high-quality iron alternative to scrap that, when used as a feedstock, allows the EAF to produce
more valuable grades of steel. We expect our HBI to partially replace the over 3 million metric tons of ore-based metallics
that are imported into the Great Lakes every year from Russia, Ukraine, Brazil and Venezuela.
Our Toledo plant is expected to produce HBI at a rate of 1.6 million metric tons per year when brought to production
in 2020. We expect that this will create additional demand for our DR-grade pellets of 2.5 million long tons. Not only
does this production plant create another outlet for our high-margin pellets, but it also presents an attractive economic
opportunity for us. As the only producer of DR-grade pellets in the Great Lakes and with access to abundant, low-cost
natural gas, we will be in a unique position to serve clients in the region. In addition, the Toledo site is in close proximity
to over 20 EAFs, giving us a natural competitive freight advantage over import competitors.
Optimized, Divested or Shut Down All Non-Core Business Segments
Given the current price discounting environment for low-grade iron ore products containing less than 62% Fe,
we are focused on optimizing the remaining ore reserve base of our Asia Pacific Iron Ore business. We will continue to
operate Asia Pacific Iron Ore with very low total capital expenditures until we cease mining operations, which we expect
to occur at some point during 2018.
Restructuring proceedings were commenced under the CCAA for the Bloom Lake Group, part of our Eastern
Canadian Iron Ore businesses, in the first quarter of 2015. During the second quarter of 2015, the CCAA protection
granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of
their businesses and operations. As of December 31, 2017, CCAA proceedings are still ongoing. The Monitor appointed
by the court in the CCAA proceedings for the Bloom Lake Group and the Wabush Group has conducted a claims process
pursuant to which creditors have filed claims against the Bloom Lake Group and the Wabush Group. The Monitor is
reviewing all claims filed as part of this claims process. Currently, there is uncertainty as to the amount of the distribution
that will be made to the creditors of the Bloom Lake Group and the Wabush Group, including, if any, to us, and whether
we could be held liable for claims that may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group
or by their respective representatives against non-debtor affiliates of the Bloom Lake Group and the Wabush Group.
During 2017, we became aware that it was probable the Monitor will assert a preference claim against us and/or certain
of our affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an estimated liability
of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group and the Wabush
Group. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount in excess of the
46
value of our related-party claims against the Bloom Lake Group and the Wabush Group. Thus, it is possible that a change
in the estimated liability may occur in the future. We deny liability for any amount and will vigorously defend such claim.
On December 22, 2015, we closed the sale of our remaining North American Coal business, which included the
Pinnacle mine in West Virginia and the Oak Grove mine in Alabama, to Seneca. The sale marked our exit from the coal
business and represented another very important step in the implementation of our U.S. Iron Ore pellet-centric strategy.
Prior to this sale, it was determined by management as of March 31, 2015 that our North American Coal operating
segment met the criteria to be classified as held for sale under ASC 205, Presentation of Financial Statements.
Maintaining Discipline on Costs and Capital Spending and Improving our Financial Flexibility
We believe our ability to execute our strategy is dependent on our improving financial position, balance sheet
strength and financial flexibility, which will enable us to manage through the inherent cyclical demand for our products
and volatility in commodity prices. Our streamlined organization and support functions are well-aligned to best serve
our strategic direction. Our capital allocation plan is focused on strengthening and protecting our core U.S. Iron Ore
operations and expanding our customer base.
As the implementation of our strategy has strengthened the business, we have put additional emphasis on the
continued improvement of our balance sheet via continued reduction of long-term debt. Since the middle of 2014, we
have reduced the principal of our debt by 15% and decreased our average cost of debt to 5% by using various liability
management strategies consistent with our capital allocation priorities and our stated objective of improving the strength
of our balance sheet and simplifying the capital structure. Given the cyclical nature of our business, we will continue to
be opportunistic in managing our balance sheet and capital structure, which will put us in an optimal position to manage
through any commodity environment, and we continue to seek the best opportunities to accomplish this.
Competitive Strengths
Resilient U.S. Iron Ore Operations
The U.S. Iron Ore segment is the primary contributor to our consolidated results, generating $1,866.0 million of
consolidated revenue and $559.4 million of consolidated Adjusted EBITDA for the year ended December 31, 2017. U.S.
Iron Ore produces differentiated iron ore pellets that are customized for use in customers’ blast furnaces as part of the
steelmaking process. The grades of pellets currently delivered to each customer are based on that customer’s
preferences, which depend in part on the characteristics of the customer’s blast furnace operation. We believe our long
history of supplying customized pellets to the U.S. steel producers has resulted in a co-dependent relationship between
us and our customers. This technical and operational co-dependency has enabled us to claim a substantial portion of
the total U.S. iron ore market. Based on our equity ownership in our U.S. mines, our share of the annual rated production
capacity is 21.2 million long tons, representing 42% of total U.S. annual pellet capacity. Long-lived assets with an average
mine life of approximately 30 years provide the opportunity to maintain our significant market position well into the future.
We believe U.S. Iron Ore is uniquely positioned in the global iron ore market due to its muted exposure to
seaborne iron ore pricing. More than half of U.S. Iron Ore production is sold through long-term contracts that are structured
with various formula-based pricing mechanisms that reference spot iron ore pricing, domestic steel prices, and Atlantic-
based pellet premiums, among other items, and mitigate the impact of any one factor's price volatility on our business.
In addition, we maintain a freight advantage compared to our competition as a result of our proximity to U.S.
steelmaking operations. The Great Lakes market is largely isolated and difficult to enter. Our costs are lower as a result
of inherent transportation advantages associated with our mine locations near the Great Lakes, which allows for
transportation via railroads and loading ports. U.S. Iron Ore mines also benefit from on-site pellet production and ore
production facilities located a short distance from the mines.
Recent Developments
On December 22, 2017, President Trump signed into law “Public Law 115–97”, commonly known as the “Tax
Cuts and Jobs Act”, which, among other things, repeals the corporate AMT and will reduce the federal corporate tax rate
to 21% for tax years beginning January 1, 2018. Along with the repeal of AMT, Public Law 115–97 provides that existing
AMT credit carryovers are refundable beginning with the filing of the calendar year 2018 tax return. We have $235.3
million of AMT credit carryovers that are expected to be fully refunded between 2019 and 2022. The tax reform legislation
is a comprehensive bill containing several other provisions, such as limitations on the deductibility of interest expense
and certain executive compensation, that are not expected to have a material effect on us due to our large net operating
loss position, our ability to access the historic losses with no limitations as described in Public Law 115–97, and our full
47
valuation allowance position. The ultimate impact of the tax reform legislation may differ from our current estimates due
to changes in the interpretations and assumptions made as well as additional regulatory guidance that may be issued.
During the fourth quarter of 2017, we completed an acquisition of certain real estate interests located in Itasca
County west of Nashwauk, Minnesota from Glacier Park Iron Ore Properties LLC. The interests include a combination
of undivided and whole fee interests as well as mineral and surface leases, all lying within the Biwabik Iron Formation.
The acreage acquired is approximately 553 acres and the acreage being leased is approximately 3,215 acres.
We completed an issuance of $400.0 million aggregate principal amount of 4.875% 2024 Senior Secured Notes
in a private transaction exempt from the registration requirements of the Securities Act on December 19, 2017. In addition,
we issued $316.25 million aggregate principal amount of 1.50% 2025 Convertible Senior Notes. We intend to use the
net proceeds from these offerings to fund a substantial portion of our HBI project in Toledo, Ohio, for upgrades at the
Northshore plant to enable it to produce significantly increased levels of DR-grade pellets that could be used as feedstock
for the HBI production plant and/or sold commercially and general corporate purposes.
Business Segments
The Company’s primary continuing operations are organized and managed according to product category and
geographic location: U.S. Iron Ore and Asia Pacific Iron Ore.
Results of Operations – Consolidated
2017 Compared to 2016
On January 25, 2018, we furnished a Current Report on Form 8-K to the SEC that included a news release
issued that same day announcing the fourth-quarter and full-year financial results for the period ended December 31,
2017, which was furnished as Exhibit 99.1 thereto (the Earnings Release). The Earnings Release reported: (a) net
income attributable to Cliffs shareholders of $317.8 million and $374.9 million; (b) earnings per common share attributable
to Cliffs shareholders - diluted of $1.05 and $1.28; and (c) Adjusted EBITDA of $129.2 million and $512.8 million, each
for the three and twelve months ended December 31, 2017. The Statements of Consolidated Operations and
accompanying notes in this Annual Report on Form 10-K reports (a) net income attributable to Cliffs shareholders of
$309.9 million and $367.0 million; (b) earnings per common share attributable to Cliffs shareholders - diluted of $1.03
and $1.26; and (c) Adjusted EBITDA of $121.3 million and $504.9 million, each for the three and twelve months ended
December 31, 2017. Subsequent to the Earnings Release, we determined that the ARO liability recorded at Asia Pacific
Iron Ore did not adequately reflect that expected costs to be incurred at the end of mine life. Accordingly, we recorded
an entry to fully reflect the estimated ARO cost.
The following is a summary of our consolidated results of operations for the years ended December 31, 2017
and 2016:
Revenues from product sales and services
Cost of goods sold and operating expenses
Sales margin
Sales margin %
Revenues from Product Sales and Services
(In Millions)
$
$
2017
2,330.2
(1,828.5)
501.7
21.5%
$
$
2016
2,109.0
(1,719.7)
389.3
18.5%
Variance
Favorable/
(Unfavorable)
221.2
(108.8)
112.4
$
$
3.0%
Revenues from product sales and services increased by $175.7 million or 9.2%, excluding the increase in freight
and reimbursements of $45.5 million, for the year ended December 31, 2017 compared to the prior year, which was
driven by an increase in realized revenue rate of 16.3% or $228.2 million and increased iron ore sales volumes of 0.5
million long tons or $36.7 million from our U.S. Iron Ore operations compared to the prior year. These increases were
offset partially by the decrease in sales volume of 1.8 million metric tons or $81.0 million and a decrease in realized
revenue rate of 1.2% or $4.9 million from our Asia Pacific Iron Ore operations compared to the prior year.
Refer to “Results of Operations – Segment Information" for additional information regarding the specific factors
that impacted revenue during the period.
48
Cost of Goods Sold and Operating Expenses
Cost of goods sold and operating expenses increased by $63.3 million or 4.2%, excluding the increase in freight
and reimbursements of $45.5 million, for the year ended December 31, 2017 compared to the prior year, which was
primarily due to increased production cost rates across all operations that resulted in increased costs of $157.0 million
and increased sales volumes from our U.S. Iron Ore operations that resulted in $18.4 million of additional costs. These
increases were offset partially by incrementally lower idle costs in our U.S. Iron Ore operations of $54.7 million and lower
iron ore sales volumes from our Asia Pacific Iron Ore operations for the year ended December 31, 2017 compared to
the prior year that resulted in lower costs of $69.3 million.
Refer to “Results of Operations – Segment Information” for additional information regarding the specific factors
that impacted our operating results during the period.
Other Operating Income (Expense)
The following is a summary of Other operating income (expense) for the years ended December 31, 2017 and
2016:
Selling, general and administrative expenses
Miscellaneous - net
(In Millions)
2017
2016
Variance
Favorable/
(Unfavorable)
$
$
(105.8) $
27.7
(78.1) $
(117.8) $
(30.7)
(148.5) $
12.0
58.4
70.4
Selling, general and administrative expenses during the year ended December 31, 2017 decreased $12.0 million
over 2016. The favorable variance for the year ended December 31, 2017 was driven by a $4.1 million decrease in
incentive compensation and $3.5 million of union signing bonuses in 2016, which were not repeated in the 2017. In
addition, external services costs, excluding costs for early stage HBI project spending, decreased by $5.4 million for the
year ended December 31, 2017 compared to the prior year. These favorable variances were offset partially by early-
stage HBI project spending of $2.3 million.
The following is a summary of Miscellaneous - net for the years ended December 31, 2017 and 2016:
Foreign exchange remeasurement
Michigan Electricity Matters accrual
Management and royalty fees
Empire idle costs
Gain (loss) on disposal of assets
Other
(In Millions)
2017
2016
Variance
Favorable/
(Unfavorable)
$
11.4 $
1.3
5.1
5.0
0.9
4.0
$
27.7 $
(16.8) $
(12.4)
9.0
(8.2)
(4.8)
2.5
(30.7) $
28.2
13.7
(3.9)
13.2
5.7
1.5
58.4
For the year ended December 31, 2017, there was an incrementally favorable impact of $28.2 million driven by
the change in foreign exchange remeasurement of short-term intercompany loans that are denominated in currency that
is not the functional currency of the entity that holds the loans. There was an incrementally favorable impact of $13.2
million in Empire mine idle costs driven primarily by an asset retirement obligation adjustment. In addition, there was an
incrementally favorable consolidated impact of $13.7 million related to the FERC ruling on the Michigan Electricity Matters
that was recorded in the third quarter of 2016 and adjusted in the fourth quarter of 2017.
49
Other Income (Expense)
The following is a summary of Other income (expense) for the years ended December 31, 2017 and 2016:
Interest expense, net
Gain (loss) on extinguishment/restructuring of debt
Other non-operating income
(In Millions)
2017
2016
Variance
Favorable/
(Unfavorable)
$
$
(132.0) $
(165.4)
3.2
(294.2) $
(200.5) $
166.3
0.4
68.5
(331.7)
2.8
(33.8) $
(260.4)
The loss on extinguishment/restructuring of debt for the year ended December 31, 2017 of $165.4 million was
related to the repurchase of certain of our unsecured senior notes and the redemption in full of certain of our then-
outstanding secured notes. This compares to a gain of $166.3 million for the year ended December 31, 2016, primarily
related to the issuance of our 8.00% 2020 1.5 Lien Notes through an exchange offer on March 2, 2016.
Interest expense, net for the year ended December 31, 2017, had a favorable variance of $68.5 million versus
the prior year, predominantly as a result of the debt restructuring activities that occurred throughout 2017. These debt
restructurings resulted in a reduction of our effective interest rate to 5.8% and extended our debt maturities.
Refer to NOTE 5 - DEBT AND CREDIT FACILITIES for further discussion.
Income Taxes
Our tax rate is affected by permanent items, such as depletion and the relative amount of income we earn in
various foreign jurisdictions with tax rates that differ from the U.S. statutory rate. It also is affected by discrete items that
may occur in any given period, but are not consistent from period to period. The following represents a summary of our
tax provision and corresponding effective rates for the years ended December 31, 2017 and 2016:
Income tax benefit
Effective tax rate
2017
(In Millions)
2016
$
252.4
$
12.2
$
(195.0)%
(5.9)%
Variance
240.2
(189.1)%
50
149.1
(11.8)
(149.1)
93.9
—
6.5
(11.3)
(73.4)
(42.7)
(36.1)
(8.8)
0.4
(1.4)
72.0
(5.7)
(72.0)
45.4
—
3.1
(5.5)
(35.5)
(20.6)
(17.4)
(4.2)
0.2
(0.7)
A reconciliation of our income tax attributable to continuing operations compared to the U.S. federal statutory
rate for the years ended December 31, 2017 and 2016 is as follows:
Tax at U.S. statutory rate of 35%
Increase (decrease) due to:
(In Millions)
2017
2016
$
45.3
35.0 % $
72.5
35.0 %
Impact of tax law change - remeasurement of deferred taxes
Prior year adjustments in current year
Valuation allowance build (reversal)
407.5
(1.1)
314.8
(0.8)
Tax law change - remeasurement of deferred taxes
Current year activity
Repeal of AMT
Prior year adjustments in current year
Tax uncertainties
Worthless stock deduction
Impact of foreign operations
Percentage depletion in excess of cost depletion
Non-taxable loss (income) related to noncontrolling interests
State taxes, net
Other items, net
Provision for income tax benefit and effective income tax rate
including discrete items
(407.5)
(471.7)
(235.3)
(3.0)
(1.4)
—
475.4
(61.6)
1.3
(0.1)
(0.2)
(314.8)
(364.4)
(181.7)
(2.4)
(1.1)
—
367.2
(47.6)
1.0
—
(0.2)
$
(252.4)
(195.0)% $
(12.2)
(5.9)%
Our tax provision for the year ended December 31, 2017 was a benefit of $252.4 million and a negative 195.0%
effective tax rate compared with a benefit of $12.2 million and an effective tax rate of negative 5.9% for the prior year.
The increase in income tax benefit from the prior year is primarily due to the repeal of AMT through U.S. income tax
reform legislation. The impact of tax law change due to remeasurement of deferred taxes primarily relates to the statutory
rate reduction in the U.S. that decreased the deferred tax assets by $334.1 million and the Luxembourg rate reduction
that decreased the deferred tax assets by $73.4 million. Both of these asset reductions were fully offset by a decrease
in valuation allowance. The impact of foreign operations relates to income and losses in foreign jurisdictions where the
statutory rates, ranging from 0% to 30%, differ from the U.S. statutory rate of 35%.
See NOTE 9 - INCOME TAXES for further information.
Loss from Discontinued Operations, net of tax
During the year ended December 31, 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA
proceedings for the Wabush Group, which resulted in a net gain of $31.4 million within Loss from Discontinued Operations,
net of tax. During the year ended December 31, 2017, we recorded a net loss from discontinued operations, net of tax,
of $18.7 million, primarily due to recording an estimated liability of $55.6 million related to the probable assertion of a
preference claim against the Company which is classified as Contingent claims in the Statements of Consolidated
Financial Position, partially offset by the gain discussed above. We recorded a loss from discontinued operations of $19.9
million for the year ended December 31, 2016.
Refer to NOTE 14 - DISCONTINUED OPERATIONS for further information.
Noncontrolling Interest
During 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the
noncontrolling interest net assets of $132.7 million to ArcelorMittal, in exchange for its interest in Empire. The agreement
had no direct impact on the Loss (income) attributable to noncontrolling interest in the Statements of Consolidated
Operations. However, for the year ended December 31, 2017, the Empire mine was indefinitely idled resulting in a loss
attributable to the noncontrolling interest of $3.9 million. In comparison, during the year ended December 31, 2016, the
Empire mine was operating and had income of $25.2 million attributable to the noncontrolling interest.
51
Results of Operations – Consolidated
2016 Compared to 2015
The following is a summary of our consolidated results of operations for the years ended December 31, 2016
and 2015:
Revenues from product sales and services
Cost of goods sold and operating expenses
Sales margin
Sales margin %
Revenues from Product Sales and Services
(In Millions)
$
$
2016
2,109.0
(1,719.7)
389.3
18.5%
$
$
2015
2,013.3
(1,776.8)
236.5
11.7%
$
$
Variance
Favorable/
(Unfavorable)
95.7
57.1
152.8
6.8%
Revenues from product sales and services for the year ended December 31, 2016 increased $95.7 million, or
4.8%, from 2015, which primarily was driven by higher sales volume from our U.S. Iron Ore operations of 932 thousand
long tons equating to an increase in revenue of $73.5 million and higher pricing from our Asia Pacific Iron Ore operations
for an increase of $69.2 million. The increase in volume mainly was attributable to additional nominated tons from short-
term contracts. Higher pricing and revenue rates were driven by an increase in the Platts 62% Price and a hedging
impact in 2015 that was not repeated in 2016, for increased revenue of $32.7 million and $29.3 million, respectively.
These positive movements were partially offset from lower pricing from our U.S. Iron Ore operations for a decrease of
$62.0 million. Lower pricing primarily was driven by the negative inflation of certain price indices and the impact of net
lower overall contracted pricing terms for two short-term customer contracts that were based on fixed negotiated rates
compared to the prior year, which was based on a different method.
Refer to “Results of Operations – Segment Information” for additional information regarding the specific factors
that impacted revenue during the period.
Cost of Goods Sold and Operating Expenses
Cost of goods sold and operating expenses for the years ended December 31, 2016 and 2015 were $1,719.7
million and $1,776.8 million, respectively, a decrease of $57.1 million, or 3.2%, year-over-year.
Cost of goods sold and operating expenses for the year ended December 31, 2016 decreased as a result of
operational efficiencies and cost-cutting efforts across each of our business units, which reduced costs by $114.5 million.
Additionally, lower idle costs and favorable foreign exchange rates decreased costs by $7.8 million and $5.5 million,
respectively, compared to the year ended December 31, 2015. These decreases in cost were offset partially by higher
iron ore sales volumes resulting in higher expense of $56.0 million compared to the year ended December 31, 2015.
Refer to “Results of Operations – Segment Information” for additional information regarding the specific factors
that impacted our operating results during the period.
Other Operating Income (Expense)
The following is a summary of Other operating income (expense) for the years ended December 31, 2016 and
2015:
Selling, general and administrative expenses
Miscellaneous - net
(In Millions)
2016
2015
$
$
(117.8) $
(30.7)
(148.5) $
(110.0) $
24.8
(85.2) $
Variance
Favorable/
(Unfavorable)
(7.8)
(55.5)
(63.3)
52
Selling, general and administrative expenses during the year ended December 31, 2016 increased $7.8 million
over 2015. The increase for the year ended December 31, 2016 compared to the prior year was driven by an increase
in employment costs of $8.1 million primarily due to incentive compensation and an increase in expenses of $2.1 million
related to a lease abandonment of a corporate office space. These increases were partially offset by a $3.9 million
decrease in IT service costs and legal fees.
The following is a summary of Miscellaneous - net for the years ended December 31, 2016 and 2015:
Foreign exchange remeasurement
Michigan Electricity Matters accrual
Management and royalty fees
Empire idle costs
Gain (loss) on disposal of assets
Other
(In Millions)
2016
2015
Variance
Favorable/
(Unfavorable)
$
$
(16.8) $
(12.4)
9.0
(8.2)
(4.8)
2.5
(30.7) $
16.3 $
—
6.4
—
3.4
(1.3)
24.8 $
(33.1)
(12.4)
2.6
(8.2)
(8.2)
3.8
(55.5)
For the year ended December 31, 2016, there was an incrementally unfavorable impact of $33.1 million driven
by the change in foreign exchange remeasurement of short-term intercompany loans that are denominated in currency
that is not the functional currency of the entity that holds the loans.
Other Income (Expense)
The following is a summary of Other income (expense) for the years ended December 31, 2016 and 2015:
Interest expense, net
Gain on extinguishment/restructuring of debt
Other non-operating income (expense)
(In Millions)
2016
2015
$
$
(200.5) $
166.3
0.4
(33.8) $
(228.5) $
392.9
(2.6)
161.8 $
Variance
Favorable/
(Unfavorable)
28.0
(226.6)
3.0
(195.6)
The gain on extinguishment/restructuring of debt for the year ended December 31, 2016 was $166.3 million,
primarily related to the issuance of 8.00% 2020 1.5 Lien Notes on March 2, 2016 compared to $392.9 million related to
the corporate debt restructuring that occurred during the year ended December 31, 2015.
Interest expense, net for the year ended December 31, 2016 was lower by $20.8 million versus the year ended
December 31, 2015 as a result of the debt restructuring activities that occurred during 2016. These debt extinguishments
and restructurings resulted in a net reduction of the outstanding principal balance of our senior notes. Additionally, there
was a favorable impact of $5.8 million due to the reduction of equipment loan interest and capital lease interest for the
year ended December 31, 2016 compared to the prior year.
Refer to NOTE 5 - DEBT AND CREDIT FACILITIES for further discussion.
53
Income Taxes
Our tax rate is affected by permanent items, such as depletion and the relative amount of income we earn in
various foreign jurisdictions with tax rates that differ from the U.S. statutory rate. It also is affected by discrete items that
may occur in any given period, but are not consistent from period to period. The following represents a summary of our
tax provision and corresponding effective rates for the years ended December 31, 2016 and 2015:
Income tax benefit (expense)
$
12.2
$
(169.3)
$
181.5
Effective tax rate
(5.9)%
54.1%
(60.0)%
(In Millions)
2016
2015
Variance
A reconciliation of our income tax attributable to continuing operations computed at the U.S. federal statutory
rate for the years ended December 31, 2016 and 2015 is as follows:
Tax at U.S. statutory rate of 35%
Increase (decrease) due to:
Impact of tax law change - remeasurement of deferred taxes
Prior year adjustments in current year
Valuation allowance build (reversal)
Tax law change - remeasurement of deferred taxes
Current year activity
Repeal of AMT
Prior year adjustments in current year
Tax uncertainties
Worthless stock deduction
Impact of foreign operations
Percentage depletion in excess of cost depletion
Non-taxable income related to noncontrolling interests
State taxes, net
Other items, net
(In Millions)
2016
2015
$
72.5
35.0 % $
109.6
35.0%
149.1
(11.8)
(149.1)
93.9
—
6.5
(11.3)
(73.4)
(42.7)
(36.1)
(8.8)
0.4
(1.4)
72.0
(5.7)
(72.0)
45.4
—
3.1
(5.5)
(35.5)
(20.6)
(17.4)
(4.2)
0.2
(0.7)
—
5.9
—
—
1.9
—
(104.6)
(33.4)
—
165.8
84.1
—
(53.9)
(34.9)
(3.0)
0.2
0.1
—
52.9
26.9
—
(17.2)
(11.1)
(1.0)
0.1
—
Provision for income tax (benefit) expense and effective income tax
rate including discrete items
$
(12.2)
(5.9)% $
169.3
54.1%
Our tax provision for the year ended December 31, 2016 was a benefit of $12.2 million and a negative 5.9%
effective tax rate compared with an expense of $169.3 million and an effective tax rate of 54.1% for the prior year. The
change to an income tax benefit from the prior year expense is due to the prior year recording of valuation allowances
against existing deferred tax assets, a worthless stock deduction in the current year and the settlement of unrecognized
tax benefits. The impact of tax law change relates to the enacted statutory rate reduction in Luxembourg that decreased
the deferred tax assets by $149.1 million and was fully offset by a decrease in valuation allowance. The impact of foreign
operations relates to income in foreign jurisdictions where the statutory rates, ranging from 0% to 30%, differ from the
U.S statutory rate of 35%.
See NOTE 9 - INCOME TAXES for further information.
54
Loss from Discontinued Operations, net of tax
Loss from Discontinued Operations, net of tax was comprised primarily of the loss on discontinued operations
related to our North American Coal operating segment and our Eastern Canadian Iron Ore operations. During the year
ended December 31, 2016, we recorded a loss from discontinued operations of $19.9 million, net of tax, attributable to
a net loss from a change in estimate to our Loans to and accounts receivable from the Canadian Entities of $17.5 million
in the Statements of Consolidated Financial Position and a net loss of $2.4 million from certain disputes related to the
sale of our North American Coal segment.
As of March 31, 2015, management determined that our North American Coal operating segment met the criteria
to be classified as held for sale under ASC 205, Presentation of Financial Statements. As such, all 2016 and historical
North American Coal operating segment results are included in our financial statements and classified within discontinued
operations. The Loss from Discontinued Operations, net of tax related to the North American Coal operating segment
was $2.4 million and $152.4 million for the years ended December 31, 2016 and 2015, respectively.
In January 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in Montreal,
Quebec under the CCAA. At that time, we had suspended Bloom Lake operations and for several months had been
exploring options to sell certain of our Canadian assets, among other initiatives. Effective January 27, 2015, following
the commencement of CCAA proceedings for the Bloom Lake Group, we deconsolidated the Bloom Lake Group and
certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations. Additionally, on May
20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec under the CCAA which resulted
in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. The Wabush
Group was no longer generating revenues and was not able to meet its obligations as they came due. As a result of this
action, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate
the reorganization of each of their businesses and operations. Financial results prior to the respective deconsolidations
of the Bloom Lake and Wabush Groups and subsequent expenses directly associated with the Canadian Entities are
included in our financial statements and classified within discontinued operations. The Loss from Discontinued
Operations, net of tax related to the deconsolidated Canadian Entities was $17.5 million and $739.7 million for the years
ended December 31, 2016 and 2015, respectively.
Refer to NOTE 14 - DISCONTINUED OPERATIONS for further information.
Noncontrolling Interest
Noncontrolling interest was comprised primarily of the 21% noncontrolling interest in the consolidated, but less-
than-wholly owned subsidiary at our Empire mining venture based on our ownership as of December 31, 2016 and 2015,
and through the CCAA filing on January 27, 2015, the 17.2% noncontrolling interest in the Bloom Lake operations. The
net income attributable to the noncontrolling interest related to the Empire mining venture was $25.2 million and $8.6
million for the years ended December 31, 2016 and 2015, respectively. The net loss attributable to the noncontrolling
interest related to Bloom Lake was $7.7 million for the year ended December 31, 2015. There was no gain or loss
attributable to the noncontrolling interest related to Bloom Lake for the year ended December 31, 2016.
Results of Operations – Segment Information
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and
operating expenses identifiable to each segment. Additionally, we evaluate performance on a segment basis, as well
as a consolidated basis, based on EBITDA and Adjusted EBITDA. These measures allow management and investors
to focus on our ability to service our debt as well as illustrate how the business and each operating segment are performing.
Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these
measures approximate the cash flows associated with operational earnings.
55
2017 Compared to 2016
Net Income
Less:
Interest expense, net
Income tax benefit
Depreciation, depletion and amortization
Total EBITDA
Less:
Gain (loss) on extinguishment of debt
Impact of discontinued operations
Foreign exchange remeasurement
Severance and contractor termination costs
Supplies inventory adjustment
Total Adjusted EBITDA
EBITDA:
U.S. Iron Ore
Asia Pacific Iron Ore
Other (including discontinued operations)
Total EBITDA
Adjusted EBITDA:
U.S. Iron Ore
Asia Pacific Iron Ore
Other
Total Adjusted EBITDA
(In Millions)
2017
2016
363.1
$
199.3
(132.0)
252.4
(87.7)
330.4
$
(165.4) $
(18.7)
11.4
—
(1.8)
504.9
$
534.9
$
40.7
(245.2)
330.4
$
559.4
$
50.4
(104.9)
504.9
$
(200.5)
12.2
(115.4)
503.0
166.3
(19.9)
(16.8)
(0.1)
—
373.5
342.4
128.3
32.3
503.0
359.6
132.9
(119.0)
373.5
$
$
$
$
$
$
$
$
EBITDA for the year ended December 31, 2017 decreased by $172.6 million on a consolidated basis from 2016.
The unfavorable variance in EBITDA for the year ended December 31, 2017 was driven primarily by an incrementally
negative impact of $331.7 million related to debt extinguishment/restructuring activities compared to the prior year,
partially offset by an increase in sales margin of $112.4 million compared to the prior year.
Adjusted EBITDA increased by $131.4 million for the year ended December 31, 2017 from the comparable period
in 2016. The increase primarily was attributable to higher consolidated sales margin of $112.4 million for the year ended
December 31, 2017, compared to the prior year. Refer to further detail below for additional information regarding the
specific factors that impacted each reportable segment's sales margin during the 2017 and 2016.
56
U.S. Iron Ore
The following is a summary of U.S. Iron Ore results for the years ended December 31, 2017 and 2016:
(In Millions)
Changes due to:
Year Ended
December 31,
2017
2016
Revenue
and cost
rate
Sales
volume
Idle cost/
production
volume
variance
Freight and
reimburse-
ment
Total
change
$ 1,866.0
$
1,554.5
$
228.2
$
36.7
$
— $
46.6
$
311.5
Revenues from product sales
and services
Cost of goods sold and
operating expenses
Sales margin
$
465.4
$
275.7
$
116.7
$
18.3
$
(1,400.6)
(1,278.8)
(111.5)
(18.4)
54.7
54.7
(46.6)
(121.8)
$
— $
189.7
Year Ended
December 31,
Per Long Sales Ton Information
Realized product revenue rate1
Cash cost of goods sold and operating expense rate1,2
Depreciation, depletion & amortization
Total cost of goods sold and operating expense rate
Sales margin
2017
2016
Difference
$
$
88.03
$
75.71
$
59.55
3.56
63.11
55.97
4.61
60.58
24.92
$
15.13
$
12.32
3.58
(1.05)
2.53
9.79
Percent
change
16.3 %
6.4 %
(22.8)%
4.2 %
64.7 %
Sales tons3 (In thousands)
Production tons3 (In thousands)
Total
Cliffs’ share of total
18,683
18,224
25,542
18,776
23,416
15,982
1 Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues
and expenses also exclude venture partner cost reimbursements.
2 Cash cost of goods sold and operating expense rate is a non-GAAP financial measure. Refer to "Non-GAAP Reconciliation" for
reconciliation in dollars back to our consolidated financial statements.
3 Tons are long tons.
Sales margin for U.S. Iron Ore was $465.4 million for the year ended December 31, 2017, compared with $275.7
million for the year ended December 31, 2016. Sales margin per long ton increased 64.7% to $24.92 per long ton during
the year ended December 31, 2017 compared to 2016.
Revenue increased by $264.9 million during the year ended December 31, 2017, compared to 2016, excluding
the freight and reimbursements increase of $46.6 million, predominantly due to:
• An increase in the average year-to-date realized product revenue rate of $12.32 per long ton or 16.3% during
the year ended December 31, 2017, compared to 2016, which resulted in an increase of $228.2 million. This
is predominantly due to:
An increase in Platts 62% Price, which positively affected the realized revenue rate by $9 per long ton
or $176 million;
An increase in the average annual daily market price and customer pricing for hot-rolled coil steel, which
positively affected the realized revenue rate by $5 per long ton or $100 million; and
Higher pellet premiums, which positively affected the realized revenue rate by $5 per long ton or $94
million.
These increases were offset partially by changes in customer and contract mix and carryover pricing
impacts, which negatively affected the realized revenue rate by $5 per long ton or $84 million; and
57
Higher index freight rates, a component in some of our contract pricing formulas, which negatively
affected the realized revenue rate by $3 per long ton or $63 million.
• Higher sales volumes of 0.5 million long tons during the year ended December 31, 2017, which resulted in
increased revenues of $36.7 million due to:
Increased demand from a customer, providing additional sales volume of 1.8 million long tons, compared
to the prior year when the customer had sufficient inventory due to the idle of one of its facilities and
additional suppliers;
Increased demand from a customer, providing additional sales volume of 1.3 million long tons, resulting
from the fourth quarter 2015 termination of its contract causing a nine-month gap in sales to that customer;
and
An increase in exports to Asia in order to offset a fourth quarter reduction in domestic nomination from
a major customer and fewer domestic spot contracts, providing additional sales volume of 0.9 million
long tons compared to 2016.
These increases were offset partially by 2.8 million long tons that were sold in 2016 on separate spot
contracts with two customers and were not renewed; and
Decreased sales to a customer due to timing of payments and a lower 2017 nomination, resulting in a
decrease in sales volume of 0.8 million long tons.
Cost of goods sold and operating expenses increased $75.2 million during the year ended December 31, 2017,
compared to 2016, excluding the freight and reimbursements increase of $46.6 million, predominantly as a result of:
• Higher spending on repairs and maintenance of $44 million or $2 per long ton, higher profit sharing and
benefit costs of $35 million or $2 per long ton, and higher energy rates for natural gas, diesel and electricity
of $23 million or $1 per long ton; and
•
Increased sales volumes as discussed above which resulted in increased costs of $18 million period-over-
period.
• These increases were offset partially by decreased idle costs of $55 million or $3 per long ton due to the
idle of the United Taconite and Northshore mines during the prior year.
Production
Our share of production in our U.S. Iron Ore segment increased by 17.5% during the year ended December 31,
2017 when compared to 2016. The increase in production volume primarily is attributable to all active mining facilities
fully operating in 2017 compared to the various idled operations during 2016. United Taconite was fully operating during
the year ended December 31, 2017, adding an incremental 3.3 million long tons of production, compared to the previous
year's production levels as a result of being idled until it was restarted again in August 2016. Secondly, Northshore added
incremental tonnage of 2.1 million long tons during the year ended December 31, 2017, when it was substantially at full
production, compared to its previous year's production tonnage when it was fully idled for the first four months of 2016.
These production gains were offset partially by the indefinite idle of the Empire mine in August 2016, lowering production
by 2.8 million long tons, compared to the prior year when the mine was operating.
58
Asia Pacific Iron Ore
The following is a summary of Asia Pacific Iron Ore results for the years ended December 31, 2017 and 2016:
(In Millions)
Change due to:
Year Ended
December 31,
2017
2016
Revenue
and cost
rate
Sales
volume
Exchange
rate
Freight and
reimburse-
ment
Total
change
Revenues from product sales
and services
Cost of goods sold and
operating expenses
Sales margin
$
$
464.2
$
554.5
$
(4.9) $
(81.0) $
(3.3) $
(1.1) $
(90.3)
(427.9)
(440.9)
(45.5)
69.3
(11.9)
1.1
36.3
$
113.6
$
(50.4) $
(11.7) $
(15.2) $
— $
13.0
(77.3)
Year Ended
December 31,
Per Metric Sales Ton Information
Realized product revenue rate1
Cash cost of goods sold and operating expense rate1,2
Depreciation, depletion & amortization
Total cost of goods sold and operating expense rate
Sales margin
2017
2016
Difference
$
$
45.31
$
45.85
$
40.15
1.46
41.61
33.94
2.16
36.10
3.70
$
9.75
$
(0.54)
6.21
(0.70)
5.51
(6.05)
Percent
change
(1.2)%
18.3 %
(32.4)%
15.3 %
(62.1)%
Sales tons3 (In thousands)
Production tons3 (In thousands)
9,812
10,113
11,642
11,839
1 The information above excludes revenues and expenses related to freight, which are offsetting and have no impact on sales margin.
2 Cash cost of goods sold and operating expense rate is a non-GAAP financial measure. Refer to "Non-GAAP Reconciliation" for
reconciliation in dollars back to our consolidated financial statements.
3 Tons are metric tons.
Sales margin for our Asia Pacific Iron Ore segment decreased to $36.3 million during the year ended
December 31, 2017, compared with $113.6 million for 2016. Sales margin per metric ton decreased 62.1% to $3.70 per
metric ton in 2017, compared to 2016.
Revenue decreased by $89.2 million during the year ended December 31, 2017, compared to 2016, excluding
the freight reimbursements decrease of $1.1 million, predominantly due to:
• Decreased sales volume of 1.8 million metric tons, or 15.7%, to 9.8 million metric tons. The decrease in
tons sold was primarily driven by lower production, as discussed below, and unfavorable market conditions
which limited the economic value on short-term contract sales and resulted in decreased revenue of $81.0
million.
• A decrease in the average year-to-date realized product revenue rate of $0.54 per metric ton or 1.2%, which
resulted in a decrease of $8 million, including the impact of foreign exchange. This increase is predominantly
a result of:
A decrease in revenue rate of $10 per metric ton or $95 million due to price and quality adjustments to
meet market competition and to compensate for varying quality ores and a reduction in iron content;
and
Higher average Western Australia to China freight rates, which unfavorably affected the revenue rate
by $3 per metric ton or $26 million.
This decrease was offset partially by an increase in the Platts 62% Price, which positively affected the
realized revenue rate by $12 per metric ton or $120 million.
59
Cost of goods sold and operating expenses decreased $11.9 million during the year ended December 31, 2017,
compared to 2016, excluding the freight and reimbursements decrease of $1.1 million, predominantly as a result of:
• A decrease in sales volume of 1.8 million metric tons, which decreased costs by $69.3 million.
• This decrease was offset partially by an increase in production costs of $37.6 million or $4 per metric ton,
predominantly due to increased mining costs driven by a higher strip ratio, increased administrative costs
and higher rail and port rates;
• An unfavorable asset retirement obligation adjustment of $7.9 million or $1 per long ton driven by an increase
in expected costs to be incurred at the end of life of mine; and
• Unfavorable foreign exchange rate variances of $11.9 million or $1 per metric ton.
Production
Production volume at our Asia Pacific Iron Ore mining complex decreased by 14.6% or 1.7 million metric tons
during the year ended December 31, 2017, compared to 2016, driven by operational decisions to reflect current market
conditions and quality ore availability.
60
2016 Compared to 2015
Net Income (Loss)
Less:
Interest expense, net
Income tax benefit (expense)
Depreciation, depletion and amortization
EBITDA
Less:
Gain on extinguishment/restructuring of debt
Impact of discontinued operations
Foreign exchange remeasurement
Severance and contractor termination costs
Supplies inventory write-off
Impairment of other long-lived assets
Total Adjusted EBITDA
EBITDA:
U.S. Iron Ore
Asia Pacific Iron Ore
Other (including discontinued operations)
Total EBITDA
Adjusted EBITDA:
U.S. Iron Ore
Asia Pacific Iron Ore
Other
Total Adjusted EBITDA
(In Millions)
2016
2015
199.3 $
(748.4)
(200.5)
12.2
(115.4)
503.0 $
166.3 $
(19.9)
(16.8)
(0.1)
—
—
373.5 $
342.4 $
128.3
32.3
503.0 $
359.6 $
132.9
(119.0)
373.5 $
(231.4)
(163.3)
(134.0)
(219.7)
392.9
(892.0)
16.3
(10.2)
(16.3)
(3.3)
292.9
317.6
35.3
(572.6)
(219.7)
352.1
32.7
(91.9)
292.9
$
$
$
$
$
$
$
$
EBITDA for the year ended December 31, 2016 increased by $722.7 million on a consolidated basis from 2015.
The period-over-period change primarily was driven by the impact of our discontinued operations during the year ended
December 31, 2015. Adjusted EBITDA increased by $80.6 million for the year ended December 31, 2016 from 2015.
The period-over-period change is a result of operational efficiencies and cost-cutting efforts across each of our business
units. See further detail below for additional information regarding the specific factors that impacted each reportable
segment's sales margin during 2016.
61
U.S. Iron Ore
The following is a summary of U.S. Iron Ore results for the years ended December 31, 2016 and 2015:
Revenues from product sales
and services
Cost of goods sold and
operating expenses
Sales margin
$
275.7
$
227.1
$
(1,278.8)
(1,298.3)
(In Millions)
Change due to
Year Ended
December 31,
2016
2015
Revenue
and cost
rate
Sales
volume
Idle cost/
production
volume
variance
Freight
and
reimburse-
ment
Total
change
$ 1,554.5
$ 1,525.4
$
(62.0) $
73.5
$
— $
17.6
$
29.1
84.7
22.7
(55.4)
$
18.1
$
7.8
7.8
(17.6)
$
— $
19.5
48.6
Year Ended
December 31,
Per Long Sales Ton Information
Realized product revenue rate1
Cash cost of goods sold and operating expense rate1,2
Depreciation, depletion & amortization
Total cost of goods sold and operating expenses rate
Sales margin
2016
2015
Difference
75.71
$
79.12
$
55.97
4.61
60.58
60.27
5.72
65.99
15.13
$
13.13
$
(3.41)
(4.30)
(1.11)
(5.41)
2.00
$
$
Percent
change
(4.3)%
(7.1)%
(19.4)%
(8.2)%
15.2 %
Sales tons3 (In thousands)
Production tons3 (In thousands)
Total
Cliffs’ share of total
18,224
17,292
23,416
15,982
26,138
19,317
1 Excludes revenues and expenses related to domestic freight, which are offsetting and have no impact on sales margin. Revenues
and expenses also exclude venture partner cost reimbursements.
2 Cash cost of goods sold and operating expense rate is a non-GAAP financial measure. See "Non-GAAP Reconciliation" for
reconciliation in dollars back to our consolidated financial statements.
3 Tons are long tons (2,240 pounds).
Sales margin for U.S. Iron Ore was $275.7 million for the year ended December 31, 2016, compared with $227.1
million for the year ended December 31, 2015. The increase compared to the prior year is attributable to an increase
in revenue of $29.1 million in addition to a decrease in cost of goods sold and operating expenses of $19.5 million.
Sales margin increased 15.2% to $15.13 per long ton during the year ended December 31, 2016 compared to 2015.
Revenue increased by $11.5 million, excluding the increase of $17.6 million of freight and reimbursements,
from the prior year, predominantly due to:
• Higher sales volumes of 0.9 million long tons, which resulted in increased revenues of $73.5 million due
to:
Additional short-term contracts in 2016 with two customers, one which we made no sales to in 2015,
providing additional sales volume of 2.4 million long tons.
This increase was offset partially by a 1.3 million net reduction in long tons from the termination of a
customer contract in the fourth quarter of the prior year that was reinstated in June 2016, to begin in
2017, and nominations on short-term contracts made with the customer in the interim.
62
• The average year-to-date realized product revenue rate declined by $3.41 per long ton or 4.3% to $75.71
per long ton in the year ended December 31, 2016, which resulted in a decrease of $62.0 million, compared
to the prior year. The decline is a result of:
Changes in customer pricing negatively affected the realized revenue rate by $2 per long ton or $32
million driven primarily by the negative inflation of certain price indices;
An unfavorable variance of $30 million or $2 per long ton due to overall net lower contracted pricing
terms for two short-term customer contracts that were based on fixed negotiated rates compared to
the prior-year which was based on a different method; and
An unfavorable change of $17 million or $1 per long ton resulting from various price adjustments,
unfavorable customer mix and net of increased service revenue.
These decreases were offset partially by an increase in realized revenue rates of $1 per long ton or
$17 million as a result of one major customer contract with a pricing mechanism tied to the full-year
estimate of their hot-rolled coil steel pricing. The increase in revenue is primarily due to the hot-rolled
coil steel estimate increasing in 2016 from the beginning of the year, compared to 2015 when the
estimate was revised lower.
Cost of goods sold and operating expenses decreased $37.1 million or $2.04 per long ton, excluding the
decrease of $17.6 million of freight and reimbursements from the prior year, predominantly as a result of:
•
Lower maintenance and repair costs resulting from cost reduction initiatives and condition based monitoring
and Empire's indefinite idle, which began in August 2016 of $28 million of $2 per long ton;
• A year-over-year reduction in energy rates for natural gas and diesel, which lowered costs by $16 million
or $1 per long ton and a reduction of employment costs of $12 million or $1 per long ton; and
• Various one-time adjustments totaling $28 million or $2 per long ton impacted the year ended December
31, 2016 compared to the previous year, including a positive asset retirement obligation adjustment for a
life of mine extension during 2016 of $9 million or $1 per long ton, and a supplies inventory adjustment that
occurred in 2015 that was not repeated in 2016 of $15 million or $1 per long ton.
• These decreases were offset partially by increased sales volume as discussed above that increased costs
by $55 million or $3 per long ton, in addition to an unfavorable impact from LIFO liquidation of $9 million
or $1 per long ton, compared to the prior year.
Production
Our share of production tons in our U.S. Iron Ore segment decreased by 3.3 million long tons or 17.3% when
compared to 2015. The decrease in production volumes primarily is attributable to the idled mining facilities. Our United
Taconite operation was idled in August 2015, until it was restarted again in August 2016. As a result, our United Taconite
operation was in full production for one-third of the year versus operating at full production for two-thirds of the prior
year causing a decrease in production volume of 1.5 million long tons. Secondly, our Northshore mining operations
were fully idled, including all four furnaces from November 2015 until May 2016, compared to running a three furnace
operation for most of 2015 until the full idle began in November 2015, reducing production by 1.0 million long tons during
2016.
63
Asia Pacific Iron Ore
The following is a summary of Asia Pacific Iron Ore results for the years ended December 31, 2016 and 2015:
(In Millions)
Change due to
Year Ended
December 31,
2016
2015
Revenue
and cost
rate
Sales
volume
Exchange
rate
Freight and
reimburse-
ment
Total
change
Revenues from product sales and
services
Cost of goods sold and operating
expenses
Sales margin
$
554.5
$
487.9
$
69.2
$
0.7
$
(0.4) $
(2.9) $
66.6
(440.9)
(478.5)
$
113.6
$
9.4
$
29.8
99.0
(0.6)
$
0.1
$
5.5
5.1
2.9
$
— $
37.6
104.2
Year Ended
December 31,
Per Metric Sales Ton Information
Realized product revenue rate1
Cash cost of goods sold and operating expense rate1,2
Depreciation, depletion & amortization
Total cost of goods sold and operating expenses rate
Sales margin
2016
2015
Difference
45.85
$
39.93
$
33.94
2.16
36.10
36.95
2.18
39.13
9.75
$
0.80
$
5.92
(3.01)
(0.02)
(3.03)
8.95
$
$
Percent
change
14.8 %
(8.1)%
(0.9)%
(7.7)%
1,118.8 %
Sales tons3 (In thousands)
Production tons3 (In thousands)
11,642
11,839
11,627
11,722
1 The information above excludes revenues and expenses related to freight, which are offsetting and have no impact on sales margin.
2 Cash cost of goods sold and operating expense rate is a non-GAAP financial measure. See "Non-GAAP Reconciliation" for
reconciliation in dollars back to our consolidated financial statements.
3 Metric tons (2,205 pounds).
Sales margin for our Asia Pacific Iron Ore segment increased to $113.6 million during the year ended
December 31, 2016 compared with $9.4 million for 2015. The increase compared to the prior year primarily is attributable
to higher revenue of $66.6 million and lower cost of goods sold and operating expenses of $37.6 million. Sales margin
per metric ton increased 1,118.8% to $9.75 per metric ton in 2016 compared to 2015.
Revenue increased by $69.5 million during the year ended December 31, 2016 over the prior year, excluding
the decrease of $2.9 million of freight and reimbursements, primarily as a result of:
• The average year-to-date realized product revenue rate increased $5.92 per metric ton or 14.8% to $45.85
per metric ton, which resulted in an increase of $68.8 million, including the impact of foreign exchange. This
increase is a result of:
An increase in the Platts 62% Price positively affected the realized revenue rate by $3 per metric ton or
$33 million; and
A favorable variance of $3 per metric ton or $29 million due to the suspension in 2015 of the hedging
program that protected against volatility in exchange rates. This did not occur in 2016.
Cost of goods sold and operating expenses decreased $34.7 million or $2.98 per metric ton, in the year ended
December 31, 2016 over the prior year, excluding the decrease of $2.9 million of freight and reimbursements, primarily
as a result of:
• Reduced administration and employment costs of $16 million or $1 per metric ton, due to lower headcount
and contractor fees;
64
• A reduction in mining costs of $12 million or $1 per metric ton, due to mining efficiencies gained from our
revised mine plan, including a reduction in the required mined tons to meet our desired yields;
•
Lower transportation costs of $11 million or $1 per metric ton, due to decreased hauling volumes and reduced
freight costs as a result of the revised mine plan; and
• Favorable foreign exchange rate variances of $6 million or $1 per metric ton.
• Partially offset by increased crushing costs due to increased maintenance activities and our use of a third-
party mobile crushing until and increased royalties, which were driven by higher gross revenues, for $9
million or $1 per metric ton.
Production
Production volume at our Asia Pacific Iron Ore segment during the year ended December 31, 2016 remained
consistent with 2015, increasing 117 thousand metric tons or 1.0%. The increase in production tons compared to the
prior year is mainly attributable to increased crusher feed productivity and the use of third-party mobile crusher support.
Liquidity, Cash Flows and Capital Resources
Our primary sources of liquidity are Cash and cash equivalents and cash generated from our operating and
financing activities. Our capital allocation decision-making process is focused on improving the strength of our balance
sheet and creating financial flexibility to manage through the inherent cyclical demand for our products and volatility in
commodity prices. We are focused on the preservation of liquidity in our business through maximizing the cash generation
of our operations as well as reducing operating costs, aligning capital investments with our strategic priorities and the
requirements of our business plan, including regulatory and permission-to-operate related projects, and managing SG&A
expenses.
During 2017, we took action consistent with our capital allocation priorities and our stated objective of improving
the strength of our balance sheet, improving our financial flexibility and executing on opportunities that will allow us to
increase our long-term profitability. Through the issuance of common shares in an underwritten public offering resulting
in net proceeds of $661.3 million and two debt offerings for an aggregate principal amount of $1.075 billion, we extinguished
$1.611 billion of our existing debt, thereby reducing our average interest rate and extending our debt maturities. In
concurrent debt offerings we sold $400.0 million aggregate principal amount of senior secured notes and $316.25 million
aggregate principal amount of convertible notes resulting in net proceeds of $697.5 million that we intend to use to fund
a substantial portion of our HBI project in Toledo, Ohio, for upgrades at the Northshore plant to enable it to produce
significantly increased levels of DR-grade pellets that could be used as feedstock for the HBI production plant and/or
sold commercially and general corporate purposes.
Based on our outlook for the next 12 months, which is subject to continued changing demand from steelmakers
that utilize our products and volatility in iron ore and domestic steel prices, we expect to generate cash from operations
sufficient to meet the needs of our existing operations and to service our debt obligations.
Refer to “Outlook” for additional guidance regarding expected future results, including projections on pricing,
sales volume and production.
The following discussion summarizes the significant activities impacting our cash flows during 2017 and
comparative years as well as those expected to impact our future cash flows over the next 12 months. Refer to the
Statements of Consolidated Cash Flows for additional information.
Operating Activities
Net cash provided by operating activities was $338.1 million and $303.0 million for the years ended December 31,
2017 and 2016, respectively. The increase in cash provided by operating activities during 2017 was primarily due to the
improved operating results previously discussed related to our U.S. Iron Ore operating segment offset partially by cash
outflows for working capital. The working capital change in 2017 versus 2016 was primarily driven by the repeal of
corporate AMT as a result of tax reform, which impacted our taxes receivable, and the timing of inventory and accounts
receivable movements.
65
Driving the increase in our taxes receivable is Public Law 115–97, commonly known as the “Tax Cuts and Jobs
Act”, which among other things, repeals the corporate AMT and will reduce the federal corporate tax rate to 21% for tax
years beginning January 1, 2018. Along with the repeal of AMT, Public Law 115–97 provides that existing AMT credit
carryovers are refundable beginning with the filing of the calendar year 2018 tax return. We have $235.3 million of AMT
credit carryovers that are expected to be fully refunded between 2019 and 2022.
Net cash provided by operating activities increased to $303.0 million for the year ended December 31, 2016,
compared to net cash provided by operating activities of $37.9 million for 2015. The increase in operating cash flows in
2016 was primarily due to better operating results previously discussed related to both the U.S. Iron Ore and Asia Pacific
Iron Ore operating segments, and improved cash flows from working capital. The working capital improvement in 2016
versus 2015 was driven by aggressively reducing inventory levels partially offset by the prior-year income tax refund.
Sales volume outpaced production volume in 2016, while in 2015, production volume was higher than sales volume.
Our U.S. cash and cash equivalents balance at December 31, 2017 was $952.1 million, or 94% of our consolidated
total cash and cash equivalents balance of $1,007.7 million.
Investing Activities
Net cash used by investing activities was $156.0 million for the year ended December 31, 2017, compared with
$57.9 million for the year ended December 31, 2016. We had capital expenditures of $151.7 million and $69.1 million
for the years ended December 31, 2017 and 2016, respectively. The 2017 capital expenditures include sustaining capital
spend, early-stage work on our HBI project and the acquisition of certain real estate interests located in Itasca County
west of Nashwauk, Minnesota.
Net cash used in investing activities was $57.9 million for the year ended December 31, 2016 compared with
$103.2 million for 2015. We had capital expenditures of $69.1 million and $80.8 million for the years ended December 31,
2016 and 2015, respectively. Offsetting our investments in property, plant and equipment, during 2016, we had cash
proceeds from investing activities of $8.3 million, primarily from the collection of a debtor-in-possession credit facility (the
"DIP financing").
We spent approximately $48 million, $43 million and $81 million globally on expenditures related to sustaining
capital during 2017, 2016 and 2015, respectively. Sustaining capital spend includes infrastructure, mobile equipment,
environmental, safety, fixed equipment, product quality and health. Additionally, during the year ended December 31,
2017, we spent approximately $43 million on our capital project to produce a specialized, super-flux pellet called "Mustang"
at United Taconite in order to meet a customer's pellet specification requirements. We have spent a total of approximately
$74 million on this project and expect remaining payments of less than $1 million.
In alignment with our strategy to prioritize our capital allocation between liquidity management and business
investment, we anticipate total cash used for capital expenditures, excluding amounts attributable to construction-related
contingencies and capitalized interest, during 2018 to be approximately $385 million, the vast majority of which relates
to our U.S. operations. Included within this estimate is approximately $250 million related to development of the HBI
production plant in Toledo, Ohio and $50 million for upgrades at the Northshore plant to enable it to produce significantly
increased levels of DR-grade pellets that could be sold commercially or used as feedstock for the HBI production plant.
In total, we expect to spend approximately $700 million on the HBI production plant and $80 million on the Northshore
upgrades, exclusive of construction-related contingencies and capitalized interest, through 2020.
Financing Activities
Net cash provided by financing activities was $498.9 million for the year ended December 31, 2017, compared
with net cash used by financing activities of $206.4 million for 2016. Sources of cash from financing activities during
2017 included a common share offering, generating net proceeds of $661.3 million, and the issuance of $1.075
billion 5.75% 2025 Senior Notes, which provided further net proceeds of $1.046 billion. We also had an issuance of
$400.0 million 4.875% 2024 Senior Secured Notes and an issuance of $316.25 million 1.5% 2025 Convertible Senior
Notes, generating net proceeds of $697.5 million.
Uses of cash from financing activities during 2017 included the redemption of various tranches of secured and
unsecured debt. We redeemed in full all of our outstanding $540 million 8.25% 2020 First Lien Notes, $218.5 million
8.00% 2020 1.5 Lien Notes and $544.2 million 7.75% 2020 Second Lien Notes and purchased certain other outstanding
senior notes through tender offers and redemptions. The total aggregate principal amount of debt redeemed and
purchased, including premiums, during 2017 was $1.721 billion.
Additionally, we finalized an agreement to distribute the net assets of the noncontrolling interest in Empire to
66
ArcelorMittal in exchange for its interest in Empire and made the first distribution of $44.2 million. The remaining annual
installments of $44.2 million each are due in August 2018 and August 2019. We also acquired the remaining 15% equity
interest in Tilden owned by U.S. Steel for $105.0 million.
Net cash used by financing activities was $206.4 million for the year ended December 31, 2016, compared with
net cash provided by financing activities of $61.0 million for 2015. Net cash used by financing activities included the
redemption of all of our outstanding 3.95% 2018 Senior Notes for $305.4 million, which was offset partially by net proceeds
from the issuance of common shares of $287.4 million. Additionally, we paid the remaining balance of certain of our
equipment loans, which resulted in cash outflows of $95.6 million. Further, we had cash outflows attributable to agreed-
upon early distributions of partnership equity of $59.9 million during the year ended December 31, 2016 and paid the
last such scheduled early distribution of partnership equity of $8.7 million in January 2017.
The following represents our future cash commitments and contractual obligations as of December 31, 2017:
Contractual Obligations
Long-term debt
Interest on debt1
Operating lease obligations
Capital lease obligations
Contingent claims
Partnership distribution payable
Purchase obligations:
Open purchase orders
Minimum "take or pay" purchase
commitments2
Total purchase obligations
Other long-term liabilities:
Pension funding minimums
OPEB claim payments
Environmental and mine closure
obligations
Total other long-term liabilities
Payments Due by Period (In Millions)
1 - 3
Less than
Years
1 Year
3 - 5
Years
$
— $
123.4
4.9
20.8
55.6
44.2
64.0
86.0
150.0
27.7
4.0
3.6
35.3
$
211.3
242.5
3.6
23.2
—
44.2
7.5
181.2
188.7
56.7
7.6
33.8
98.1
138.4
212.8
3.6
12.6
—
—
0.1
69.1
69.2
57.2
7.3
4.8
69.3
More than
5 Years
$ 2,089.7
520.2
7.5
—
—
—
—
136.1
136.1
138.5
86.5
157.9
382.9
$
Total
2,439.4
1,098.9
19.6
56.6
55.6
88.4
71.6
472.4
544.0
280.1
105.4
200.1
585.6
Total
$
4,888.1
$
434.2
$
811.6
$
505.9
$ 3,136.4
1 Refer to NOTE 5 - DEBT AND CREDIT FACILITIES for additional information regarding our debt and related interest rates.
2 Includes minimum railroad transportation obligations, minimum electric power demand charges, minimum coal, diesel and natural
gas obligations and minimum port facility obligations.
The above table does not reflect $6.1 million of unrecognized tax benefits, which we have recorded for uncertain
tax positions, as we are unable to determine a reasonable and reliable estimate of the timing of future payments.
Refer to NOTE 20 - COMMITMENTS AND CONTINGENCIES for additional information regarding our future
commitments and obligations.
67
Capital Resources
We expect to fund our business obligations from available cash, current and future operations and existing
borrowing arrangements. We also may pursue other funding strategies in the capital markets to strengthen our liquidity.
The following represents a summary of key liquidity measures as of December 31, 2017 and 2016:
Cash and cash equivalents
Available borrowing base on ABL Facility1
ABL Facility loans drawn
Letter of credit obligations and other commitments
Borrowing capacity available
$
$
$
(In Millions)
December 31,
2017
December 31,
2016
1,007.7 $
323.4
273.2 $
—
(46.5)
226.7 $
333.0
—
(106.0)
227.0
1 The ABL Facility has the maximum borrowing base of $550 million, determined by applying customary advance
rates to eligible accounts receivable, inventory and certain mobile equipment.
Our primary sources of funding are cash and cash equivalents, which totaled $1,007.7 million as of December 31,
2017, cash generated by our business, availability under the ABL Facility and other financing activities. Cash and cash
equivalents include cash on hand and on deposit as well as all short-term securities held for the primary purpose of
general liquidity. The combination of cash and availability under the ABL Facility gives us $1,234.4 million in liquidity
entering the first quarter of 2018, which is expected to be adequate to fund operations, letter of credit obligations, sustaining
and expansion capital expenditures and other cash commitments for at least the next 12 months.
As of December 31, 2017, we were in compliance with the ABL Facility liquidity requirements and, therefore, the
springing financial covenant requiring a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0 was not applicable. We
believe that the cash on hand and the ABL Facility provide us sufficient liquidity to support our operating, investing and
financing activities. We have the capability to issue additional unsecured notes and, subject to the limitations set forth
in our existing debt indentures, additional secured indebtedness, if we elect to access the debt capital markets. However,
available capacity of these notes could be limited by market conditions.
Consistent with our stated strategy, we intend from time to time to seek to retire or purchase our outstanding
senior notes with cash on hand, borrowings from existing credit sources or new debt financings and/or exchanges for
debt or equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases,
if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors,
and the amounts involved may be material.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to certain arrangements that are not reflected on our Statements
of Consolidated Financial Position. These arrangements include minimum "take or pay" purchase commitments, such
as minimum electric power demand charges, minimum coal, diesel and natural gas purchase commitments, minimum
railroad transportation commitments and minimum port facility usage commitments; financial instruments with off-balance
sheet risk, such as bank letters of credit and bank guarantees; and operating leases, which primarily relate to equipment
and office space.
Market Risks
We are subject to a variety of risks, including those caused by changes in commodity prices, foreign currency
exchange rates and interest rates. We have established policies and procedures to manage such risks; however, certain
risks are beyond our control.
Pricing Risks
Commodity Price Risk
Our consolidated revenues include the sale of iron ore pellets, iron ore lump and iron ore fines. Our financial
results can vary significantly as a result of fluctuations in the market prices of iron ore and hot-rolled coil steel. World
market prices for these commodities have fluctuated historically and are affected by numerous factors beyond our control.
68
The world market price that most commonly is utilized in our iron ore sales contracts is the Platts 62% Price, which can
fluctuate widely due to numerous factors, such as global economic growth or contraction, change in demand for steel
or changes in availability of supply. The other important metric in our price realizations in the U.S. is the prices for hot-
rolled coil steel, which can fluctuate due to similar factors.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore and Asia Pacific Iron Ore customer supply agreements specify provisional price
calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be
based on market inputs at a specified point in time in the future, per the terms of the supply agreements. At December
31, 2017, we had derivative assets and liabilities of $1.5 million and $2.4 million, respectively, reflected as part of our
U.S. Iron Ore and Asia Pacific Iron Ore segment revenue, representing the fair value of the provisional price calculations.
We estimate that a positive or negative $10 change in the Platts 62% Price from the December 31, 2017 estimated price
recorded would cause a corresponding increase or decrease in the fair value of the derivative instrument of approximately
$5 million and $4 million for our U.S. Iron Ore and Asia Pacific Iron Ore segments, respectively.
We have not entered into any hedging programs to mitigate the risk of adverse price fluctuations; however, most
of our Asia Pacific Iron Ore supply agreements are short-term in nature and therefore do not expose us to long-term risk.
Customer Supply Agreements
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds based
on the average annual daily market price for hot-rolled coil steel at the time the product is consumed in the customer’s
blast furnaces. In the new contract which commenced in 2017, this supplemental revenue and refund data source
changes from the customer's average annual steel price to an average annual daily market price for hot-rolled coil steel.
At December 31, 2017, we had derivative assets of $37.9 million, representing the fair value of the pricing factors, based
upon the amount of unconsumed long tons and an estimated average hot-rolled coil steel price related to the period in
which the iron ore is expected to be consumed in the customer’s blast furnaces, subject to final pricing at a future date.
We estimate that a $75 positive or negative change in the average daily market price for hot-rolled coil steel realized
from the December 31, 2017 estimated price recorded would cause the fair value of the derivative instrument to increase
or decrease by approximately $15 million, respectively, thereby impacting our consolidated revenues by the same amount.
We have not entered into any hedging programs to mitigate the risk of adverse price fluctuations.
Volatile Energy and Fuel Costs
The volatile cost of energy is an important factor affecting the production costs at our iron ore operations. Our
consolidated U.S. Iron Ore operations consumed 17.3 million MMBtu’s of natural gas at an average delivered price of
$3.75 per MMBtu, excluding the natural gas hedge impact, or $3.80 per MMBtu net of the natural gas hedge impact
during 2017. Additionally, our consolidated U.S. Iron Ore operations consumed 22.3 million gallons of diesel fuel at an
average delivered price of $1.87 per gallon, excluding the diesel fuel hedge impact, or $1.88 per gallon net of the diesel
fuel hedge impact during 2017. Consumption of diesel fuel by our Asia Pacific operations was 11.2 million gallons at an
average delivered price of $1.73 per gallon for the same period.
In the ordinary course of business, there may also be increases in prices relative to electricity costs at our U.S.
mine sites. Specifically, our Tilden mine in Michigan has entered into large curtailable special contracts with Wisconsin
Electric Power Company. Charges under those special contracts are subject to a power supply cost recovery mechanism
that is based on variations in the utility's actual fuel and purchase power expenses.
Our strategy to address volatile natural gas and diesel rates includes improving efficiency in energy usage,
identifying alternative providers and utilizing the lowest cost alternative fuels. A full-year hedging program was
implemented during the fourth quarter of 2017 in order to manage the price risk of diesel and natural gas at our U.S. Iron
Ore mines. We will continue to monitor relevant energy markets for risk mitigation opportunities and may make additional
forward purchases or employ other hedging instruments in the future as warranted and deemed appropriate by
management. In the near term, a 10% change from our current average year-to-date natural gas and diesel fuel prices
would result in a change of approximately $11 million in our annual fuel and energy cost based on expected consumption
for 2018.
Valuation of Other Long-Lived Assets
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that
would indicate that the carrying value of the assets may not be recoverable. Such indicators may include, among others:
a significant decline in expected future cash flows; a sustained, significant decline in market pricing; a significant adverse
69
change in legal or environmental factors or in the business climate; changes in estimates of our recoverable reserves;
unanticipated competition; and slower growth or production rates. Any adverse change in these factors could have a
significant impact on the recoverability of our long-lived assets and could have a material impact on our consolidated
statements of operations and statement of financial position.
A comparison of each asset group's carrying value to the estimated undiscounted future cash flows expected to
result from the use of the assets, including cost of disposition, is used to determine if an asset is recoverable. Projected
future cash flows reflect management's best estimates of economic and market conditions over the projected period,
including growth rates in revenues and costs, estimates of future expected changes in operating margins and capital
expenditures. If the carrying value of the asset group is higher than its undiscounted future cash flows, the asset group
is measured at fair value and the difference is recorded as a reduction to the long-lived assets. We estimate fair value
using a market approach, an income approach or a cost approach. As of December 31, 2017, there were no indicators
present indicative of potential impairment or the inability to recover the value of our long-lived assets at our U.S. Iron
Ore operations. As of December 31, 2017, there were certain indicators present indicative of potential impairment or
the inability to recover the value of our long-lived assets at our Asia Pacific Iron Ore operations; however, the carrying
value of our long-lived assets are at or below the liquidation fair value.
Foreign Currency Exchange Rate Risk
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia, which
could impact our financial condition. With respect to Australia, foreign exchange currency risk arises from our exposure
to fluctuations in foreign currency exchange rates because our reporting currency is the U.S. dollar, but the functional
currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency
for their iron ore sales and incur costs in Australian currency. We estimate that if the average Australian dollar to U.S.
dollar exchange rate during the year ended December 31, 2018 was $0.05 higher or lower than the average exchange
rate for the year ended December 31, 2017, our forecasted cash cost of goods sold and operating expense would increase
or decrease by approximately $26 million, respectively, for our Asia Pacific Iron Ore segment.
We have not entered into any hedging programs to mitigate the risk of adverse currency fluctuations. We have
suspended entering into new foreign exchange rate contracts as we have indefinitely deferred the program. In the future,
we may enter into additional hedging instruments as needed in order to further hedge our exposure to changes in foreign
currency exchange rates.
Interest Rate Risk
Interest payable on our senior notes is at fixed rates. Interest payable under our ABL Facility is at a variable
rate based upon the base rate plus the base rate margin depending on the excess availability. As of December 31, 2017,
we had no amounts drawn on the ABL Facility.
During 2017, we issued the 5.75% 2025 Senior Notes in private transactions exempt from the registration
requirements of the Securities Act. Pursuant to the registration rights agreement executed as part of the issuances, we
agreed to file a registration statement with the SEC with respect to a registered offer to exchange the 5.75% 2025 Senior
Notes for publicly registered notes within 365 days of the issue date. If we fail to satisfy our obligations under the
registration rights agreement, we will be required to pay additional interest to the holders of the 5.75% 2025 Senior Notes
under certain circumstances. In the event of a registration default, the interest rate will be increased by 0.25% per annum
during the 90-day period immediately following the occurrence of any registration default, and such rate shall increase
by 0.25% per annum at the end of each subsequent 90-day period until all registration defaults have been cured, up to
a maximum additional interest rate of 1.00% per annum.
Supply Concentration Risks
Many of our mines are dependent on one source each of electric power and natural gas. A significant interruption
or change in service or rates from our energy suppliers could impact materially our production costs, margins and
profitability.
Outlook
Segment Outlook
After evaluating current and anticipated future market conditions in connection with the remaining iron ore
reserves at Asia Pacific Iron Ore, including quality and the current market price for the ore, we have decided to accelerate
the projected time frame for the planned closure of mining operations in Australia, which will more than likely occur in
2018. Accordingly, we will no longer provide guidance related to this business segment.
70
Per Long Ton Information
Revenues from product sales and services1
Cost of goods sold and operating expense rate
Less:
Freight expense rate2
Depreciation, depletion & amortization rate
Cash cost of goods sold and operating expense rate
Sales volume (million long tons)
Production volume (million long tons)
2018 Outlook Summary
U.S. Iron Ore
$97 - $102
$69 - $74
$7
$4
$58 - $63
20
20
1 This expectation is based on the assumption that iron ore prices, steel prices, and pellet premiums will
average for the remainder of 2018 their respective year-to-date averages.
2 Freight has an offsetting amount in revenue and has no impact on sales margin.
U.S. Iron Ore Outlook (Long Tons)
Based on the assumption that iron ore prices, steel prices, and pellet premiums will average for the remainder
of 2018 their respective year-to-date averages, we would realize U.S. Iron Ore revenue rates in the range of $97 to
$102 per long ton.
As previously disclosed, for 2018 we expect full-year sales and production volumes of approximately 20 million
long tons from our U.S. Iron Ore business. This compares to 18.7 million long tons of sales and 18.8 million long tons
of production in 2017.
Our full-year 2018 U.S. Iron Ore cash cost of goods sold and operating expense expectation is $58 - $63 per
long ton, which compares to $60 per long ton for the full-year 2017.
SG&A Expenses and Other Expectations
Full-year 2018 SG&A expenses are expected to be approximately $115 million. We also note that of the $115
million expectation, approximately $20 million is considered non-cash. The increase compared to 2017 is partially
attributable to a required accounting change related to the reclassification of certain Pension/OPEB components.
Our full-year 2018 interest expense is expected to be approximately $130 million, compared to $132 million
recorded in 2017. Consolidated full-year 2018 depreciation, depletion and amortization is expected to be approximately
$100 million, incurred ratably throughout the year.
Capital Expenditures
Our 2018 capital spending expectations are:
• Approximately $85 million in sustaining capital.
• Approximately $250 million toward the HBI project in Toledo, OH (fully funded with the December 2017
debt offerings).
• Approximately $50 million toward the upgrade of the Northshore mine to produce up to 3.5 million long tons
of DR-grade pellets a year.
Recently Issued Accounting Pronouncements
Refer to NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES of the
consolidated financial statements for a description of recent accounting pronouncements, including the respective dates
of adoption and effects on results of operations and financial condition.
71
Critical Accounting Estimates
Management's discussion and analysis of financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in accordance with GAAP. Preparation of financial
statements requires management to make assumptions, estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, costs and expenses, and the related disclosures of contingencies. Management bases its
estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the
inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. On a
regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our
financial statements are fairly presented in accordance with GAAP. However, because future events and their effects
cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences
could be material. Management believes that the following critical accounting estimates and judgments have a significant
impact on our financial statements.
Revenue Recognition
U.S. Iron Ore and Asia Pacific Iron Ore Provisional Pricing Arrangements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price
adjustment factors. The base price is the primary component of the purchase price for each contract. The inflation-
indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but
typically include adjustments based upon changes in the Platts 62% Price, along with pellet premiums, published Platts
international indexed freight rates and changes in specified Producer Price Indices, including those for industrial
commodities, energy and steel. The pricing adjustments generally operate in the same manner, with each factor typically
comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms
of each agreement. In most cases, these adjustment factors have not been finalized at the time our product is sold. In
these cases, we estimate the adjustment factors at each reporting period based upon the best third-party information
available. The estimates are then adjusted to actual when the information has been finalized.
The Producer Price Indices remain an estimated component of the sales price throughout the contract year
and are estimated each quarter using publicly available forecasts of such indices. The final indices referenced in certain
of the U.S. Iron Ore supply contracts typically are not published by the U.S. Department of Labor until the second quarter
of the subsequent year. As a result, we record an adjustment for the difference between the fourth quarter estimate
and the final price in the following year.
Throughout the year, certain of our Asia Pacific Iron Ore customers have contractual arrangements in which
pricing settlements are based upon an average index price for future periods. Most of the future periods are settled
within three months. To the extent the particular pricing settlement period is subsequent to the reporting period, we
estimate the final pricing settlement based upon information available. Similar to U.S. Iron Ore, the estimates are then
adjusted to actual when the price settlement period elapses.
Provisional pricing arrangement adjustments have not been material to U.S. and Asia Pacific Iron Ore's
respective revenues for each of the fiscal years ended December 31, 2017, 2016 and 2015.
U.S. Iron Ore Customer Supply Agreements
Certain supply agreements with one U.S. Iron Ore customer include provisions for supplemental revenue or
refunds based on the average annual daily market price for hot-rolled coil steel for the year that the product is consumed
in the customer's blast furnaces. The supplemental pricing is characterized as a freestanding derivative and is required
to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a
future price, is marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and
the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate
of the average annual daily market price for hot-rolled coil steel, and takes into consideration current market conditions
and nonperformance risk. At December 31, 2017, we had a derivative asset of $37.9 million, representing the fair value
of the pricing factors, based upon the amount of unconsumed long tons and an estimated average annual daily hot-
rolled coil steel price related to the period in which the iron ore are expected to be consumed in the customer's blast
furnace at each respective steelmaking facility, subject to final pricing at a future date.
72
The accuracy of our estimates typically increases as the year progresses based on additional information in
the market becoming available. The supplemental revenue adjustments have not been material to U.S. Iron Ore's
product revenues for the year ended December 31, 2017.
Mineral Reserves
We regularly evaluate our mineral reserves and update them as required in accordance with SEC Industry
Guide 7. The estimated mineral reserves could be affected by future industry conditions, geological conditions and
ongoing mine planning. Maintenance of effective production capacity of the mineral reserve could require increases in
capital and development expenditures. Generally, as mining operations progress, haul lengths and lifts increase.
Alternatively, changes in economic conditions or the expected quality of mineral reserves could decrease capacity of
mineral reserves. Technological progress could alleviate such factors or increase capacity of mineral reserves.
We use our mineral reserve estimates, combined with our estimated annual production levels, to determine the
mine closure dates utilized in recording the fair value liability for asset retirement obligations for our active operating
mines. Refer to NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS, for further information. Since
the liability represents the present value of the expected future obligation, a significant change in mineral reserves or
mine lives could have a substantial effect on the recorded obligation. We also utilize mineral reserves for evaluating
potential impairments of mine assets and in determining maximum useful lives utilized to calculate depreciation and
amortization of long-lived mine assets. Increases or decreases in mineral reserves or mine lives could significantly
affect these items.
Valuation of Long-Lived Assets
In assessing the recoverability of our long-lived assets, significant assumptions regarding the estimated future
cash flows and other factors to determine the fair value of the respective assets must be made, as well as the related
estimated useful lives. If these estimates or their related assumptions change in the future as a result of changes in
strategy or market conditions, we may be required to record impairment charges for these assets in the period such
determination was made.
We monitor conditions that indicate that the carrying value of an asset or asset group may be impaired. In
order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable,
independent cash flows are available. An impairment loss exists when projected undiscounted cash flows are less than
the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the
difference between the fair value and the carrying value of the asset group. Fair value can be determined using a
market approach, income approach or cost approach. The impairment analysis and fair value determination can result
in substantially different outcomes based on critical assumptions and estimates including the quantity and quality of
remaining mineral reserves, future iron ore prices and production costs.
As a result of these assessments during 2017 and 2015, no material impairment charges were recorded related
to long-lived tangible or intangible assets at our continuing operations. During 2016, there were no impairment indicators
present; as a result, no impairment assessments were required.
Refer to NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, NOTE 4 -
PROPERTY, PLANT AND EQUIPMENT and NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further
information regarding our policy on asset impairment, detail on our remaining PP&E and mineral rights and non-recurring
fair value measurements.
Investments In and Receivables From Canadian Entities and Contingent Claims
We determined the fair value and recoverability of our Canadian investments by comparing the estimated fair
value of the underlying assets of the Canadian Entities to estimated liabilities. We estimated the fair value of major
asset classes by using actual liquidation values through December 31, 2017 less estimated cost to sell. Outstanding
liabilities include accounts payable and other liabilities, forward commitments, unsubordinated related party payables,
lease liabilities, and other potential claims. Potential claims include an accrual for the estimated probable loss related
to claims that may be asserted against the Canadian Entities under certain contracts. Based on our estimates, the fair
value of liabilities exceeds the fair value of assets. To assess the fair value and recoverability of amounts receivable
from the Canadian Entities, we estimated the fair value of the underlying net assets of the Canadian Entities available
for distribution to their creditors in relation to the estimated creditor claims and the priority of those claims. Additionally,
given that it is probable a preference claim will be asserted against us and/or certain of our affiliates, we recorded an
estimated liability as a contingent claim. To assess the fair value of the contingent claim, we estimated the value by
73
utilizing the approximate value of our related-party claims against the Bloom Lake Group and the Wabush Group. Our
estimates involve significant judgment and are based on currently available information, an assessment of the validity
of certain claims, and estimated payments by the Canadian Entities. Our ultimate recovery, if any, is subject to the final
liquidation value of the Canadian Entities and the distribution of the net proceeds as determined by the Canadian Court
and may vary significantly from our current estimates. See NOTE 14 - DISCONTINUED OPERATIONS for further
information.
Asset Retirement Obligations and Environmental Remediation Costs
The accrued mine closure obligations for our active mining operations provide for contractual and legal
obligations associated with the eventual closure of the mining operations. We perform an in-depth evaluation of the
liability every three years in addition to our routine annual assessments. In 2017, we employed a third-party specialist
to assist in the evaluation. Our obligations are determined based on detailed estimates adjusted for factors that a
market participant would consider (i.e., inflation, overhead and profit), which are escalated at an assumed rate of inflation
to the estimated closure dates, and then discounted using the current credit-adjusted risk-free interest rate. The estimate
also incorporates incremental increases in the closure cost estimates and changes in estimates of mine lives. The
closure date for each location is determined based on the exhaustion date of the remaining iron ore reserves, which is
dependent on our estimate of mineral reserves. The estimated obligations are particularly sensitive to the impact of
changes in mine lives given the difference between the inflation and discount rates. Changes in the base estimates of
legal and contractual closure costs due to changes in legal or contractual requirements, available technology, inflation,
overhead or profit rates also could have a significant impact on the recorded obligations.
We have a formal policy for environmental protection and remediation. Our obligations for known environmental
matters at active and closed mining operations and other sites have been recognized based on estimates of the cost
of investigation and remediation at each site. If the obligation can only be estimated as a range of possible amounts,
with no specific amount being more likely, the minimum of the range is accrued. Management reviews its environmental
remediation sites quarterly to determine if additional cost adjustments or disclosures are required. The characteristics
of environmental remediation obligations, where information concerning the nature and extent of clean-up activities is
not immediately available and which are subject to changes in regulatory requirements, result in a significant risk of
increase to the obligations as they mature. Expected future expenditures are not discounted to present value unless
the amount and timing of the cash disbursements can be reasonably estimated. Potential insurance recoveries are not
recognized until realized. Refer to NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS, for further
information.
Income Taxes
Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect
management's best assessment of estimated future taxes to be paid. We are subject to income taxes in the U.S. and
various foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income
tax expense.
Deferred income taxes arise from temporary differences between tax and financial statement recognition of
revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive
and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax
planning strategies and recent financial operations. In projecting future taxable income, we begin with historical results
adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions
including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences,
and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment
about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage
the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years
of cumulative operating income (loss).
At December 31, 2017 and 2016, we had a valuation allowance of $2,238.5 million and $3,334.8 million,
respectively, against our deferred tax assets. Our losses in certain locations in recent periods represented sufficient
negative evidence to require a full valuation allowance against certain deferred tax assets. We intend to maintain a
valuation allowance against the deferred tax assets related to these operating losses, until sufficient positive evidence
exists to support the realization of such assets.
Changes in tax laws and rates also could affect recorded deferred tax assets and liabilities in the future. In
2017, both the U.S. and Luxembourg reduced the statutory rate; this decreased the deferred tax assets and related
valuation allowance by $407.5 million. The U.S. tax legislation also repealed the corporate AMT which resulted in a
74
reversal of the valuation allowance related to the AMT credits and generated a $235.3 million long-term Income tax
receivable, which will be refunded between the years 2019 through 2022.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws
and regulations in various jurisdictions across our global operations. The ultimate impact of the U.S. income tax reform
legislation may differ from our current estimates due to changes in the interpretations and assumptions made as well
as additional regulatory guidance that may be issued.
Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit
from an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation processes, based on technical merits.
We recognize tax liabilities in accordance with ASC 740, Income Taxes, and we adjust these liabilities when
our judgment changes as a result of evaluation of new information not previously available. Due to the complexity of
some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current
estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in
the period in which they are determined. Refer to NOTE 9 - INCOME TAXES, for further information.
Employee Retirement Benefit Obligations
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit
plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total
compensation and benefits program. We do not have employee retirement benefit obligations at our Asia Pacific Iron
Ore operations. The defined benefit pension plans largely are noncontributory and benefits generally are based on
employees' years of service and average earnings for a defined period prior to retirement, or a minimum formula.
Following is a summary of our U.S. defined benefit pension and OPEB funding and expense for the years 2015
through 2018:
Pension
OPEB
Funding
35.7
$
Expense
23.9
$
Funding
3.5
$
1.2
24.4
27.7
16.5
18.0
12.3
1.1
2.1
4.0
Expense
(Benefit)
4.4
$
(4.0)
(6.1)
(6.2)
2015
2016
2017
2018 (Estimated)
Assumptions used in determining the benefit obligations and the value of plan assets for defined benefit pension
plans and postretirement benefit plans (primarily retiree healthcare benefits) that we offer are evaluated periodically by
management. Critical assumptions, such as the discount rate used to measure the benefit obligations, the expected
long-term rate of return on plan assets, the medical care cost trend, and the rate of compensation increase are reviewed
annually.
75
As of December 31, 2017 and 2016, we used the following assumptions:
U.S. plan discount rate
Iron Hourly Pension Plan
Salaried Pension Plan
Ore Mining Pension Plan
SERP
Hourly OPEB Plan
Salaried OPEB Plan
U.S. rate of compensation increase - Salaried
U.S. rate of compensation increase - Hourly
U.S. pension plan expected return on plan assets
U.S. OPEB plan expected return on plan assets
Health care cost trend rate assumed for next year
Ultimate health care cost trend rate
Year that the ultimate rate is reached
Pension and Other
Benefits
2017
2016
3.60 %
3.52
3.61
3.50
3.60
3.57
3.00
2.00
8.25
7.00
7.00
5.00
2026
4.02 %
3.92
4.04
3.90
4.02
3.99
3.00
2.00
8.25
7.00
6.50
5.00
2023
The decrease in the discount rates in 2017 was driven by the change in corporate bond yields, which were
down approximately 40 basis points compared to the prior year.
Additionally, on December 31, 2017, the assumed mortality improvement projection was changed from
generational scale MP-2016 to generational scale MP-2017. The healthy mortality assumption remains the RP-2014
mortality tables with blue collar and white collar adjustments made for certain hourly and salaried groups to determine
the expected life of our plan participants.
Following are sensitivities of potential further changes in these key assumptions on the estimated 2018 pension
and OPEB expense and the pension and OPEB benefit obligations as of December 31, 2017:
Decrease discount rate 0.25%
Decrease return on assets 1.00%
Increase medical trend rate 1.00%
Increase in Expense
Increase in Benefit
Obligation
(In Millions)
(In Millions)
Pension
$
1.7 $
7.3
N/A
OPEB
0.3
2.6
2.5
Pension
$
27.9 $
N/A
N/A
OPEB
7.6
N/A
21.2
Changes in actuarial assumptions, including discount rates, employee retirement rates, mortality, compensation
levels, plan asset investment performance and healthcare costs, are determined based on analyses of actual and
expected factors. Changes in actuarial assumptions and/or investment performance of plan assets may have a significant
impact on our financial condition due to the magnitude of our retirement obligations. Refer to NOTE 7 - PENSIONS
AND OTHER POSTRETIREMENT BENEFITS, for further information.
76
Forward-Looking Statements
This report contains statements that constitute "forward-looking statements" within the meaning of the federal
securities laws. As a general matter, forward-looking statements relate to anticipated trends and expectations rather
than historical matters. Forward-looking statements are subject to uncertainties and factors relating to Cliffs’ operations
and business environment that are difficult to predict and may be beyond our control. Such uncertainties and factors
may cause actual results to differ materially from those expressed or implied by the forward-looking statements. 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. Uncertainties and risk factors that could affect Cliffs’ future performance and cause
results to differ from the forward-looking statements in this report include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
uncertainty and weaknesses in global economic conditions, including downward pressure on prices caused
by oversupply or imported products, the impact of barriers to trade, the outcomes of trade cases, reduced
market demand and any change to the economic growth rate in China;
continued volatility of iron ore and steel prices and other trends, including the supply approach of the major
iron ore producers, affecting our financial condition, results of operations or future prospects—specifically,
the impact of price-adjustment factors on our sales contracts;
our ability to successfully diversify our product mix and add new customers beyond our traditional blast
furnace clientele, specifically successful completion of our HBI production plant;
our level of indebtedness could limit cash flow available to fund working capital, capital expenditures,
acquisitions and other general corporate purposes or ongoing needs of our business;
availability of capital and our ability to maintain adequate liquidity;
risks related to former and current international operations, including our ability to successfully conclude the
CCAA process in Canada and plan for the end of mine life in Australia in a manner that minimizes cash
outflows and associated liabilities;
our actual economic iron ore reserves or changes in current mineral estimates, including whether any
mineralized material qualifies as a reserve;
the impact of our customers reducing their steel production due to increased market share of steel produced
using other methods or lighter-weight steel alternatives;
the ability of our customers, joint venture partners and significant suppliers and service providers to meet
their obligations to us on a timely basis or at all;
the outcome of any litigation or arbitration, including any contractual disputes with our customers, joint venture
partners or significant energy, material or service providers;
our ability to maintain satisfactory relations with unions and employees;
impacts of existing and increasing governmental regulation and related costs and liabilities, including failure
to receive or maintain required operating and environmental permits, approvals, modifications or other
authorization of, or from, any governmental or regulatory entity and costs related to implementing
improvements to ensure compliance with regulatory changes;
problems or uncertainties with productivity, tons mined, transportation, capital spending, mine-closure
obligations, environmental liabilities, employee-benefit costs and other risks of the mining industry;
our ability to cost-effectively achieve planned production rates or levels, including at our HBI production
plant;
our ability to successfully identify and consummate any strategic investments or development projects,
including our HBI production plant;
changes in sales volume or mix;
our ability to reach agreement with our customers regarding any modifications to sales contract provisions,
renewals or new arrangements;
77
•
•
•
•
•
events or circumstances that could impair or adversely impact the viability of a mine and the carrying value
of associated assets, as well as any resulting impairment charges;
uncertainties associated with natural disasters, weather conditions, unanticipated geological conditions,
supply or price of energy, equipment failures and other unexpected events;
adverse changes in currency values, currency exchange rates, interest rates and tax laws;
uncertainty relating to restructurings in the steel industry and/or affecting the steel industry; and
the potential existence of significant deficiencies or material weaknesses in our internal control over financial
reporting.
For additional factors affecting the business of Cliffs, refer to Part I – Item 1A. Risk Factors. You are urged to
carefully consider these risk factors.
Non-GAAP Reconciliation
We present cash cost of goods sold and operating expense rate per long/metric ton, which is a non-GAAP
financial measure that management uses in evaluating operating performance. We believe our presentation of non-
GAAP cash cost of goods sold and operating expenses is useful to investors because it excludes depreciation, depletion
and amortization, which are non-cash, and freight and joint venture partners' cost reimbursements, which have no impact
on sales margin, thus providing a more accurate view of the cash outflows related to the sale of iron ore. The presentation
of this measure is not intended to be considered in isolation from, as a substitute for, or as superior to, the financial
information prepared and presented in accordance with GAAP. The presentation of this measure may be different from
non-GAAP financial measures used by other companies. Below is a reconciliation in dollars of this non-GAAP financial
measure to our consolidated financial statements for the years ended December 31, 2017 and 2016:
(In Millions)
Year Ended December 31,
Year Ended December 31,
2017
2016
U.S. Iron
Ore
Asia Pacific
Iron Ore
Total
U.S. Iron
Ore
Asia Pacific
Iron Ore
Total
$
(1,400.6) $
(427.9) $
(1,828.5) $
(1,278.8) $
(440.9) $
(1,719.7)
Cost of goods sold and operating
expenses
Less:
Freight and reimbursements
(221.4)
(19.6)
(241.0)
(174.8)
(20.7)
(195.5)
Depreciation, depletion &
amortization
Cash cost of goods sold and
operating expenses
(66.6)
(14.3)
(80.9)
(84.0)
(25.1)
(109.1)
$
(1,112.6) $
(394.0) $
(1,506.6) $
(1,020.0) $
(395.1) $
(1,415.1)
Below is a reconciliation in dollars of this non-GAAP measure to our consolidated financial statements for the
years ended December 31, 2016 and 2015:
(In Millions)
Year Ended December 31,
Year Ended December 31,
2016
2015
U.S. Iron
Ore
Asia Pacific
Iron Ore
Total
U.S. Iron
Ore
Asia Pacific
Iron Ore
Total
$
(1,278.8) $
(440.9) $
(1,719.7) $
(1,298.3) $
(478.5) $
(1,776.8)
Cost of goods sold and operating
expenses
Less:
Freight and reimbursements
(174.8)
(20.7)
(195.5)
(157.3)
(23.6)
(180.9)
Depreciation, depletion &
amortization
Cash cost of goods sold and
operating expenses
(84.0)
(25.1)
(109.1)
(98.9)
(25.3)
(124.2)
$
(1,020.0) $
(395.1) $
(1,415.1) $
(1,042.1) $
(429.6) $
(1,471.7)
78
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Information regarding our Market Risk is presented under the caption Market Risks, which is included in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated by reference
and made a part hereof.
79
Item 8.
Financial Statements and Supplementary Data
Statements of Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Inventories
Supplies and other inventories
Derivative assets
Loans to and accounts receivables from the Canadian Entities
Other current assets
TOTAL CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT, NET
Income tax receivable
Other non-current assets
TOTAL ASSETS
(In Millions)
December 31,
2017
2016
$
$
1,007.7 $
140.6
183.4
93.9
39.4
51.6
28.0
1,544.6
1,051.0
235.3
122.5
2,953.4 $
323.4
128.7
178.4
91.4
33.1
48.6
21.0
824.6
984.4
—
114.9
1,923.9
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
80
Statements of Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries - (Continued)
LIABILITIES
CURRENT LIABILITIES
Accounts payable
Accrued employment costs
State and local taxes payable
Accrued expenses
Accrued interest
Accrued royalties
Contingent claims
Partnership distribution payable
Other current liabilities
TOTAL CURRENT LIABILITIES
POSTEMPLOYMENT BENEFIT LIABILITIES
Pensions
Other postretirement benefits
TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
LONG-TERM DEBT
OTHER LIABILITIES
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (SEE NOTE 20)
EQUITY
CLIFFS SHAREHOLDERS' DEFICIT
Preferred Stock - no par value
Class A - 3,000,000 shares authorized
Class B - 4,000,000 shares authorized
Common Shares - par value $0.125 per share
(In Millions)
December 31,
2017
2016
$
127.7 $
56.1
30.2
33.7
31.4
17.3
55.6
44.2
56.0
452.2
222.8
34.9
257.7
196.5
2,304.2
186.9
3,397.5
107.6
56.1
28.3
41.1
40.2
26.2
—
8.7
82.9
391.1
245.7
34.8
280.5
193.9
2,175.1
213.8
3,254.4
Authorized - 600,000,000 shares (2016 - 400,000,000 shares);
Issued - 301,886,794 shares (2016 - 238,636,794 shares);
Outstanding - 297,400,968 shares (2016 - 233,074,091 shares)
Capital in excess of par value of shares
Retained deficit
Cost of 4,485,826 common shares in treasury (2016 - 5,562,703 shares)
Accumulated other comprehensive loss
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
NONCONTROLLING INTEREST
TOTAL DEFICIT
TOTAL LIABILITIES AND DEFICIT
37.7
3,933.9
(4,207.3)
(169.6)
(39.0)
(444.3)
0.2
(444.1)
2,953.4 $
29.8
3,347.0
(4,574.3)
(245.5)
(21.3)
(1,464.3)
133.8
(1,330.5)
1,923.9
$
The accompanying notes are an integral part of these consolidated financial statements.
81
Statements of Consolidated Operations
Cleveland-Cliffs Inc. and Subsidiaries
REVENUES FROM PRODUCT SALES AND SERVICES
Product
Freight and venture partners' cost reimbursements
COST OF GOODS SOLD AND OPERATING EXPENSES
SALES MARGIN
OTHER OPERATING INCOME (EXPENSE)
Selling, general and administrative expenses
Miscellaneous - net
OPERATING INCOME
OTHER INCOME (EXPENSE)
Interest expense, net
Gain (loss) on extinguishment/restructuring of debt
Other non-operating income (expense)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY
LOSS FROM VENTURES
INCOME TAX BENEFIT (EXPENSE)
EQUITY LOSS FROM VENTURES, net of tax
INCOME FROM CONTINUING OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS, net of tax
NET INCOME (LOSS)
LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
(Year Ended December 31, 2017 and 2016 - No loss related to Discontinued Operations and Year Ended
December 31, 2015 - Loss of $7.7 million)
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
PREFERRED STOCK DIVIDENDS
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS
SHAREHOLDERS - BASIC
Continuing operations
Discontinued operations
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS
SHAREHOLDERS - DILUTED
Continuing operations
Discontinued operations
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
Basic
Diluted
(In Millions, Except Per Share
Amounts)
Year Ended
December 31,
2017
2016
2015
$ 2,089.2
241.0
2,330.2
(1,828.5)
501.7
$ 1,913.5
195.5
2,109.0
(1,719.7)
389.3
$ 1,832.4
180.9
2,013.3
(1,776.8)
236.5
(105.8)
27.7
(78.1)
423.6
(132.0)
(165.4)
3.2
(294.2)
129.4
252.4
—
381.8
(18.7)
363.1
3.9
367.0
—
367.0
1.34
(0.06)
1.28
1.32
(0.06)
1.26
$
$
$
$
$
$
(117.8)
(30.7)
(148.5)
240.8
(200.5)
166.3
0.4
(33.8)
207.0
12.2
—
219.2
(19.9)
199.3
(25.2)
174.1
—
174.1
0.98
(0.10)
0.88
0.97
(0.10)
0.87
$
$
$
$
$
$
(110.0)
24.8
(85.2)
151.3
(228.5)
392.9
(2.6)
161.8
313.1
(169.3)
(0.1)
143.7
(892.1)
(748.4)
(0.9)
(749.3)
(38.4)
(787.7)
0.63
(5.77)
(5.14)
0.63
(5.76)
(5.13)
288,435
292,961
197,659
200,145
153,230
153,605
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
82
Statements of Consolidated Comprehensive Income (Loss)
Cleveland-Cliffs Inc. and Subsidiaries
(In Millions)
Year Ended
December 31,
2017
2016
2015
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
367.0
$
174.1
$
(749.3)
OTHER COMPREHENSIVE INCOME (LOSS)
Pension and OPEB liability, net of tax
Unrealized net gain on marketable securities, net of tax
Unrealized net gain (loss) on foreign currency translation
Unrealized net gain (loss) on derivative financial instruments, net of tax
OTHER COMPREHENSIVE INCOME (LOSS)
OTHER COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO THE
NONCONTROLLING INTEREST
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS
SHAREHOLDERS
11.5
—
(13.9)
(0.5)
(2.9)
(19.8)
—
18.6
(2.6)
(3.8)
45.2
1.7
155.6
20.7
223.2
(1.1)
0.5
4.6
$
363.0
$
170.8
$
(521.5)
The accompanying notes are an integral part of these consolidated financial statements.
83
Statements of Consolidated Cash Flows
Cleveland-Cliffs Inc. and Subsidiaries
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization
Impairment of long-lived assets
Deferred income taxes
Loss (gain) on extinguishment/restructuring of debt
Loss on deconsolidation, net of cash deconsolidated
Other
Changes in operating assets and liabilities:
Receivables and other assets
Product inventories
Payables and accrued expenses
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchase of property, plant and equipment
Other investing activities
Net cash used by investing activities
FINANCING ACTIVITIES
Net proceeds from issuance of common shares
Proceeds from issuance of debt
Debt issuance costs
Borrowings under credit facilities
Repayment under credit facilities
Repayments of equipment loans
Repurchase of debt
Acquisition of noncontrolling interest
Distributions of partnership equity
Preferred stock dividends
Other financing activities
Net cash provided (used) by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
(In Millions)
Year Ended
December 31,
2017
2016
2015
$
363.1
$
199.3
$
(748.4)
87.7
—
—
165.4
20.2
21.2
(248.7)
(1.8)
(69.0)
338.1
(151.7)
(4.3)
(156.0)
661.3
1,771.5
(28.6)
—
—
—
(1,720.7)
(105.0)
(52.9)
—
(26.7)
498.9
3.3
684.3
323.4
1,007.7
$
$
115.4
—
—
(166.3)
17.5
10.0
43.2
157.8
(73.9)
303.0
(69.1)
11.2
(57.9)
287.4
—
(5.2)
105.0
(105.0)
(95.6)
(305.4)
—
(59.9)
—
(27.7)
(206.4)
(0.5)
38.2
285.2
323.4
$
134.0
76.6
159.8
(392.9)
668.3
61.1
369.1
(62.0)
(227.7)
37.9
(80.8)
(22.4)
(103.2)
—
503.5
(33.6)
309.8
(309.8)
(45.4)
(225.9)
—
(40.6)
(51.2)
(45.8)
61.0
(1.4)
(5.7)
290.9
285.2
The accompanying notes are an integral part of these consolidated financial statements.
See NOTE 17 - CASH FLOW INFORMATION.
84
Statements of Consolidated Changes in Equity
Cleveland-Cliffs Inc. and Subsidiaries
(In Millions)
Cliffs Shareholders
Number
of
Depositary
Shares
Depositary
Shares
Number
of
Common
Shares
Common
Shares
Capital in
Excess of
Par Value
of Shares
Retained
Earnings
Common
Shares
in
Treasury
Accumulated
Other
Comprehensive
Income
(Loss)
Non-
Controlling
Interest
Total
29.3
$
731.3
153.2
$ 19.8
$2,309.8
$ (3,960.7) $ (285.7) $
(245.8) $ (303.0) $ (1,734.3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(10.9)
(749.3)
—
—
—
—
—
—
—
—
—
—
—
—
20.7
—
(38.4)
—
—
227.8
—
—
—
—
—
—
0.9
(4.6)
(3.7)
0.2
(0.2)
(51.7)
528.2
—
—
(748.4)
223.2
(525.2)
0.2
(0.2)
(51.7)
528.2
9.8
(38.4)
January 1, 2015
Comprehensive income (loss)
Net income (loss)
Other comprehensive income (loss)
Total comprehensive loss
Capital contribution by noncontrolling
interest to subsidiary
Distributions to noncontrolling interest
Distributions of partnership equity
Effect of deconsolidation
Stock and other incentive plans
Preferred Share dividends ($1.32 per
depositary share)
December 31, 2015
29.3
$
731.3
153.5
$ 19.8
$2,298.9
$ (4,748.4) $ (265.0) $
(18.0) $
169.8
$ (1,811.6)
Comprehensive income (loss)
Net income
Other comprehensive loss
Total comprehensive income
—
—
—
—
Preferred Share conversion
(29.3)
(731.3)
Equity offering
Debt exchanges
Distributions to noncontrolling interest
Distributions of partnership equity
Stock and other incentive plans
December 31, 2016
Comprehensive income (loss)
Net income (loss)
Other comprehensive income (loss)
Total comprehensive income (loss)
Issuance of convertible debt
Equity offering
Acquisition of noncontrolling interest
Distribution of partnership equity
Capital contributions by noncontrolling
interest to subsidiary
Stock and other incentive plans
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
December 31, 2017
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26.5
44.4
8.2
—
—
0.5
—
—
3.5
5.5
1.0
—
—
—
—
—
727.8
281.9
44.2
—
—
(5.8)
174.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19.5
—
(3.3)
—
—
—
—
—
—
25.2
(0.5)
24.7
—
—
—
(3.2)
(57.5)
—
199.3
(3.8)
195.5
—
287.4
45.2
(3.2)
(57.5)
13.7
233.1
$ 29.8
$3,347.0
$ (4,574.3) $ (245.5) $
(21.3) $
133.8
$ (1,330.5)
—
—
—
63.3
—
—
—
1.0
—
—
—
7.9
—
—
—
—
—
—
83.4
653.4
(70.2)
(17.3)
—
(62.4)
367.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
75.9
—
(4.0)
—
—
(3.9)
1.1
(2.8)
—
—
(18.9)
(15.9)
5.2
(116.7)
—
—
1.8
—
363.1
(2.9)
360.2
83.4
661.3
(105.0)
(128.8)
1.8
13.5
297.4
$ 37.7
$3,933.9
$ (4,207.3) $ (169.6) $
(39.0) $
0.2
$
(444.1)
The accompanying notes are an integral part of these consolidated financial statements.
85
Cleveland-Cliffs Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Founded in 1847, we are the largest and oldest independent iron ore mining company in the United States. We
are a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in
Michigan and Minnesota. Additionally, we operate an iron ore mining complex in Western Australia. By 2020, we expect
to be the sole producer of HBI in the Great Lakes region with the development of our first production plant in Toledo,
Ohio.
Significant Accounting Policies
We consider the following policies to be beneficial in understanding the judgments that are involved in the
preparation of our consolidated financial statements and the uncertainties that could impact our financial condition, results
of operations and cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves future
realizable cash flow; environmental, reclamation and closure obligations; valuation of long-lived assets; valuation of
inventory; valuation of post-employment, post-retirement and other employee benefit liabilities; valuation of tax assets;
reserves for contingencies and litigation; the fair value of derivative instruments; and the fair value of loans to and accounts
receivable from Canadian entities. Actual results could differ from estimates. On an ongoing basis, management reviews
estimates. Changes in facts and circumstances may alter such estimates and affect the results of operations and financial
position in future periods.
Basis of Consolidation
The consolidated financial statements include our accounts and the accounts of our wholly owned and majority-
owned subsidiaries, including the following operations at December 31, 2017:
Name
Northshore
United Taconite
Tilden1
Empire1
Koolyanobbing
Location
Minnesota
Minnesota
Michigan
Michigan
Western Australia
Ownership
Interest
100.0%
100.0%
100.0%
100.0%
100.0%
Operation
Iron Ore
Status of Operations
Active
Iron Ore
Iron Ore
Iron Ore
Iron Ore
Active
Active
Indefinitely Idled
Active
1 During 2017, our ownership interest in Tilden and Empire changed. Refer to the Noncontrolling Interests section below for
additional information.
Intercompany transactions and balances are eliminated upon consolidation.
86
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not
control, are accounted for under the equity method.
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of December 31, 2017
and 2016, our investment in Hibbing was $11.0 million and $8.7 million, respectively, classified in Other liabilities in the
Statements of Consolidated Financial Position.
Our share of equity income (loss) is eliminated against consolidated product inventory upon production, and
against Cost of goods sold and operating expenses when sold. This effectively reduces our cost for our share of the
mining ventures' production cost, reflecting the cost-based nature of our participation in unconsolidated ventures.
Noncontrolling Interests
During 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the
noncontrolling interest net assets of $132.7 million to ArcelorMittal, in exchange for its interest in Empire. The parties
agreed that the net assets were to be distributed in three installments of $44.2 million each, the first of which was paid
upon the execution of the agreement and the remaining distributions are due in August 2018 and August 2019. Upon
payment of the first installment, we assumed ArcelorMittal's 21% interest and have reflected this ownership percentage
change in our consolidated financial statements. We accounted for the increase in ownership as an equity transaction,
which resulted in a net $12.1 million decrease in equity attributable to Cliffs' shareholders and a $116.7 million decrease
in Noncontrolling interest. The net loss and income attributable to the noncontrolling interest of the Empire mining venture
was $3.9 million and $25.2 million for the years ended December 31, 2017 and 2016, respectively.
During 2017, we also acquired the remaining 15% equity interest in Tilden owned by U.S. Steel for $105.0 million.
With the closing of this transaction, we now have 100% ownership of the mine. We accounted for the increase in
ownership as an equity transaction, which resulted in an $89.1 million decrease in equity attributable to Cliffs' shareholders
and a $15.9 million decrease in Noncontrolling interest.
Noncontrolling interest is also comprised of the 17.2% noncontrolling interest in the Bloom Lake operations,
through the CCAA filing on January 27, 2015. Financial results prior to the deconsolidation of the Bloom Lake Group
and subsequent expenses directly associated with the Canadian Entities are included in our financial statements. There
was no net income or loss attributable to the noncontrolling interest related to Bloom Lake for the years ended
December 31, 2017 and 2016. See NOTE 14 - DISCONTINUED OPERATIONS for further information.
Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit as well as all short-term securities held for the
primary purpose of general liquidity. We consider investments in highly liquid debt instruments with an original maturity
of three months or less from the date of acquisition and longer maturities when funds can be withdrawn in three months
or less without a significant penalty to be cash equivalents. We routinely monitor and evaluate counterparty credit risk
related to the financial institutions in which our short-term investment securities are held.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for
doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We
establish provisions for losses on accounts receivable when it is probable that all or part of the outstanding balance will
not be collected. We regularly review our accounts receivable balances and establish or adjust the allowance as necessary
using the specific identification method. There was no allowance for doubtful accounts at December 31, 2017 and 2016
and no bad debt expense for the years ended December 31, 2017 and 2016. There was $7.1 million bad debt expense
for the year ended December 31, 2015.
Inventories
U.S. Iron Ore
U.S. Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is
determined using the LIFO method.
87
We had 1.5 million long tons of finished goods stored at ports and customer facilities on the lower Great Lakes
to service customers at December 31, 2017 and 2016. We maintain ownership of the inventories until title has transferred
to the customer, usually when payment is received. Maintaining ownership of the iron ore products at ports on the lower
Great Lakes reduces risk of non-payment by customers.
Asia Pacific Iron Ore
Asia Pacific Iron Ore product inventories are stated at the lower of cost or net realizable value. Iron ore inventories
are valued on a weighted average cost basis. We maintain ownership of the inventories until title has transferred to the
customer, which generally is when the product is loaded into the vessel.
Supplies and Other Inventories
Supply inventories include replacement parts, fuel, chemicals and other general supplies, which are expected
to be used or consumed in normal operations. Supply inventories also include critical spares. Critical spares are
replacement parts for equipment that is critical for the continued operation of the mine or processing facilities.
Supply inventories are stated at the lower of cost or net realizable value using average cost, less an allowance
for obsolete and surplus items. The allowance for obsolete and surplus items was $16.0 million and $14.0 million at
December 31, 2017 and 2016, respectively.
Derivative Financial Instruments and Hedging Activities
We are exposed to certain risks related to the ongoing operations of our business, including those caused by
changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and
procedures, including the use of certain derivative instruments, to manage such risks, if deemed necessary.
Derivative financial instruments are recognized as either assets or liabilities in the Statements of Consolidated
Financial Position and measured at fair value. On the date a derivative instrument is entered into, we designate a
qualifying derivative instrument as a hedge of the variability of cash flows to be received or paid related to a forecasted
transaction (cash flow hedge). We formally document all relationships between hedging instruments and hedged items,
as well as our risk-management objective and strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash flow hedges to specific firm commitments or forecasted transactions.
We also formally assess both at the hedge's inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in cash flows of the related hedged items. When it is
determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we
discontinue hedge accounting prospectively and record all future changes in fair value in the period of the instrument's
earnings or losses.
For derivative instruments that have been designated as cash flow hedges, the changes in fair value are recorded
in Accumulated other comprehensive loss. Amounts recorded in Accumulated other comprehensive loss are reclassified
to earnings or losses in the period the underlying hedged transaction affects earnings or when the underlying hedged
transaction is no longer reasonably possible of occurring.
For derivative instruments that have not been designated as cash flow hedges, changes in fair value are recorded
in the period of the instrument's earnings or losses.
Refer to Revenue Recognition below for discussion of derivatives recorded as a result of pricing terms in our
sales contracts.
Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
88
Property, Plant and Equipment
Our properties are stated at the lower of cost less accumulated depreciation or fair value. Depreciation of plant
and equipment is computed principally by the straight-line method based on estimated useful lives, not to exceed the
mine lives. Depreciation continues to be recognized when operations are idled temporarily. The U.S. Iron Ore operations
use the double-declining balance method of depreciation for certain mining equipment. The Asia Pacific Iron Ore operation
uses the production output method for certain mining equipment. Depreciation is provided over the following estimated
useful lives:
Asset Class
Office and information technology
Buildings
Mining equipment
Processing equipment
Electric power facilities
Land improvements
Asset retirement obligation
Basis
Straight line
Straight line
Life
3 to 15 Years
45 Years
Straight line/Double declining balance
3 to 20 Years
Straight line
Straight line
Straight line
Straight line
10 to 45 Years
10 to 45 years
20 to 45 years
Life of mine
Refer to NOTE 4 - PROPERTY, PLANT AND EQUIPMENT for further information.
Capitalized Stripping Costs
During the development phase, stripping costs are capitalized as a part of the depreciable cost of building,
developing and constructing a mine. These capitalized costs are amortized over the productive life of the mine using
the units of production method. The production phase does not commence until the removal of more than a de minimis
amount of saleable mineral material occurs in conjunction with the removal of overburden or waste material for purposes
of obtaining access to an ore body. The stripping costs incurred in the production phase of a mine are variable production
costs included in the costs of the inventory produced (extracted) during the period that the stripping costs are incurred.
Stripping costs related to expansion of a mining asset of proven and probable reserves are variable production
costs that are included in the costs of the inventory produced during the period that the stripping costs are incurred.
Other Intangible Assets and Liabilities
Other intangible assets are subject to periodic amortization over their estimated useful lives as follows:
Intangible Assets
Permits - Asia Pacific Iron Ore
Permits - USIO
Basis
Units of production
Straight line
Useful Life
Life of mine
Life of mine
Asset Impairment
Long-Lived Tangible and Intangible Assets
We monitor conditions that may affect the carrying value of our long-lived tangible and intangible assets when
events and circumstances indicate that the carrying value of the asset groups may not be recoverable. In order to
determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable,
independent cash flows are available ("asset group"). An impairment loss exists when projected undiscounted cash
flows are less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is
based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined
using a market approach, income approach or cost approach.
For the years ended December 31, 2017 and 2015, although certain factors indicated that the carrying value of
certain asset groups may not be recoverable, an assessment for the potential impairment was performed and an
impairment adjustment was not required. During 2016, there were no impairment indicators present; as a result, no
impairment assessments were required.
Refer to NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NOTE 12 - GOODWILL AND OTHER INTANGIBLE
ASSETS and NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
89
Fair Value Measurements
Valuation Hierarchy
ASC 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for
classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market
participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are
inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on
market data obtained from independent sources. Unobservable inputs are inputs that reflect our own views about the
assumptions market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. The three-tier hierarchy of inputs is summarized below:
•
•
•
Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active
markets.
Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other
inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term
of the financial instrument.
Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value
measurement.
The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input
that is significant to the fair value measurement in its entirety. Valuation methodologies used for assets and liabilities
measured at fair value are as follows:
Cash Equivalents
Where quoted prices are available in an active market, cash equivalents are classified within Level 1 of the
valuation hierarchy. Cash equivalents classified in Level 1 include money market funds and treasury bonds. Valuation
of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical
assets in active markets. Cash equivalents classified in Level 2 include commercial paper and certificates of deposit.
Valuation of these instruments is determined using financial models that use as their basis readily observable market
parameters.
Derivative Financial Instruments
Derivative financial instruments valued using financial models that use as their basis readily observable market
parameters are classified within Level 2 of the valuation hierarchy. Such derivative financial instruments include our
commodity hedging instruments. Derivative financial instruments that are valued based upon models with significant
unobservable market parameters and are normally traded less actively, are classified within Level 3 of the valuation
hierarchy.
Refer to NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS and NOTE 7 - PENSIONS AND OTHER
POSTRETIREMENT BENEFITS for further information.
Pensions and Other Postretirement Benefits
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit
plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total
compensation and benefits program. We do not have employee pension or post-retirement benefit obligations at our
Asia Pacific Iron Ore operations.
We recognize the funded or unfunded status of our postretirement benefit obligations on our December 31, 2017
and 2016 Statements of Consolidated Financial Position based on the difference between the market value of plan assets
and the actuarial present value of our retirement obligations on that date, on a plan-by-plan basis. If the plan assets
exceed the retirement obligations, the amount of the surplus is recorded as an asset; if the retirement obligations exceed
the plan assets, the amount of the underfunded obligations is recorded as a liability. Year-end balance sheet adjustments
to postretirement assets and obligations are recorded as Accumulated other comprehensive loss in the Statements of
Consolidated Financial Position.
90
The actuarial estimates of the PBO and APBO incorporate various assumptions including the discount rates,
the rates of increases in compensation, healthcare cost trend rates, mortality, retirement timing and employee turnover.
The discount rate is determined based on the prevailing year-end rates for high-grade corporate bonds with a duration
matching the expected cash flow timing of the benefit payments from the various plans. The remaining assumptions are
based on our estimates of future events by incorporating historical trends and future expectations. The amount of net
periodic cost that is recorded in the Statements of Consolidated Operations consists of several components including
service cost, interest cost, expected return on plan assets, and amortization of previously unrecognized amounts. Service
cost represents the value of the benefits earned in the current year by the participants. Interest cost represents the cost
associated with the passage of time. Certain items, such as plan amendments, gains and/or losses resulting from
differences between actual and assumed results for demographic and economic factors affecting the obligations and
assets of the plans, and changes in other assumptions are subject to deferred recognition for income and expense
purposes. The expected return on plan assets is determined utilizing the weighted average of expected returns for plan
asset investments in various asset categories based on historical performance, adjusted for current trends. See NOTE
7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Asset Retirement Obligations
Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The fair value
of the liability is determined as the discounted value of the expected future cash flows. The asset retirement obligation
is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized and
amortized over the life of the related asset. Reclamation costs are adjusted periodically to reflect changes in the estimated
present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the
reclamation costs. We review, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation
at each mine site in accordance with the provisions of ASC 410, Asset Retirement and Environmental Obligations. We
perform an in-depth evaluation of the liability every three years in addition to our routine annual assessments. In 2017,
we employed a third-party specialist to assist in the evaluation.
Future reclamation costs for inactive mines are accrued based on management’s best estimate at the end of
each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing
maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an
estimate is revised. See NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Environmental Remediation Costs
We have a formal policy for environmental protection and restoration. Our mining and exploration activities are
subject to various laws and regulations governing protection of the environment. We conduct our operations to protect
the public health and environment and believe our operations are in compliance with applicable laws and regulations in
all material respects. Our environmental liabilities, including obligations for known environmental remediation exposures
at active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation
and remediation at each site. If the cost can only be estimated as a range of possible amounts with no point in the range
being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and
timing of the cash disbursements reasonably can be estimated. It is possible that additional environmental obligations
could be incurred, the extent of which cannot be assessed. Potential insurance recoveries have not been reflected in
the determination of the liabilities. See NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further
information.
Revenue Recognition
We sell our products pursuant to comprehensive supply agreements negotiated and executed with our customers.
Revenue is recognized from a sale when persuasive evidence of an arrangement exists, the price is fixed or determinable,
the product is delivered in accordance with shipping terms, title and risk of loss have transferred to the customer in
accordance with the specified provisions of each supply agreement and collection of the sales price reasonably is assured.
Our U.S. Iron Ore and Asia Pacific Iron Ore supply agreements provide that title and risk of loss transfer to the customer
either upon loading of the vessel, shipment or, as is the case with some of our U.S. Iron Ore supply agreements, when
payment is received. Under certain supply agreements, we ship the product to ports on the lower Great Lakes or to the
customers’ facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and
retaining title until payment is received for these products is to minimize credit risk exposure.
91
Sales are recorded at a sales price specified in the relevant supply agreements resulting in revenue and a
receivable at the time of sale. The majority of our contracts have pricing mechanisms that require price estimation at
the time of delivery with price finalization at a future period. Upon revenue recognition for provisionally priced sales, a
derivative is created for the difference between the sales price used and expected future settlement price. The derivative
is adjusted to fair value through Product revenues as a revenue adjustment each reporting period based upon current
market data and forward-looking estimates determined by management until the final sales price is determined. The
principal risks associated with recognition of sales on a provisional basis include iron ore price, index pellet premiums
and index freight fluctuations between the date initially recorded and the date of final settlement. For revenue recognition,
we estimate the future settlement rate; however, if significant changes in inputs occur between the provisional pricing
date and the final settlement date, we might be required to either return a portion of the sales proceeds received or bill
for the additional sales proceeds due based on the provisional sales price. Refer to NOTE 13 - DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES for further information.
In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds
based on the customer's average annual steel pricing or an average annual daily market price for hot-rolled coil steel
the year the product is consumed in the customer’s blast furnaces. We account for this provision as a free standing
derivative instrument at the time of sale and record this provision at fair value until the year the product is consumed and
the amounts are settled as an adjustment to Product revenues. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES for further information.
Revenue from product sales and services also includes reimbursement for freight charges associated with
domestic freight and venture partner cost reimbursements for the U.S. Iron Ore operations and freight associated with
CFR based shipments paid on behalf of customers for the Asia Pacific Iron Ore operations. These are included in Freight
and venture partners' cost reimbursements separate from Product revenues. Revenue is recognized for the expected
reimbursement of services when the services are performed.
Deferred Revenue
The terms of one of our U.S. Iron Ore pellet supply agreements required supplemental payments to be paid by
the customer during the period 2009 through 2012, with the option to defer a portion of the 2009 monthly amount in
exchange for interest payments until the deferred amount was repaid in 2013. Installment amounts received under this
arrangement in excess of sales were classified as deferred revenue in the Statements of Consolidated Financial Position
upon receipt of payment. Revenue is recognized over the life of the supply agreement, which extends until 2022, in
equal annual installments. As of December 31, 2017 and 2016, installment amounts received in excess of sales totaled
$64.2 million and $77.1 million, respectively. As of December 31, 2017, deferred revenue of $12.8 million was recorded
in Other current liabilities and $51.4 million was recorded as long-term in Other liabilities in the Statements of Consolidated
Financial Position, related to this agreement. As of December 31, 2016, deferred revenue of $12.8 million was recorded
in Other current liabilities and $64.3 million was recorded as long-term in Other liabilities in the Statements of Consolidated
Financial Position, related to this agreement.
In 2017 and 2016, due to the payment terms and the timing of cash receipts near year-end, cash receipts
exceeded shipments for certain customers. Revenue recognition on these transactions totaling $9.6 million and $3.4
million was deferred on the Statements of Consolidated Financial Position for the years ended December 31, 2017 and
2016, respectively.
Cost of Goods Sold
Cost of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to
the sales from our mining operations. Operating expenses primarily represent the portion of the Tilden mining venture
costs prior to our 100% ownership; that is, the costs attributable to the share of the mine’s production owned by the other
joint venture partner in the Tilden mine until we acquired the remaining 15% noncontrolling interest during 2017. The
mining venture functioned as a captive cost company, supplying product only to its owners effectively for the cost of
production. Accordingly, the noncontrolling interests’ revenue amounts are stated at cost of production and are offset
by an equal amount included in Cost of goods sold and operating expenses resulting in no sales margin reflected for the
noncontrolling partner participant. As we were responsible for product fulfillment under the venture, we acted as a
principal in the transaction and, accordingly, recorded revenue under these arrangements on a gross basis.
92
In some circumstances, as requested by the customer, we will coordinate and ship our product via vessel directly
to the port nearest to the customer's blast furnace. In this type of contract, the customer will pay one amount inclusive
of both product and freight. We recognize revenue for both product revenue and the amount reimbursed for the vessel
freight to the final port. We separate these revenue types in the Statements of Consolidated Operations. Accordingly,
the revenue we record for freight is offset by an equal amount included in Cost of goods sold and operating expenses
for costs we incur for that freight, resulting in no impact on sales margin.
The following table is a summary of reimbursements in our U.S. Iron Ore operations for the years ended
December 31, 2017, 2016 and 2015:
Reimbursements for:
Freight
Venture partners’ cost
Total reimbursements
(In Millions)
Year Ended December 31,
2016
2015
2017
$
$
166.7 $
106.8 $
54.7
68.0
221.4 $
174.8 $
105.3
52.0
157.3
We sell a portion of our Asia Pacific Iron Ore product on a CFR basis. As a result, $19.6 million, $20.7 million
and $23.6 million of freight was included in Cost of goods sold and operating expenses for the years ended December 31,
2017, 2016 and 2015, respectively.
Where we have joint ownership of a mine, such as Hibbing and up to the point at which we purchased the
remaining interest in Tilden, our contracts entitle us to receive management fees or royalties, which we earn as the pellets
are produced.
Repairs and Maintenance
Repairs, maintenance and replacement of components are expensed as incurred. The cost of major equipment
overhauls is capitalized and depreciated over the estimated useful life, which is the period until the next scheduled
overhaul, generally five years. All other planned and unplanned repairs and maintenance costs are expensed when
incurred.
Share-Based Compensation
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation
to forecast relative TSR performance. Consistent with the guidelines of ASC 718, Stock Compensation, a correlation
matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of
mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each
of the three plan-year agreements. We estimated the volatility of our common shares and that of the peer group of mining
and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant
date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.
The fair value of stock options is estimated on the date of grant using a Black-Scholes model using the grant
date price of our common shares and option exercise price, and assumptions regarding the option’s expected term, the
volatility of our common shares, the risk-free interest rate, and the dividend yield over the option’s expected term.
Upon vesting of share-based compensation awards, we issue shares from treasury shares before issuing new
shares. Forfeitures are recognized when they occur.
Refer to NOTE 8 - STOCK COMPENSATION PLANS for additional information.
Income Taxes
Income taxes are based on income for financial reporting purposes, calculated using tax rates by jurisdiction,
and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return
and expected annual changes in deferred taxes. Any interest or penalties on income tax are recognized as a component
of income tax expense.
93
We account for income taxes under the asset and liability method, which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial results of operations.
Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit from
an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon examination,
including resolutions of any related appeals or litigation processes, based on technical merits.
See NOTE 9 - INCOME TAXES for further information.
Discontinued Operations
North American Coal Operations
As we executed our strategy to focus on strengthening our U.S. Iron Ore operations, management determined
as of March 31, 2015 that our North American Coal operating segment met the criteria to be classified as held for sale
under ASC 205, Presentation of Financial Statements and continued to meet the criteria throughout 2015. In December
2015, we completed the sale of our remaining two metallurgical coal operations, Oak Grove and Pinnacle mines, which
marked our exit from the coal business. Our plan to sell the Oak Grove and Pinnacle mine assets represented a strategic
shift in our business. For this reason, our previously reported North American Coal operating segment results for all
periods, prior to the March 31, 2015 held for sale determination, as well as costs to exit are classified as discontinued
operations. Refer to NOTE 14 - DISCONTINUED OPERATIONS for further discussion of our discontinued operations.
Canadian Operations
As more fully described in NOTE 14 - DISCONTINUED OPERATIONS, in January 2015, we announced that
the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. At that time, we
had suspended Bloom Lake operations and for several months had been exploring options to sell certain of our Canadian
assets, among other initiatives. Effective January 27, 2015, following the commencement of CCAA proceedings for the
Bloom Lake Group, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising
substantially all of our Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced restructuring
proceedings in Montreal, Quebec under the CCAA which resulted in the deconsolidation of the remaining Wabush Group
entities that were not previously deconsolidated. The Wabush Group was no longer generating revenues and was not
able to meet its obligations as they came due. As a result of this action, the CCAA protection granted to the Bloom Lake
Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and
operations. Our Canadian exit represents a strategic shift in our business. For this reason, our previously reported
Eastern Canadian Iron Ore and Ferroalloys operating segment results for all periods prior to the respective
deconsolidations as well as costs to exit are classified as discontinued operations.
Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of
our Australian subsidiaries is the Australian dollar. The functional currency of all other international subsidiaries is the
U.S. dollar. The financial statements of international subsidiaries are translated into U.S. dollars using the exchange
rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for
revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are
recorded as Accumulated other comprehensive loss. Income taxes generally are not provided for foreign currency
translation adjustments. To the extent that monetary assets and liabilities, inclusive of short-term and certain long-term
intercompany loans, are recorded in a currency other than the functional currency, these amounts are remeasured each
reporting period, with the resulting gain or loss being recorded in the Statements of Consolidated Operations. Transaction
gains and losses resulting from remeasurement of intercompany loans are included in Miscellaneous - net in our
Statements of Consolidated Operations.
94
The following represents the net gain (loss) related to impact of transaction gains and losses resulting from
remeasurement for the years ended December 31, 2017, 2016 and 2015:
2017
(In Millions)
2016
2015
Remeasurement of intercompany loans
Remeasurement of cash and cash equivalents
Other remeasurement
Net gain (loss) related to impact of transaction gains
and losses resulting from remeasurement
$
$
16.6 $
(2.5)
(2.7)
(16.6) $
(1.0)
0.8
11.4 $
(16.8) $
11.5
1.5
3.3
16.3
Earnings Per Share
We present both basic and diluted earnings per share amounts for continuing operations and discontinued
operations. Basic earnings per share amounts are calculated by dividing Net income (loss) attributable to Cliffs
shareholders less any paid or declared but unpaid dividends on our depositary shares by the weighted average number
of common shares outstanding during the period presented. Diluted earnings per share amounts are calculated by
dividing Net income (loss) attributable to Cliffs shareholders by the weighted average number of common shares, common
share equivalents under stock plans using the treasury stock method and the number of common shares that would be
issued under an assumed conversion of our outstanding depositary shares, each representing a 1/40th interest in a
share of our Series A Mandatory Convertible Preferred Stock, Class A, under the if-converted method. We currently do
not have any outstanding depositary shares. Historically, when we have had outstanding depositary shares, they were
convertible into common shares based on the volume weighted average of closing prices of our common shares over
the 20 consecutive trading day period ending on the third day immediately preceding the end of that reporting period.
Holders of the 1.50% 2025 Convertible Senior Notes may convert their notes during any quarter between April
1, 2018 and July 15, 2024 where our share price exceeds 130% of the conversion price for 20 trading days during a 30
trading day period. Holders of the 1.50% 2025 Convertible Senior Notes may also convert their notes during any quarter
between April 1, 2018 and July 15, 2024 during the five business day period after any five consecutive trading day period
in which the trading price per $1,000 principal amount of notes, for each trading day of the measurement period was
less than 98% of the product of the last reported sale price of our common shares and the conversion price on each
such trading day. If our common shares rise in value above the conversion price, diluted EPS will be calculated based
on the treasury-stock method with the number of dilutive shares being calculated based on the difference in the average
share price and the conversion price. Common share equivalents are excluded from EPS computations in the periods
in which they have an anti-dilutive effect. See NOTE 19 - EARNINGS PER SHARE for further information.
Recent Accounting Pronouncements
Issued and Adopted
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities. The new standard simplifies hedge accounting through changes to both designation
and measurement requirements. For hedges that qualify as highly effective, the new standard eliminates the requirement
to separately measure and record hedge ineffectiveness resulting in better alignment between the presentation of the
effects of the hedging instrument and the hedged item in the financial statements. We elected to early adopt ASU No.
2017-12 for the year ended December 31, 2017. The adoption of this standard required retrospective adoption, but did
not impact prior-period financial results.
Issued and Not Effective
In May 2014, the FASB issued ASU No. 2014-09, Revenues from Contracts with Customers (Topic 606). The
new revenue guidance broadly replaces the revenue guidance provided throughout the Codification. The core principle
of the revenue guidance is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. Reporting entities must prepare new disclosures providing qualitative and quantitative information
on the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. New
disclosures also include qualitative and quantitative information on significant judgments, changes in judgments, and
contract acquisition assets. We will adopt the standard on its effective date of January 1, 2018 using the modified
retrospective transition method. As of December 31, 2017, we have completed the evaluation of the new standard and
the related review and assessment of all existing contracts with our customers. Under Topic 606, revenue will generally
95
be recognized upon delivery for our U.S. Iron Ore customers, which in most cases is earlier than under the previous
guidance. As an example, for certain iron ore shipments where revenue is deferred currently as title does not transfer
until payment is received, under Topic 606, we will recognize revenue when control transfers, generally upon delivery.
Due to the closure of the Soo Locks and the Welland Canal during the winter months, our revenues will be lower than
historical levels during the first quarter and higher than historical levels during the remaining three quarters in future
years. However, the total amount of revenue recognized during the year should remain substantially the same as under
current GAAP. We do not anticipate any significant changes in the timing and pattern of revenue recognition for our Asia
Pacific Iron Ore contracts. In addition to the timing impacts, we anticipate the primary impact on a full-year basis of the
adoption on our consolidated financial statements will be the additional required disclosures around revenue recognition
in the notes to the consolidated financial statements. As a result of the adoption of the new standard on January 1, 2018,
we expect to record a cumulative transition adjustment of between $30 million and $35 million to Retained deficit in our
Statements of Consolidated Financial Position related to shipments made in 2017 that would have been recognized as
revenue in 2018 under the previous accounting guidance.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new standard requires
the service cost component of pension and other postretirement benefit expenses to be included in the same line item
as other compensation costs arising from services rendered by employees, with the other components of net benefit
cost to be presented in the income statement separately from the service cost component and outside a subtotal of
income from operations. The guidance is effective for fiscal years beginning after December 15, 2017. The adoption of
ASU No. 2017-07 in the first quarter of 2018 will impact the Statements of Consolidated Operations by changing our
classification of the components of pension and OPEB costs; however, it will not impact our Net Income (Loss). The
following represents the estimated impact from the adoption of ASU No. 2017-07 for the year ended December 31, 2017:
($ in Millions)
Year Ended
December 31, 2017
Estimate
Financial Statement Line Impacted
Cost of goods sold and operating expenses
Selling, general and administrative expenses
Miscellaneous - net
Operating income
Other non-operating income
Net Income
As Reported
Adoption of ASU
No. 2017-07
As Adjusted
$
$
$
$
$
$
(1,828.5) $
(105.8) $
27.7 $
423.6 $
3.2 $
363.1 $
2.4 $
(7.7) $
(1.7) $
(7.0) $
7.0 $
— $
(1,826.1)
(113.5)
26.0
416.6
10.2
363.1
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires lessees
to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases.
For lessees, leases will continue to be classified as either operating or finance leases in the income statement. We plan
to adopt the standard on its effective date of January 1, 2019. The new standard must be adopted using a modified
retrospective approach and requires application of the new guidance at the beginning of the earliest comparative period
presented. We are currently finalizing our implementation plan, compiling an inventory of existing leases and evaluating
the effect the updated standard will have on our consolidated financial statements and related disclosures.
NOTE 2 - SEGMENT REPORTING
Our continuing operations are organized and managed according to geographic location: U.S. Iron Ore and Asia
Pacific Iron Ore. Our U.S. Iron Ore segment is a major supplier of iron ore pellets to the North American steel industry
from our mines and pellet plants located in Michigan and Minnesota. The Asia Pacific Iron Ore segment is located in
Western Australia and provides iron ore to the seaborne market for Asian steel producers. There were no intersegment
product revenues in 2017, 2016 or 2015.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and
operating expenses identifiable to each segment. Additionally, we evaluate performance on a segment basis, as well
as a consolidated basis, based on EBITDA and Adjusted EBITDA. These measures allow management and investors
to focus on our ability to service our debt as well as illustrate how the business and each operating segment are performing.
96
Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these
measures approximate the cash flows associated with operational earnings.
The following tables present a summary of our reportable segments for the years ended December 31, 2017,
2016 and 2015, including a reconciliation of segment sales margin to Income from continuing operations before income
taxes and equity loss from ventures and a reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA:
Revenues from product sales and services:
U.S. Iron Ore
Asia Pacific Iron Ore
Total revenues from product sales and services
$ 1,866.0
464.2
$ 2,330.2
80% $ 1,554.5
554.5
20%
100% $ 2,109.0
74% $ 1,525.4
26%
487.9
76%
24%
100% $ 2,013.3
100%
2017
(In Millions)
2016
2015
Sales margin:
U.S. Iron Ore
Asia Pacific Iron Ore
Sales margin
Other operating expense
Other income (expense)
$ 465.4
36.3
501.7
(78.1)
(294.2)
$ 275.7
$
227.1
113.6
389.3
(148.5)
(33.8)
9.4
236.5
(85.2)
161.8
Income from continuing operations before income
taxes and equity loss from ventures
$ 129.4
$ 207.0
$
313.1
97
Net income (loss)
Less:
Interest expense, net
Income tax benefit (expense)
Depreciation, depletion and amortization
Total EBITDA
Less:
Gain (loss) on extinguishment/restructuring of debt
Impact of discontinued operations
Foreign exchange remeasurement
Severance and contractor termination costs
Supplies inventory adjustment
Impairment of other long-lived assets
Total Adjusted EBITDA
EBITDA:
U.S. Iron Ore
Asia Pacific Iron Ore
Other (including discontinued operations)
Total EBITDA
Adjusted EBITDA:
U.S. Iron Ore
Asia Pacific Iron Ore
Other
Total Adjusted EBITDA
$
$
$
$
$
$
$
$
2017
(In Millions)
2016
2015
363.1 $
199.3 $
(748.4)
(132.0)
252.4
(87.7)
330.4 $
(165.4) $
(18.7)
11.4
—
(1.8)
—
504.9 $
(200.5)
12.2
(115.4)
503.0 $
166.3 $
(19.9)
(16.8)
(0.1)
—
—
373.5 $
534.9 $
342.4 $
40.7
(245.2)
330.4 $
128.3
32.3
503.0 $
559.4 $
359.6 $
50.4
(104.9)
504.9 $
132.9
(119.0)
373.5 $
(231.4)
(163.3)
(134.0)
(219.7)
392.9
(892.0)
16.3
(10.2)
(16.3)
(3.3)
292.9
317.6
35.3
(572.6)
(219.7)
352.1
32.7
(91.9)
292.9
98
Depreciation, depletion and amortization:
U.S. Iron Ore
Asia Pacific Iron Ore
Other
Total depreciation, depletion and amortization
Capital additions1:
U.S. Iron Ore
Asia Pacific Iron Ore
Other2
Total capital additions
2017
(In Millions)
2016
2015
66.6 $
14.3
6.8
87.7 $
84.0 $
25.1
6.3
98.9
25.3
6.6
115.4 $
130.8
136.8 $
2.8
16.4
156.0 $
62.2 $
0.2
6.1
68.5 $
58.2
5.4
8.6
72.2
$
$
$
$
1 Includes capital lease additions and non-cash accruals. Refer to NOTE 17 - CASH FLOW INFORMATION.
2 Includes spend related to our HBI project.
A summary of assets by segment is as follows:
Assets:
U.S. Iron Ore
Asia Pacific Iron Ore
Total segment assets
Corporate
Assets of discontinued operations
Total assets
(In Millions)
December 31,
2017
December 31,
2016
December 31,
2015
$
$
1,500.6 $
138.8
1,639.4
1,314.0
—
2,953.4 $
1,372.5 $
155.1
1,527.6
396.3
—
1,476.4
202.5
1,678.9
441.7
14.9
1,923.9 $
2,135.5
Included in the consolidated financial statements are the following amounts relating to geographic location:
(In Millions)
2017
2016
2015
Revenues from product sales and services
United States
China
Canada
Other countries
$
Total revenues from product sales and services $
Property, Plant and Equipment, Net
1,504.5 $
364.7
206.2
254.8
2,330.2 $
1,236.2 $
452.5
267.1
153.2
2,109.0 $
United States
Australia
Total Property, Plant and Equipment, Net
Concentrations in Revenue
$
$
1,033.8 $
17.2
1,051.0 $
961.0 $
23.4
984.4 $
1,206.4
370.8
282.4
153.7
2,013.3
1,012.7
46.3
1,059.0
In 2017 and 2016, two customers individually accounted for more than 10% of our consolidated product revenue
and in 2015, three customers individually accounted for more than 10% of our consolidated product revenue. Total product
revenue from these customers represents $1.3 billion, $1.1 billion and $1.3 billion of our total consolidated product
revenue in 2017, 2016 and 2015, respectively, and is attributable to our U.S. Iron Ore business segment.
99
The following table represents the percentage of our total Revenues from product sales and services contributed
by each category of products and services in 2017, 2016 and 2015:
2017
2016
2015
Revenue category
Product
Freight and venture partners’ cost reimbursements
Total revenues from product sales and services
NOTE 3 - INVENTORIES
91%
90%
10%
9%
100% 100%
91%
9%
100%
The following table presents the detail of our Inventories in the Statements of Consolidated Financial Position
as of December 31, 2017 and 2016:
(In Millions)
December 31, 2017
Work-in
Process
Total
Inventory
Finished
Goods
December 31, 2016
Finished
Goods
Work-in
Process
Total
Inventory
$
$
127.1 $
11.3 $
138.4 $
124.4 $
12.6 $
33.3
11.7
45.0
23.6
17.8
160.4 $
23.0 $
183.4 $
148.0 $
30.4 $
137.0
41.4
178.4
Segment
U.S. Iron Ore
Asia Pacific Iron Ore
Total
U.S. Iron Ore
The excess of current cost over LIFO cost of iron ore inventories was $96.2 million and $78.5 million at
December 31, 2017 and 2016, respectively. As of December 31, 2017, the product inventory balance for U.S. Iron Ore
increased, resulting in a LIFO increment in 2017. The effect of the inventory build was an increase in Inventories of $6.2
million in the Statements of Consolidated Financial Position for the year ended December 31, 2017. As of December 31,
2016, the product inventory balance for U.S. Iron Ore declined, resulting in the liquidation of a LIFO layer in 2016. The
effect of the inventory reduction was an increase in Cost of goods sold and operating expenses of $8.8 million in the
Statements of Consolidated Financial Position for the year ended December 31, 2016.
Asia Pacific Iron Ore
We recorded a lower of cost or net realizable value inventory charge of $1.8 million related to work-in process
inventory in Cost of goods sold and operating expenses in the Statements of Consolidated Operations for the year ended
December 31, 2017. The charge was predominantly a result of the decline in our realized revenue rate as well as the
additional production and transportation costs required to be incurred in order for our work-in process inventory to be
ready for sale. There were no LCM inventory adjustments recorded for the year ended December 31, 2016.
100
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our consolidated depreciable
assets as of December 31, 2017 and 2016:
Land rights and mineral rights
Office and information technology
Buildings
Mining equipment
Processing equipment
Electric power facilities
Land improvements
Asset retirement obligation
Other
Construction in-progress
Allowance for depreciation and depletion
(In Millions)
December 31,
2017
2016
$
$
549.6 $
66.3
86.8
594.4
617.0
57.0
23.7
19.2
30.3
35.1
2,079.4
(1,028.4)
1,051.0 $
500.5
65.1
67.9
592.2
552.0
49.4
23.5
19.8
28.1
42.8
1,941.3
(956.9)
984.4
We recorded depreciation expense of $78.8 million, $106.8 million and $119.2 million in the Statements of
Consolidated Operations for the years ended December 31, 2017, 2016 and 2015, respectively.
Our asset groups consist of the assets and liabilities of our mines and associated reserves. The lowest level of
identifiable cash flows largely is at the U.S. Iron Ore and Asia Pacific Iron Ore segment levels. For the years ended
December 31, 2017 and 2015, although certain factors indicated that the carrying value of certain asset groups may not
be recoverable, an assessment for the potential impairment was performed and an impairment adjustment was not
required. For the year ended December 31, 2016, there were no factors present that indicated the carrying value of
certain asset groups would not be recoverable; therefore, additional impairment assessments were not required.
The net book value of the land rights and mineral rights as of December 31, 2017 and 2016 is as follows:
Land rights
Mineral rights:
Cost
Depletion
Net mineral rights
(In Millions)
December 31,
2017
2016
12.4 $
11.6
537.2 $
(119.1)
418.1 $
488.9
(112.2)
376.7
$
$
$
Accumulated depletion relating to mineral rights, which was recorded using the unit-of-production method, is
included in Cost of goods sold and operating expenses. We recorded depletion expense of $6.8 million, $3.8 million
and $7.4 million in the Statements of Consolidated Operations for the years ended December 31, 2017, 2016 and 2015,
respectively.
101
NOTE 5 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of December 31, 2017 and 2016:
($ in Millions)
December 31, 2017
Annual
Effective
Interest
Rate
Total
Principal
Amount
Debt
Issuance
Costs
Unamortized
Discounts
Total Debt
Debt Instrument
Senior Secured Notes
$400 Million 4.875% 2024 Senior Notes
5.00% $
400.0 $
(7.1) $
(2.6) $
390.3
Unsecured Notes
$400 Million 5.90% 2020 Senior Notes
$500 Million 4.80% 2020 Senior Notes
$700 Million 4.875% 2021 Senior Notes
$316.25 Million 1.50% 2025 Convertible
Senior Notes
$1.075 Billion 5.75% 2025 Senior Notes
$800 Million 6.25% 2040 Senior Notes
ABL Facility
Fair Value Adjustment to Interest Rate Hedge
Long-term debt
5.98%
4.83%
4.89%
6.26%
6.01%
6.34%
N/A
88.9
122.4
138.4
316.3
1,075.0
298.4
550.0
(0.2)
(0.3)
(0.3)
(6.6)
(11.3)
(2.4)
N/A
(0.1)
(0.1)
(0.1)
(85.6)
(16.5)
(3.4)
N/A
88.6
122.0
138.0
224.1
1,047.2
292.6
—
1.4
$ 2,304.2
($ in Millions)
December 31, 2016
Annual
Effective
Interest
Rate
Total
Principal
Amount
Debt
Issuance
Costs
Undiscounted
Interest/
(Unamortized
Discounts)
Total Debt
Debt Instrument
Senior Secured Notes
$540 Million 8.25% 2020 First Lien Notes
9.97% $
540.0 $
(8.0) $
(25.7) $
$218.5 Million 8.00% 2020 1.5 Lien Notes
N/A
218.5
—
65.7
506.3
284.2
$544.2 Million 7.75% 2020 Second Lien
Notes
Unsecured Notes
$400 Million 5.90% 2020 Senior Notes
$500 Million 4.80% 2020 Senior Notes
$700 Million 4.875% 2021 Senior Notes
$800 Million 6.25% 2040 Senior Notes
ABL Facility
Fair Value Adjustment to Interest Rate Hedge
Long-term debt
Less current portion
Long-term debt
15.55%
430.1
(5.8)
(85.2)
339.1
5.98%
4.83%
4.89%
6.34%
N/A
225.6
236.8
309.4
298.4
550.0
(0.6)
(0.7)
(1.0)
(2.5)
N/A
(0.5)
(0.2)
(0.2)
(3.4)
N/A
224.5
235.9
308.2
292.5
—
1.9
$ 2,192.6
17.5
$ 2,175.1
$1.075 Billion 5.75% 2025 Senior Notes - 2017 Offering
On February 27, 2017, we entered into an indenture among the Company, the guarantors party thereto and U.S.
Bank National Association, as trustee, relating to the issuance of $500 million aggregate principal amount of 5.75% 2025
Senior Notes. On August 7, 2017, we issued an additional $575 million aggregate principal amount of our 5.75% 2025
Senior Notes. The second tranche was issued at 97.0% of face value. The 5.75% 2025 Senior Notes were issued in
private transactions exempt from the registration requirements of the Securities Act. Pursuant to the registration rights
102
agreement executed as part of the offerings, we agreed to file a registration statement with the SEC with respect to a
registered offer to exchange the 5.75% 2025 Senior Notes for publicly registered notes within 365 days of the closing
date, with all significant terms and conditions remaining the same.
The 5.75% 2025 Senior Notes bear interest at a rate of 5.75% per annum, which is payable semi-annually in
arrears on March 1 and September 1 of each year, which commenced on September 1, 2017. The 5.75% 2025 Senior
Notes mature on March 1, 2025.
The 5.75% 2025 Senior Notes are general unsecured senior obligations and rank equally in right of payment
with all of our existing and future senior unsecured indebtedness and rank senior in right of payment to all of our existing
and future subordinated indebtedness. The 5.75% 2025 Senior Notes are effectively subordinated to our existing or
future secured indebtedness to the extent of the value of the assets securing such indebtedness. The 5.75% 2025 Senior
Notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly-owned domestic subsidiaries
and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such
guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries
that do not guarantee the 5.75% 2025 Senior Notes.
The terms of the 5.75% 2025 Senior Notes are governed by an indenture, which contains customary covenants
that, among other things, limit our and our subsidiaries' ability to create liens on property that secure indebtedness, enter
into sale and leaseback transactions and merge, consolidate or amalgamate with another company. Upon the occurrence
of a “change of control triggering event,” as defined in the indenture, we are required to offer to repurchase the 5.75%
2025 Senior Notes at 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to,
but excluding, the repurchase date.
We may redeem the 5.75% 2025 Senior Notes, in whole or in part, on or after March 1, 2020, at the redemption
prices set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption,
and prior to March 1, 2020, at a redemption price equal to 100% of the principal amount thereof plus a “make-whole”
premium set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.
We may also redeem up to 35% of the aggregate principal amount of the 5.75% 2025 Senior Notes on or prior to March
1, 2020 at a redemption price equal to 105.75% of the principal amount thereof, plus accrued and unpaid interest, if any,
to, but not including, the date of redemption with the net cash proceeds of one or more equity offerings.
The 5.75% 2025 Senior Notes indenture contains customary events of default, including failure to make required
payments, failure to comply with certain agreements or covenants, failure to pay or acceleration of certain other
indebtedness, certain events of bankruptcy and insolvency and failure to pay certain judgments. An event of default
under the indenture will allow either the trustee or the holders of at least 25% in aggregate principal amount of the then-
outstanding notes issued under the indenture to accelerate, or in certain cases, will automatically cause the acceleration
of, the amounts due under the 5.75% 2025 Senior Notes.
Debt issuance costs of $12.4 million were incurred related to the offering of the 5.75% 2025 Senior Notes, $11.3
million of which is included in Long-term debt in the Statements of Consolidated Financial Position as of December 31,
2017.
$400 Million 4.875% 2024 Senior Secured Notes - 2017 Offering
On December 19, 2017, we entered into an indenture among the Company, the guarantors party thereto and
U.S. Bank National Association, as trustee and first lien notes collateral agent, relating to the issuance of $400 million
aggregate principal amount of 4.875% 2024 Senior Secured Notes at 99.347% of face value. The 4.875% 2024 Senior
Secured Notes were issued in a private transaction exempt from the registration requirements of the Securities Act. The
4.875% 2024 Senior Secured Notes have not been, and will not be, registered under the Securities Act and may not be
offered or sold in the United States absent registration or an applicable exemption from the registration requirements of
the Securities Act.
The 4.875% 2024 Senior Secured Notes bear interest at a rate of 4.875% per annum, which is payable semi-
annually in arrears on January 15 and July 15 of each year, commencing on July 15, 2018. The 4.875% 2024 Senior
Secured Notes mature on January 15, 2024 and are secured senior obligations of the Company.
The 4.875% 2024 Senior Secured Notes are jointly and severally and fully and unconditionally guaranteed on
a senior secured basis by substantially all of our material domestic subsidiaries and will be secured (subject in each case
to certain exceptions and permitted liens) by (i) a first-priority lien on substantially all of our assets and the assets of the
Guarantors (other than accounts receivable and other rights to payment, inventory, as-extracted collateral, certain
investment property, certain general intangibles and commercial tort claims, certain mobile equipment, commodities
103
accounts, deposit accounts, securities accounts and other related assets and proceeds and products of each of the
foregoing (collectively, the “ABL Collateral”)), and (ii) a second-priority lien on the ABL Collateral, which is junior to a first-
priority lien for the benefit of the lenders under the Company’s senior secured asset-based credit facility.
The terms of the 4.875% 2024 Senior Secured Notes are governed by the Secured Notes Indenture. The Secured
Notes Indenture contains customary covenants that, among other things, limit our and our subsidiaries’ ability to create
certain liens on property that secure indebtedness, use proceeds of dispositions of collateral, enter into sale and leaseback
transactions, merge or consolidate with another company, and transfer or sell all or substantially all of our assets. Upon
the occurrence of a “change of control triggering event,” as defined in the Secured Notes Indenture, we are required to
offer to repurchase the 4.875% 2024 Senior Secured Notes at 101% of the aggregate principal amount thereof, plus any
accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem any of the Secured Notes beginning on January 15, 2021. The initial redemption price is
102.438% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The
redemption price will decline each year after January 15, 2021 and will be 100% of their principal amount, plus accrued
interest, beginning on January 15, 2023. We may also redeem some or all of the 4.875% 2024 Senior Secured Notes
at any time and from time to time prior to January 15, 2021 at a price equal to 100% of the principal amount thereof plus
a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. We may also
redeem up to 10% of the original aggregate principal amount of the 4.875% 2024 Senior Secured Notes (calculated after
giving effect to any issuance of additional 4.875% 2024 Senior Secured Notes) per year prior to January 15, 2021 at a
redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding,
the redemption date.
In addition, at any time and from time to time on or prior to January 15, 2021, we may redeem in the aggregate
up to 35% of the original aggregate principal amount of the Secured Notes (calculated after giving effect to any issuance
of additional 4.875% 2024 Senior Secured Notes) with the net cash proceeds of certain equity offerings, at a redemption
price of 104.875%, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, so long as at least
65% of the original aggregate principal amount of the 4.875% 2024 Senior Secured Notes (calculated after giving effect
to any issuance of additional 4.875% 2024 Senior Secured Notes) issued under the Secured Notes Indenture remain
outstanding after each such redemption.
The Secured Notes Indenture contains customary events of default, including failure to make required payments,
failure to comply with certain agreements or covenants, failure to pay or acceleration of certain other indebtedness,
certain events of bankruptcy and insolvency, and failure to pay certain judgments. An event of default under the Secured
Notes Indenture will allow either the Trustee or the holders of at least 25% in aggregate principal amount of the then-
outstanding 4.875% 2024 Senior Secured Notes to accelerate, or in certain cases, will automatically cause the acceleration
of, the amounts due under the 4.875% 2024 Senior Secured Notes.
Debt issuance costs of $7.1 million were incurred related to the offering of the 4.875% 2024 Senior Secured
Notes and are included in Long-term debt in the Statements of Consolidated Financial Position as of December 31, 2017.
$316.25 Million 1.50% 2025 Convertible Senior Notes - 2017 Offering
On December 19, 2017, we issued $316.25 million aggregate principal amount of 1.50% 2025 Convertible Senior
Notes. The 1.50% 2025 Convertible Senior Notes bear interest at a rate of 1.50% per year, payable semiannually in
arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The 1.50% 2025 Convertible Senior Notes
mature on January 15, 2025.
Holders may convert their 1.50% 2025 Convertible Senior Notes at their option at any time prior to the close of
business on the business day immediately preceding July 15, 2024, only under the following circumstances: (1) during
any calendar quarter commencing after the calendar quarter ending on March 31, 2018 (and only during such calendar
quarter), if the last reported sale price of our common shares, par value $0.125 per share, for at least 20 trading days
(whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable
trading day; (2) during the five-business day period after any five-consecutive trading day period (the “measurement
period”) in which the trading price (as defined below) per $1,000 principal amount of 1.50% 2025 Convertible Senior
Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price
of our common shares and the conversion rate on each such trading day; (3) if we call the notes for redemption, at any
time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon
the occurrence of specified corporate events. On or after July 15, 2024 until the close of business on the second scheduled
trading day immediately preceding the maturity date, holders may convert their 1.50% 2025 Convertible Senior Notes
104
at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be,
cash, common shares or a combination of cash and common shares, at our election.
The conversion rate will initially be 122.4365 common shares per $1,000 principal amount of 1.50% 2025
Convertible Senior Notes (equivalent to an initial conversion price of $8.17 per common share). The conversion rate will
be subject to adjustment in some circumstances but will not be adjusted for any accrued and unpaid interest. In addition,
following certain corporate events that occur prior to the maturity date, or if we deliver a notice of redemption, we will, in
certain circumstances, increase the conversion rate for a holder who elects to convert its 1.50% 2025 Convertible Senior
Notes in connection with such a corporate event or notice of redemption, as the case may be.
We may not redeem the 1.50% 2025 Convertible Senior Notes prior to January 15, 2022. We may redeem all
or any portion of the 1.50% 2025 Convertible Senior Notes, for cash at our option on or after January 15, 2022 if the last
reported sale price of our common shares has been at least 130% of the conversion price then in effect for at least 20
trading days (whether or not consecutive) during any 30-consecutive trading day period (including the last trading day
of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of
redemption at a redemption price equal to 100% of the principal amount of the 1.50% 2025 Convertible Senior Notes to
be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for
the 1.50% 2025 Convertible Senior Notes.
It is our current intent to settle conversions through combination settlement with a specified dollar amount per
$1,000 principal amount of notes of $1,000. Our ability to settle conversions through combination settlement and cash
settlement will be subject to restrictions in the agreement governing our ABL Facility and may be subject to restrictions
in agreements governing our future debt.
If we undergo a fundamental change as defined in the indenture, holders may require us to repurchase for cash
all or any portion of their 1.50% 2025 Convertible Senior Notes at a fundamental change repurchase price equal to 100%
of the principal amount of the 1.50% 2025 Convertible Senior Notes to be repurchased, plus accrued and unpaid interest
to, but excluding, the fundamental change repurchase date.
The 1.50% 2025 Convertible Senior Notes are senior unsecured obligations and rank senior in right of payment
to any of our indebtedness that is expressly subordinated in right of payment to the 1.50% 2025 Convertible Senior
Notes; equal in right of payment to any of our unsecured indebtedness that is not so subordinated; effectively junior in
right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness;
and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
In accounting for the issuance of the notes, we separated the 1.50% 2025 Convertible Senior Notes into liability
and equity components. The carrying amount of the liability component was calculated by measuring the fair value of
similar liabilities that do not have associated convertible features. The carrying amount of the equity component of $85.9
million representing the conversion option was determined by deducting the fair value of the liability component from the
par value of the notes. The difference represents the debt discount that is amortized to interest expense over the term
of the notes. The equity component is not remeasured as long as it continues to qualify for equity classification.
We allocated the total debt issuance costs incurred to the notes on a prorated basis using the aggregate principal
balance. In accounting for the debt issuance costs related to the notes, we allocated the total amount of issuance costs
incurred to liability and equity components. The issuance costs attributable to the equity component was netted against
the equity component in Capital in excess of par value of shares for a net amount of $83.4 million. Debt issuance costs
of $9.1 million were incurred related to the offering of the Secured Notes, $6.6 million of which are included in Long-term
debt and $2.5 million of which are included in Capital in excess of par value of shares in the Statements of Consolidated
Financial Position as of December 31, 2017.
Other Outstanding Unsecured Senior Notes
The following represents a summary of our unsecured senior notes' maturity and interest payable due dates:
Debt Instrument
$400 Million 5.90% 2020 Senior Notes
$500 Million 4.80% 2020 Senior Notes
Maturity
Interest Payable
(until maturity)
March 15, 2020 March 15 and September 15
April 1 and October 1
October 1, 2020
$700 Million 4.875% 2021 Senior Notes
$800 Million 6.25% 2040 Senior Notes
April 1, 2021
October 1, 2040
April 1 and October 1
April 1 and October 1
105
The senior notes are unsecured obligations and rank equally in right of payment with all our other existing and
future unsecured and unsubordinated indebtedness. There are no subsidiary guarantees of the interest and principal
amounts.
The senior notes may be redeemed any time at our option not less than 30 days nor more than 60 days after
prior notice is sent to the holders of the applicable series of notes. The senior notes are redeemable at a redemption
price equal to the greater of (1) 100% of the principal amount of the notes to be redeemed or (2) the sum of the present
values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the
redemption date on a semi-annual basis at the treasury rate plus 35 basis points with respect to the 5.90% 2020 Senior
Notes and 4.80% 2020 Senior Notes, 25 basis points with respect to the 4.875% 2021 Senior Notes and 40 basis points
with respect to the 6.25% 2040 Senior Notes, plus, in each case, accrued and unpaid interest to the date of redemption.
However, if the 4.875% 2021 Senior Notes are redeemed on or after the date that is three months prior to their maturity
date, the 4.875% 2021 Senior Notes will be redeemed at a redemption price equal to 100% of the principal amount of
the notes to be redeemed plus accrued and unpaid interest to the date of redemption.
In addition, if a change of control triggering event occurs with respect to the senior notes, as defined in the
agreement, we will be required to offer to purchase the notes of the applicable series at a purchase price equal to 101%
of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.
Debt Extinguishments - 2017
During the year ended December 31, 2017, we issued 63.25 million common shares in an underwritten public
offering. We received net proceeds of $661.3 million at a public offering price of $10.75 per common share. The net
proceeds from the issuance of our common shares and the net proceeds from the issuance of $1.075 billion 5.75% 2025
Senior Notes were used to redeem in full all of our outstanding 8.25% 2020 First Lien Notes, 8.00% 2020 1.5 Lien Notes
and 7.75% 2020 Second Lien Notes. Additionally, through tender offers, we purchased certain of our 5.90% 2020 Senior
Notes, our 4.80% 2020 Senior Notes and our 4.875% 2021 Senior Notes. The aggregate principal amount outstanding
of debt redeemed was $1.611 billion, which resulted in a loss on extinguishment of $165.4 million.
The following is a summary of the debt extinguished during the year ended December 31, 2017 and the respective
gain (loss) on extinguishment for the year ended December 31, 2017:
Secured Notes
$540 Million 8.25% 2020 First Lien Notes
$218.5 Million 8.00% 2020 1.5 Lien Notes
$544.2 Million 7.75% 2020 Second Lien Notes
Unsecured Notes
$400 Million 5.90% 2020 Senior Notes
$500 Million 4.80% 2020 Senior Notes
$700 Million 4.875% 2021 Senior Notes
(In Millions)
Year Ended
December 31, 2017
Debt Extinguished
Gain (Loss) on
Extinguishment1
$
$
540.0 $
218.5
430.1
136.7
114.4
171.0
1,610.7 $
(93.5)
45.1
(104.5)
(7.8)
(1.9)
(2.8)
(165.4)
1 This includes premiums paid related to the redemption of our notes of $110.0 million.
Debt Extinguishments/Restructuring - 2016
8.00% 2020 1.5 Lien Notes Exchange
On March 2, 2016, we entered into an indenture among the Company, the guarantors party thereto and U.S.
Bank National Association, as trustee and notes collateral agent, relating to our issuance of $218.5 million aggregate
principal amount of 8.00% 2020 1.5 Lien Notes. The 8.00% 2020 1.5 Lien Notes were issued in exchange offers for
certain of our existing senior notes.
106
We accounted for the 8.00% 2020 1.5 Lien Notes exchange as a troubled debt restructuring. For an exchange
classified as a troubled debt restructuring, if the future undiscounted cash flows of the newly issued debt are less than
the net carrying value of the original debt, the carrying value of the newly issued debt is adjusted to the future undiscounted
cash flow amount, a gain is recorded for the difference and no future interest expense is recorded. All future interest
payments on the newly issued debt reduce the carrying value. Accordingly, we recognized a gain of $174.3 million in
the Gain (loss) on extinguishment/restructuring of debt in the Statements of Consolidated Operations for the year ended
December 31, 2016. Debt issuance costs incurred of $5.2 million related to the notes exchange were expensed and
were included in the Gain (loss) on extinguishment/restructuring of debt in the Statements of Consolidated Operations
for the year ended December 31, 2016. As of December 31, 2016, $17.5 million of the undiscounted interest was recorded
as current and classified as Other current liabilities in the Statements of Consolidated Financial Position.
The following is a summary of the debt exchanged for our $218.5 million 8.00% 2020 1.5 Lien Notes:
($ In Millions)
Debt
Extinguished
1.5 Lien
Amount
Issued
Carrying
Value1
Gain on
Restructuring2
6.9
$544.2 Million 7.75% 2020 Second Lien Notes $
114.1 $
57.0 $
77.5 $
$500 Million 3.95% 2018 Senior Notes
$400 Million 5.90% 2020 Senior Notes
$500 Million 4.80% 2020 Senior Notes
$700 Million 4.875% 2021 Senior Notes
$800 Million 6.25% 2040 Senior Notes
17.6
65.1
44.7
76.3
194.4
512.2 $
$
11.4
26.0
17.9
30.5
75.7
15.5
35.4
24.4
41.5
103.0
1.8
28.3
19.5
33.3
84.5
218.5 $
297.3 $
174.3
1 Includes undiscounted interest payments
2 Net of amounts expensed for unamortized original issue discount and deferred origination fees
Debt-for-Equity Exchanges
During the year ended December 31, 2016, we entered into a series of privately negotiated exchange agreements
whereby we issued an aggregate of 8.2 million common shares in exchange for $10.0 million aggregate principal amount
of our 3.95% 2018 Senior Notes, $20.1 million aggregate principal amount of our 4.80% 2020 Senior Notes and $26.8
million aggregate principal amount of our 4.875% 2021 Senior Notes. There were no exchanges that represented more
than 1% of our outstanding common shares during any quarter. Accordingly, we recognized a gain of $11.3 million in
Gain (loss) on extinguishment/restructuring of debt in the Statements of Consolidated Operations for the year ended
December 31, 2016.
Other Debt Redemptions
Our 3.95% 2018 Senior Notes were redeemed in whole on September 16, 2016 at a total redemption price
of $301.0 million, which included $283.6 million outstanding aggregate principal. As a result, we recorded a $19.9
million pre-tax loss on full retirement of long-term debt in the third quarter of 2016, which consisted of debt redemption
premiums of $17.4 million and expenses of $2.5 million related to the write-off of unamortized debt issuance costs,
unamortized bond discount and deferred losses on interest rate swaps. The loss was recorded against the Gain (loss)
on extinguishment/restructuring of debt in the Statements of Consolidated Operations for the year ended December 31,
2016.
During the year ended December 31, 2016, we purchased with cash $5.0 million of our outstanding 4.80% 2020
Senior Notes, which resulted in a gain on extinguishment of $0.6 million.
107
Debt Maturities
The following represents a summary of our maturities of debt instruments, excluding borrowings on the ABL
Facility, based on the principal amounts outstanding at December 31, 2017:
2018
2019
2020
2021
2022
(In Millions)
Maturities of Debt
—
$
—
211.3
138.4
—
2,089.7
2,439.4
2023 and thereafter
Total maturities of debt
$
ABL Facility
On March 30, 2015, we entered into a senior secured asset-based revolving credit facility with various financial
institutions. The ABL Facility will mature upon the earlier of March 30, 2020 or 60 days prior to the maturity of the First
Lien Notes and certain other material debt, and provides for up to $550.0 million in borrowings, comprised of (i) a $450.0
million U.S. tranche, including a $250.0 million sublimit for the issuance of letters of credit and a $100.0 million sublimit
for U.S. swingline loans, and (ii) a $100.0 million Australian tranche, including a $50.0 million sublimit for the issuance
of letters of credit and a $20.0 million sublimit for Australian swingline loans. Availability under both the U.S. tranche and
Australian tranche of the ABL Facility is limited to an eligible U.S. borrowing base and Australian borrowing base, as
applicable, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile
equipment.
The ABL Facility and certain bank products and hedge obligations are guaranteed by us and certain of our
existing wholly-owned U.S. and Australian subsidiaries and are required to be guaranteed by certain of our future U.S.
and Australian subsidiaries; provided, however, that the obligations of any U.S. entity will not be guaranteed by any
Australian entity. Amounts outstanding under the ABL Facility will be secured by (i) a first-priority security interest in the
ABL Collateral, including, in the case of the Australian tranche only, ABL Collateral owned by a borrower or guarantor
that is organized under the laws of Australia, and (ii) a third-priority security interest in the Notes Collateral (as defined
herein). The priority of the security interests in the ABL Collateral and the Notes Collateral of the lenders under the ABL
Facility and the holders of the First Lien Notes are set forth in intercreditor provisions contained in an ABL intercreditor
agreement.
The ABL Collateral generally consists of the following assets: accounts receivable and other rights to payment,
inventory, as-extracted collateral, investment property, certain general intangibles and commercial tort claims, certain
mobile equipment, commodities accounts, deposit accounts, securities accounts and other related assets and proceeds
and products of each of the foregoing.
Borrowings under the ABL Facility bear interest, at our option, at a base rate, an Australian base rate or, if certain
conditions are met, a LIBOR rate, in each case plus an applicable margin. The base rate is equal to the greater of the
federal funds rate plus ½ of 1%, the LIBOR rate based on a one-month interest period plus 1% and the floating rate
announced by Bank of America Merrill Lynch as its “prime rate.” The Australian base rate is equal to the LIBOR rate as
of 11:00 a.m. on the first business day of each month for a one-month period. The LIBOR rate is a per annum fixed rate
equal to LIBOR with respect to the applicable interest period and amount of LIBOR rate loan requested.
The ABL Facility contains customary representations and warranties and affirmative and negative covenants
including, among others, covenants regarding the maintenance of certain financial ratios if certain conditions are triggered,
covenants relating to financial reporting, covenants relating to the payment of dividends on, or purchase or redemption
of our capital stock, covenants relating to the incurrence or prepayment of certain debt, covenants relating to the incurrence
of liens or encumbrances, compliance with laws, transactions with affiliates, mergers and sales of all or substantially all
of our assets and limitations on changes in the nature of our business.
The ABL Facility provides for customary events of default, including, among other things, the event of nonpayment
of principal, interest, fees, or other amounts, a representation or warranty proving to have been materially incorrect when
made, failure to perform or observe certain covenants within a specified period of time, a cross-default to certain material
108
indebtedness, the bankruptcy or insolvency of the Company and certain of its subsidiaries, monetary judgment defaults
of a specified amount, invalidity of any loan documentation, a change of control of the Company, and ERISA defaults
resulting in liability of a specified amount. In the event of a default by us (beyond any applicable grace or cure period, if
any), the administrative agent may and, at the direction of the requisite number of lenders, shall declare all amounts
owing under the ABL Facility immediately due and payable, terminate such lenders’ commitments to make loans under
the ABL Facility and/or exercise any and all remedies and other rights under the ABL Facility. For certain defaults related
to insolvency and receivership, the commitments of the lenders will be automatically terminated and all outstanding loans
and other amounts will become immediately due and payable.
As of December 31, 2017 and 2016, we were in compliance with the ABL Facility liquidity requirements and,
therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
As of December 31, 2017, no loans were drawn under the ABL Facility and we had total availability of $273.2
million as a result of borrowing base limitations. As of December 31, 2017, the principal amount of letter of credit
obligations totaled $46.5 million, thereby further reducing available borrowing capacity on our ABL Facility to $226.7
million.
As of December 31, 2016, no loans were drawn under the ABL Facility and we had total availability of $333.0
million as a result of borrowing base limitations. As of December 31, 2016, the principal amount of letter of credit
obligations totaled $106.0 million, thereby further reducing available borrowing capacity to $227.0 million.
Letters of Credit
We issued standby letters of credit with certain financial institutions in order to support business obligations
including, but not limited to, workers compensation and environmental obligations. As of December 31, 2017 and 2016,
these letter of credit obligations totaled $46.5 million and $106.0 million, respectively.
109
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at December 31,
2017 and 2016:
(In Millions)
December 31, 2017
Quoted Prices in
Active
Markets for Identical
Assets/Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
66.3 $
—
66.3 $
— $
— $
550.6 $
—
550.6 $
0.3 $
0.3 $
— $
39.4
39.4 $
2.4 $
2.4 $
(In Millions)
December 31, 2016
Quoted Prices in
Active
Markets for Identical
Assets/Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
177.0 $
—
177.0 $
— $
— $
— $
1.5
1.5 $
— $
— $
— $
31.6
31.6 $
0.5 $
0.5 $
616.9
39.4
656.3
2.7
2.7
177.0
33.1
210.1
0.5
0.5
Description
Assets:
Cash equivalents
Derivative assets
Total
Liabilities:
Derivative liabilities
Total
Description
Assets:
Cash equivalents
Derivative assets
Total
Liabilities:
Derivative liabilities
Total
Financial assets classified in Level 1 as of December 31, 2017, include money market funds and treasury bonds
of $66.3 million. Financial assets classified in Level 1 as of December 31, 2016, include money market funds of $177.0
million. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active
markets.
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach
based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable. Level
2 assets included $550.6 million of commercial paper and certificates of deposit at December 31, 2017 and $1.5 million
of commodity hedge contracts at December 31, 2016. Level 2 liabilities included $0.3 million of commodity hedge
contracts at December 31, 2017.
The Level 3 assets and liabilities include derivative assets that consist of freestanding derivative instruments
related to certain supply agreements with one of our U.S. Iron Ore customers and derivative assets and liabilities related
to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers.
The supply agreements included in our Level 3 assets include provisions for supplemental revenue or refunds
based on the average annual daily market price for hot-rolled coil steel at the time the product is consumed in the
customer’s blast furnaces. We account for these provisions as derivative instruments at the time of sale and adjust
these provisions to fair value as an adjustment to Product revenues each reporting period until the product is consumed
and the amounts are settled. The fair value of the instruments are determined using a market approach based on the
estimate of the average annual daily market price for hot-rolled coil steel. In the new contract that commenced in 2017,
110
this supplemental revenue and refund data source changed from the customer's average annual steel price to an
average annual daily market price for hot-rolled coil steel for one of our supply agreements. This estimate takes into
consideration current market conditions and nonperformance risk. We had assets of $37.9 million and $21.3 million at
December 31, 2017 and 2016, respectively, related to supply agreements.
The provisional pricing arrangements included in our Level 3 assets/liabilities specify provisional price
calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be
based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference
between the estimated final revenue at the date of sale and the estimated final revenue rate at the measurement date
is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized.
The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current
market data and forward-looking estimates provided by management until the final revenue rate is determined. We
had assets of $1.5 million and $10.3 million at December 31, 2017 and 2016, respectively, related to provisional pricing
arrangements. In addition, we had liabilities of $2.4 million and $0.5 million related to provisional pricing arrangements
at December 31, 2017 and 2016, respectively.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets
and derivative liabilities categorized in Level 3 of the fair value hierarchy:
Qualitative/Quantitative Information About Level 3 Fair Value Measurements
($ in millions)
Customer Supply
Agreement
Provisional Pricing
Arrangements
Provisional Pricing
Arrangements
Fair Value at
December 31,
2017
Balance
Sheet
Location
Valuation
Technique
$
$
$
37.9
Derivative
assets
Market
Approach
1.5
Derivative
assets
Market
Approach
2.4 Other current
liabilities
Market
Approach
Range or Point
Estimate
(Weighted
Average)
$655
$72 - $74
($72)
$72 - $74
($72)
Unobservable Input
Management's
Estimate of Market
Hot-Rolled Coil Steel
per net ton
Management's
Estimate of Platts
62% Price per dry
metric ton
Management's
Estimate of Platts
62% Price per dry
metric ton
The significant unobservable input used in the fair value measurement of our customer supply agreement is
an estimate determined by management including the forward-looking estimate for the average annual daily market
price for hot-rolled coil steel.
The significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements
are management’s estimates of Platts 62% Price based upon current market data and index pricing, of which includes
forward-looking estimates determined by management.
111
We recognize any transfers between levels as of the beginning of the reporting period, including both transfers
into and out of levels. There were no transfers between Level 1 and Level 2 and no transfers into or out of Level 3 of
the fair value hierarchy during the years ended December 31, 2017 and 2016. The following tables represent a
reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the years ended December 31, 2017 and 2016:
(In Millions)
Derivative Assets
(Level 3)
Year Ended
December 31,
Derivative Liabilities
(Level 3)
Year Ended
December 31,
2017
2016
2017
2016
Beginning balance - January 1
$
31.6 $
7.8 $
(0.5) $
(3.4)
Total gains (losses)
Included in earnings
Settlements
Ending balance - December 31
Total gains (losses) for the period included in earnings
attributable to the change in unrealized gains (losses) on
assets still held at the reporting date
195.8
(188.0)
39.4 $
103.8
(80.0)
31.6 $
(91.1)
89.2
(2.4) $
(14.1)
17.0
(0.5)
39.4 $
23.7 $
(2.4) $
(0.5)
$
$
Gains and losses included in earnings are reported in Product revenues in the Statements of Consolidated
Operations for the years ended December 31, 2017 and 2016.
The carrying amount for certain financial instruments (e.g. Accounts receivable, net, Accounts payable and
Accrued expenses) approximate fair value and, therefore, has been excluded from the table below. A summary of the
carrying amount and fair value of other financial instruments at December 31, 2017 and 2016 is as follows:
(In Millions)
December 31, 2017
December 31, 2016
Classification
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Long-term debt:
Secured Notes
$400 Million 4.875% 2024 Senior Notes
$540 Million 8.25% 2020 First Lien Notes
$218.5 Million 8.00% 2020 1.5 Lien Notes
$544.2 Million 7.75% 2020 Second Lien
Notes
Unsecured Notes
$400 Million 5.90% 2020 Senior Notes
$500 Million 4.80% 2020 Senior Notes
$700 Million 4.875% 2021 Senior Notes
$316.25 Million 1.50% 2025 Convertible
Senior Notes
$1.075 Billion 5.75% 2025 Senior Notes
$800 Million 6.25% 2040 Senior Notes
ABL Facility
Fair Value Adjustment to Interest Rate Hedge
Total long-term debt
Level 1
Level 1
Level 2
Level 1
Level 1
Level 1
Level 1
Level 1
Level 1
Level 1
Level 2
Level 2
112
$
390.3 $
—
—
—
88.6
122.0
138.0
398.0 $
—
—
—
88.0
118.8
130.8
224.1
352.9
1,047.2
1,029.3
292.6
—
227.1
—
— $
506.3
284.2
—
595.0
229.5
339.1
439.7
224.5
235.9
308.2
—
—
292.5
—
219.6
221.1
283.1
—
—
234.7
—
1.4
1.9
$ 2,304.2 $ 2,346.3 $ 2,192.6 $ 2,224.6
1.9
1.4
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based
upon current borrowing rates.
NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit
plans, primarily consisting of retiree healthcare benefits, to most employees in the U.S. as part of a total compensation
and benefits program. The defined benefit pension plans largely are noncontributory and benefits generally are based
on employees’ years of service and average earnings for a defined period prior to retirement or a minimum formula. We
do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations.
We offer retiree medical coverage to hourly retirees of our USW-represented mines. The 2015 USW agreement
set fixed monthly medical premiums for participants who retired prior to January 1, 2015. These fixed premiums will
expire on December 31, 2018 and revert to increasing premiums based a cost-sharing formula. The agreements also
provide for an OPEB cap that limits the amount of contributions that we have to make toward retiree medical insurance
coverage for each retiree and spouse of a retiree per calendar year who retired on or after January 1, 2015. The amount
of the annual OPEB cap is based upon the gross plan costs we incurred in 2014. The OPEB cap does not apply to
surviving spouses.
The 2015 USW agreement also eliminates retiree medical coverage for USW-represented employees hired after
September 1, 2016. In lieu of retiree medical coverage, USW-represented employees hired after September 1, 2016
will receive a 401(k) contribution of $0.50 per hour worked to a restricted Retiree Health Care Account.
In addition, we currently provide various levels of retirement health care and OPEB to some full-time employees
who meet certain length of service and age requirements (a portion of which is 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.
There is a cap on our cost for medical coverage under the salaried plans. The annual limit applies to each covered
participant and equals $7,000 for coverage prior to age 65, with the retiree’s participation adjusted based on the age at
which the retiree’s benefits commence. Beginning in 2015, we changed the delivery of the post-65 salaried retiree
medical benefit program, including salaried retirees from our Northshore operation, from an employer sponsored plan
to the combination of an employer subsidy plan and an individual supplemental Medicare insurance plan purchased
through a Medicare exchange. This allows the program to take full advantage of available government subsidies and
more efficient pricing in the Medicare market. For participants at our Northshore operation, the annual limit ranges from
$4,020 to $4,500 for coverage prior to age 65. Covered participants pay an amount for coverage equal to the excess
of (i) the average cost of coverage for all covered participants, over (ii) the participant’s individual limit, but in no event
will the participant’s cost be less than 15.0% of the average cost of coverage for all covered participants. For Northshore
participants, the minimum participant cost is a fixed dollar amount. We do not provide OPEB for most salaried employees
hired after January 1, 1993. Retiree healthcare coverage is provided through programs administered by insurance
companies whose charges are based on benefits paid.
The Pinnacle and Oak Grove mines were sold in December 2015, and the liabilities representing vested salaried
pension benefits at the time of the sale remained with Cliffs. The sale triggered a curtailment event for the Salaried
Pension Plan. Liabilities for other postretirement benefits were transferred as part of the sale, and associated adjustments
were made to the Accumulated other comprehensive loss balances as they pertained to Pinnacle and Oak Grove
participants in the Hourly OPEB plan. Accordingly, all amounts shown below include retained obligations of vested
employees of the North American Coal mines. Further, all disclosures presented include the annual expense,
contributions and obligations associated with the retained vested benefits of these participants.
The following table summarizes the annual expense (income) recognized related to the retirement plans for
2017, 2016 and 2015:
Defined benefit pension plans
Defined contribution pension plans
Other postretirement benefits
Total
2017
(In Millions)
2016
2015
$
$
18.0 $
2.9
(6.1)
14.8 $
16.5 $
2.8
(4.0)
15.3 $
23.9
3.6
4.4
31.9
113
Obligations and Funded Status
The following tables and information provide additional disclosures for the years ending December 31, 2017 and
2016:
(In Millions)
Pension Benefits
2016
2017
Other Benefits
2016
2017
931.6 $
17.1
30.5
—
54.6
(60.7)
—
—
973.1 $
685.8 $
100.2
—
24.4
0.1
(60.7)
749.8 $
910.8 $
17.6
30.3
5.7
38.1
(70.9)
—
—
931.6 $
700.6 $
54.8
—
1.2
0.1
(70.9)
685.8 $
264.6 $
1.8
8.3
—
7.4
(21.4)
4.6
0.6
265.9 $
253.0 $
24.2
0.3
1.7
—
(16.7)
262.5 $
266.0
1.7
9.1
9.8
(7.2)
(21.3)
6.0
0.5
264.6
250.6
16.0
0.5
1.7
—
(15.8)
253.0
749.8 $
(973.1)
(223.3) $
685.8 $
(931.6)
(245.8) $
262.5 $
(265.9)
(3.4) $
253.0
(264.6)
(11.6)
— $
— $
(0.5)
(222.8)
(223.3) $
(0.1)
(245.7)
(245.8) $
35.4 $
(3.9)
(34.9)
(3.4) $
27.3
(4.1)
(34.8)
(11.6)
318.7 $
8.8
327.5 $
315.9 $
11.0
326.9 $
88.3 $
(25.6)
62.7 $
87.0
(26.9)
60.1
21.1
2.2
23.3
$
$
4.9
(3.0)
1.9
$
$
$
$
$
$
$
$
$
$
$
$
Change in benefit obligations:
Benefit obligations — beginning of year
Service cost (excluding expenses)
Interest cost
Plan amendments
Actuarial (gain) loss
Benefits paid
Participant contributions
Federal subsidy on benefits paid
Benefit obligations — end of year
Change in plan assets:
Fair value of plan assets — beginning of year
Actual return on plan assets
Participant contributions
Employer contributions
Asset transfers
Benefits paid
Fair value of plan assets — end of year
Funded status at December 31:
Fair value of plan assets
Benefit obligations
Amount recognized at December 31
Amounts recognized in Statements of Financial Position:
Noncurrent assets
Current liabilities
Noncurrent liabilities
Total amount recognized
Amounts recognized in accumulated other comprehensive
loss:
Net actuarial loss
Prior service cost (credit)
Net amount recognized
The estimated amounts that will be amortized from
accumulated other comprehensive loss into net periodic
benefit cost in 2018:
Net actuarial loss
Prior service cost (credit)
Net amount recognized
114
(In Millions)
2017
Fair value of plan assets
Benefit obligation
Funded status
Fair value of plan assets
Benefit obligation
Funded status
Pension Plans
Mining
SERP
Other Benefits
Total
Salaried Hourly
Total
Salaried Hourly
$ 269.4 $ 473.0 $
(368.0)
(590.0)
(10.3)
$ (98.6) $ (117.0) $
(2.9) $
(4.8)
(4.8) $ (223.3) $ (37.7) $
(37.7)
7.4 $
— $
749.8 $
(973.1)
— $ 262.5 $ 262.5
(265.9)
(3.4)
34.3 $
(228.2)
Pension Plans
Other Benefits
2016
Salaried
$ 242.9 $ 436.9 $
Hourly
Mining
SERP
Total
Salaried
Hourly
Total
6.0 $
— $
685.8 $
— $ 253.0 $ 253.0
(351.9)
(565.6)
(10.0)
(4.1)
(931.6)
(37.6)
(227.0)
(264.6)
$ (109.0) $ (128.7) $
(4.0) $
(4.1) $ (245.8) $ (37.6) $
26.0 $
(11.6)
The accumulated benefit obligation for all defined benefit pension plans was $963.0 million and $922.0 million
at December 31, 2017 and 2016, respectively. The increase in the accumulated benefit obligation primarily is a result
of a decrease in the discount rates.
Components of Net Periodic Benefit Cost
(In Millions)
Pension Benefits
2016
2015
2017
Other Benefits
2016
2015
2017
Service cost
Interest cost
Expected return on plan assets
Amortization:
Prior service costs (credits)
Net actuarial loss
Curtailments and settlements
Net periodic benefit cost (credit)
Curtailment effects
Current year actuarial loss (gain)
Amortization of net loss
Current year prior service cost
Amortization of prior service credit (cost)
Total recognized in other comprehensive income
(loss)
Total recognized in net periodic cost and other
comprehensive income (loss)
Assumptions
$
$
$
$
17.1 $
30.5
(54.5)
17.6 $
30.3
(54.7)
22.7 $
37.7
1.8 $
8.3
1.7 $
9.1
6.4
13.4
(59.8)
(17.7)
(17.1)
(18.3)
2.6
22.3
—
18.0 $
—
9.3
(22.3)
—
(2.6)
2.2
21.1
—
16.5 $
—
37.8
(21.1)
5.7
(2.2)
2.3
20.8
0.2
23.9 $
(1.2)
(0.7)
(21.0)
—
(2.3)
(3.0)
4.5
—
(6.1) $
—
1.2
(4.5)
—
3.0
(3.7)
6.0
—
(4.0) $
—
(8.1)
(6.0)
9.8
3.7
(3.7)
6.6
—
4.4
—
0.2
(6.6)
—
3.7
(15.6) $
20.2 $
(25.2) $
(0.3) $
(0.6) $
(2.7)
2.4 $
36.7 $
(1.3) $
(6.4) $
(4.6) $
1.7
The discount rate for determining PBO is determined individually for each plan as noted in the assumption chart
below. The discount rates are determined by matching the projected cash flows used to determine the PBO and APBO
to a projected yield curve of 623 Aa graded bonds in the 40th to 90th percentiles. These bonds are either noncallable or
callable with make-whole provisions. The decreases in discount rates due to market conditions resulted in increases of
$46.1 million and $12.6 million for the pension and other postretirement benefit plans, respectively, to the plans PBO.
115
Effective January 1, 2016, we changed the approach used to calculate the service and interest components of
net periodic benefit cost. Previously, we calculated the service and interest components utilizing a single weighted-
average discount rate derived from the yield curve used to measure the PBO. We have elected an alternative approach
that utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along
the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The change
resulted in a decrease to our net periodic benefit cost of $8.2 million and $1.8 million for our pension plans and OPEB
plans, respectively for the year ended December 31, 2016.
On December 31, 2017, the assumed mortality improvement projection was changed from generational scale
MP-2016 to generational scale MP-2017. The healthy mortality assumption remains the RP-2014 mortality tables with
blue collar adjustments for the Iron Hourly and Hourly PRW plans, with white collar adjustments for the SERP and Salaried
PRW Plan, and without collar adjustments for the Salaried and Ore Mining. The adoption of the new projection scale
resulted in decreases to our PBO totaling $6.1 million or 0.6% for the pension plans and $1.9 million or 0.7% for the
OPEB plans.
On December 31, 2016, the assumed mortality improvement projection was changed from generational scale
MP-2015 to generational scale MP-2016. The healthy mortality assumption remains the RP-2014 mortality tables with
blue collar adjustments for the Iron Hourly and Hourly PRW plans, with white collar adjustments for the SERP and Salaried
PRW Plan, and without collar adjustments for the Salaried and Ore Mining. The adoption of the new projection scale
resulted in decreases to our PBO totaling $13.1 million or 1.4% for the pension plans and $4.9 million or 1.8% for the
OPEB plans.
Weighted-average assumptions used to determine benefit obligations at December 31 were:
Discount rate
Iron Hourly Pension Plan
Salaried Pension Plan
Ore Mining Pension Plan
SERP
Hourly OPEB Plan
Salaried OPEB Plan
Salaried rate of compensation increase
Hourly rate of compensation increase
Pension Benefits
2016
2017
Other Benefits
2017
2016
3.60 %
4.02 %
3.52
3.61
3.50
N/A
N/A
3.00
2.00
3.92
4.04
3.90
N/A
N/A
3.00
2.00
%
%
N/A
N/A
N/A
N/A
3.60
3.57
3.00
N/A
N/A
N/A
N/A
N/A
4.02
3.99
3.00
N/A
116
Weighted-average assumptions used to determine net benefit cost for the years 2017, 2016 and 2015 were:
Obligation Discount Rate
Iron Hourly Pension Plan
Salaried Pension Plan
Ore Mining Pension Plan
SERP
Hourly OPEB Plan
Salaried OPEB Plan
Service Cost Discount Rate
Iron Hourly Pension Plan
Salaried Pension Plan
Ore Mining Pension Plan
SERP
Hourly OPEB Plan
Salaried OPEB Plan
Interest Cost Discount Rate
Iron Hourly Pension Plan
Salaried Pension Plan
Ore Mining Pension Plan
SERP
Hourly OPEB Plan
Salaried OPEB Plan
Expected return on plan assets
Salaried rate of compensation increase
Hourly rate of compensation increase
Pension Benefits
2016
2017
2015
2017
Other Benefits
2016
2015
4.02 %
3.91
4.04
3.90
N/A
N/A
4.30
3.93
4.27
3.69
N/A
N/A
3.38
3.21
3.41
3.36
N/A
N/A
8.25
3.00
2.00
4.27 %
3.83 %
4.13
4.28
4.01
N/A
N/A
4.66
4.14
4.60
3.87
N/A
N/A
3.46
3.21
3.48
3.30
N/A
N/A
8.25
3.00
2.00
3.83
3.83
3.83
N/A
N/A
3.83
3.83
3.83
3.83
N/A
N/A
3.83
3.83
3.83
3.83
N/A
N/A
8.25
3.00
2.50
N/A %
N/A
N/A
N/A
4.03
3.98
N/A
N/A
N/A
N/A
4.23
4.30
N/A
N/A
N/A
N/A
3.24
3.28
7.00
3.00
N/A
N/A %
N/A %
N/A
N/A
N/A
4.32
4.22
N/A
N/A
N/A
N/A
4.56
4.63
N/A
N/A
N/A
N/A
3.48
3.31
7.00
3.00
N/A
N/A
N/A
N/A
3.83
3.83
N/A
N/A
N/A
N/A
3.83
3.83
N/A
N/A
N/A
N/A
3.83
3.83
7.00
3.00
N/A
Assumed health care cost trend rates at December 31 were:
Health care cost trend rate assumed for next year
Ultimate health care cost trend rate
Year that the ultimate rate is reached
2017
7.00 %
5.00
2026
2016
6.50 %
5.00
2023
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
A change of one percentage point in assumed health care cost trend rates would have the following effects:
Effect on total of service and interest cost
Effect on postretirement benefit obligation
Plan Assets
(In Millions)
Increase Decrease
(0.8)
$
(17.6)
1.0 $
21.2
Our financial objectives with respect to our pension and VEBA plan assets are to fully fund the actuarial accrued
liability for each of the plans, to maximize investment returns within reasonable and prudent levels of risk, and to maintain
sufficient liquidity to meet benefit obligations on a timely basis.
117
Our investment objective is to outperform the expected ROA assumption used in the plans’ actuarial reports over
the life of the plans. The expected ROA takes into account historical returns and estimated future long-term returns
based on capital market assumptions applied to the asset allocation strategy. The expected return is net of investment
expenses paid by the plans. In addition, investment performance is monitored on a quarterly basis by benchmarking to
various indices and metrics for the one-, three- and five-year periods.
The asset allocation strategy is determined through a detailed analysis of assets and liabilities by plan, which
defines the overall risk that is acceptable with regard to the expected level and variability of portfolio returns, surplus
(assets compared to liabilities), contributions and pension expense.
The asset allocation review process involves simulating capital market behaviors including global asset class
performance, inflation and interest rates in order to evaluate various asset allocation scenarios and determine the asset
mix with the highest likelihood of meeting financial objectives. The process includes factoring in the current funded status
and likely future funded status levels of the plans by taking into account expected growth or decline in the contributions
over time.
The asset allocation strategy varies by plan. The following table reflects the actual asset allocations for pension
and VEBA plan assets as of December 31, 2017 and 2016, as well as the 2018 weighted average target asset allocations.
Equity investments include securities in large-cap, mid-cap and small-cap companies located in the U.S. and worldwide.
Fixed income investments primarily include corporate bonds and government debt securities. Alternative investments
include hedge funds, private equity, structured credit and real estate.
Pension Assets
VEBA Assets
Asset Category
Equity securities
Fixed income
Hedge funds
Private equity
Structured credit
Real estate
Cash
Total
2018
Target
Allocation
Percentage of
Plan Assets at
December 31,
2016
2017
43.2%
43.6%
26.4%
27.0%
5.9%
5.0%
5.3%
5.3%
9.3%
9.7%
9.0%
8.7%
0.9%
0.7%
100.0% 100.0% 100.0%
45.0%
28.0%
5.0%
7.0%
7.5%
7.5%
—%
2018
Target
Allocation
Percentage of
Plan Assets at
December 31,
2016
2017
8.0%
80.0%
4.0%
3.0%
2.0%
3.0%
—%
8.4%
78.3%
4.4%
1.7%
2.7%
4.4%
0.1%
100.0% 100.0% 100.0%
8.7%
77.7%
4.4%
1.5%
3.0%
4.6%
0.1%
118
Pension
The fair values of our pension plan assets at December 31, 2017 and 2016 by asset category are as follows:
Quoted Prices in Active
Markets for Identical
Assets/Liabilities
(Level 1)
(In Millions)
December 31, 2017
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
130.1 $
35.5
160.9
173.6
—
—
—
—
5.3
505.4 $
— $
—
—
28.8
—
—
—
—
—
28.8 $
— $ 130.1
35.5
—
160.9
—
202.4
—
37.4
37.4
39.8
39.8
72.9
72.9
65.5
65.5
5.3
—
215.6 $ 749.8
Quoted Prices in Active
Markets for Identical
Assets/Liabilities
(Level 1)
(In Millions)
December 31, 2016
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
144.7 $
39.9
111.8
157.5
—
—
—
—
5.8
459.7 $
— $
—
—
23.7
—
—
—
—
—
23.7 $
— $ 144.7
39.9
—
111.8
—
181.2
—
40.6
40.6
36.1
36.1
63.8
63.8
61.9
61.9
5.8
—
202.4 $ 685.8
Asset Category
Equity securities:
U.S. large-cap
U.S. small/mid-cap
International
Fixed income
Hedge funds
Private equity
Structured credit
Real estate
Cash
Total
Asset Category
Equity securities:
U.S. large-cap
U.S. small/mid-cap
International
Fixed income
Hedge funds
Private equity
Structured credit
Real estate
Cash
Total
Following is a description of the inputs and valuation methodologies used to measure the fair value of our plan
assets.
Equity Securities
Equity securities classified as Level 1 investments include U.S. large-, small- and mid-cap investments and
international equity. These investments are comprised of securities listed on an exchange, market or automated quotation
system for which quotations are readily available. The valuation of these securities is determined using a market approach,
and is based upon unadjusted quoted prices for identical assets in active markets.
119
Fixed Income
Fixed income securities classified as Level 1 investments include bonds and government debt securities. These
investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations
are readily available. The valuation of these securities is determined using a market approach, and is based upon
unadjusted quoted prices for identical assets in active markets. Also included in Fixed Income is a portfolio of U.S.
Treasury STRIPS, which are zero-coupon bearing fixed income securities backed by the full faith and credit of the U.S.
government. The securities sell at a discount to par because there are no incremental coupon payments. STRIPS are
not issued directly by the Treasury, but rather are created by a financial institution, government securities broker or
government securities dealer. Liquidity on the issue varies depending on various market conditions; however, in general
the STRIPS market is slightly less liquid than that of the U.S. Treasury Bond market. The STRIPS are priced daily through
a bond pricing vendor and are classified as Level 2.
Hedge Funds
Hedge funds are alternative investments comprised of direct or indirect investment in offshore hedge funds with
an investment objective to achieve equity-like returns with one half the volatility of equities and moderate correlation.
The valuation techniques used to measure fair value attempt to maximize the use of observable inputs and minimize the
use of unobservable inputs. Considerable judgment is required to interpret the factors used to develop estimates of fair
value. Valuations of the underlying investment funds are obtained and reviewed. The securities that are valued by the
funds are interests in the investment funds and not the underlying holdings of such investment funds. Thus, the inputs
used to value the investments in each of the underlying funds may differ from the inputs used to value the underlying
holdings of such funds.
In determining the fair value of a security, the fund managers may consider any information that is deemed
relevant, which may include one or more of the following factors regarding the portfolio security, if appropriate: type of
security or asset; cost at the date of purchase; size of holding; last trade price; most recent valuation; fundamental
analytical data relating to the investment in the security; nature and duration of any restriction on the disposition of the
security; evaluation of the factors that influence the market in which the security is purchased or sold; financial statements
of the issuer; discount from market value of unrestricted securities of the same class at the time of purchase; special
reports prepared by analysts; information as to any transactions or offers with respect to the security; existence of merger
proposals or tender offers affecting the security; price and extent of public trading in similar securities of the issuer or
compatible companies and other relevant matters; changes in interest rates; observations from financial institutions;
domestic or foreign government actions or pronouncements; other recent events; existence of shelf registration for
restricted securities; existence of any undertaking to register the security; and other acceptable methods of valuing
portfolio securities.
Private Equity Funds
Private equity funds are alternative investments that represent direct or indirect investments in partnerships,
venture funds or a diversified pool of private investment vehicles (fund of funds).
Investment commitments are made in private equity funds based on an asset allocation strategy, and capital
calls are made over the life of the funds to fund the commitments. As of December 31, 2017, remaining commitments
total $52.7 million for both our pension and other benefits. Committed amounts are funded from plan assets when capital
calls are made. Investment commitments are not pre-funded in reserve accounts.
The valuation of investments in private equity funds initially is performed by the underlying fund managers. In
determining the fair value, the fund managers may consider any information that is deemed relevant, which may include:
type of security or asset; cost at the date of purchase; size of holding; last trade price; most recent valuation; fundamental
analytical data relating to the investment in the security; nature and duration of any restriction on the disposition of the
security; evaluation of the factors that influence the market in which the security is purchased or sold; financial statements
of the issuer; discount from market value of unrestricted securities of the same class at the time of purchase; special
reports prepared by analysts; information as to any transactions or offers with respect to the security; existence of merger
proposals or tender offers affecting the security; price and extent of public trading in similar securities of the issuer or
compatible companies and other relevant matters; changes in interest rates; observations from financial institutions;
domestic or foreign government actions or pronouncements; other recent events; existence of shelf registration for
restricted securities; existence of any undertaking to register the security; and other acceptable methods of valuing
portfolio securities.
120
The valuations are obtained from the underlying fund managers, and the valuation methodology and process is
reviewed for consistent application and adherence to policies. Considerable judgment is required to interpret the factors
used to develop estimates of fair value.
Private equity investments are valued quarterly and recorded on a one-quarter lag. For alternative investment
values reported on a lag, current market information is reviewed for any material changes in values at the reporting date.
Capital distributions for the funds do not occur on a regular frequency. Liquidation of these investments would require
sale of the partnership interest.
Structured Credit
Structured credit investments are alternative investments comprised of collateralized debt obligations and other
structured credit investments that are priced based on valuations provided by independent, third-party pricing agents, if
available. Such values generally reflect the last reported sales price if the security is actively traded. The third-party
pricing agents may also value structured credit investments at an evaluated bid price by employing methodologies that
utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market
value of such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call
features, ratings and developments relating to specific securities in arriving at valuations. Securities listed on a securities
exchange, market or automated quotation system for which quotations are readily available are valued at the last quoted
sale price on the primary exchange or market on which they are traded. Debt obligations with remaining maturities of
60 days or less may be valued at amortized cost, which approximates fair value.
Structured credit investments are valued monthly and recorded on a one-month lag. For alternative investment
values reported on a lag, current market information is reviewed for any material changes in values at the reporting date.
Historically, redemption requests have been considered quarterly, subject to notice of 90 days, although the advisor is
currently only requiring notice of 65 days.
Real Estate
The real estate portfolio for the pension plans is an alternative investment primarily comprised of two funds with
strategic categories of real estate investments. All real estate holdings are appraised externally at least annually, and
appraisals are conducted by reputable, independent appraisal firms that are members of the Appraisal Institute. All
external appraisals are performed in accordance with the Uniform Standards of Professional Appraisal Practices. The
property valuations and assumptions about each property are reviewed quarterly by the investment advisor and values
are adjusted if there has been a significant change in circumstances relating to the property since the last external
appraisal. The valuation methodology utilized in determining the fair value is consistent with the best practices prevailing
within the real estate appraisal and real estate investment management industries, including the Real Estate Information
Standards, and standards promulgated by the National Council of Real Estate Investment Fiduciaries, the National
Association of Real Estate Investment Fiduciaries, and the National Association of Real Estate Managers. In addition,
the investment advisor may cause additional appraisals to be performed. One of the fund's fair value is updated monthly,
and there is no lag in reported value. Redemption requests are considered on a quarterly basis, subject to notice of 45
days.
The real estate fund of funds investment for the Empire, Tilden, Hibbing and United Taconite VEBA plans invests
in pooled investment vehicles that in turn invest in commercial real estate properties. Valuations are performed quarterly
and financial statements are prepared on a semi-annual basis, with annual audited statements. Asset values for this
fund are reported with a one-quarter lag and current market information is reviewed for any material changes in values
at the reporting date. In most cases, values are based on valuations reported by underlying fund managers or other
independent third-party sources, but the fund has discretion to use other valuation methods, subject to compliance with
ERISA. Valuations are typically estimates and subject to upward or downward revision based on each underlying fund’s
annual audit. Withdrawals are permitted on the last business day of each quarter subject to a 65-day prior written notice.
121
The following represents the effect of fair value measurements using significant unobservable inputs (Level 3)
on changes in plan assets for the years ended December 31, 2017 and 2016:
Beginning balance — January 1, 2017
Actual return on plan assets:
Relating to assets still held at
the reporting date
Relating to assets sold during
the period
Purchases
Sales
Ending balance — December 31, 2017
$
(In Millions)
Year Ended December 31, 2017
Hedge
Funds
Private Equity
Funds
Structured
Credit Fund
Real
Estate
Total
$
40.6 $
36.1 $
63.8 $
61.9 $ 202.4
2.5
0.3
9.1
4.2
16.1
0.4
39.0
(45.1)
37.4 $
4.5
4.5
(5.6)
39.8 $
—
—
—
72.9 $
(0.1)
4.8
14.4
57.9
(65.6)
(14.9)
65.5 $ 215.6
(In Millions)
Year Ended December 31, 2016
Hedge
Funds
Private Equity
Funds
Structured
Credit Fund
Real
Estate
Total
Beginning balance — January 1, 2016
$
40.7 $
33.1 $
62.1 $
57.5 $ 193.4
Actual return on plan assets:
Relating to assets still held at
the reporting date
Relating to assets sold during
the period
Purchases
Sales
(0.1)
—
—
—
(2.7)
3.7
8.0
(6.0)
10.0
(0.3)
—
(8.0)
5.1
12.3
(0.1)
—
(0.6)
3.3
8.0
(14.6)
Ending balance — December 31, 2016
$
40.6 $
36.1 $
63.8 $
61.9 $ 202.4
VEBA
Assets for other benefits include VEBA trusts pursuant to bargaining agreements that are available to fund retired
employees’ life insurance obligations and medical benefits. The fair value of our other benefit plan assets at December 31,
2017 and 2016 by asset category are as follows:
Asset Category
Equity securities:
U.S. large-cap
U.S. small/mid-cap
International
Fixed income
Hedge funds
Private equity
Structured credit
Real estate
Cash
Total
(In Millions)
December 31, 2017
Quoted Prices in Active
Markets for Identical
Assets/Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
11.4 $
2.8
8.8
164.1
—
—
—
—
0.2
187.3 $
122
— $
—
—
40.0
—
—
—
—
—
40.0 $
— $
—
—
—
11.4
3.9
7.9
12.0
—
35.2 $
11.4
2.8
8.8
204.1
11.4
3.9
7.9
12.0
0.2
262.5
(In Millions)
December 31, 2016
Quoted Prices in Active
Markets for Identical
Assets/Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Asset Category
Equity securities:
U.S. large-cap
$
10.6 $
— $
— $
U.S. small/mid-cap
International
Fixed income
Hedge funds
Private equity
Structured credit
Real estate
Cash
Total
2.7
8.1
162.0
—
—
—
—
0.2
—
—
35.9
—
—
—
—
—
—
—
—
11.2
4.3
6.9
11.1
—
10.6
2.7
8.1
197.9
11.2
4.3
6.9
11.1
0.2
$
183.6 $
35.9 $
33.5 $
253.0
Refer to the pension asset discussion above for further information regarding the inputs and valuation
methodologies used to measure the fair value of each respective category of plan assets.
The following represents the effect of fair value measurements using significant unobservable inputs (Level 3)
on changes in plan assets for the year ended December 31, 2017 and 2016:
(In Millions)
Year Ended December 31, 2017
Hedge
Funds
Private Equity
Funds
Structured
Credit Fund
Real
Estate
Total
Beginning balance — January 1, 2017
$
11.2 $
4.3 $
6.9 $
11.1 $
33.5
Actual return on plan assets:
Relating to assets still held at the
reporting date
Relating to assets sold during the
period
Purchases
Sales
Ending balance — December 31, 2017
$
0.8
—
17.1
(17.7)
11.4 $
0.9
(0.4)
1.8
(2.7)
3.9 $
2.0
(1.0)
2.1
(2.1)
7.9 $
3.4
7.1
(2.5)
3.0
(3.0)
12.0 $
(3.9)
24.0
(25.5)
35.2
(In Millions)
Year Ended December 31, 2016
Hedge
Funds
Private Equity
Funds
Structured
Credit Fund
Real
Estate
Total
Beginning balance — January 1, 2016
$
11.2 $
5.5 $
5.8 $
10.0 $
32.5
Actual return on plan assets:
Relating to assets still held at the
reporting date
Relating to assets sold during the
period
Purchases
Sales
Ending balance — December 31, 2016
$
(0.3)
0.1
—
(1.0)
4.3 $
1.1
—
—
1.1
—
—
1.9
0.1
—
—
6.9 $
—
11.1 $
(1.0)
33.5
—
—
—
—
11.2 $
123
Contributions
Annual contributions to the pension plans are made within income tax deductibility restrictions in accordance
with statutory regulations. In the event of plan termination, the plan sponsors could be required to fund additional shutdown
and early retirement obligations that are not included in the pension obligations. Costs for early termination for pensions
and other benefits are estimated to be $22.5 million and $0.8 million, respectively. The Company currently has no intention
to shutdown, terminate or withdraw from any of its employee benefit plans.
Company Contributions
2016
2017
2018 (Expected)1
(In Millions)
Pension
Benefits
VEBA
Other Benefits
Direct
Payments
Total
$
1.2 $
— $
1.1 $
24.4
27.8
—
—
2.1
4.0
1.1
2.1
4.0
1 Pursuant to the bargaining agreement, benefits can be paid from VEBA trusts that are at least 70% funded (all VEBA
trusts are over 70% funded at December 31, 2017). Funding obligations have been suspended as Hibbing's, UTAC's,
Tilden's and Empire's share of the value of their respective trust assets have reached 90% of their obligation.
VEBA plans are not subject to minimum regulatory funding requirements. Amounts contributed are pursuant
to bargaining agreements.
Contributions by participants to the other benefit plans were $4.6 million for the year ended December 31,
2017 and $6.0 million for the year ended December 31, 2016.
Estimated Cost for 2018
For 2018, we estimate net periodic benefit cost as follows:
Defined benefit pension plans
Other postretirement benefits
Total
Estimated Future Benefit Payments
(In Millions)
$
$
12.3
(6.2)
6.1
2018
2019
2020
2021
2022
2023-2027
(In Millions)
Pension
Benefits
Gross
Company
Benefits
Other Benefits
Less
Medicare
Subsidy
Net
Benefit
Payments
$
69.6 $
66.7
66.0
65.1
65.2
310.5
18.9 $
18.0
17.4
16.9
16.7
81.5
(0.7) $
(0.8)
(0.9)
(1.0)
(1.1)
(6.6)
18.2
17.2
16.5
15.9
15.6
74.9
124
NOTE 8 - STOCK COMPENSATION PLANS
At December 31, 2017, we have outstanding awards under two share-based compensation plans, which are
described below. The compensation cost that has been charged against income for those plans was $18.7 million,
$14.2 million and $13.9 million in 2017, 2016 and 2015, respectively, which primarily was recorded in Selling, general
and administrative expenses in the Statements of Consolidated Operations. There was no income tax benefit recognized
for the years ended December 31, 2017, 2016 and 2015, due to the full valuation allowance.
Employees’ Plans
The Amended 2015 Equity Plan was approved by our Board of Directors on February 21, 2017 and by our
shareholders on April 25, 2017. The Amended 2015 Equity Plan increased the maximum number of shares that may
be issued by 15.0 million common shares. The 2015 Equity Plan was approved by our Board of Directors on March
26, 2015 and by our shareholders on May 19, 2015. The 2015 Equity Plan replaced the 2012 Equity Plan, and allowed
for a maximum of 12.9 million common shares to be issued. No additional grants were issued from the 2012 Equity
Plan after the date of approval of the 2015 Equity Plan; however, all awards previously granted under the 2012 Amended
Equity Plan will continue in full force and effect in accordance with the terms of outstanding awards.
Following is a summary of approved grants by the Compensation Committee:
Grant
Year
2017
2017
2016
2015
2015
Vesting Date
12/31/2019
Plan
Amended 2015 Equity Plan
12/31/2019
12/31/2018
12/15/2017
12/31/2017
2015 Equity Plan
2015 Equity Plan
2015 Equity Plan
2012 Equity Plan
Performance Shares
Restricted
Stock Granted
532,358
Performance
Shares Granted
249,106
Stock Options
Granted
—
—
—
—
553,725
—
—
874,575
412,710
553,725
3,406,716
1,473,184
874,575
The outstanding performance share or unit grants vest over a period of three years and are intended to be paid
out in common shares or cash in certain circumstances. Performance is measured on the basis of relative TSR for the
period and measured against the constituents of the S&P Metals and Mining ETF Index at the beginning of the relevant
performance period. The final payouts for the outstanding performance period grants will vary from 0% to 200% of the
original grant depending on whether and to what extent the Company achieves certain objectives and performance
goals as established by the Compensation Committee.
Following is a summary of our performance share award agreements currently outstanding:
Performance
Share
Plan Year
2017
2017
20151
20151
Performance
Shares
Granted
Forfeitures
to Date
249,106
553,725
410,105
464,470
—
5,192
155,235
68,667
Expected to
Vest
249,106
548,533
254,870
395,803
Grant Date
June 26, 2017
February 21, 2017
February 9, 2015
January 12, 2015
Performance Period
5/31/2017 - 12/31/2019
1/1/2017 - 12/31/2019
1/1/2015 - 12/31/2017
1/1/2015 - 12/31/2017
1 The performance shares granted in 2015 will have a payout of 75.3% of the original grant based on the final performance evaluation
versus the performance goals that were established in the grants.
Performance-Based Restricted Stock Units
For the outstanding 400,000 performance-based restricted stock units that were granted on November 17,
2014, the award may be earned and settled based upon certain VWAP performance for the Company’s common shares,
(Threshold VWAP, Target VWAP, or Maximum VWAP) for any period of ninety (90) consecutive calendar days during
a performance period commencing August 7, 2014 and ending December 31, 2017. The performance-based restricted
stock units will not have a payout based on the final performance evaluation versus the performance goals that were
established in the grants.
125
Restricted Stock Units
All of the outstanding restricted stock units are subject to continued employment, are retention based, and are
payable in common shares or cash in certain circumstances at a time determined by the Compensation Committee at
its discretion. The outstanding restricted stock units that were granted in 2016, cliff vest in three years on December
31, 2018 and the outstanding restricted stock units that were granted in 2017, cliff vest in three years on December 31,
2019.
Stock Options
The 412,710 stock options that were granted during the first quarter of 2015 vested on December 31, 2017,
are exercisable at a strike price of $7.70 after the vesting date and expire on January 12, 2025. The 187,160 stock
options that were granted in the fourth quarter of 2014 vested in equal thirds on each of December 31, 2015, 2016 and
2017 and are exercisable at a strike price of $13.83 and expire on November 17, 2021. As of December 31, 2017,
599,870 shares are exercisable with a weighted average price of $10.25.
Employee Stock Purchase Plan
On March 26, 2015, upon recommendation by the Compensation Committee, our Board of Directors approved
and adopted, subject to the approval of Cliffs' shareholders at the 2015 Annual Meeting, the Cliffs Natural Resources
Inc. 2015 Employee Stock Purchase Plan. This plan was approved by our shareholders at the 2015 Annual Meeting
held May 19, 2015. 10 million common shares have been reserved for issuance under this plan; however, as of December
31, 2017, this program has not been made active and no common shares have been purchased. We sought shareholder
approval of this plan for the purpose of qualifying the reserved common shares for special tax treatment under Section
423 of the Internal Revenue Code of 1986, as amended.
Nonemployee Directors
Equity Grants
Our nonemployee directors are entitled to receive restricted share awards under the Directors’ Plan. For 2017,
2016 and 2015, nonemployee directors were granted a specified number of restricted shares, with a value equal to
$100,000, $85,000 and $85,000, respectively. The amount of shares is based on the closing price of our common shares
on the date of the Annual Meeting. The awards are subject to any deferral election and pursuant to the terms of the
Directors’ Plan and an award agreement.
For the last three years, Equity Grant shares have been awarded to elected or re-elected nonemployee Directors
as follows:
Year of Grant
2015
2016
2017
Restricted Equity
Grant Shares
Deferred Equity
Grant Shares
109,408
135,038
93,359
25,248
29,583
17,289
126
Other Information
The following table summarizes the share-based compensation expense that we recorded for continuing
operations in 2017, 2016 and 2015:
(In Millions, except per
share amounts)
2016
2015
2017
Cost of goods sold and operating expenses
Selling, general and administrative expenses
Reduction of operating income from continuing operations before income
taxes and equity loss from ventures
Income tax benefit1
Reduction of net income attributable to Cliffs shareholders
Reduction of earnings per share attributable to Cliffs shareholders:
Basic
Diluted
1 No income tax benefit due to the full valuation allowance.
Determination of Fair Value
Performance Shares
$
$
$
$
2.3
16.4
18.7
—
18.7
0.06
0.06
$
2.1 $
12.1
14.2
—
$
$
$
14.2 $
0.07 $
0.07 $
4.0
9.9
13.9
—
13.9
0.09
0.09
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation
to forecast relative TSR performance. A correlation matrix of historical and projected stock prices was developed for
both the Company and our predetermined peer group of mining and metals companies. The fair value assumes that
performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each
of the three plan-year agreements. We estimate the volatility of our common shares and that of the peer group of mining
and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant
date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance period.
Performance shares were granted in February and June 2017. A fair value analysis was required for each of
these grants and the fair value was determined to be $19.69 and $10.74, respectively.
Stock Options
The fair value of each stock option grant is estimated on the date of grant using a Black-Scholes valuation
model. The expected term of the option grant is determined using the simplified method. We estimate the volatility of
our common shares using historical stock prices with consistent frequency over the most recent historical period equal
to the option’s expected term. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds,
with a term commensurate with the expected term.
No stock options were granted in 2017, therefore no fair value analysis was required.
Restricted Stock Units
The fair value of the restricted stock units is determined based on the closing price of our common shares on
the grant date.
127
Stock option, restricted stock awards and performance share activity under our long-term equity plans and
Directors’ Plans are as follows:
Stock options:
Outstanding at beginning of year
Granted during the year
Forfeited/canceled
Outstanding at end of year
Restricted awards:
Outstanding and restricted at beginning of year
Granted during the year
Vested
Forfeited/canceled
2017
Shares
2016
Shares
2015
Shares
599,870
607,489
—
—
599,870
5,461,783
1,196,731
(1,813,315)
(68,716)
—
(7,619)
599,870
2,338,070
3,571,337
(271,988)
(175,636)
250,000
412,710
(55,221)
607,489
523,176
2,482,415
(477,157)
(190,364)
Outstanding and restricted at end of year
4,776,483
5,461,783
2,338,070
Performance shares:
Outstanding at beginning of year
Granted during the year
Issued1
Forfeited/canceled
Outstanding at end of year
Vested or expected to vest as of December 31, 20172
Directors’ retainer and voluntary shares:
Outstanding at beginning of year
Granted during the year
Vested
Outstanding at end of year
Reserved for future grants or awards at end of year:
Employee plans
Directors’ plans
Total
1,368,469
1,496,489
1,072,376
—
(59,260)
(68,760)
874,575
(242,920)
(207,542)
1,368,469
1,496,489
—
—
—
—
—
—
—
—
802,831
—
(322,988)
1,848,312
7,224,665
—
25,476
(25,476)
—
16,606,386
612,266
17,218,652
1 For the year ended December 31, 2015, the shares vesting due to the change in control were paid out in cash, at target,
and valued as of the respective participants' termination dates.
2 With the adoption of ASU 2016-09, we assume all shares are expected to vest and none will forfeit.
A summary of our outstanding share-based awards as of December 31, 2017 is shown below:
Outstanding, beginning of year
Granted
Vested
Forfeited/expired
Outstanding, end of year
Weighted
Average
Grant Date
Fair Value
5.55
12.19
5.52
12.84
6.79
Shares
7,430,122 $
1,999,562 $
(1,813,315) $
(391,704) $
7,224,665 $
The total compensation cost related to outstanding awards not yet recognized is $20.1 million at December 31,
2017. The weighted average remaining period for the awards outstanding at December 31, 2017 is approximately 1.5
years.
128
NOTE 9 - INCOME TAXES
Income from continuing operations before income taxes and equity loss from ventures includes the following
components:
United States
Foreign
2017
(In Millions)
2016
$
$
90.7 $
38.7
129.4 $
124.9 $
82.1
207.0 $
2015
314.2
(1.1)
313.1
The components of the provision (benefit) for income taxes on continuing operations consist of the following:
2017
(In Millions)
2016
2015
Current provision (benefit):
United States federal
United States state & local
Foreign
Deferred provision (benefit):
United States federal
Foreign
$
(252.6) $
(0.1)
0.3
(252.4)
—
—
—
(252.4) $
(11.1) $
(0.5)
(0.1)
(11.7)
(0.5)
—
(0.5)
(12.2) $
8.2
0.3
0.9
9.4
165.8
(5.9)
159.9
169.3
Total provision (benefit) on income from continuing operations
$
129
Reconciliation of our income tax attributable to continuing operations computed at the U.S. federal statutory
rate is as follows:
Tax at U.S. statutory rate of 35%
$
45.3
35.0 % $
72.5
35.0 % $
109.6
35.0%
2017
(In Millions)
2016
2015
Increase (decrease) due to:
Impact of tax law change -
remeasurement of deferred taxes
Prior year adjustments in current year
Valuation allowance build (reversal)
Tax law change - remeasurement of
deferred taxes
Current year activity
Repeal of AMT
Prior year adjustments in current year
Tax uncertainties
Worthless stock deduction
Impact of foreign operations
Percentage depletion in excess of cost
depletion
Non-taxable loss (income) related to
noncontrolling interests
State taxes, net
Other items, net
Provision for income tax (benefit) expense
and effective income tax rate including
discrete items
407.5
(1.1)
314.8
(0.8)
149.1
(11.8)
72.0
(5.7)
—
5.9
—
1.9
(407.5)
(471.7)
(235.3)
(3.0)
(1.4)
—
(314.8)
(364.4)
(181.7)
(2.4)
(1.1)
—
475.4
367.2
(149.1)
(72.0)
—
—
93.9
45.4
(104.6)
(33.4)
—
6.5
(11.3)
(73.4)
(42.7)
—
3.1
(5.5)
(35.5)
(20.6)
—
165.8
84.1
—
—
52.9
26.9
—
(53.9)
(17.2)
(61.6)
(47.6)
(36.1)
(17.4)
(34.9)
(11.1)
1.3
(0.1)
(0.2)
1.0
—
(0.2)
(8.8)
0.4
(1.4)
(4.2)
0.2
(0.7)
(3.0)
0.2
0.1
(1.0)
0.1
—
$ (252.4)
(195.0)% $
(12.2)
(5.9)% $
169.3
54.1%
The components of income taxes for other than continuing operations consisted of the following:
Other comprehensive (income) loss:
Postretirement benefit liability
Mark-to-market adjustments
Other
Total
Discontinued Operations
2017
(In Millions)
2016
2015
$
$
$
— $
—
—
— $
— $
—
0.5
0.5 $
5.9
0.3
—
6.2
— $
— $
(6.0)
130
Significant components of our deferred tax assets and liabilities as of December 31, 2017 and 2016 are as
follows:
Deferred tax assets:
Pensions
Postretirement benefits other than pensions
Alternative minimum tax credit carryforwards
Deferred income
Intangible assets
Financial instruments
Asset retirement obligations
Operating loss carryforwards
Property, plant and equipment and mineral rights
State and local
Lease liabilities
Other liabilities
Total deferred tax assets before valuation allowance
Deferred tax asset valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Property, plant and equipment and mineral rights
Investment in ventures
Intangible assets
Product inventories
Intercompany notes
Other assets
Total deferred tax liabilities
Net deferred tax assets (liabilities)
(In Millions)
2017
2016
$
76.3 $
25.6
—
24.2
12.2
—
9.9
2,368.1
188.2
74.2
9.6
100.4
2,888.7
(2,238.5)
650.2
(1.5)
(137.5)
—
(3.8)
(465.7)
(41.7)
(650.2)
$
— $
114.6
35.2
251.2
44.5
—
71.3
22.3
2,699.7
181.2
59.2
12.9
108.3
3,600.4
(3,334.8)
265.6
(34.0)
(203.1)
(1.0)
(3.4)
—
(24.1)
(265.6)
—
At December 31, 2017, we had no gross deferred tax asset related to U.S. AMT credits compared to $251.2
million at December 31, 2016. This deferred tax asset is now recorded as an income tax receivable as a result of the
recently enacted income tax legislation allowing the credits to be refunded between the years 2019 through 2022.
We had gross domestic (including states) and foreign net operating loss carryforwards, inclusive of discontinued
operations, of $4.2 billion and $7.2 billion, respectively, at December 31, 2017. We had gross domestic and foreign net
operating loss carryforwards at December 31, 2016 of $3.7 billion and $6.9 billion, respectively. The U.S. Federal net
operating losses will begin to expire in 2035 and state net operating losses will begin to expire in 2019. The foreign
net operating losses can be carried forward indefinitely. We had foreign tax credit carryforwards of $5.8 million at
December 31, 2017 and 2016. The foreign tax credit carryforwards will begin to expire in 2020.
We recorded a $1,096.3 million net decrease in the valuation allowance of certain deferred tax assets. Of this
amount, a $465.7 million decrease relates to impairment income on Luxembourg intercompany notes, a $407.5 million
decrease relates to the reversal of deferred tax assets due to the change in the U.S. and Luxembourg statutory rates,
a $235.3 million decrease relates to the repeal of AMT as a result of U.S. income tax reform and the remainder relates
to current year activity.
At December 31, 2017 and 2016, we had no cumulative undistributed earnings of foreign subsidiaries included
in consolidated retained earnings. Accordingly, no provision has been made for U.S. deferred taxes related to future
repatriation of earnings.
131
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefits balance as of January 1
Increase (decrease) for tax positions in prior years
Increase for tax positions in current year
Decrease due to foreign exchange
Settlements
Lapses in statutes of limitations
Other
Unrecognized tax benefits balance as of December 31
2017
(In Millions)
2016
2015
30.7 $
(2.8)
4.5
—
1.0
—
0.1
33.5 $
156.2 $
(61.0)
0.2
—
(64.7)
—
—
72.6
6.7
78.5
—
(1.1)
(0.5)
—
30.7 $
156.2
$
$
At December 31, 2017 and 2016, we had $33.5 million and $30.7 million, respectively, of unrecognized tax
benefits recorded. Of this amount, $6.1 million and $8.3 million, respectively, were recorded in Other liabilities and
$27.4 million and $22.4 million, respectively, were recorded as Other non-current assets in the Statements of
Consolidated Financial Position for both years. If the $33.5 million were recognized, only $6.1 million would impact the
effective tax rate. We do not expect that the amount of unrecognized benefits will change significantly within the next
12 months. At December 31, 2017 and 2016, we had $2.1 million and $0.8 million, respectively, of accrued interest
and penalties related to the unrecognized tax benefits recorded in Other liabilities in the Statements of Consolidated
Financial Position.
Tax years 2015 and forward remain subject to examination for the U.S. and tax years 2013 and forward for
Australia. Tax years 2008 and forward remain subject to examination for Canada.
NOTE 10 - LEASE OBLIGATIONS
We lease certain mining, production and other equipment under operating and capital leases. The leases are
for varying lengths, generally at market interest rates and contain purchase and/or renewal options at the end of the
terms. Our operating lease expense was $7.1 million, $7.6 million and $12.0 million for the years ended December 31,
2017, 2016 and 2015, respectively. Capital lease assets were $37.4 million and $29.3 million at December 31, 2017
and 2016, respectively. Corresponding accumulated amortization of capital leases included in respective allowances
for depreciation were $21.0 million and $13.1 million at December 31, 2017 and 2016, respectively.
Future minimum payments under capital leases and non-cancellable operating leases at December 31, 2017
are as follows:
(In Millions)
Capital Leases
Operating Leases
2018
2019
2020
2021
2022
2023 and thereafter
Total minimum lease payments
Amounts representing interest
Present value of net minimum lease payments1
$
$
$
$
$
20.8
12.1
11.1
10.5
2.1
—
56.6
8.8
47.8
4.9
1.8
1.8
1.8
1.8
7.5
19.6
1 The total is comprised of $16.9 million and $30.9 million classified as Other current liabilities and Other liabilities,
respectively, in the Statements of Consolidated Financial Position at December 31, 2017.
132
NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
We had environmental and mine closure liabilities of $200.1 million and $206.8 million at December 31, 2017
and 2016, respectively. The following is a summary of the obligations as of December 31, 2017 and 2016:
(In Millions)
December 31,
2017
2016
$
2.9 $
2.8
168.4
28.8
197.2
200.1
3.6
196.5 $
187.8
16.2
204.0
206.8
12.9
193.9
Environmental
Mine closure
U.S. Iron Ore1
Asia Pacific Iron Ore
Total mine closure
Total environmental and mine closure obligations
Less current portion
Long-term environmental and mine closure obligations
$
1 U.S. Iron Ore includes our active operating mines, our indefinitely idled Empire mine and a closed mine formerly
operating as LTVSMC.
Environmental
Our mining and exploration activities are subject to various laws and regulations governing the protection of the
environment. We conduct our operations to protect the public health and environment and believe our operations are
in compliance with applicable laws and regulations in all material respects. Our environmental liabilities of $2.9 million
and $2.8 million at December 31, 2017 and 2016, respectively, including obligations for known environmental remediation
exposures at various 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 more likely, the minimum of the range is accrued. Future expenditures are not discounted
unless the amount and timing of the cash disbursements are readily known. Potential insurance recoveries have not
been reflected. Additional environmental obligations could be incurred, the extent of which cannot be assessed.
Mine Closure
Our mine closure obligations of $197.2 million and $204.0 million at December 31, 2017 and 2016, respectively,
include our U.S. Iron Ore mines and our Asia Pacific Iron Ore mine.
The accrued closure obligation for our mining operations provides for contractual and legal obligations associated
with the eventual closure of the mining operations. We performed a detailed assessment of our asset retirement obligations
related to our active mining locations most recently in 2017 in accordance with our accounting policy, which requires us
to perform an in-depth evaluation of the liability every three years in addition to routine annual assessments. In 2017,
we employed a third-party specialist to assist in the evaluation.
Management periodically performs an assessment of the obligation to determine the adequacy of the liability in
relation to the closure activities still required at the LTVSMC site, most recently performed in detail during 2017. The
LTVSMC closure liability was $28.6 million and $25.5 million at December 31, 2017 and 2016, respectively. We are
anticipating MPCA to reissue the NPDES permits for this facility in the future that could modify the closure liability, but
the scale of that change will not be understood until reissuance of the permits.
For the assessments performed, we determined the obligations based on detailed estimates adjusted for factors
that a market participant would consider (i.e., inflation, overhead and profit) and then discounted the obligation using the
current credit-adjusted risk-free interest rate based on the corresponding life of mine. The estimate also incorporates
incremental increases in the closure cost estimates and changes in estimates of mine lives. The closure date for each
of our active operating U.S. Iron Ore mines was determined based on the exhaustion date of the remaining iron ore
reserves. The closure date and expected timing of the capital requirements to meet our obligations for our Asia Pacific
Iron Ore mine, and our other indefinitely idled or closed mines, is determined based on the unique circumstances of each
property. The accretion of the liability and amortization of the related asset is recognized over the estimated mine lives
for each location.
133
The following represents a roll forward of our asset retirement obligation liability for the years ended December 31,
2017 and 2016:
Asset retirement obligation at beginning of year
Accretion expense
Remediation payments
Exchange rate changes
Revision in estimated cash flows
Asset retirement obligation at end of year
(In Millions)
December 31,
2017
2016
$
$
204.0 $
14.9
(5.6)
1.5
(17.6)
197.2 $
230.4
14.0
(2.2)
(0.2)
(38.0)
204.0
The revision in estimated cash flows recorded during the year ended December 31, 2017 relate primarily to
updates to our estimates resulting from our three-year in-depth review of our asset retirement obligations for each of our
U.S. mines. The primary driver of the decrease in estimated cash flows was the Empire mine, as the asset retirement
obligation was reduced $26.2 million as a result of the refinement of the cash flows required for reclamation, remediation
and structural removal. Prior estimates were based on RS Means (a common costing methodology used in the
construction and demolition industry) costing data while the current estimate was compiled using a more detailed cost
build-up approach. The overall decrease in estimated cash flows for our U.S. Iron Ore mines was offset partially by an
increase in costs of $10.1 million relating to the refinement of expected costs to be incurred at the end of life of mine at
our Asia Pacific Iron Ore operations.
The revision in estimated cash flows recorded during the year ended December 31, 2016 relate primarily to
revisions in the timing of the estimated cash flows at two of our U.S. mines. The Empire mine asset retirement obligation
was reduced $29.6 million as a result of the further refinement of the timing of cash flows and a downward revision of
estimated cost of required storm water management systems expected to be implemented. Additionally, during 2016,
a new economic reserve estimate was completed for United Taconite, increasing salable product reserves by 115 million
long tons and consequently significantly increasing the life-of-mine plan, resulting in a $9.2 million decrease in the asset
retirement obligation.
NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The carrying amount of goodwill for the years ended December 31, 2017 and 2016 was $2.0 million and related
to our U.S. Iron Ore operating segment.
Other Intangible Assets
Following is a summary of the definite-lived intangible assets as of December 31, 2017 and 2016:
Classification
Other non-current
assets
Permits
(In Millions)
December 31, 2017
December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
78.8 $
(26.5) $
52.3 $
78.4 $
(24.6) $
53.8
Amortization expense relating to other intangible assets was $2.1 million, $4.8 million and $4.2 million for the
years ended December 31, 2017, 2016 and 2015, respectively, and is recognized in Cost of goods sold and operating
expenses in the Statements of Consolidated Operations. Amortization expense of other intangible assets is expected
to continue to be immaterial going forward.
134
NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The following table presents the fair value of our derivative instruments and the classification of each in the
Statements of Consolidated Financial Position as of December 31, 2017 and 2016:
(In Millions)
Derivative Assets
Derivative Liabilities
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
Derivative
Instrument
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Derivatives designated as
hedging instruments under ASC
815:
Commodity Contracts
Derivatives not designated as
hedging instruments under ASC
815:
Customer Supply Agreements Derivative
assets
$ —
$ —
$ 37.9
Derivative
assets
$ 21.3
Provisional Pricing
Arrangements
Commodity Contracts
Derivative
assets
1.5
Derivative
assets
Derivative
assets
—
Total derivatives not designated
as hedging instruments under
ASC 815:
Total derivatives
$ 39.4
$ 39.4
Derivatives Designated as Hedging Instruments
Cash Flow Hedges
10.3
1.5
$ 33.1
$ 33.1
Other
current
liabilities
Other
current
liabilities
$
0.3
$ —
$ —
$ —
Other
current
liabilities
2.4
—
2.4
2.7
$
$
0.5
—
$ 0.5
$ 0.5
As of December 31, 2017, we had outstanding natural gas hedge contracts for a notional amount of 3.5 million
MMBtu in the form of forward contracts with varying maturity dates ranging from January 2018 to November 2018. We
had no natural gas hedge contracts as of December 31, 2016 that qualified for hedge accounting. Changes in fair value
of highly effective hedges are recorded as a component of Accumulated other comprehensive loss in the Statements of
Consolidated Financial Position. During the year ended December 31, 2017, we recorded an unrealized loss of $0.5
million in Other comprehensive income (loss) for changes in the fair value of these instruments. As of December 31,
2017 no amounts have been reclassified from Accumulated other comprehensive loss into earnings.
135
Derivatives Not Designated as Hedging Instruments
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment
factors. The base price is the primary component of the purchase price for each contract. The indexed price adjustment
factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments
based upon changes in the Platts 62% Price, along with pellet premiums, published Platts international indexed freight
rates and changes in specified Producer Price Indices, including those for industrial commodities, fuel and steel. The
pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price
adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. In most
cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically
have estimated the adjustment factors at each reporting period based upon the best third-party information available.
The estimates are then adjusted to actual when the information has been finalized. The price adjustment factors have
been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic
characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly,
they have not been separately valued as derivative instruments.
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds to the
customer based on the customer's average annual steel pricing or based on the average annual daily steel market price
for hot-rolled coil steel at the time the product is consumed in the customer’s blast furnace. In the new contract which
commenced in 2017, this supplemental revenue and refund data source changes from the customer's average annual
steel price to an average annual daily market price for hot-rolled coil steel. The supplemental pricing is characterized
as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative
instrument, which is finalized based on a future price, is adjusted to fair value as a revenue adjustment each reporting
period until the pellets are consumed and the amounts are settled.
We recognized $163.3 million, $41.7 million and $27.1 million as Product revenues in the Statements of
Consolidated Operations for the years ended December 31, 2017, 2016 and 2015, respectively, related to the
supplemental payments. Derivative assets, representing the fair value of the supplemental revenue, were $37.9 million
and $21.3 million as of December 31, 2017 and 2016, respectively, in the Statements of Consolidated Financial Position.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore and Asia Pacific Iron Ore customer supply agreements specify provisional price
calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on
certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs
are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the
agreement. The pricing mechanisms typically include adjustments based upon changes in the Platts 62% Price, along
with pellet premiums, published Platts international indexed freight rates and changes in specified Producer Price Indices,
including those for industrial commodities, fuel and steel. The pricing adjustments generally operate in the same manner,
with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based
upon the specific terms of each agreement.
U.S. Iron Ore sales revenue is primarily recognized when cash is received. For U.S. Iron Ore sales, the difference
between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a freestanding
derivative and must be accounted for separately once the provisional revenue has been recognized. Asia Pacific Iron
Ore sales revenue is recorded initially at the provisionally agreed-upon price with the pricing provision embedded in the
receivable. The pricing provision is not clearly and closely related to the economic characteristics of the host receivable;
therefore, the pricing provision is an embedded derivative that must be bifurcated and accounted for separately from the
receivable. Subsequently, the derivative instruments for both U.S. Iron Ore and Asia Pacific Iron Ore are adjusted to fair
value through Product revenues each reporting period based upon current market data and forward-looking estimates
provided by management until the final revenue rate is determined.
At December 31, 2017, we recorded $1.5 million as Derivative assets and $2.4 million as derivative liabilities
classified as Other current liabilities related to our estimate of the final revenue rate for our U.S. Iron Ore and Asia Pacific
Iron Ore customers in the Statements of Consolidated Financial Position. At December 31, 2016, we recorded $10.3
million as Derivative assets and $0.5 million as derivative liabilities classified as Other current liabilities related to our
estimate of the final revenue rate with our U.S. Iron Ore and Asia Pacific Iron Ore customers in the Statements of
Consolidated Financial Position. These amounts represent the difference between the provisional price agreed upon
with our customers based on the supply agreement terms and our estimate of the final revenue rate based on the price
calculations established in the supply agreements. We recognized a net decrease of $58.6 million in Product revenues
136
in the Statements of Consolidated Operations for the year ended December 31, 2017 related to these arrangements.
This compares with a net increase of $49.0 million and net decrease of $1.4 million in Product revenues for the comparable
periods in 2016 and 2015, respectively.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the
Statements of Consolidated Operations for the years ended December 31, 2017, 2016 and 2015:
Derivatives Not Designated as
Hedging Instruments
(In Millions)
Location of Gain (Loss)
Recognized in
Income on Derivative
Customer Supply Agreements
Product revenues
Provisional Pricing Arrangements
Foreign Exchange Contracts
Foreign Exchange Contracts
Commodity Contracts
Total
Product revenues
Other non-operating income
(expense)
Product revenues
Cost of goods sold and operating
expenses
Year Ended
December 31,
2017
2016
2015
163.3 $
(58.6)
41.7 $
49.0
27.1
(1.4)
—
—
—
104.7 $
—
—
1.9
92.6 $
(3.6)
(12.6)
(4.0)
5.5
$
$
Refer to NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.
NOTE 14 - DISCONTINUED OPERATIONS
The information below sets forth selected financial information related to operating results of our businesses
classified as discontinued operations. While the reclassification of revenues and expenses related to discontinued
operations from prior periods have no impact upon previously reported net income, the Statements of Consolidated
Operations present the revenues and expenses that were reclassified from the specified line items to discontinued
operations.
137
The chart below provides an asset group breakout for each financial statement line impacted by discontinued
operations:
(In Millions)
Canadian Operations
North
American
Coal
Eastern
Canadian
Iron Ore
Total
Canadian
Operations
Total
Discontinued
Operations
Other
Statements of Consolidated Operations
Gain (Loss) from Discontinued
Operations, net of tax
Loss from Discontinued
Operations, net of tax
Loss from Discontinued
Operations, net of tax
YTD
December 31, 2017 $
2.6
$
(21.3) $
— $
(21.3) $
(18.7)
YTD
December 31, 2016
YTD
December 31, 2015
$
$
(2.4) $
(17.5) $
— $
(17.5) $
(19.9)
(152.4) $
(638.7) $ (101.0) $
(739.7) $
(892.1)
Statements of Consolidated Financial Position
Other current liabilities
Other current liabilities
As of
December 31, 2017 $
As of
December 31, 2016
Non-Cash Operating and Investing Activities
Depreciation, depletion and
amortization
Purchase of property, plant and
equipment
Impairment of long-lived assets
YTD
December 31, 2015
YTD
December 31, 2015
YTD
December 31, 2015
North American Coal Operations
Background
3.2
6.0
3.2
15.9
73.4
$
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
3.2
6.0
3.2
15.9
73.4
$
$
$
$
As of March 31, 2015, management determined that our North American Coal operating segment met the criteria
to be classified as held for sale under ASC 205, Presentation of Financial Statements. The North American Coal segment
continued to meet the criteria throughout 2015 until we sold our North American Coal operations during the fourth quarter
of 2015. As such, all current and historical North American Coal operating segment results are classified as discontinued
operations in our financial statements. Historical results also include our CLCC assets, which were sold during the fourth
quarter of 2014.
In the first quarter of 2015, as part of the held for sale classification assigned to North American Coal, an
impairment of $73.4 million was recorded. The impairment charge was to reduce the assets to their estimated fair value
which was determined based on potential sales scenarios. No further impairment was recorded in 2015.
On December 22, 2015, we completed a strategic shift in our business by closing the sale of our remaining North
American Coal business, which included Pinnacle mine in West Virginia and Oak Grove mine in Alabama. Pinnacle
mine and Oak Grove mine were sold to Seneca and the deal structure was a sale of equity interests of our remaining
coal business. Additionally, Seneca may pay us an earn-out of up to $50 million contingent upon the terms of a revenue
sharing agreement which extends through the year 2020. However, we have not recorded a gain contingency in relation
to this earn-out. We recorded the results of this sale within Loss from Discontinued Operations, net of tax for the year
ended December 31, 2015.
138
Loss from Discontinued Operations
Revenues from product sales and services
Cost of goods sold and operating expenses
Sales margin
Other operating income (expense)
Gain on sale of coal mines
Other expense
$
Gain (loss) from discontinued operations before income
taxes
Impairment of long-lived assets
Income tax benefit
Gain (loss) from discontinued operations, net of tax
$
Items Measured at Fair Value on a Non-Recurring Basis
(In Millions)
Year Ended
December 31,
2016
2015
2017
— $
—
—
0.5
2.1
—
2.6
—
—
2.6 $
— $
392.9
—
—
(4.5)
2.1
—
(2.4)
—
—
(449.2)
(56.3)
(30.4)
9.3
(1.8)
(79.2)
(73.4)
0.2
(2.4) $
(152.4)
The following table presents information about the impairment charge on non-financial assets that was measured
on a fair value basis at March 31, 2015 for the North American Coal operations. There were no financial and non-financial
assets and liabilities that were measured on a non-recurring fair value basis at December 31, 2017 and 2016 for the
North American Coal operations. The table also indicates the fair value hierarchy of the valuation techniques used to
determine such fair value:
(In Millions)
March 31, 2015
Quoted
Prices in
Active
Markets for
Identical
Assets/
Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Total
Losses
$
$
— $
— $
— $
— $
20.4 $
20.4 $
20.4 $
20.4 $
73.4
73.4
Description
Assets:
Other long-lived assets - Property, plant and
equipment and Mineral rights: North
American Coal operating unit
In the first quarter of 2015, as part of the held for sale classification assigned to North American Coal, an
impairment charge of $73.4 million was recorded. The impairment charge was to reduce the assets to their estimated
fair value which was determined based on potential sales scenarios. We determined the fair value and recoverability of
our North American Coal operating segment by comparing the estimated fair value of the underlying assets and liabilities
to the estimated sales price of the operating segment held for sale. No further impairment was recorded in 2015.
139
Recorded Assets and Liabilities
Assets and Liabilities of Discontinued Operations1
Accrued liabilities
Other current liabilities
Total liabilities of discontinued operations
(In Millions)
December 31,
2017
December 31,
2016
$
$
— $
3.2
3.2 $
1.1
4.9
6.0
1 At December 31, 2017, we had no contingent liabilities associated with our exit from the coal business
recorded on our parent company compared to $2.1 million at December 31, 2016.
As part of the CLCC asset sale during the fourth quarter of 2014, there was an amount placed in escrow to cover
decreases in working capital, indemnity obligations and regulatory liabilities. During the year ended December 31, 2016,
the final distribution of $10.3 million was released to us from escrow.
Income Taxes
We recognized no tax expense or benefit for the years ended December 31, 2017 and 2016 in Loss from
Discontinued Operations, net of tax, related to our North American Coal investments. For the year ended December 31,
2015, we recognized a tax benefit of $0.2 million in Loss from Discontinued Operations, net of tax, related to a loss on
our North American Coal investments.
Canadian Operations
Background
On January 27, 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in
Montreal, Quebec under the CCAA to address the Bloom Lake Group's immediate liquidity issues and to preserve and
protect its assets for the benefit of all stakeholders while restructuring and/or sale options were explored. At that time,
the Bloom Lake Group was no longer generating revenues and was not able to meet its obligations as they came due.
As part of the CCAA process, the Court approved the appointment of a Monitor and certain other financial advisors.
Additionally, on May 20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec
under the CCAA. The Wabush Group was no longer generating revenues and was not able to meet its obligations as
they came due. As a result of this action, the CCAA protection granted to the Bloom Lake Group was extended to include
the Wabush Group to facilitate the reorganization of each of their businesses and operations. The Monitor appointed
by the court in the CCAA proceeding for the Bloom Lake Group has also been appointed by the court as the Monitor in
the CCAA proceeding for the Wabush Group.
As a result of the commencement of CCAA proceedings for the Bloom Lake Group on January 27, 2015, we no
longer have a controlling interest in the Bloom Lake Group. For that reason, we deconsolidated the Bloom Lake Group
and certain other wholly-owned subsidiaries effective January 27, 2015, which resulted in a pretax impairment loss on
deconsolidation and other charges totaling $818.7 million that was recorded in the first quarter of 2015. The pretax loss
on deconsolidation includes the derecognition of the carrying amounts of the Bloom Lake Group and certain other wholly-
owned subsidiaries' assets, liabilities and accumulated other comprehensive losses and the recording of our remaining
interests at fair value.
As a result of the commencement of CCAA proceedings for the Wabush Group on May 20, 2015, we
deconsolidated certain Wabush Group wholly-owned subsidiaries effective May 20, 2015. The wholly-owned subsidiaries
that were deconsolidated effective May 20, 2015 are Wabush Group entities that were not deconsolidated as part of the
deconsolidation effective January 27, 2015 as discussed previously in this section. This deconsolidation, effective May
20, 2015, resulted in a pretax gain on deconsolidation and other charges, totaling $134.7 million. The pretax gain on
deconsolidation includes the derecognition of the carrying amounts of these certain deconsolidated Wabush Group
wholly-owned subsidiaries' assets, liabilities and accumulated other comprehensive losses and the adjustment of our
remaining interests in the Canadian Entities to fair value.
Subsequent to each of the deconsolidations discussed above, we utilized the cost method to account for our
investment in the Canadian Entities, which has been reflected as zero in our Statements of Consolidated Financial
Position as of December 31, 2017 and 2016 based on the estimated fair value of the Canadian Entities' net assets.
Loans to and accounts receivable from the Canadian Entities are recorded at an estimated fair value of $51.6 million
and $48.6 million classified as Loans to and accounts receivables from the Canadian Entities in the Statements of
140
Consolidated Financial Position as of December 31, 2017 and 2016, respectively. The Loans to and accounts receivables
from the Canadian Entities balance reflects our current estimate. We continue to update the estimate as the CCAA
proceedings progress. The December 31, 2017 balance reflects developments since the January 27, 2015 and May
20, 2015 CCAA filings, including finalized liquidation values for completed asset sales and updates for the expected
allocation of proceeds for those sales, updates for ongoing costs incurred by the various estates that will be held back
from the final distribution to creditors of the Bloom Lake Group and the Wabush Group and the repayment of DIP financing.
Status of CCAA Proceedings
As of December 31, 2017, CCAA proceedings are ongoing and the majority of the assets of each of the Bloom
Lake Group and the Wabush Group have been liquidated. The net proceeds of sale of the assets of the Bloom Lake
Group and the Wabush Group are currently being held by the Monitor. Certain of these funds will be utilized to fund the
accrued and ongoing costs of the CCAA proceedings. The Monitor has conducted a claims process pursuant to which
creditors, including the Company and its affiliates, have filed claims against the Bloom Lake Group and the Wabush
Group. The Monitor is reviewing all claims filed as part of this claims process. Currently, there is uncertainty as to the
amount of the distribution that will be made to the creditors of the Bloom Lake Group and the Wabush Group, including,
if any, to us, and whether we could be held liable for claims that may be asserted by or on behalf of the Bloom Lake
Group or the Wabush Group or by their respective representatives against non-debtor affiliates of the Bloom Lake Group
and the Wabush Group.
During 2017, we became aware that it was probable the Monitor will assert a preference claim against us and/
or certain of our affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an
estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group
and the Wabush Group. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount
in excess of the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Thus, it is
possible that a change in the estimated liability may occur in the future. We deny liability for any amount and will vigorously
defend such claim. Refer to the Guarantees and Contingent Liabilities section below for additional information.
During 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the Wabush Group.
As part of the sale, the environmental remediation obligations were conveyed to the buyer and we were released from
our guarantees. Refer to the Guarantees and Contingent Liabilities section below for additional information.
Loss on Discontinued Operations
Our Canadian exit represents a strategic shift in our business. For this reason, our previously reported Eastern
Canadian Iron Ore and Ferroalloys operating segment results for all periods prior to the respective deconsolidations, as
well as costs to exit, are classified as discontinued operations.
Loss from Discontinued Operations
Revenues from product sales and services
Cost of goods sold and operating expenses
Sales margin
Other operating expense
Other expense
Loss from discontinued operations before income taxes
Loss from deconsolidation
Income tax benefit
Loss from discontinued operations, net of tax
(In Millions)
Year Ended
December 31,
2016
2017
$
$
— $
—
—
—
—
—
(21.3)
—
(21.3) $
— $
—
—
—
—
—
(17.5)
—
(17.5) $
2015
11.3
(11.1)
0.2
(33.8)
(1.0)
(34.6)
(710.9)
5.8
(739.7)
141
Canadian Entities loss from deconsolidation totaled $21.3 million and $17.5 million for the year ended December
31, 2017 and 2016, respectively and included the following:
Year Ended
December 31,
2017
(In Millions)
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Investment impairment on deconsolidation1
Guarantees and contingent liabilities
Total loss from deconsolidation
$
$
3.0 $
(24.3)
(21.3) $
(17.5) $
—
(17.5) $
(507.8)
(203.1)
(710.9)
1 Includes the adjustment to fair value of our remaining interest in the Canadian Entities.
Investments in the Canadian Entities
We continue to indirectly own a majority of the interest in the Canadian Entities but have deconsolidated those
entities because we no longer have a controlling interest as a result of the CCAA proceedings commenced with respect
to the Bloom Lake Group and the Wabush Group. At the respective dates of deconsolidation, January 27, 2015 and
May 20, 2015 and subsequently at each reporting period, we adjusted our investment in the Canadian Entities to fair
value with a corresponding charge to Loss from Discontinued Operations, net of tax. As the estimated amount of the
Canadian Entities' liabilities exceeded the estimated fair value of the assets available for distribution to their creditors,
the fair value of our equity investment is approximately zero.
Amounts Receivable from the Canadian Entities
Prior to the deconsolidations, certain of our wholly-owned subsidiaries made loans to the Canadian Entities for
the purpose of funding their operations and had accounts receivable generated in the ordinary course of business. The
loans, corresponding interest and the accounts receivable were considered intercompany transactions and eliminated
in our consolidated financial statements. Since the deconsolidations, the loans, associated interest and accounts
receivable are considered related party transactions and have been recognized in our consolidated financial statements
at their estimated fair value of $51.6 million and $48.6 million classified as Loans to and accounts receivables from the
Canadian Entities in the Statements of Consolidated Financial Position at December 31, 2017 and 2016, respectively.
Pre-Petition Financing
Prior to the commencement of CCAA proceedings for the Wabush Group on May 20, 2015, a secured credit
facility (the "Pre-Petition financing") was made available by Cliffs Mining Company to provide support to the Wabush
Group for ongoing business activities. As of December 31, 2017 and 2016, the amount outstanding under the Pre-
Petition financing was $7.2 million. Our estimated recovery of the Pre-Petition financing is included within the Loans to
and accounts receivables from the Canadian Entities of $51.6 million. The Pre-Petition financing is secured by the
proceeds of certain assets of the Wabush Group.
Guarantees and Contingent Liabilities
During 2017, we became aware that it was probable the Monitor will assert a preference claim against the
Company and/or certain of its affiliates. Given that it is probable the claim will be asserted by the Monitor, we have
recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom
Lake Group and the Wabush Group, classified as Contingent claims in the Statements of Consolidated Financial Position
as of December 31, 2017 and included within Loss from Discontinued Operations, net of tax in the Statements of
Consolidated Operations for the year ended December 31, 2017. Should the Monitor proceed to assert the claim, we
believe the Monitor will demand an amount in excess of the value of our related-party claims against the Bloom Lake
Group and the Wabush Group. Thus, it is possible that a change in the estimated liability may occur in the future. We
deny liability for any amount and will vigorously defend such claim.
We previously recorded liabilities of $37.2 million related to guarantees for certain environmental obligations of
the Canadian Entities, classified as Other liabilities in the Statements of Consolidated Financial Position as of
December 31, 2016. During 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the
Wabush Group. As part of this transaction, we were required to fund the buyer's financial assurance shortfall of $7.7
million in order to complete the conveyance of the environmental remediation obligations to the buyer, which released
us from our guarantees and resulted in a net gain of $31.4 million included in Loss from Discontinued Operations, net
142
of tax in the Statements of Consolidated Operations. Refer to the Items Measured at Fair Value on a Non-Recurring
Basis section below for additional information.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the financial assets and liabilities that were measured on a fair
value basis at December 31, 2017 and 2016 for the Canadian Entities. The table also indicates the fair value hierarchy
of the valuation techniques used to determine such fair value:
(In Millions)
December 31, 2017
Quoted Prices
in Active
Markets for
Identical
Assets/
Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Gains
Description
Assets:
Loans to and accounts receivables from the
Canadian Entities
Liabilities:
Guarantees and contingent liabilities
$
$
— $
— $
— $
51.6 $
51.6 $
3.0
— $
— $
— $
31.4
(In Millions)
December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets/
Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Losses
Description
Assets:
Loans to and accounts receivables from the
Canadian Entities
Liabilities:
Guarantees and contingent liabilities
$
$
— $
— $
— $
48.6 $
48.6 $
17.5
— $
37.2 $
37.2 $
—
To assess the fair value and recoverability of the accounts receivable from the Canadian Entities, we estimated
the fair value of the underlying net assets of the Canadian Entities available for distribution to their creditors in relation
to the estimated creditor claims and the priority of those claims. These underlying amounts are denominated primarily
in Canadian dollars and are remeasured on a quarterly basis.
We determined the fair value and recoverability of our Canadian investments by comparing the estimated fair
value of the remaining underlying assets of the Canadian Entities to remaining estimated liabilities. We recorded the
Canadian denominated guarantees at book value, which best approximated fair value.
Our estimates involve significant judgment and are based on currently available information, an assessment of
the validity of certain claims and estimated payments made by the Canadian Entities. Our ultimate recovery is subject
to the final liquidation value of the Canadian Entities. Further, the final liquidation value and ultimate recovery of the
creditors of the Canadian Entities, including, if any, to Cliffs and various subsidiaries, may impact our estimates of
contingent liability exposure described previously.
Income Taxes
We have recognized no tax expense or benefit for the years ended December 31, 2017 and 2016 in Loss from
Discontinued Operations, net of tax, related to our Canadian investments. For the year ended December 31, 2015, we
recognized a tax benefit of $5.8 million in Loss from Discontinued Operations, net of tax.
143
NOTE 15 - CAPITAL STOCK
Common Share Public Offering
On February 9, 2017, we issued 63.25 million common shares in an underwritten public offering at a public
offering price of $10.75 per common share. We received net proceeds of $661.3 million. The net proceeds from the
issuance of our common shares and our issuance of $500 million aggregate principal amount of 5.75% 2025 Senior
Notes were used to redeem in full all of our outstanding 8.00% 2020 1.5 Lien Notes and 7.75% 2020 Second Lien Notes.
The aggregate principal amount outstanding of debt redeemed was $648.6 million. Additionally, through tender offers,
we purchased $422.2 million in aggregate principal amount of debt, excluding unamortized discounts and deferred
charges, of our 5.90% 2020 Senior Notes, our 4.80% 2020 Senior Notes and our 4.875% 2021 Senior Notes. In addition,
we redeemed $35.6 million aggregate principal amount of the 8.25% 2020 First Lien Notes with the remaining net
proceeds from our common share offering.
On August 10, 2016, we issued 44.4 million common shares in an underwritten public offering at a public offering
price of $6.75 per common share. We received net proceeds of $287.6 million. The net proceeds from the issuance of
our common shares were used to fully redeem our 3.95% 2018 Senior Notes.
Preferred Shares Conversion to Common Shares
On January 4, 2016, we announced that our Board of Directors determined the final quarterly dividend of our
Preferred Shares would not be paid in cash, but instead, pursuant to the terms of the Preferred Shares, the conversion
rate was increased such that holders of the Preferred Shares received additional common shares in lieu of the accrued
dividend at the time of the mandatory conversion on February 1, 2016. The number of common shares in the aggregate
that were issued in lieu of the final dividend was 1.3 million. This resulted in an effective conversion rate of 0.9052
common shares, rather than 0.8621 common shares, per depositary share, each representing a 1/40th of a Preferred
Share.
Prior to the mandatory conversion, holders of the depositary shares were entitled to a proportional fractional
interest in the rights and preferences of the Series A preferred shares, including conversion, dividend, liquidation and
voting rights, subject to the provisions of the deposit agreement. The Series A preferred shares were convertible, at the
option of the holder, at the minimum conversion rate of 28.1480 of our common shares (equivalent to 0.7037 of our
common shares per depositary share) at any time prior to February 1, 2016 or other than during a fundamental change
conversion period, subject to anti-dilution adjustments. If not converted prior to that time, each Series A preferred share
converted automatically on February 1, 2016 into between 28.1480 and 34.4840 common shares, par value $0.125 per
share, subject to anti-dilution adjustments. The number of common shares issued on conversion was determined based
on the average VWAP per share of our common shares during the 20 trading day period beginning on, and including,
the 23rd scheduled trading day prior to February 1, 2016, subject to customary anti-dilution adjustments. Upon conversion
on February 1, 2016, an aggregate of 26.5 million common shares were issued, representing 25.2 million common shares
issuable upon conversion and 1.3 million that were issued in lieu of a final cash dividend.
Dividends
On November 19, 2014, March 27, 2015, July 1, 2015 and September 10, 2015, our Board of Directors declared
the quarterly cash dividend of $17.50 per Preferred Share, which is equivalent to $0.44 per depositary share. The cash
dividend was paid on February 2, 2015, May 1, 2015, August 3, 2015 and November 2, 2015 to our shareholders of
record as of the close of business on January 15, 2015, April 15, 2015, July 15, 2015 and October 15, 2015, respectively.
Debt-for-Equity Exchanges
During the year ended December 31, 2016, we entered into a series of privately negotiated exchange agreements
whereby we issued an aggregate of 8.2 million common shares in exchange for $10.0 million aggregate principal amount
of our 3.95% 2018 Senior Notes, $20.1 million aggregate principal amount of our 4.80% 2020 Senior Notes and $26.8
million aggregate principal amount of our 4.875% 2021 Senior Notes. There were no exchanges that represented more
than 1% of our outstanding common shares during any quarter. Accordingly, we recognized a gain of $11.3 million in
Gain (loss) on extinguishment/restructuring of debt in the Statements of Consolidated Operations for the year ended
December 31, 2016. The issuances of the common shares in exchange for our senior notes due 2018, 2020 and 2021
were made in reliance on the exemption from registration provided in Section 3(a)(9) of the Securities Act.
144
NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of Accumulated other comprehensive loss within Cliffs shareholders’ deficit and related tax
effects allocated to each are shown below as of December 31, 2017, 2016 and 2015:
As of December 31, 2017:
Postretirement benefit liability
Foreign currency translation adjustments
Unrealized net loss on derivative financial instruments
As of December 31, 2016:
Postretirement benefit liability
Foreign currency translation adjustments
As of December 31, 2015:
Postretirement benefit liability
Foreign currency translation adjustments
Unrealized net gain on derivative financial instruments
Unrealized gain on securities
(In Millions)
Pre-tax
Amount
Tax
Benefit
After-tax
Amount
$
$
$
$
$
$
(387.3) $
225.4
(0.5)
(162.4) $
123.4 $
—
—
123.4 $
(384.0) $
123.4 $
239.3
—
(144.7) $
123.4 $
(364.8) $
123.4 $
220.7
2.2
0.1
—
0.4
—
(263.9)
225.4
(0.5)
(39.0)
(260.6)
239.3
(21.3)
(241.4)
220.7
2.6
0.1
(141.8) $
123.8 $
(18.0)
145
The following tables reflect the changes in Accumulated other comprehensive loss related to Cliffs shareholders’
equity for December 31, 2017, 2016 and 2015:
(In Millions)
Postretirement
Benefit
Liability, net of
tax
Unrealized Net
Gain (Loss) on
Foreign
Currency
Translation
Net Unrealized
Loss on Derivative
Financial
Instruments, net of
tax
Accumulated
Other
Comprehensive
Income (Loss)
Balance December 31, 2016
Other comprehensive loss
before reclassifications
Net loss reclassified from
accumulated other
comprehensive income (loss)
Balance December 31, 2017
$
$
(260.6) $
239.3 $
(29.8)
(13.9)
26.5
(263.9) $
—
225.4 $
(In Millions)
— $
(0.5)
—
(0.5) $
(21.3)
(44.2)
26.5
(39.0)
Unrealized
Net Gain
(Loss) on
Securities,
net of tax
Unrealized
Net Gain on
Foreign
Currency
Translation
Net Unrealized
Gain (Loss) on
Derivative
Financial
Instruments,
net of tax
Accumulated
Other
Comprehensive
Income (Loss)
Postretirement
Benefit Liability,
net of tax
Balance December 31, 2015 $
(241.4) $
0.1 $
220.7 $
2.6 $
(18.0)
(44.8)
(0.1)
18.4
(3.3)
(29.8)
Other comprehensive
income (loss) before
reclassifications
Net loss reclassified from
accumulated other
comprehensive income
(loss)
Balance December 31, 2016 $
(260.6) $
25.6
—
— $
0.2
239.3 $
0.7
— $
26.5
(21.3)
Postretirement
Benefit Liability,
net of tax
Unrealized
Net Gain
(Loss) on
Securities,
net of tax
(In Millions)
Unrealized
Net Gain
(Loss) on
Foreign
Currency
Translation
Net Unrealized
Gain (Loss) on
Derivative
Financial
Instruments,
net of tax
Accumulated
Other
Comprehensive
Income (Loss)
Balance December 31, 2014 $
(291.1) $
(1.0) $
64.4 $
(18.1) $
(245.8)
Other comprehensive
income (loss) before
reclassifications
Net loss (gain) reclassified
from accumulated other
comprehensive income
(loss)
Balance December 31, 2015 $
9.1
5.4
(26.4)
1.9
(10.0)
40.6
(241.4) $
(4.3)
0.1 $
182.7
220.7 $
18.8
2.6 $
237.8
(18.0)
146
The following table reflects the details about Accumulated other comprehensive loss components related to
Cliffs shareholders’ equity for the years ended December 31, 2017, 2016 and 2015:
Details about Accumulated
Other Comprehensive Income
(Loss) Components
Amount of (Gain)/Loss Reclassified
into Income
Affected Line Item in the Statement of
Consolidated Operations
(In Millions)
Year Ended
December
31, 2017
Year Ended
December
31, 2016
Year Ended
December
31, 2015
Amortization of Pension and
Postretirement Benefit Liability:
Prior service costs1
Net actuarial loss1
Curtailments/Settlements1
Effect of deconsolidation2
Unrealized loss on marketable
securities:
$
(0.4) $
(1.5) $
26.9
—
—
26.5
—
27.1
—
—
25.6
—
(1.4)
27.4
0.2
15.1
Loss from Discontinued Operations, net of tax
41.3 Total before taxes
(0.7)
Income tax benefit (expense)
$
26.5
$
25.6
$
40.6 Net of taxes
Sale of marketable securities
$
— $
— $
(2.6) Other non-operating income (expense)
Impairment
Unrealized gain on foreign
currency translation:
Dissolution of entity
Effect of deconsolidation3
Unrealized gain on derivative
financial instruments:
Treasury lock
Australian dollar foreign
exchange contracts
Total Reclassifications for the
Period
$
$
$
$
$
$
—
—
—
—
—
—
(2.0) Other non-operating income (expense)
(4.6) Total before taxes
0.3
Income tax benefit (expense)
— $
— $
(4.3) Net of taxes
— $
—
— $
0.2
$
—
— Other non-operating income (expense)
182.7
Loss from Discontinued Operations, net of tax
0.2
$
182.7 Net of taxes
— $
1.2
$
Gain (loss) on extinguishment/restructuring of
debt
—
—
—
—
—
1.2
(0.5)
26.9 Product revenues
26.9 Total before taxes
(8.1)
Income tax benefit (expense)
— $
0.7
$
18.8 Net of taxes
26.5
$
26.5
$
237.8
1 These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See
NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
2 Represents Canadian postretirement benefit liabilities that were deconsolidated. See NOTE 14 - DISCONTINUED OPERATIONS
for further information.
3 Represents Canadian accumulated currency translation adjustments that were deconsolidated. See NOTE 14 - DISCONTINUED
OPERATIONS for further information.
147
NOTE 17 - CASH FLOW INFORMATION
A reconciliation of capital additions to cash paid for capital expenditures for the years ended December 31,
2017, 2016 and 2015 is as follows:
(In Millions)
Year Ended December 31,
2016
2015
2017
Capital additions1
Less:
Non-cash accruals
Capital leases
Cash paid for capital expenditures
$
$
$
156.0 $
68.5 $
96.7
(2.2) $
6.5
151.7 $
(0.6) $
—
69.1 $
14.4
1.5
80.8
1 Includes capital additions of $72.2 million and $24.5 million related to continuing operations and discontinued operations,
respectively, for the year ended December 31, 2015.
Cash payments for interest and income taxes in 2017, 2016 and 2015 are as follows:
Taxes paid on income
Income tax refunds
Interest paid on debt obligations1
2017
(In Millions)
2016
$
$
$
1.7 $
(7.8) $
139.0 $
6.0 $
(5.4) $
184.0 $
2015
5.0
(211.4)
185.6
1 Includes interest paid on the corporate guarantees of the equipment loans that relate to discontinued operations for the years
ended December 31, 2016 and 2015 of $1.4 million and $4.8 million, respectively.
NOTE 18 - RELATED PARTIES
One of our four operating U.S. iron ore mines is a co-owned joint venture with companies that are integrated
steel producers or their subsidiaries. We are the manager of such co-owned mine and 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. Our joint
venture partners are also our customers. The following is a summary of the mine ownership of the co-owned iron ore
mine at December 31, 2017:
Mine
Hibbing
Cleveland-Cliffs Inc.
23.0%
ArcelorMittal
U.S. Steel
62.3%
14.7%
During 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the
noncontrolling interest net assets of $132.7 million to ArcelorMittal, in exchange for its interest in Empire. The net assets
were agreed to be distributed in three installments of $44.2 million each, the first of which was paid upon the execution
of the agreement and the remaining distributions are due in August 2018 and August 2019. The remaining two outstanding
installments are reflected in Partnership distribution payable and Other liabilities in the Statements of Consolidated
Financial Position as of December 31, 2017. We accounted for the increase in ownership as an equity transaction, which
resulted in a $12.1 million decrease in equity attributable to Cliffs' shareholders and a $116.7 million decrease in
Noncontrolling interest.
As part of a 2014 extension agreement between us and ArcelorMittal, which amended certain terms of the Empire
partnership agreement, distributions of the partners' equity amounts were required to be made on a quarterly basis
beginning in the first quarter of 2015. These equity distributions were made through the termination of the partnership
agreement on December 31, 2016. We paid $8.7 million in January 2017 related to 2016 distributions. During the year
ended December 31, 2016, we recorded distributions of $57.5 million to ArcelorMittal under this agreement, of which
$48.8 million was paid as of December 31, 2016. During the year ended December 31, 2015, we recorded distributions
148
of $51.7 million under this agreement, of which $40.6 million was paid as of December 31, 2015 and $11.1 million was
paid in January 2016.
During 2017, we also acquired the remaining 15% equity interest in Tilden for $105.0 million. With the closing
of this transaction, we now have 100% ownership of the mine. We accounted for the increase in ownership as an equity
transaction, which resulted in an $89.1 million decrease in equity attributable to Cliffs' shareholders and a $15.9 million
decrease in Noncontrolling interest.
Product revenues from related parties were as follows:
Product revenues from related parties
Total product revenues
(In Millions)
Year Ended
December 31,
2016
2015
$
830.1
$
671.1
1,913.5
1,832.4
$
2017
806.7
2,089.2
Related party product revenue as a percent of total product revenue
38.6%
43.4%
36.6%
The following table presents the classification of related party assets and liabilities in the Statements of
Consolidated Financial Position as of December 31, 2017 and 2016:
(In Millions)
Balance Sheet
Location
December 31,
2017
December 31,
2016
Amounts due from related parties
Accounts receivable, net
$
68.1 $
Customer supply agreements and provisional
pricing agreements
Amounts due to related parties
Amounts due to related parties
Amounts due to related parties
Net amounts due from related parties
Derivative assets
Partnership distribution
payable
Other current liabilities
Other liabilities
37.9
(44.2)
(12.3)
(41.4)
$
8.1 $
46.9
26.8
(8.7)
—
—
65.0
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds to the
customer based on the customer's average annual steel pricing or based on the average annual daily market price for
hot-rolled coil steel at the time the product is consumed in the customer’s blast furnace. The supplemental pricing is
characterized as a freestanding derivative. Refer to NOTE 13 - DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES for further information.
149
NOTE 19 - EARNINGS PER SHARE
The following table summarizes the computation of basic and diluted earnings (loss) per share:
(In Millions, Except Per Share
Amounts)
Year Ended
December 31,
2016
2015
2017
Income from Continuing Operations
Loss (Income) from Continuing Operations attributable to
Noncontrolling Interest
Net Income from Continuing Operations
attributable to Cliffs shareholders
Loss from Discontinued Operations, net of tax
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
PREFERRED STOCK DIVIDENDS
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON
SHAREHOLDERS
Weighted Average Number of Shares:
Basic
Employee Stock Plans
Diluted
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Basic:
Continuing operations
Discontinued operations
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Diluted:
Continuing operations
Discontinued operations
$
$
$
$
$
$
$
$
381.8 $
219.2 $
143.7
3.9
(25.2)
(8.6)
385.7 $
(18.7)
367.0 $
—
194.0 $
(19.9)
174.1 $
—
135.1
(884.4)
(749.3)
(38.4)
367.0 $
174.1 $
(787.7)
288.4
4.6
293.0
197.7
2.4
200.1
1.34 $
(0.06)
1.28 $
0.98 $
(0.10)
0.88 $
1.32 $
(0.06)
1.26 $
0.97 $
(0.10)
0.87 $
153.2
0.4
153.6
0.63
(5.77)
(5.14)
0.63
(5.76)
(5.13)
The common share equivalents for the $316.25 million 1.50% 2025 Convertible Senior Notes that were issued
in the fourth quarter of 2017 were not included in the computation of diluted earnings per common share as we have the
ability and intent, both currently and in the future, to settle these in cash. The diluted earnings per share calculation
excludes 25.3 million depositary shares that were anti-dilutive for the year ended December 31, 2015. Refer to NOTE
5 - DEBT AND CREDIT FACILITIES for further information.
150
NOTE 20 - COMMITMENTS AND CONTINGENCIES
Contingencies
Litigation
We are currently the subject of, or party to, various claims and legal proceedings incidental to our operations.
If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record
the amount of the loss or the minimum estimated liability when the loss is estimated using a range, and no point within
the range is more probable than another. As additional information becomes available, any potential liability related to
these matters is assessed and the estimates are revised, if necessary. Based on currently available information,
management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a
material effect on our financial position, results of operations or cash flows. However, these claims and legal proceedings
are subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary
damages, additional funding requirements or an injunction. If an unfavorable ruling were to occur, there exists the
possibility of a material impact on the financial position and results of operations for the period in which the ruling occurs
or future periods. However, we do not believe that any pending claims or legal proceedings will result in a material liability
in relation to our consolidated financial statements.
Currently, we have recorded a liability in the Statements of Consolidated Financial Position related to the following
legal matters:
Michigan Electricity Matters. On February 19, 2015, in connection with various proceedings before FERC with
respect to certain cost allocations for continued operation of the Presque Isle Power Plant in Marquette, Michigan, FERC
issued an order directing MISO to submit a revised methodology for allocating SSR costs that identified the load serving
entities that require the operation of SSR units at the power plant for reliability purposes. On September 17, 2015, FERC
issued an order conditionally approving MISO’s revised allocation methodology. On September 22, 2016, FERC denied
requests for rehearing of the February 19 order, rejecting arguments that FERC did not have the authority to order refunds
in a cost allocation case and to impose retroactive surcharges to effectuate such refunds. FERC, however, suspended
any refunds and surcharges pending its review of a July 25, 2016 ALJ initial decision on the appropriate amount of SSR
compensation. On November 8, 2016, Tilden and Empire, along with various Michigan-aligned parties, filed petitions
for review of FERC’s order regarding allocation and non-cost SSR issues with the U.S. Court of Appeals for the D.C.
Circuit. On January 27, 2017, Tilden, Empire and other appellants filed a motion to terminate further abeyance of briefing
so that cost allocation issues could be heard at the Court of Appeals, which motion was granted on April 4, 2017. Should
retroactive surcharges be permitted, our current estimate of the potential liability to the Empire and Tilden mines is $12.3
million, based on FERC's October 19, 2017 Order reviewing the July 25, 2016 ALJ initial decision. We will continue to
vigorously challenge the retroactive imposition of any SSR costs before the U.S. Court of Appeals for the D.C. Circuit.
As of December 31, 2017 and December 31, 2016, $12.3 million and $13.6 million, respectively, is included in our
Statements of Consolidated Financial Position as part of Accrued expenses.
CCAA Proceedings
Effective January 27, 2015, following the commencement of CCAA proceedings for the Bloom Lake Group, we
deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our
Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced CCAA proceedings which resulted
in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. As a result of
this action, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate
the reorganization of each of their businesses and operations.
Prior to the deconsolidations, certain of our wholly-owned subsidiaries made loans to the Canadian Entities for
the purpose of funding their operations and had accounts receivable generated in the ordinary course of business. The
loans, corresponding interest and the accounts receivable were considered intercompany transactions and eliminated
in our consolidated financial statements. Since the deconsolidations, the loans, associated interest and accounts
receivable are considered related party transactions and have been recognized in our consolidated financial statements
at their estimated fair value of $51.6 million and $48.6 million classified as Loans to and accounts receivables from the
Canadian Entities in the Statements of Consolidated Financial Position at December 31, 2017 and 2016, respectively.
As of December 31, 2017, CCAA proceedings are ongoing and the majority of the assets of each of the Bloom
Lake Group and the Wabush Group have been liquidated. The Monitor appointed by the court in the CCAA proceedings
for the Bloom Lake Group and the Wabush Group has conducted a claims process pursuant to which creditors have
filed claims against the Bloom Lake Group and the Wabush Group. The Monitor is reviewing all claims filed as part of
this claims process. Currently, there is uncertainty as to the amount of the distribution that will be made to the creditors
151
of the Bloom Lake Group and the Wabush Group, including, if any, to us, and whether we could be held liable for claims
that may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group or by their respective representatives
against non-debtor affiliates of the Bloom Lake Group and the Wabush Group.
The net proceeds of sale of the assets of the Bloom Lake Group and the Wabush Group are currently being held
by the Monitor. Certain of these funds will be utilized to fund the accrued and ongoing costs of the CCAA proceedings
and the remaining funds will be available for distribution to the creditors of the Bloom Lake Group and the Wabush Group.
During 2017, we became aware that it was probable the Monitor will assert a preference claim against the
Company and/or certain of its affiliates. Given that it is probable the claim will be asserted by the Monitor, we have
recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom
Lake Group and the Wabush Group, classified as Contingent claims in the Statements of Consolidated Financial Position
as of December 31, 2017 and included within Loss from Discontinued Operations, net of tax in the Statements of
Consolidated Operations for the year ended December 31, 2017. Should the Monitor proceed to assert the claim, we
believe the Monitor will demand an amount in excess of the value of our related-party claims against the Bloom Lake
Group and the Wabush Group. Thus, it is possible that a change in the estimated liability may occur in the future. We
deny liability for any amount and will vigorously defend such claim.
We previously recorded liabilities of $37.2 million related to guarantees for certain environmental obligations of
the Canadian Entities, classified as Other liabilities in the Statements of Consolidated Financial Position as of
December 31, 2016. During 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the
Wabush Group. As part of this transaction, we were required to fund the buyer's financial assurance shortfall of $7.7
million in order to complete the conveyance of the environmental remediation obligations to the buyer, which released
us from our guarantees and resulted in a net gain of $31.4 million included in Loss from Discontinued Operations, net
of tax in the Statements of Consolidated Operations.
Environmental Matters
We had environmental liabilities of $2.9 million and $2.8 million at December 31, 2017 and 2016, respectively,
including obligations for known environmental remediation exposures at active and closed mining operations and other
sites. These amounts have been recognized based on the estimated cost of investigation and remediation at each site,
and include site studies, design and implementation of remediation plans, legal and consulting fees, and post-remediation
monitoring and related activities. Future expenditures are not discounted unless the amount and timing of the cash
disbursements are readily known. Potential insurance recoveries have not been reflected. Additional environmental
obligations could be incurred, the extent of which cannot be assessed. The amount of our ultimate liability with respect
to these matters may be affected by several uncertainties, primarily the ultimate cost of required remediation and the
extent to which other responsible parties contribute. Refer to NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE
OBLIGATIONS for further information.
Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations.
We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which,
additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the
liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We
also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged
by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required
to pay amounts in excess of our liabilities, our effective tax rate in a given period could be materially affected. An
unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the year of
resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.
Refer to NOTE 9 - INCOME TAXES for further information.
NOTE 21 - SUBSEQUENT EVENTS
We have evaluated subsequent events through the date of financial issuance.
152
NOTE 22 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The sum of quarterly EPS may not equal EPS for the year due to discrete quarterly calculations.
Revenues from product sales and services
Sales margin
Income (Loss) from Continuing Operations
Loss from Continuing Operations attributable to
Noncontrolling Interest
Net Income (Loss) from Continuing Operations
attributable to Cliffs shareholders
Income (Loss) from Discontinued Operations, net of
tax
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS
SHAREHOLDERS
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Basic:
Continuing Operations
Discontinued Operations
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Diluted:
Continuing Operations
Discontinued Operations
$
$
$
$
$
$
$
(In Millions, Except Per Share Amounts)
2017
Quarters
First
Second
Third
Fourth
Year
461.6 $
95.7
(30.3) $
569.3 $
145.1
698.4 $
160.2
76.5 $
20.6 $
600.9 $ 2,330.2
501.7
100.7
381.8
315.0 $
1.7
1.7
(28.6)
78.2
0.5
(46.4)
0.5
21.1
32.3
—
3.9
315.0
385.7
(5.1)
(18.7)
(28.1) $
31.8 $
53.4 $
309.9 $
367.0
(0.11) $
—
(0.11) $
0.26 $
0.07 $
1.06 $
(0.16)
0.11
(0.02)
0.10 $
0.18 $
1.04 $
(0.11) $
—
(0.11) $
0.26 $
0.07 $
1.05 $
(0.15)
0.11
(0.02)
0.11 $
0.18 $
1.03 $
1.34
(0.06)
1.28
1.32
(0.06)
1.26
The diluted earnings per share calculation for the first quarter of 2017 excludes equity plan awards of 4.6 million
that were anti-dilutive. There was no anti-dilution in the second, third or fourth quarter of 2017.
153
Revenues from product sales and services
Sales margin
Income (Loss) from Continuing Operations
Loss (Income) from Continuing Operations
attributable to Noncontrolling Interest
Net Income (Loss) from Continuing Operations
attributable to Cliffs shareholders
Income (Loss) from Discontinued Operations, net of
tax
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS
COMMON SHAREHOLDERS
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Basic:
Continuing Operations
Discontinued Operations
Earnings (Loss) per Common Share Attributable to
Cliffs Common Shareholders - Diluted:
Continuing Operations
Discontinued Operations
(In Millions, Except Per Share Amounts)
2016
Quarters
First
Second
Third
Fourth
Year
$
$
305.5 $
496.2 $
553.3 $
754.0 $ 2,109.0
30.9
91.5
85.4
181.5
114.3 $
29.9 $
(25.1) $
100.1 $
389.3
219.2
(8.8)
(16.7)
2.0
(1.7)
(25.2)
$
105.5 $
13.2 $
(23.1) $
98.4 $
194.0
2.5
(0.4)
(2.7)
(19.3)
(19.9)
$
108.0 $
12.8 $
(25.8) $
79.1 $
174.1
$
$
$
$
0.61 $
0.07 $
(0.11) $
0.43 $
0.01
—
(0.01)
(0.08)
0.62 $
0.07 $
(0.12) $
0.35 $
0.61 $
0.07 $
(0.11) $
0.42 $
0.01
—
(0.01)
(0.08)
0.62 $
0.07 $
(0.12) $
0.34 $
0.98
(0.10)
0.88
0.97
(0.10)
0.87
The diluted earnings per share calculation for the third quarter of 2016 excludes equity plan awards of 3.0 million
that were anti-dilutive. There was no anti-dilution in the first, second or fourth quarter of 2016.
154
NOTE 23 - SUPPLEMENTARY GUARANTOR INFORMATION
The accompanying condensed consolidating financial information has been prepared and presented pursuant
to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered
or Being Registered.” Certain of our subsidiaries have guaranteed the obligations under the $1.075 billion 5.75% 2025
Senior Notes issued by Cleveland-Cliffs Inc. See NOTE 5 - DEBT AND CREDIT FACILITIES for further information.
The following presents the condensed consolidating financial information for: (i) the Parent Company and the
Issuer of the guaranteed obligations (Cleveland-Cliffs Inc.); (ii) the Guarantor subsidiaries, on a combined basis; (iii) the
non-guarantor subsidiaries, on a combined basis; (iv) consolidating eliminations; and (v) Cleveland-Cliffs Inc. and
Subsidiaries on a consolidated basis. Each Guarantor subsidiary is 100% owned by the Parent Company as of December
31, 2017. The condensed consolidating financial information is presented as if the Guarantor structure at December 31,
2017 existed for all years presented. As a result, the Guarantor subsidiaries within the condensed consolidating financial
information as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 include
results of subsidiaries that were previously less than wholly-owned and were historically non-guarantors until 100%
ownership was obtained.
Each of the Guarantor subsidiaries fully and unconditionally guarantee, on a joint and several basis, the obligations
of Cleveland-Cliffs Inc. under the $1.075 billion 5.75% 2025 Senior Notes. The guarantee of a Guarantor subsidiary will
be automatically and unconditionally released and discharged, and such Guarantor subsidiary’s obligations under the
guarantee and the related indenture governing the $1.075 billion 5.75% 2025 Senior Notes (the “Indenture”) will be
automatically and unconditionally released and discharged, upon:
(a) any sale, exchange, transfer or disposition of such Guarantor subsidiary (by merger, consolidation, or the
sale of) or the capital stock of such Guarantor subsidiary after which the applicable Guarantor subsidiary is
no longer a subsidiary of the Company or the sale of all or substantially all of such Guarantor subsidiary’s
assets (other than by lease);
(b) upon designation of any Guarantor subsidiary as an “excluded subsidiary” (as defined in the Indenture); and
(c) upon defeasance or satisfaction and discharge of the Indenture.
Each entity in the consolidating financial information follows the same accounting policies as described in the
consolidated financial statements. The accompanying condensed consolidating financial information has been presented
on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded
at cost and adjusted for the subsidiaries’ cumulative results of operations, capital contributions and distributions, and
other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries,
and intra-entity activity and balances.
155
Condensed Consolidating Statement of Financial Position
As of December 31, 2017
(In Millions)
Cleveland-
Cliffs Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Inventories
Supplies and other inventories
Derivative assets
Loans to and accounts receivables from the
Canadian Entities
Other current assets
TOTAL CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT, NET
INCOME TAX RECEIVABLE
INVESTMENT IN SUBSIDIARIES
LONG-TERM INTERCOMPANY NOTES
OTHER NON-CURRENT ASSETS
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
Accounts payable
Accrued employment costs
State and local taxes payable
Accrued expenses
Accrued interest
Accrued royalties
Contingent claims
Partnership distribution payable
Other current liabilities
TOTAL CURRENT LIABILITIES
POSTEMPLOYMENT BENEFIT LIABILITIES
Pensions
Other postretirement benefits
TOTAL POSTEMPLOYMENT BENEFIT
LIABILITIES
ENVIRONMENTAL AND MINE CLOSURE
OBLIGATIONS
LONG-TERM DEBT
LONG-TERM INTERCOMPANY NOTES
OTHER LIABILITIES
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
EQUITY
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
NONCONTROLLING INTEREST
TOTAL DEFICIT
$
948.9
$
2.1
$
4.5
—
—
—
44.7
16.4
1,014.5
17.5
235.3
1,024.3
—
7.8
102.9
138.4
88.8
37.9
6.9
7.5
384.5
959.0
—
29.9
—
93.0
56.7
33.9
45.0
5.1
1.5
—
4.1
146.3
74.5
—
—
242.0
21.7
$
— $
1,007.7
(0.7)
—
—
—
—
—
(0.7)
—
—
(1,054.2)
(242.0)
140.6
183.4
93.9
39.4
51.6
28.0
1,544.6
1,051.0
235.3
—
—
—
122.5
$
$
2,299.4
$
1,466.4
$
484.5
$
(1,296.9) $
2,953.4
7.1
$
13.7
—
5.3
31.4
—
55.6
—
2.1
115.2
59.2
7.2
66.4
—
2,304.2
242.0
15.7
2,743.5
(444.1)
—
(444.1)
89.7
38.9
30.0
13.2
—
7.8
—
44.2
33.5
257.3
403.6
27.0
430.6
140.6
—
—
147.2
975.7
490.7
—
490.7
$
31.6
$
(0.7) $
127.7
3.5
0.2
15.2
—
9.5
—
—
20.4
80.4
(240.0)
0.7
(239.3)
55.9
—
—
24.0
(79.0)
563.3
0.2
563.5
—
—
—
—
—
—
—
—
56.1
30.2
33.7
31.4
17.3
55.6
44.2
56.0
(0.7)
452.2
—
—
—
—
—
(242.0)
—
(242.7)
222.8
34.9
257.7
196.5
2,304.2
—
186.9
3,397.5
(1,054.2)
—
(1,054.2)
(444.3)
0.2
(444.1)
TOTAL LIABILITIES AND DEFICIT
$
2,299.4
$
1,466.4
$
484.5
$
(1,296.9) $
2,953.4
156
Condensed Consolidating Statement of Financial Position
As of December 31, 2016
(In Millions)
Cleveland-
Cliffs Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Inventories
Supplies and other inventories
Derivative assets
Loans to and accounts receivables from the Canadian
Entities
Other current assets
TOTAL CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT, NET
INVESTMENT IN SUBSIDIARIES
LONG-TERM INTERCOMPANY NOTES
OTHER NON-CURRENT ASSETS
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
Accounts payable
Accrued employment costs
State and local taxes payable
Accrued expenses
Accrued interest
Accrued royalties
Partnership distribution payable
Other current liabilities
TOTAL CURRENT LIABILITIES
POSTEMPLOYMENT BENEFIT LIABILITIES
Pensions
Other postretirement benefits
TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
LONG-TERM DEBT
LONG-TERM INTERCOMPANY NOTES
OTHER LIABILITIES
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
EQUITY
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
NONCONTROLLING INTEREST
TOTAL DEFICIT
$
283.4
$
2.5
$
4.5
—
—
—
41.7
8.6
338.2
21.4
882.4
—
11.0
59.3
137.0
86.4
31.7
6.9
8.2
332.0
937.7
24.6
—
94.1
37.5
65.7
41.4
5.0
1.4
—
4.2
155.2
25.3
—
197.0
9.8
$
— $
(0.8)
—
—
—
—
—
(0.8)
—
(907.0)
(197.0)
—
323.4
128.7
178.4
91.4
33.1
48.6
21.0
824.6
984.4
—
—
114.9
$
$
1,253.0
$
1,388.4
$
387.3
$
(1,104.8) $
1,923.9
1.6
$
15.6
—
7.6
40.2
—
—
23.0
88.0
56.9
7.6
64.5
—
2,175.1
197.0
58.9
2,583.5
(1,330.5)
—
(1,330.5)
92.6
34.6
28.1
14.4
—
13.0
8.7
35.3
226.7
397.4
26.5
423.9
153.9
—
—
118.8
923.3
331.5
133.6
465.1
$
14.2
$
(0.8) $
107.6
5.9
0.2
19.1
—
13.2
—
24.6
77.2
(208.6)
0.7
(207.9)
40.0
—
—
36.1
(54.6)
441.7
0.2
441.9
—
—
—
—
—
—
—
56.1
28.3
41.1
40.2
26.2
8.7
82.9
(0.8)
391.1
—
—
—
—
—
(197.0)
—
(197.8)
245.7
34.8
280.5
193.9
2,175.1
—
213.8
3,254.4
(907.0)
(1,464.3)
—
133.8
(907.0)
(1,330.5)
TOTAL LIABILITIES AND DEFICIT
$
1,253.0
$
1,388.4
$
387.3
$
(1,104.8) $
1,923.9
157
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Year Ended December 31, 2017
(In Millions)
REVENUES FROM PRODUCT SALES AND SERVICES
Product
$
— $
1,644.6
$
444.6
$
— $
2,089.2
Cleveland-
Cliffs Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Freight and venture partners' cost
reimbursements
COST OF GOODS SOLD AND OPERATING EXPENSES
SALES MARGIN
OTHER OPERATING INCOME (EXPENSE)
Selling, general and administrative expenses
Miscellaneous - net
OPERATING INCOME (LOSS)
OTHER INCOME (EXPENSE)
Interest expense, net
Loss on extinguishment/restructuring of debt
Other non-operating income
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
INCOME TAX BENEFIT (EXPENSE)
EQUITY IN INCOME OF SUBSIDIARIES
INCOME FROM CONTINUING OPERATIONS
LOSS (INCOME) FROM DISCONTINUED OPERATIONS,
net of tax
NET INCOME
LOSS ATTRIBUTABLE TO NONCONTROLLING
INTEREST
NET INCOME ATTRIBUTABLE TO CLIFFS
SHAREHOLDERS
OTHER COMPREHENSIVE INCOME (LOSS)
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO
CLIFFS SHAREHOLDERS
$
$
—
—
—
—
(81.4)
(2.2)
(83.6)
(83.6)
(126.8)
(165.4)
0.1
(292.1)
(375.7)
251.4
512.6
388.3
(21.3)
367.0
—
221.4
1,866.0
(1,400.6)
465.4
19.6
464.2
(427.9)
36.3
(24.7)
12.3
(12.4)
453.0
(1.0)
—
3.1
2.1
455.1
1.3
11.8
468.2
1.7
469.9
3.9
0.3
17.6
17.9
54.2
(4.2)
—
—
(4.2)
50.0
(0.3)
—
49.7
0.9
50.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(524.4)
(524.4)
—
(524.4)
—
367.0
$
473.8
$
50.6
$
(524.4) $
(4.0)
12.8
(5.2)
(7.6)
241.0
2,330.2
(1,828.5)
501.7
(105.8)
27.7
(78.1)
423.6
(132.0)
(165.4)
3.2
(294.2)
129.4
252.4
—
381.8
(18.7)
363.1
3.9
367.0
(4.0)
363.0
$
486.6
$
45.4
$
(532.0) $
363.0
158
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Year Ended December 31, 2016
(In Millions)
REVENUES FROM PRODUCT SALES AND SERVICES
Product
$
— $
1,379.6
$
533.9
$
— $
1,913.5
Cleveland-
Cliffs Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Freight and venture partners' cost
reimbursements
COST OF GOODS SOLD AND OPERATING
EXPENSES
SALES MARGIN
OTHER OPERATING INCOME (EXPENSE)
Selling, general and administrative expenses
Miscellaneous - net
OPERATING INCOME (LOSS)
OTHER INCOME (EXPENSE)
Interest expense, net
Gain on extinguishment/restructuring of debt
Other non-operating income (expense)
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
INCOME TAX BENEFIT
EQUITY IN INCOME OF SUBSIDIARIES
INCOME FROM CONTINUING OPERATIONS
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, net of tax
NET INCOME
INCOME ATTRIBUTABLE TO NONCONTROLLING
INTEREST
NET INCOME ATTRIBUTABLE TO CLIFFS
SHAREHOLDERS
OTHER COMPREHENSIVE INCOME (LOSS)
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE
TO CLIFFS SHAREHOLDERS
$
$
—
—
—
—
(97.9)
(5.6)
(103.5)
(103.5)
(195.0)
166.3
(0.5)
(29.2)
(132.7)
4.3
319.6
191.2
(17.1)
174.1
174.9
1,554.5
(1,278.8)
275.7
(20.8)
(10.8)
(31.6)
244.1
0.6
—
0.4
1.0
245.1
3.0
13.7
261.8
2.6
264.4
—
(25.2)
174.1
$
239.2
$
(3.3)
(20.7)
20.6
554.5
(440.9)
113.6
0.9
(14.3)
(13.4)
100.2
(6.1)
—
0.5
(5.6)
94.6
4.9
—
99.5
(5.4)
94.1
—
94.1
13.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(333.3)
(333.3)
—
(333.3)
—
$
(333.3) $
6.9
195.5
2,109.0
(1,719.7)
389.3
(117.8)
(30.7)
(148.5)
240.8
(200.5)
166.3
0.4
(33.8)
207.0
12.2
—
219.2
(19.9)
199.3
(25.2)
174.1
(3.3)
170.8
$
218.5
$
107.9
$
(326.4) $
170.8
159
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
For the Year Ended December 31, 2015
(In Millions)
REVENUES FROM PRODUCT SALES AND SERVICES
Product
$
— $
1,368.1
$
464.3
$
— $
1,832.4
Cleveland-
Cliffs Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations Consolidated
Freight and venture partners' cost
reimbursements
COST OF GOODS SOLD AND OPERATING EXPENSES
SALES MARGIN
OTHER OPERATING INCOME (EXPENSE)
Selling, general and administrative expenses
Miscellaneous - net
OPERATING INCOME (LOSS)
OTHER INCOME (EXPENSE)
Interest expense, net
Gain on extinguishment/restructuring of debt
Other non-operating income (expense)
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND EQUITY LOSS FROM
VENTURES
INCOME TAX BENEFIT (EXPENSE)
EQUITY IN INCOME (LOSS) OF SUBSIDIARIES
EQUITY LOSS FROM VENTURES, net of tax
INCOME (LOSS) FROM CONTINUING OPERATIONS
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of tax
NET INCOME (LOSS)
LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING
INTEREST
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS
SHAREHOLDERS
PREFERRED STOCK DIVIDENDS
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS
COMMON SHAREHOLDERS
OTHER COMPREHENSIVE INCOME
TOTAL COMPREHENSIVE (LOSS) INCOME
ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
$
$
—
—
—
—
(88.5)
7.7
(80.8)
(80.8)
(221.4)
392.9
(114.6)
56.9
(23.9)
(19.1)
(501.2)
—
(544.2)
(205.1)
(749.3)
157.3
1,525.4
(1,298.3)
227.1
(21.2)
(3.0)
(24.2)
202.9
(0.1)
—
1.2
1.1
204.0
(176.3)
12.9
—
40.6
(762.2)
(721.6)
23.6
487.9
(478.5)
9.4
(0.3)
20.1
19.8
29.2
(7.0)
—
110.8
103.8
133.0
26.1
—
(0.1)
159.0
75.2
234.2
—
(8.6)
7.7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
488.3
—
488.3
—
488.3
—
180.9
2,013.3
(1,776.8)
236.5
(110.0)
24.8
(85.2)
151.3
(228.5)
392.9
(2.6)
161.8
313.1
(169.3)
—
(0.1)
143.7
(892.1)
(748.4)
(0.9)
(749.3) $
(730.2) $
241.9
$
488.3
$
(749.3)
(38.4)
—
—
—
(38.4)
(787.7) $
(730.2) $
241.9
$
488.3
$
266.2
20.0
176.4
(196.4)
(787.7)
266.2
(521.5) $
(710.2) $
418.3
$
291.9
$
(521.5)
160
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2017
(In Millions)
Cleveland-
Cliffs Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Net cash provided (used) by operating activities
$
(166.8) $
430.4
$
74.5
$
— $
338.1
INVESTING ACTIVITIES
Purchase of property, plant and equipment
Intercompany investing
Other investing activities
Net cash provided (used) in investing
activities
FINANCING ACTIVITIES
Net proceeds from issuance of common shares
Proceeds from issuance of debt
Debt issuance costs
Repurchase of debt
Acquisition of noncontrolling interest
Distributions of partnership equity
Intercompany financing
Other financing activities
Net cash provided (used) by financing
activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR
(3.4)
225.7
(7.7)
214.6
661.3
1,771.5
(28.6)
(1,720.7)
(105.0)
—
45.0
(5.8)
617.7
—
665.5
283.4
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
948.9
$
(80.6)
(7.4)
3.4
(84.6)
—
—
—
—
—
(52.9)
(288.8)
(4.5)
(346.2)
—
(0.4)
2.5
2.1
$
(67.7)
(45.0)
—
—
(173.3)
—
(151.7)
—
(4.3)
(112.7)
(173.3)
(156.0)
—
—
—
—
—
—
70.5
(16.4)
54.1
3.3
19.2
37.5
56.7
—
—
—
—
—
—
173.3
—
173.3
—
—
—
661.3
1,771.5
(28.6)
(1,720.7)
(105.0)
(52.9)
—
(26.7)
498.9
3.3
684.3
323.4
$
— $
1,007.7
161
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2016
(In Millions)
Cleveland-
Cliffs Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Net cash provided (used) by operating activities
$
(275.7) $
462.9
$
115.8
$
— $
303.0
INVESTING ACTIVITIES
Purchase of property, plant and equipment
Intercompany investing
Other investing activities
Net cash provided (used) by investing activities
FINANCING ACTIVITIES
Net proceeds from issuance of common shares
Debt issuance costs
Borrowings under credit facilities
Repayments under credit facilities
Repayments on equipment loans
Repurchase of debt
Distributions of partnership equity
Intercompany financing
Other financing activities
Net cash used by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR
(6.2)
356.6
0.4
350.8
287.4
(5.2)
105.0
(105.0)
(95.6)
(305.4)
—
117.0
(0.6)
(2.4)
—
72.7
210.7
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
283.4
$
(60.0)
(3.3)
10.8
(52.5)
—
—
—
—
—
—
(59.9)
(339.9)
(9.9)
(409.7)
—
0.7
1.8
2.5
(2.9)
(117.0)
—
(119.9)
—
—
—
—
—
—
—
(13.4)
(17.2)
(30.6)
(0.5)
(35.2)
72.7
37.5
$
$
—
(236.3)
—
(236.3)
—
—
—
—
—
—
—
236.3
—
236.3
—
—
—
— $
(69.1)
—
11.2
(57.9)
287.4
(5.2)
105.0
(105.0)
(95.6)
(305.4)
(59.9)
—
(27.7)
(206.4)
(0.5)
38.2
285.2
323.4
162
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2015
(In Millions)
Cleveland-
Cliffs Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Net cash provided (used) by operating activities
$
65.6
$
(23.7) $
(4.0) $
— $
37.9
INVESTING ACTIVITIES
Purchase of property, plant and equipment
Intercompany investments
Other investing activities
Net cash used by investing activities
FINANCING ACTIVITIES
Proceeds from issuance of debt
Debt issuance costs
Borrowings under credit facilities
Repayments on credit facilities
Repayments on equipment loans
Repurchase of debt
Distributions of partnership equity
Preferred stock dividends
Intercompany financing
Other financing activities
Net cash provided by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR
(6.9)
(205.8)
—
(212.7)
503.5
(33.6)
296.8
(296.8)
(43.6)
(225.9)
—
(51.2)
80.0
(5.0)
224.2
—
77.1
133.6
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
210.7
$
(68.2)
(2.9)
(27.6)
(98.7)
—
—
—
—
—
—
(40.6)
—
188.5
(25.0)
122.9
—
0.5
1.3
1.8
(5.7)
(80.0)
5.2
(80.5)
—
—
13.0
(13.0)
(1.8)
—
—
—
20.2
(15.8)
2.6
(1.4)
(83.3)
156.0
—
288.7
—
288.7
—
—
—
—
—
—
—
—
(288.7)
—
(288.7)
—
—
—
$
72.7
$
— $
(80.8)
—
(22.4)
(103.2)
503.5
(33.6)
309.8
(309.8)
(45.4)
(225.9)
(40.6)
(51.2)
—
(45.8)
61.0
(1.4)
(5.7)
290.9
285.2
163
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cleveland-Cliffs Inc.
Opinion on the Financial Statements
We have audited the accompanying statements of consolidated financial position of Cleveland-Cliffs Inc. (formerly Cliffs
Natural Resources Inc.) and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related statements
of consolidated operations, comprehensive income (loss), cash flows, and changes in equity, for each of the three years
in the period ended December 31, 2017, and the related notes and the financial schedule listed in the Index at Item 15
(collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 14, 2018, expressed an unqualified opinion on the Company's
internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 14, 2018
We have served as the Company's auditor since 2004.
164
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cleveland-Cliffs Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Cleveland-Cliffs Inc. and subsidiaries (the "Company")
as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended
December 31, 2017, of the Company and our report dated February 14, 2018, expressed an unqualified opinion on those
financial statements and financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 14, 2018
165
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including
our President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure based solely on the definition of “disclosure controls and procedures” in Rule 13a-15(e) promulgated
under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an evaluation under the supervision and with
the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our
President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective.
166
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company's consolidated financial statements for external
purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of
the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with appropriate authorizations of management and
directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management conducted an assessment of the Company's internal control over financial reporting as of
December 31, 2017 using the framework specified in Internal Control - Integrated Framework (2013), published by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, management has
concluded that the Company's internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been
audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report that appears
herein.
February 14, 2018
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting or in other factors that occurred
during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B.
Other Information
None.
167
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information required to be furnished by this Item will be set forth in our definitive proxy statement for the
2018 Annual Meeting of Shareholders (the "Proxy Statement") under the headings "Board Meetings and Committees -
Audit Committee", "Code of Business Conduct and Ethics", "Independence and Related Party Transactions", "Information
Concerning Director Nominees” and “Section 16(a) Beneficial Ownership Reporting Compliance”, and is incorporated
herein by reference and made a part hereof from the Proxy Statement. The information regarding executive officers
required by this Item is set forth in Part I - Item 1. Business hereof under the heading “Executive Officers of the Registrant”,
which information is incorporated herein by reference and made a part hereof.
Item 11.
Executive Compensation
The information required to be furnished by this Item will be set forth in our Proxy Statement under the headings
“Director Compensation”, “Compensation Committee Report”, “Compensation Committee Interlocks and Insider
Participation” and “Executive Compensation” and is incorporated herein by reference and made a part hereof from the
Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information required to be furnished by this Item regarding "Securities Authorized for Issuance Under Equity
Compensation Plans", "Related Stockholder Matters" and "Security Ownership" will be set forth in the Proxy Statement
under the headings "Independence and Related Party Transactions", "Ownership of Equity Securities of the Company"
and "Equity Compensation Plan Information", respectively, and is incorporated herein by reference and made part hereof
from the Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required to be furnished by this Item will be set forth in the Proxy Statement under the heading
“Independence and Related Party Transactions” and is incorporated herein by reference and made a part hereof from
the Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information required to be furnished by this Item will be set forth in the Proxy Statement under the heading
“Ratification of Independent Registered Public Accounting Firm” and is incorporated herein by reference and made a
part hereof from the Proxy Statement.
168
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) and (2) - List of Financial Statements and Financial Statement Schedules.
The following consolidated financial statements of Cleveland-Cliffs Inc. are included at Item 8. Financial
Statements and Supplementary Data above:
•
•
Statements of Consolidated Financial Position - December 31, 2017 and 2016
Statements of Consolidated Operations - Years ended December 31, 2017, 2016 and 2015
•
and 2015
Statements of Consolidated Comprehensive Income (Loss) - Years ended December 31, 2017, 2016
•
•
•
Statements of Consolidated Cash Flows - Years ended December 31, 2017, 2016 and 2015
Statements of Consolidated Changes in Equity - Years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of Cleveland-Cliffs Inc. is included herein in Item 15(d)
and attached as Exhibit 99(a):
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required
under the related instructions or are inapplicable, and therefore have been omitted.
(3) List of Exhibits
All documents referenced below have been filed pursuant to the Securities Exchange Act of 1934 by Cleveland-
Cliffs Inc., file number 1-09844, unless otherwise indicated.
Exhibit
Number
Exhibit
2.1
3.1
3.2
3.3
3.4
4.1
4.2
Plan of purchase, sale, reorganization, arrangement, liquidation or succession
***Unit Purchase Agreement, dated as of December 22, 2015, by and among Cliffs Natural Resources Inc.,
CLF PinnOak LLC and Seneca Coal Resources, LLC (filed as Exhibit 2.3 to Cliffs’ Form 10-K for the period
ended December 31, 2015 and incorporated herein by reference)
Articles of Incorporation and By-Laws of Cleveland-Cliffs Inc.
Third Amended Articles of Incorporation of Cliffs (as filed with the Secretary of State of the State of Ohio on
May 13, 2013 (filed as Exhibit 3.1 to Cliffs’ Form 8-K on May 13, 2013 and incorporated herein by reference)
Certificate of Amendment to Third Amended Articles of Incorporation of Cliffs (as filed with the Secretary of
State of the State of Ohio on April 26, 2017 (filed as Exhibit 3.1 to Cliffs’ Form 8-K on April 27, 2017 and
incorporated herein by reference)
Certificate of Amendment to Third Amended Articles of Incorporation of Cliffs, as amended (as filed with the
Secretary of State of the State of Ohio on August 15, 2017 (filed as Exhibit 3.1 to Cliffs’ Form 8-K on August
17, 2017 and incorporated herein by reference)
Regulations of Cliffs (filed as Exhibit 3.2 to Cliffs’ Form 10-K for the period ended December 31, 2011 and
incorporated herein by reference)
Instruments defining rights of security holders, including indentures
Indenture between Cliffs Natural Resources Inc. and U.S. Bank National Association, as trustee, dated
March 17, 2010 (filed as Exhibit 4.3 to Cliffs’ Registration Statement on Form S-3 No. 333-186617 on
February 12, 2013 and incorporated herein by reference)
Form of 5.90% Notes due 2020 First Supplemental Indenture between Cliffs Natural Resources Inc. and
U.S. Bank National Association, as trustee, dated March 17, 2010, including Form of 5.90% Notes due 2020
(filed as Exhibit 4.2 to Cliffs’ Form 8-K on March 16, 2010 and incorporated herein by reference)
169
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
10.1
10.2
10.3
Form of 4.80% Notes due 2020 Second Supplemental Indenture between Cliffs Natural Resources Inc. and
U.S. Bank National Association, as trustee, dated September 20, 2010, including Form of 4.80% Notes due
2020 (filed as Exhibit 4.3 to Cliffs’ Form 8-K on September 17, 2010 and incorporated herein by reference)
Form of 6.25% Notes due 2040 Third Supplemental Indenture between Cliffs Natural Resources Inc. and
U.S. Bank National Association, as trustee, dated September 20, 2010, including Form of 6.25% Notes due
2040 (filed as Exhibit 4.4 to Cliffs’ Form 8-K on September 17, 2010 and incorporated herein by reference)
Form of 4.875% Notes due 2021 Fourth Supplemental Indenture between Cliffs Natural Resources Inc. and
U.S. Bank National Association, as trustee, dated March 23, 2011, including Form of 4.875% Notes due
2021 (filed as Exhibit 4.1 to Cliffs’ Form 8-K on March 23, 2011 and incorporated herein by reference)
Fifth Supplemental Indenture between Cliffs Natural Resources Inc. and U.S. Bank National Association,
as trustee, dated March 31, 2011 (filed as Exhibit 4(b) to Cliffs’ Form 10-Q for the period ended June 30,
2011 and incorporated herein by reference)
Seventh Supplemental Indenture between Cliffs Natural Resources Inc. and U.S. Bank National
Association, as trustee, dated May 7, 2013 (as filed as Exhibit 4.1 to Cliffs' Form 10-Q for the period
ended June 30, 2013 and incorporated herein by reference)
Eighth Supplemental Indenture, dated as of December 19, 2017, by and between Cleveland-Cliffs Inc.
and U.S. Bank National Association, as trustee, including Form of 1.50% Convertible Senior Notes due
2025 (filed as Exhibit 4.2 to Cliffs' Form 8-K on December 19, 2017 and incorporated herein by
reference)
Indenture, dated as of February 27, 2017, among Cliffs Natural Resources Inc. (n/k/a Cleveland-Cliffs Inc.),
the Guarantors party thereto and U.S. Bank National Association, as trustee, including Form of 5.75% Senior
Notes due 2025 (filed as Exhibit 4.1 to Cliffs' Form 8-K on August 7, 2017 and incorporated herein by
reference)
First Supplemental Indenture, dated as of August 7, 2017, among Cliffs Natural Resources Inc. (n/k/a
Cleveland-Cliffs Inc.), the Guarantors party thereto and U.S. Bank National Association, as trustee, including
Form of 5.75% Senior Notes due 2025 (filed as Exhibit 4.2 to Cliffs' Form 8-K filed on August 7, 2017 and
incorporated herein by reference)
Second Supplemental Indenture, dated as of September 29, 2017, among Cliffs Empire II Inc. and Empire
Iron Mining Partnership, as additional guarantors, Cleveland-Cliffs Inc., the Guarantors party thereto and
U.S. Bank National Association, as trustee (filed herewith)
Third Supplemental Indenture, dated as of October 27, 2017, among Cliffs TIOP II, LLC, Marquette Range
Coal Service Company and Tilden Mining Company L.C., as additional guarantors thereto, Cleveland-Cliffs
Inc., the Guarantors party thereto and U.S. Bank National Association, as trustee (filed herewith)
Indenture, dated as of December 19, 2017, by and among Cleveland-Cliffs Inc., the guarantors party thereto
and U.S. Bank National Association, as trustee and first lien notes collateral agent, including Form of 4.875%
Senior Secured Notes due 2024 (filed as Exhibit 4.1 to Cliffs' Form 8-K filed on December 19, 2017 and
incorporated herein by reference)
Registration Rights Agreement, dated as of February 27,2017, by and among Cliffs Natural Resources Inc.
(n/k/a Cleveland-Cliffs Inc.), the Guarantors party thereto and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as representative of the several initial purchasers (filed as Exhibit 4.2 to Cliffs' Form 10-Q for
the period ended March 31, 2017 and incorporated herein by reference)
Joinder to Registration Rights Agreement, dated as of August 7,2017, by and among Cliffs Natural Resources
Inc. (n/k/a Cleveland-Cliffs Inc.), the Guarantors party thereto and Credit Suisse Securities (USA) LLC, as
representative of the several initial purchasers (filed as Exhibit 4.3 to Cliffs' Form 8-K on August 7, 2017
and incorporated herein by reference)
Form of Common Share Certificate (filed as Exhibit 4.4 to Cliffs’ Form 10-Q for the period ended September
30, 2017 and incorporated herein by reference)
Material contracts
Syndicated Facility Agreement, dated as of March 30, 2015, by and among Bank of America, N.A., as
Administrative Agent and Australian Security Trustee, the Lenders that are Parties hereto, as the Lenders,
Cliffs Natural Resources Inc., as Parent and a Borrower, and the Subsidiaries of Parent Party hereto, as
Borrowers (filed as Exhibit 10.2 to Cliffs’ Form 10-Q for the period ended March 31, 2015 and incorporated
herein by reference)
First Amendment to Syndicated Facility Agreement, dated as of June 17, 2016, to that certain Syndicated
Facility Agreement, dated as of March 30, 2015, by and among Bank of America, N.A., as Administrative
Agent and Australian Security Trustee, the Lenders that are Parties hereto, as the Lenders, Cleveland-Cliffs
Inc., as Parent and a Borrower, and the Subsidiaries of Parent Party hereto, as Borrowers (filed as Exhibit
10.3 to Cliffs’ Form 10-Q for the period ended June 30, 2016 and incorporated herein by reference)
* Form of Change in Control Severance Agreement (covering newly hired officers) (filed as Exhibit 10.4 to
Cliffs’ Form 8-K/A on September 16, 2014 and incorporated herein by reference)
170
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
* Form of 2016 Change in Control Severance Agreement (filed as Exhibit 10.1 to Cliffs’ 10-Q for the period
ended September 30, 2016 and incorporated herein by reference)
* Cleveland-Cliffs Inc. 2012 Non-Qualified Deferred Compensation Plan (effective January 1, 2012) dated
November 8, 2011 (filed as Exhibit 10.1 to Cliffs’ Form 8-K on November 8, 2011 and incorporated herein
by reference)
* Form of Indemnification Agreement between Cliffs Natural Resources Inc. and Directors (filed as Exhibit
10.5 to Cliffs’ Form 10-K for the period ended December 31, 2011 and incorporated herein by reference)
* Cliffs Natural Resources Inc. Nonemployee Directors’ Compensation Plan (Amended and Restated as of
December 31, 2008) (filed as Exhibit 10(nnn) to Cliffs’ Form 10-K for the period ended December 31, 2008
and incorporated herein by reference)
* Cliffs Natural Resources Inc. Amended and Restated 2014 Nonemployee Directors’ Compensation Plan
(filed as Exhibit 10.1 to Cliffs’ Form 8-K on May 2, 2016 and incorporated herein by reference)
* Trust Agreement No. 1 (Amended and Restated effective June 1, 1997), dated June 12, 1997, by and
between Cleveland-Cliffs Inc and KeyBank National Association, Trustee, with respect to the Cleveland-
Cliffs Inc Supplemental Retirement Benefit Plan, Severance Pay Plan for Key Employees and certain
executive agreements (filed as Exhibit 10.10 to Cliffs’ Form 10-K for the period ended December 31, 2011
and incorporated herein by reference)
* Trust Agreement No. 1 Amendments to Exhibits, effective as of January 1, 2000, by and between Cleveland-
Cliffs Inc and KeyBank National Association, as Trustee (filed as Exhibit 10.11 to Cliffs’ Form 10-K for the
period ended December 31, 2011 and incorporated herein by reference)
* First Amendment to Trust Agreement No. 1, effective September 10, 2002, by and between Cleveland-
Cliffs Inc and KeyBank National Association, as Trustee (filed as Exhibit 10.12 to Cliffs’ Form 10-K for the
period ended December 31, 2011 and incorporated herein by reference)
* Second Amendment to Trust Agreement No. 1 between Cliffs Natural Resources Inc. (f/k/a Cleveland-
Cliffs Inc) and KeyBank National Association, Trustee, entered into and effective as of December 31, 2008
(filed as Exhibit 10(y) to Cliffs’ Form 10-K for the period ended December 31, 2008 and incorporated herein
by reference)
* Third Amendment to Trust Agreement No. 1 between Cliffs Natural Resources Inc. (f/k/a Cleveland-Cliffs
Inc) and KeyBank National Association, Trustee, entered into and effective as of July 28, 2014 (filed as
Exhibit 10.15 to Cliffs’ Form 10-K for the period ended December 31, 2014 and incorporated herein by
reference)
* Amended and Restated Trust Agreement No. 2, effective as of October 15, 2002, by and between Cleveland-
Cliffs Inc and KeyBank National Association, Trustee, with respect to Executive Agreements and
Indemnification Agreements with the Company’s Directors and certain Officers, the Company’s Severance
Pay Plan for Key Employees, and the Retention Plan for Salaried Employees (filed as Exhibit 10.14 to Cliffs’
Form 10-K for the period ended December 31, 2011 and incorporated herein by reference)
* Second Amendment to Amended and Restated Trust Agreement No. 2 between Cliffs Natural Resources
Inc. (f/k/a Cleveland-Cliffs Inc) and KeyBank National Association, Trustee, entered into and effective as of
December 31, 2008 (filed as Exhibit 10(aa) to Cliffs’ Form 10-K for the period ended December 31, 2008
and incorporated herein by reference)
* Third Amendment to Amended and Restated Trust Agreement No. 2 between Cliffs Natural Resources
Inc. (f/k/a Cleveland-Cliffs Inc) and KeyBank National Association, Trustee, entered into and effective as of
July 28, 2014 (filed as Exhibit 10.18 to Cliffs’ Form 10-K for the period ended December 31, 2014 and
incorporated herein by reference)
* Trust Agreement No. 5, dated as of October 28, 1987, by and between Cleveland-Cliffs Inc and KeyBank
National Association, Trustee, with respect to certain deferred compensation agreements (filed as Exhibit
10.16 to Cliffs’ Form 10-K for the period ended December 31, 2011 and incorporated herein by reference)
* First Amendment to Trust Agreement No. 5, dated as of May 12, 1989, by and between Cleveland-Cliffs
Inc and KeyBank National Association, Trustee (filed as Exhibit 10.17 to Form 10-K of Cliffs’ for the period
ended December 31, 2011 and incorporated herein by reference)
* Second Amendment to Trust Agreement No. 5, dated as of April 9, 1991, by and between Cleveland-Cliffs
Inc and KeyBank National Association, Trustee (filed as Exhibit 10.18 to Form 10-K of Cliffs’ for the period
ended December 31, 2011 and incorporated herein by reference)
* Third Amendment to Trust Agreement No. 5, dated as of March 9, 1992, by and between Cleveland-Cliffs
Inc and KeyBank National Association, Trustee (filed as Exhibit 10.19 to Cliffs’ Form 10-K for the period
ended December 31, 2011 and incorporated herein by reference)
* Fourth Amendment to Trust Agreement No. 5, dated November 18, 1994, by and between Cleveland-Cliffs
Inc and KeyBank National Association, Trustee (filed as Exhibit 10.20 to Cliffs’ Form 10-K for the period
ended December 31, 2011 and incorporated herein by reference)
* Fifth Amendment to Trust Agreement No. 5, dated May 23, 1997, by and between Cleveland-Cliffs Inc and
KeyBank National Association, Trustee (filed as Exhibit 10.19 to Cliffs’ Form 10-K for the period ended
December 31, 2011 and incorporated herein by reference)
171
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
*Sixth Amendment to Trust Agreement No. 5 between Cliffs Natural Resources Inc. (f/k/a Cleveland-Cliffs
Inc) and KeyBank National Association, Trustee, entered into and effective as of December 31, 2008 (filed
as Exhibit 10(hh) to Cliffs’ Form 10-K for the period ended December 31, 2008 and incorporated herein by
reference)
*Seventh Amendment to Trust Agreement No. 5 between Cliffs Natural Resources Inc. (f/k/a Cleveland-
Cliffs Inc) and KeyBank National Association, Trustee, entered into and effective as of July 28, 2014 (filed
as Exhibit 10.26 to Cliffs’ Form 10-K for the period ended December 31, 2014 and incorporated herein by
reference)
* Trust Agreement No. 7, dated as of April 9, 1991, by and between Cliffs Natural Resources Inc and KeyBank
National Association, Trustee, with respect to the Cleveland-Cliffs Inc Supplemental Retirement Benefit Plan
(filed as Exhibit 10.23 to Cliffs’ Form 10-K for the period ended December 31, 2011 and incorporated herein
by reference)
* First Amendment to Trust Agreement No. 7, by and between Cleveland-Cliffs Inc and KeyBank National
Association, Trustee, dated as of March 9, 1992 (filed as Exhibit 10.24 to Cliffs’ Form 10-K for the period
ended December 31, 2011 and incorporated herein by reference)
* Second Amendment to Trust Agreement No. 7, dated November 18, 1994, by and between Cleveland-
Cliffs Inc and KeyBank National Association, Trustee (filed as Exhibit 10.25 to Cliffs’ Form 10-K for the period
ended December 31, 2011 and incorporated herein by reference)
* Third Amendment to Trust Agreement No. 7, dated May 23, 1997, by and between Cleveland-Cliffs Inc
and KeyBank National Association, Trustee (filed as Exhibit 10.26 to Cliffs’ Form 10-K for the period ended
December 31, 2011 and incorporated herein by reference)
* Fourth Amendment to Trust Agreement No. 7, dated July 15, 1997, by and between Cleveland-Cliffs Inc
and KeyBank National Association, Trustee (filed as Exhibit 10.27 to Cliffs’ Form 10-K for the period ended
December 31, 2011 and incorporated herein by reference)
* Amendment to Exhibits to Trust Agreement No. 7, effective as of January 1, 2000, by and between
Cleveland-Cliffs Inc and KeyBank National Association, Trustee (filed as Exhibit 10.28 to Cliffs’ Form 10-K
for the period ended December 31, 2011 and incorporated herein by reference)
* Sixth Amendment to Trust Agreement No. 7 between Cliffs Natural Resources Inc. (f/k/a Cleveland-Cliffs
Inc) and KeyBank National Association, Trustee, entered into and effective as of December 31, 2008 (filed
as Exhibit 10(oo) to Cliffs’ Form 10-K for the period ended December 31, 2008 and incorporated herein by
reference)
* Seventh Amendment to Trust Agreement No. 7 between Cliffs Natural Resources Inc. (f/k/a Cleveland-
Cliffs Inc) and KeyBank National Association, Trustee, entered into and effective as of July 28, 2014 (filed
as Exhibit 10.34 to Cliffs’ Form 10-K for the period ended December 31, 2014 and incorporated herein by
reference)
* Trust Agreement No. 10, dated as of November 20, 1996, by and between Cleveland-Cliffs Inc and KeyBank
National Association, Trustee, with respect to the Cleveland-Cliffs Inc Nonemployee Directors’
Compensation Plan (filed as Exhibit 10.36 to Cliffs’ Form 10-K for the period ended December 31, 2011
and incorporated herein by reference)
*First Amendment to Trust Agreement No. 10 between Cliffs Natural Resources Inc. (f/k/a Cleveland-Cliffs
Inc) and KeyBank National Association, Trustee, entered into and effective as of December 31, 2008 (filed
as Exhibit 10(ww) to Cliffs’ Form 10-K for the period ended February 26, 2009 and incorporated herein by
reference)
* Second Amendment to Trust Agreement No. 10 between Cliffs Natural Resources Inc. (f/k/a Cleveland-
Cliffs Inc) and KeyBank National Association, Trustee, entered into and effective as of July 28, 2014 (filed
as Exhibit 10.45 to Cliffs’ Form 10-K for the period ended December 31, 2014 and incorporated herein by
reference)
*Severance Agreement and Release, by and between P. Kelly Tompkins and Cleveland-Cliffs Inc., effective
December 31, 2017 (filed herewith)
* Letter Agreement, by and between Lourenco Goncalves and Cliffs Natural Resources Inc., signed as of
September 11, 2014 (filed as Exhibit 10.1 to Cliffs’ Form 8-K/A on September 16, 2014 and incorporated
herein by reference)
* Cleveland-Cliffs Inc and Subsidiaries Management Performance Incentive Plan Summary, effective
January 1, 2004 (filed as Exhibit 10.47 to Cliffs’ Form 10-K for the period ended December 31, 2011 and
incorporated herein by reference)
* Cliffs Natural Resources Inc. 2012 Executive Management Performance Incentive Plan effective March
13, 2012 (filed as Exhibit 10.3 to Cliffs’ Form 8-K on May 14, 2012 and incorporated herein by reference)
* Cliffs Natural Resources Inc. 2017 Executive Management Performance Incentive Plan effective January
1, 2017 (filed as Exhibit 10.2 to Cliffs' Form 8-K on April 27, 2017 and incorporated herein by reference)
* Cliffs Natural Resources Inc. Amended and Restated 2012 Incentive Equity Plan (filed as Exhibit 10.1 to
Cliffs’ Form 8-K on August 4, 2014 and incorporated herein by reference)
172
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
12
21
23
24
* Form of Cliffs Natural Resources Inc. Amended and Restated 2012 Incentive Equity Plan Non-Qualified
Stock Option Award Memorandum (2014 Grant) and Stock Option Award Agreement (filed as Exhibit 10.2
to Cliffs’ Form 8-K/A on September 16, 2014 and incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. Amended and Restated 2012 Incentive Equity Plan Performance
Unit Award Memorandum (2014 Grant) and Performance Unit Award Agreement (filed as Exhibit 10.3 to
Cliffs’ Form 8-K/A on September 16, 2014 and incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. Amended and Restated 2012 Incentive Equity Plan Non-Qualified
Stock Option Award Memorandum (3-Year Vesting – January 2015 Grant) and Stock Option Award
Agreement (filed as Exhibit 10.69 to Cliffs’ Form 10-K for the period ended December 31, 2014 and
incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. Amended and Restated 2012 Incentive Equity Plan Performance
Share Award Memorandum (3-Year Vesting – January 2015 Grant) and Performance Share Award
Agreement (filed as Exhibit 10.71 to Cliffs’ Form 10-K for the period ended December 31, 2014 and
incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. Amended and Restated 2012 Incentive Equity Plan Performance
Share Award Memorandum (3 year Vesting – February 2015 Grant) and Restricted Share Unit Award
Agreement (filed as Exhibit 10.73 to Cliffs’ Form 10-K for the period ended December 31, 2014 and
incorporated herein by reference)
* Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan (filed as Exhibit 10.1 to Cliffs’
Form 8-K on May 21, 2015 and incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan Restricted Stock Unit
Award Memorandum (Vesting May 2018) and Restricted Stock Unit Award Agreement (filed as Exhibit 10.61
to Cliffs’ Form 10-K for the period ended December 31, 2015 and incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan Restricted Stock Unit
Award Memorandum (Vesting December 31, 2018) and Restricted Stock Unit Award Agreement (filed as
Exhibit 10.1 to Cliffs’ Form 10-Q for the period ended March 31, 2016 and incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan Cash Incentive Award
Memorandum (TSR) (Vesting December 31, 2018) and Cash Incentive Award Agreement (TSR) (filed as
Exhibit 10.2 to Cliffs’ Form 10-Q for the period ended March 31, 2016 and incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan Cash Incentive Award
Memorandum (EBITDA) (January 1, 20XX - December 31, 20XX) and Cash Incentive Award Agreement
(EBITDA) (filed as Exhibit 10.3 to Cliffs’ Form 10-Q for the period ended March 31, 2016 and incorporated
herein by reference)
* Form of Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan, as Amended,
Performance Share Award Memorandum and Performance Share Award Agreement (filed as Exhibit 10.3
to Cliffs’ Form 10-Q for the period ended June 30, 2017 and incorporated herein by reference)
* Cliffs Natural Resources Inc. Amended and Restated 2015 Equity and Incentive Compensation Plan (filed
as Exhibit 10.1 to Cliffs’ Form 8-K on April 27, 2017 and incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. Amended and Restated 2015 Equity and Incentive Compensation
Plan Performance Share Award Memorandum and Performance Share Award Agreement (filed as Exhibit
10.4 to Cliffs’ Form 10-Q for the period ended June 30, 2017 and incorporated herein by reference)
* Form of Cliffs Natural Resources Inc. Amended and Restated 2015 Equity and Incentive Compensation
Plan Restricted Stock Unit Award Memorandum and Restricted Stock Unit Award Agreement (filed as Exhibit
10.5 to Cliffs’ Form 10-Q for the period ended June 30, 2017 and incorporated herein by reference)
* Cliffs Natural Resources Inc. Supplemental Retirement Benefit Plan (as Amended and Restated effective
December 1, 2006) dated December 31, 2008 (filed as Exhibit 10(mmm) to Cliffs’ Form 10-K for the period
ended December 31, 2008 and incorporated herein by reference)
* Cliffs Natural Resources Inc. 2015 Employee Stock Purchase Plan (filed as Exhibit 4.4 to Cliffs’ Registration
Statement on Form S-8 on August 20, 2015 and incorporated herein by reference)
** Pellet Sale and Purchase Agreement, effective as of October 31, 2016, by and among Cliffs Natural
Resources Inc., The Cleveland-Cliffs Iron Company and Cliffs Mining Company and ArcelorMittal USA LLC
(filed as Exhibit 10.72 to Cliffs’ Registration Statement on Form S-1/A No. 333-212054 on August 4, 2016
and incorporated herein by reference)
** Amended and Restated Pellet Sale and Purchase Agreement, effective as of December 31, 2015, by and
among The Cleveland-Cliffs Iron Company, Cliffs Mining Company and AK Steel Corporation (filed herewith)
Ratio of Earnings To Combined Fixed Charges And Preferred Stock Dividend Requirements (filed herewith)
Subsidiaries of the Registrant (filed herewith)
Consent of Independent Registered Public Accounting Firm (filed herewith)
Power of Attorney (filed herewith)
173
31.1
31.2
32.1
32.2
95
99(a)
Certification Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002, signed and dated by Lourenco Goncalves as of February 14, 2018 (filed herewith)
Certification Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002, signed and dated by Timothy K. Flanagan as of February 14, 2018 (filed herewith)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, signed and dated by Lourenco Goncalves, Chairman, President and Chief Executive
Officer of Cleveland-Cliffs Inc., as of February 14, 2018 (filed herewith)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, signed and dated by Timothy K. Flanagan, Executive Vice President, Chief Financial
Officer of Cleveland-Cliffs Inc., as of February 14, 2018 (filed herewith)
Mine Safety Disclosures (filed herewith)
Schedule II – Valuation and Qualifying Accounts (filed herewith)
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
_______________
*
**
***
Indicates management contract or other compensatory arrangement.
Confidential treatment requested and/or approved as to certain portions, which portions have been
omitted and filed separately with the Securities and Exchange Commission.
Certain immaterial schedules and exhibits to this exhibit have been omitted pursuant to the provisions
of Regulation S-K, Item 601(b)(2). A copy of any of the omitted schedules and exhibits will be furnished
to the Securities and Exchange Commission upon request.
(c) Exhibits listed in Item 15(a)(3) above are incorporated herein by reference.
(d) The schedule listed above in Item 15(a)(1) and (2) is attached as Exhibit 99(a) and incorporated herein by
reference.
174
Item 16.
Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEVELAND-CLIFFS INC.
By:
/s/ R. C. Cebula
Name:
R. Christopher Cebula
Date: February 14, 2018
Title:
Vice President, Corporate Controller &
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ C. L. Goncalves
C. L. Goncalves
/s/ T. K. Flanagan
T. K. Flanagan
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
February 14, 2018
February 14, 2018
/s/ R. C. Cebula
R. C. Cebula
Vice President, Corporate Controller &
Chief Accounting Officer
February 14, 2018
*
J. T. Baldwin
*
R. P. Fisher, Jr.
*
S. M. Green
*
J. A. Rutkowski, Jr.
*
E. M. Rychel
*
M. D. Siegal
*
G. Stoliar
*
D. C. Taylor
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
* The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to a
Power of Attorney executed on behalf of the above-indicated officers and directors of the registrant and filed herewith
as Exhibit 24 on behalf of the registrant.
By:
/s/ T. K. Flanagan
(T. K. Flanagan, as Attorney-in-Fact)
175
Ratio of Earnings To Combined Fixed Charges
And Preferred Stock Dividend Requirements
(In Millions)
Exhibit 12
Consolidated pretax income (loss) from continuing
operations
Undistributed earnings of non-consolidated
affiliates
Amortization of capitalized interest
Interest expense
Acceleration of debt issuance costs
Interest portion of rental expense
Total Earnings
Interest expense
Acceleration of debt issuance costs
Interest portion of rental expense
Preferred Stock dividend requirements
2017
2016
2015
2014
2013
Year Ended December 31,
$
129.4
$
207.0
$
313.1
$ (19.7)
$1,190.9
—
—
135.2
116.3
0.2
381.1
135.2
116.3
0.2
—
$
$
—
0.1
201.1
35.6
0.3
444.1
201.1
35.6
0.3
—
$
$
(0.1)
0.3
230.0
11.3
0.9
555.5
230.0
11.3
0.9
38.4
(9.9)
0.3
178.3
3.6
2.3
(74.4)
2.3
189.9
—
2.1
$ 154.9
$ 178.3
$1,310.8
$ 189.9
3.6
2.3
51.2
—
2.1
48.7
$
$
Fixed Charges Requirements
$
251.7
$
237.0
$
280.6
$ 235.4
$ 240.7
Fixed Charges and Preferred Stock Dividend
Requirements
$
251.7
$
237.0
$
280.6
$ 235.4
$ 240.7
RATIO OF EARNINGS TO FIXED CHARGES
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDEND
REQUIREMENTS
1.5
1.5
1.9
1.9
2.0
2.0
(A)
(A)
5.4
5.4
(A) For the year ended December 31, 2014, there was a deficiency of earnings to cover the fixed charges of
$235.4 million.
SIGNIFICANT SUBSIDIARIES
CLEVELAND-CLIFFS INC. AS OF DECEMBER 31, 2017
Name
Cleveland-Cliffs International Holding Company
Cleveland-Cliffs Ore Corporation
Cliffs Finance US LLC
Cliffs Finance Lux SCS
Cliffs (Gibraltar) Holdings Limited
Cliffs (Gibraltar) Holdings Limited Luxembourg S.C.S.
Cliffs (Gibraltar) Limited
Cliffs Mining Company
Cliffs Minnesota Mining Company
Cliffs Natural Resources Pty Ltd.
Cliffs Natural Resources Holdings Pty Ltd.
Cliffs Natural Resources Luxembourg S.a.r.l
Cliffs TIOP Holding, LLC
Cliffs TIOP, Inc.
Cliffs TIOP II, LLC
Cliffs UTAC Holding LLC
The Cleveland-Cliffs Iron Company
Tilden Mining Company L.C.
Lake Superior & Ishpeming Railroad Company
Cliffs PinnOak LLC
Cliffs Marquette, Inc.
Marquette Iron Mining Partnership
Northshore Mining Company
Pickands Hibbing Corporation
Cliffs Pickands Holding, LLC
Cliffs' Effective
Ownership
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Exhibit 21
Place of Incorporation
Delaware, USA
Ohio, USA
Ohio, USA
Luxembourg
Gibraltar
Luxembourg
Gibraltar
Delaware, USA
Delaware, USA
WA Australia
WA Australia
Luxembourg
Delaware, USA
Michigan, USA
Ohio, USA
Delaware, USA
Ohio, USA
Michigan, USA
Michigan, USA
Ohio, USA
Michigan, USA
Michigan, USA
Michigan, USA
Minnesota, USA
Delaware, USA
Consent of Independent Registered Public Accounting Firm
Exhibit 23
We consent to the incorporation by reference in:
Registration Statement No. 333-215980 on Form S-3 pertaining to the registration of an indeterminate number
of common shares, preferred stock, depositary shares, warrants and subscription rights as well as an
indeterminate amount of debt securities that may from time to time be issued at indeterminate prices;
Registration Statement No. 333-56661 on Form S-8 (as amended by Post-Effective Amendment No.1)
pertaining to the Northshore Mining Company and Silver Bay Power Company Retirement Savings Plan and
the related prospectus;
Registration Statement No. 333-64008 on Form S-8 (as amended by Post-Effective Amendment No.1 and
Post-Effective Amendment No.2) pertaining to the Cliffs Natural Resources Inc. Nonemployee Directors’
Compensation Plan (as amended and restated as of January 1, 2005);
Registration Statement No. 333-184620 on Form S-8 pertaining to the Cliffs Natural Resources Inc. 2012
Incentive Equity Plan;
Registration Statement No. 333-197687 on Form S-8 pertaining to the Cliffs Natural Resources Inc. Amended
and Restated 2012 Incentive Equity Plan;
Registration Statement No. 333-197688 on Form S-8 pertaining to the Cliffs Natural Resources Inc. 2014
Nonemployee Directors’ Compensation Plan;
Registration Statement No. 333-204369 on Form S-8 pertaining to the Cliffs Natural Resources Inc. 2015
Equity and Incentive Compensation Plan;
Registration Statement No. 333-206487 on Form S-8 pertaining to the Cliffs Natural Resources Inc. 2015
Employee Stock Purchase Plan;
Registration Statement No. 333-210954 on Form S-8 pertaining to the Cliffs Natural Resources Inc. Amended
and Restated 2014 Nonemployee Directors' Compensation Plan; and
Registration Statement No. 333-217506 on Form S-8 pertaining to the Cliffs Natural Resources Inc. Amended
and Restated 2015 Equity and Incentive Compensation Plan.
of our reports dated February 14, 2018, relating to the consolidated financial statements and financial statement
schedule of Cleveland-Cliffs Inc., and the effectiveness of Cleveland-Cliffs Inc.’s internal control over financial reporting,
appearing in this Annual Report on Form 10-K of Cleveland-Cliffs Inc. for the year ended December 31, 2017.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 14, 2018
POWER OF ATTORNEY
Exhibit 24
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors and officers of Cleveland-Cliffs Inc.,
an Ohio corporation ("Company"), hereby constitute and appoint C. Lourenco Goncalves, Timothy K. Flanagan, James
D. Graham and R. Christopher Cebula, and each of them, their true and lawful attorney or attorneys-in-fact, with full
power of substitution and revocation, for them and in their name, place and stead, to sign on their behalf as a Director
or officer of the Company, or both, as the case may be, an Annual Report on Form 10-K pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2017, and to sign any and all
amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorney or attorneys-in-fact, and each
of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying
and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Executed as of the 6th day of February, 2018.
/s/ C. L. Goncalves
C. L. Goncalves,
Chairman, President and Chief Executive Officer
/s/ T. K. Flanagan
T. K. Flanagan,
Executive Vice President, Chief Financial Officer
/s/ R. C. Cebula
R. C. Cebula,
Vice President, Corporate Controller & Chief
Accounting Officer
/s/ R. P. Fisher, Jr.
R. P. Fisher, Jr., Director
/s/ J. A. Rutkowski, Jr.
J. A. Rutkowski, Jr., Director
/s/ M. D. Siegal
M. D. Siegal, Director
/s/ D. C. Taylor
D. C. Taylor, Director
/s/ J. T. Baldwin
J. T. Baldwin, Director
/s/ S. M. Green
S. M. Green, Director
/s/ E. M. Rychel
E. M. Rychel, Director
/s/ G. Stoliar
G. Stoliar, Director
I, Lourenco Goncalves, certify that:
CERTIFICATION
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Cleveland-Cliffs Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and
have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected or is reasonably likely to
materially affect the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: February 14, 2018
By:
/s/ Lourenco Goncalves
Lourenco Goncalves
Chairman, President and Chief Executive Officer
I, Timothy K. Flanagan, certify that:
CERTIFICATION
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Cleveland-Cliffs Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and
have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected or is reasonably likely to
materially affect the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: February 14, 2018
By:
/s/ Timothy K. Flanagan
Timothy K. Flanagan
Executive Vice President, Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Cleveland-Cliffs Inc. (the “Company”) on Form 10-K for the period
ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-
K”), I, Lourenco Goncalves, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s
knowledge:
(1)
(2)
The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
The information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company as of the dates and for the periods
expressed in the Form 10-K.
Date:
February 14, 2018
By:
/s/ Lourenco Goncalves
Lourenco Goncalves
Chairman, President and Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Cleveland-Cliffs Inc. (the “Company”) on Form 10-K for the period
ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-
K”), I, Timothy K. Flanagan, Executive Vice President, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s
knowledge:
(1)
(2)
The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
The information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company as of the dates and for the periods
expressed in the Form 10-K.
Date:
February 14, 2018
By:
/s/ Timothy K. Flanagan
Timothy K. Flanagan
Executive Vice President, Chief Financial Officer
Mine Safety Disclosures
Exhibit 95
The operation of our mines located in the United States is subject to regulation by MSHA under the FMSH
Act. MSHA inspects these mines on a regular basis and issues various citations and orders when it believes a violation
has occurred under the FMSH Act. We present information below regarding certain mining safety and health citations
that MSHA has issued with respect to our mining operations. In evaluating this information, consideration should be
given to factors such as: (i) the number of citations and orders will vary depending on the size of the mine; (ii) the
number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be
contested and appealed and, in that process, are often reduced in severity and amount, and are sometimes dismissed.
Under the Dodd-Frank Act, each operator of a coal or other mine is required to include certain mine safety
results within its periodic reports filed with the SEC. As required by the reporting requirements included in §1503(a)
of the Dodd-Frank Act, we present the following items regarding certain mining safety and health matters, for the period
presented, for each of our mine locations that are covered under the scope of the Dodd-Frank Act:
(A) The total number of violations of mandatory health or safety standards that could significantly and
substantially contribute to the cause and effect of a coal or other mine safety or health hazard under
section 104 of the FMSH Act (30 U.S.C. 814) for which the operator received a citation from MSHA;
(B) The total number of orders issued under section 104(b) of the FMSH Act (30 U.S.C. 814(b));
(C) The total number of citations and orders for unwarrantable failure of the mine operator to comply with
mandatory health or safety standards under section 104(d) of the FMSH Act (30 U.S.C. 814(d));
(D) The total number of imminent danger orders issued under section 107(a) of the FMSH Act (30 U.S.C.
817(a));
(E) The total dollar value of proposed assessments from MSHA under the FMSH Act (30 U.S.C. 801 et seq.);
(F) Legal actions pending before the Federal Mine Safety and Health Review Commission involving such
coal or other mine as of the last day of the period;
(G) Legal actions initiated before the Federal Mine Safety and Health Review Commission involving such
coal or other mine during the period; and
(H) Legal actions resolved before the Federal Mine Safety and Health Review Commission involving such
coal or other mine during the period.
During the year ended December 31, 2017, our U.S. mine locations did not receive any flagrant violations
under Section 110(b)(2) of the FMSH Act, no orders issued under Section 104(b) of the FMSH Act, and no written
notices of a pattern of violations, or the potential to have a pattern of such violations, under section 104(e) of the FMSH
Act. In addition, there were no mining-related fatalities at any of our U.S. mine locations during this same period.
Following is a summary of the information listed above for the year ended December 31, 2017:
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
Year Ended December 31, 2017
Section
104 S&S
Citations
Section
104(b)
Orders
Section
104(d)
Orders
61
—
15
1
14
14
2
—
—
—
—
—
—
—
1
—
—
—
—
—
—
Section
107(a)
Citations
&
Orders
Total Dollar
Value of
MSHA
Proposed
Assessments
(1)
Legal
Actions
Pending
as of
Last Day
of Period
— $
445,212
29 (2)
— $
— $
— $
—
20,352
2,151
1
$
108,155
— $
107,985
— $
10,658
—
7 (3)
—
—
—
—
Legal
Actions
Initiated
During
Period
Legal
Actions
Resolved
During
Period
15
—
7
—
5
5
1
32
8
12
—
5
7
1
Mine Name/ MSHA ID No.
Operation
Tilden / 2000422
Empire / 2001012
Iron Ore
Iron Ore
Northshore Plant / 2100831
Iron Ore
Northshore Mine / 2100209
Iron Ore
Hibbing / 2101600
United Taconite Plant /
2103404
United Taconite Mine /
2103403
Iron Ore
Iron Ore
Iron Ore
(1)
(2)
(3)
Amounts included under the heading “Total Dollar Value of MSHA Proposed Assessments” are the total dollar amounts for proposed
assessments received from MSHA on or before December 31, 2017.
This number consists of 17 pending legal actions related to contests of proposed penalties referenced in Subpart C of FMSH Act's
procedural rules, 10 pending legal actions related to contests of citations and orders referenced in Subpart B of FMSH Act's procedural
rules, and 2 pending legal actions related to complaints of discharge, discrimination, or interference referenced in Subpart E of FMSH
Act's procedural rules.
This number consists of 7 pending legal actions related to contests of proposed penalties referenced in Subpart C of FMSH Act's procedural
rules.
Cleveland-Cliffs Inc. and Subsidiaries
Schedule II – Valuation and Qualifying Accounts
(Dollars in Millions)
Exhibit 99(a)
Balance at
Beginning
of Year
Charged
to Cost
and
Expenses
Additions
Charged
to Other
Accounts
Acquisition
Deductions
Balance at
End of Year
3,334.8
$ (1,104.3)
$
$
$
$
$
3,372.5
7.1
1,152.3
$
$
$
— $
$
$
(40.6)
— $
54.3
7.1
$
$
(9.8)
5.1
(7.1)
2,165.9
$
$
$
$
— $
17.8
$
— $
2,238.5
— $
— $
— $
— $
2.2
$
3,334.8
— $
—
— $
3,372.5
— $
7.1
Classification
Year Ended December 31, 2017:
Deferred Tax Valuation Allowance
Year Ended December 31, 2016:
Deferred Tax Valuation Allowance
Accounts Receivable Allowance
Year Ended December 31, 2015:
Deferred Tax Valuation Allowance
Accounts Receivable Allowance
EXECUTIVE COMMITTEE
Name
Position
Lourenco Goncalves
Chairman, President and Chief Executive Officer
Terry G. Fedor
Executive Vice President, United States Iron Ore
Timothy K. Flanagan
Executive Vice President, Chief Financial Officer
James D. Graham
Executive Vice President, Chief Legal Officer & Secretary
Maurice D. Harapiak
Executive Vice President, Human Resources & Chief Administration Officer
Terrence R. Mee
Clifford T. Smith
Executive Vice President, Global Commercial
Executive Vice President, Business Development
Age
60
53
40
52
56
48
58
Service
4
7
10
11
4
21
14
DIRECTORS
Lourenco Goncalves 4 (2014)
Chairman, President
and Chief Executive Officer
Cleveland-Cliffs Inc.
John T. Baldwin 1 (2014)
Former Chief Financial Officer
Worthington Industries, Inc.
Eric M. Rychel 1 (2016)
Executive Vice President, Chief Financial
Officer & Treasurer
Aleris Corporation
Michael D. Siegal 1,3 (2014)
Chairman and Chief Executive Officer
Olympic Steel, Inc.
Committees Served
1 – Audit
2 – Compensation and Organization
3 – Governance and Nominating
4 – Strategy
Year in parentheses indicates year he/she became a director.
Robert P. Fisher, Jr. 1,2 (2014)
President and Chief Executive Officer
George F. Fisher, Inc.
Former Managing Director
Goldman, Sachs & Co.
Gabriel Stoliar 2,3,4 (2014)
Managing Partner
Studio Investimentos
Former Executive Vice President
Vale S.A.
Susan M. Green 3 (2007)
Former Deputy General Counsel
U.S. Congress Office of Compliance
Douglas C. Taylor 2,3 (2014)
Former Managing Partner
Casablanca Capital LP
Joseph A. Rutkowski, Jr. 2,4 (2014)
Principal
Winyah Advisors LLC
Former Executive Vice President
Nucor Corporation
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About Cleveland-Cliffs Inc.
Founded in 1847, Cleveland-Cliffs Inc. is the largest and oldest iron ore mining company
in the United States. We are a major supplier of iron ore pellets to the North American
steel industry from our mines and pellet plants located in Michigan and Minnesota.
Additionally, we operate an iron ore mining complex in Western Australia. By 2020, Cliffs
expects to be the sole producer of hot briquetted iron (HBI) in the Great Lakes region
with the development of its first production plant in Toledo, OH. Driven by the core values
of safety, social, environmental and capital stewardship, our employees endeavor to
provide all stakeholders with operating and financial transparency.
Investor and Corporate Information
CORPORATE OFFICE
Cleveland-Cliffs Inc.
200 Public Square, Suite 3300
Cleveland, OH 44114
P: 216.694.5700 F: 216.694.5385
clevelandcliffs.com
TRANSFER AGENT AND REGISTRAR
EQ Shareholder Services
P.O. Box 64874
St. Paul, MN 55164-0874
800.468.9716
ANNUAL MEETING
Date: April 24, 2018
Time: 11:30 a.m. EDT
Place: North Point
901 Lakeside Avenue
Cleveland, OH 44114
ADDITIONAL INFO
Cliffs’ Annual Report to the SEC (Form 10-K) and proxy statement are available on Cliffs’ website. Copies of these
reports and other Company publications also may be obtained by sending requests to the attention of Investor
Relations at the corporate office, or by telephone at 800.214.0739, or e-mail: ir@clevelandcliffs.com.
COMMON SHARES
NYSE: CLF
200 PUBLIC SQUARE
200 PUBLIC SQUARE
SUITE 3300
SUITE 3300
CLEVELAND, OH 44114
CLEVELAND, OH 44114-2315
CLEVELANDCLIFFS.COM
CLEVELANDCLIFFS.COM
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