Jessica Moran – Director, Investor Relations Gary Halverson – President and Chief Executive Officer Terrance Paradie – Executive Vice President and Chief Financial Officer Kelly Tompkins – Executive Vice President, External Affairs and President, Global Commercial.

Brian Hsien Yu – Citigroup Global Markets Inc. Timna Tanners – Bank of America Merrill Lynch Mitesh Thakkar – FBR Capital Markets & Co. Sal Tharani – Goldman Sachs & Co. Anthony Rizzuto – Cowen and Company Kuni Chen – UBS Securities LLC Nathan Littlewood – Credit Suisse Securities Aldo Mazzaferro – Macquarie Capital.

Good morning, ladies and gentlemen. My name is Michelle, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2014 Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

At this time, I would like to introduce Jessica Moran, Director, Investor Relations. Ms. Moran, kindly proceed..

Thanks, Michelle. I'd like to welcome everyone to this morning's call. Before I turn the call over, let me remind you that certain comments made on today’s call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995.

Although the Company believes that its forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially.

Important factors that could cause results to differ materially are set forth in reports on Forms 10-K and 10-Q and news releases filed with the SEC, which are available on our website. Today’s conference call is also available and being broadcast at cliffsnaturalresources.com.

At the conclusion of the call, it will be archived on the website and available for replay. We will also discuss our results excluding certain special items, which is a non-GAAP financial measure. A reconciliation for Regulation G purposes can be found in our earnings presentation, which is posted on our website at cliffsnaturalresources.com.

Joining me today are President and Chief Executive Officer, Gary Halverson; Executive Vice President and Chief Financial Officer, Terry Paradie; and Executive Vice President-External Affairs and President-Global Commercial, Kelly Tompkins. At this time, I’ll turn the call over to Gary to discuss our second quarter's results..

Thanks, Jess. Thanks to everyone for joining us this morning. The second quarter's results were solid. Year-over-year CapEx was down over $200 million. Costs were lower in every segment. And liquidity is up 20%.

All while we experienced significant pricing pressure and the residual effects of first quarter's unprecedented cold weather, which impacted sales tons. Before I cover the quarter's results in detail I'll briefly discuss the current status of the proxy contest as we approach our annual meeting on July 29.

Last week, three proxy advisory firms issued the recommendations for how shareholders should vote at the annual meeting. It is important for highlight that all three firms were clear and unanimous on one key point; Casablanca nominee should not constitute a majority of Cliffs' board.

In response to the proxy advisory firms' recommendations we reduced our director slate to seven individuals to provide our shareholders a way to vote in line with both ISS and Glass Lewis recommendations of providing Casablanca with minority representation.

We're extremely pleased that Glass Lewis revised its analysis and now recommends shareholders' vote for all of Cliffs' nominees on the white proxy card.

We issued a press release this morning with additional detail on this recommendation, but it is important to note that Glass Lewis reiterated our concern that Casablanca can use cumulative voting which enables shareholders to aggregate their votes towards one or more nominees to its advantage to elect the majority of the board.

As we have previously raised, if most shareholder's vote the gold card, we believe it is almost certain that not four but all six of Casablanca's nominees would be elected constituting the majority of Cliffs' board. This is not the intended outcome recommended by any of the three proxy advisory firms.

By voting our new white card Casablanca will gain significant representation on our board with four seats but will not gain a majority of your board. Replacing a majority of the members on the board will have a number of significant impacts to the company of which we do not believe are in the best interest of our shareholders.

With Casablanca having a majority of your board we believe they will put Lourenco Goncalves in place as CEO and carry out what we believe is a short-term oriented plan to liquidate assets in a very low pricing environment.

Operating Cliffs' business is a lot easier to run in a $120 iron ore environment but true management teams are tested in the sub-$100 pricing environment that we are currently facing. Now is not the time to liquidate assets. It is the time to lower asset costs and capital profiles to preserve their longer term value.

Since joining Cliffs, our management-team on board have a nine-month track record of taking decisive actions to do just that. Shareholders have a critical choice to make in the coming days about the future of Cliff's and I urge all shareholders to carefully consider their vote.

With that aside, I would like to highlight some of the actions we took during the quarter to navigate through this challenging pricing environment. First, we worked with our banking partners and received unanimous support to amend our $1.75 billion revolving credit facility.

This amendment will enable us to continue making prudent decisions by enhancing our financial flexibility, the details of which Terry will discuss later in the call. We also announced an additional $100 million cut to our full-year CapEx outlook lowering our total expected spending by approximately 65% from 2013's full-year results.

The decrease impacts all of our reporting segments, with Bloom Lake and North American Coal representing 75% of the reduction. We will continue reviewing opportunities to further reduce our CapEx spending without compromising safety the environment ore production.

During the quarter we also reported decreased year-over-year SG&A and exploration expenses and lower cash costs per ton rates across all reporting segments, as well as reduced our cash cost per ton outlook for both APIO and Bloom Lake.

Based on my 30 years of experience in operating high fixed costs and capital intensive mining assets through previous commodity cycles, all of the actions we took this quarter and we'll continue to take if needed, will enable us to navigate this much lower pricing environment.

Looking to the end markets for our products, in China, demand for steel making raw materials has remained strong as crude steel production has increased by approximately 3% year-over-year.

As expected, the incoming seaborne supply for both iron ore and met coal has outpaced current demand, resulting in a year-over-year price decrease of 19% in iron ore and 30% in met coal. Specifically with iron ore one development that appears to be sticking is an increase discount for sub-62% iron products.

We believe this is the result of significantly more volume of low grade material being dumped into the marketplace by certain Pilbara iron ore producers.

Despite this, we are encouraged by China's second quarter annualized GDP growth of 7.5%, indicating that the demand for our products should remain steady as Chinese policies look to be on track to support this growth rate through at least the remainder of the year.

In the U.S., we expect the demand for our iron ore pellets will continue to be very strong for the balance of the year as steel producers catch up from the tough winter and will be supported by the broader improvements in the labor market, construction activity, and motor vehicle production.

Now, turning to the performance of our business segments during the quarter. In U.S. Iron Ore, the residual impact of the tough winter season resulted in second quarter sales volume decreasing 24% to 4.3 million tons. This volume decline was primarily driven by the delay in the start of the 2014 shipping season due to ice on the Great Lakes.

Vessels were required to have coastguard escorts in the second week of May, which is about half of the quarter later than in previous years.

Despite the late start to the shipping season, I'm pleased to report that we shipped nearly 3 million tons in the month of June and July shipments to-date are very strong, a clear sign in normal shipping conditions have returned.

Maintaining shipments even close to the June's pace for the remainder of the year increases our confidence we can reach our revised sales guidance of 22 million tons and restore customer inventories to adequate levels by year end.

Pellet inventories at our customers' steel mills remain tight, but they are improved from the critically low level seen in the first quarter. On the DRI front as we previously discussed, we continue to believe that this market will develop in the Midwest over the next three to five years and we will be the go-to-supplier of DR-grade pellets.

Although we cannot comment on any specific companies, we are encouraged by the number of parties conducting feasibility studies on Midwest DRI facilities.

We will continue to explore the right level of participation in this market, ranging from supplying DR-grade pellets from our Northshore facility to an equity-based joint venture if it meets our investment criteria.

Turning to Eastern Canadian Iron Ore, second quarter year-over-year sales volume increased 3% to 2 million tons and reflected Bloom Lake concentrate sales only. Bloom Lake's second quarter 2014 sales volume increased 33% versus last year's comparable quarter and was a record quarter for ton shipped.

Further, Bloom Lake sales volume increased 11% in the first-half of 2014 versus 2013. The second quarter sales volume increase was driven by improved production rates and the timing of vessel shipments. And this was partially offset by the absence of sales from our idled Wabush Mine, which shipped 0.5 million tons in the prior year's second quarter.

Over the last few months, we have been evaluating several strategic alternatives for Bloom Lake, ranging from possible equity partners to potential sale of the entire asset.

To-date, we have talked to a number of parties and we'll continue this process to find the best possible solution to maximize the value of the asset for the benefit of all shareholders. Not surprisingly the current pricing environment is challenging, but the quality of the asset in terms of product spec and expansion opportunities are attractive.

In the meantime, we are relentlessly focused on optimizing Phase I, which is demonstrated in our improved results quarter-over-quarter. We have updated the geotechnical data assumptions and compiled a new block model for Bloom Lake's orebody.

As a result of this new model, reserves associated with higher stripping requirements will remove from the long-term mine plan. While this slightly decreases Bloom Lake's reserve base and thus mine life, it has a very favorable impact on strip ratios and consequently costs.

The result is a life of mine strip ratio of 0.86 compared to a previous ratio of 1.30. Based on this new data, the team will also be revising the feasibility study for Phase II to better understand the projects new investment profile. The efficiencies from this improved pit design carryover into the processing plant as well.

This includes the modifications of the feed slurry distribution, improvement of screening efficiency, and installation of spiral repulpers to enhance water flow to name a few. Given all these improvements of Bloom Lake, we are expecting improved cash costs of below $80 per ton in the second-half of this year.

This is reflected in our lower full-year costs-per-ton expectation of Bloom Lake of $80 to $85 from our previous expectation of $85 to $90. I'm extremely pleased with our work the team has done in getting to this point, and I'm excited to tell you and to report to you on the execution of this in future quarters.

In addition to our lower cash cost, consistent product availability has allowed us to revise our full-year sales and production volume expectations to the higher end of our previous range of 6 million tons to 7 million tons. This includes approximately 750,000 tons from Wabush with Bloom Lake making up the remainder.

The additional sales tons from Wabush represents the residual inventory that will be sold in the third quarter. Turning to Asia Pacific Iron Ore, second quarter sales volume decreased 3% to 2.9 million tons from 3 million tons in the prior year's comparable quarter. This was driven by the timing of vessel shipments.

On the cost side, this operation just continues to outperform. The second quarter's cash-cost-per-ton results mark the operations fifth consecutive quarter of lower costs..

Now turning to coal, our second quarter sales volume decreased 2% to 2 million tons from 2.1 million tons last year. This was attributable to lower sales to certain customers due to lower demand for met coal, partially offset by increased low vol met coal exports and increased thermal sales.

As coal market conditions remain challenging, we continue to review our internal run versus idle cash flow analysis for each mine site, and we believe that idling Pinnacle Mine is increasingly likely given the current market conditions. As such during the quarter, we issued a warrant notice announcing a potential idle to our employees.

We will continue to monitor the pricing environment and must see constructive pricing emerge before we enter into discussions with customers for 2015 nominations. Based on this, we are revising our North American coal sales and production volume expectations to the lower end our previously expected range of 7 million tons to 8 million tons.

We do not anticipate any increases to our 2014 North American coal cash-cost-per-ton outlook if Pinnacle is idled. In closing, I'm proud of what our team has accomplished in light of the weaker pricing this quarter. We've gained tremendous amount of traction in controlling while we can't control.

Our capital budget has drastically reduced, costs are down, liquidity is up, and Bloom Lake is showing continued operational progress. We know how to operate and extract value from our assets and we've been doing it for 167 years. So with that, I will turn it over to Terry to discuss our financial results..

Thank you, Gary. I'd like to start by reviewing some of our new features of our amended revolving debt agreement, which will be in place until October of 2017. Given the declining pricing we saw during the quarter, we took proactive measures to manage our debt profile in order to enhance our liquidity.

On June 30, we announced amendment to our 1.75 billion revolving credit facility with the unanimous support of the lender group. The prior leverage covenant ratio of debt to EBITDA of less than 3.5 times was replaced with a debt to capitalization ratio of less than 45%.

Additionally, the amendment increases the current EBITDA to interest covenant – coverage covenant to a minimum requirement ratio of 3.5 times, a level we are currently well above.

Other changes include the establishment of a net leverage incurrence ratio related to dividend increases, share repurchases, investments and acquisitions, as well as the tighter restriction on the company's ability to issue priority debt.

Our ability to successfully execute this amendment without reducing the facilities borrowing capacity, increasing the interest rate, or shortening maturity reinforces the strength of our banking partner relationships, and the confidence they have in our current management team.

We also believe this is their endorsement of their underlying fundamentals of our long-term strategy. The primary benefit of this agreement is that it enables us to be more resilient and volatile iron ore and met coal pricing environments.

Despite the year-over-year decline in pricing, we ended the quarter with over $1.8 billion in total liquidity, a 20% increase compared to prior year's second quarter. This is the result of having higher cash balance of $360 million and lower amounts drawn under our existing credit facilities of $378 million.

In addition to the amendment, our continued success in cutting capital, overhead, and operating costs has been important to maintaining a strong liquidity position. Turning now to the P&L, consolidated revenues for the quarter were $1.1 billion, down $388 million from the prior year.

Lower market pricing impacted our second quarter revenues by $187 million with the remainder driven by lower sales volumes, most notably from the delayed start in the U.S. shipping season.

Cost of goods sold decreased 17% to $1 billion year-over-year, largely driven by the absence of $95 million in Wabush costs and $64 million related to slower sales volumes.

Consolidated sales margin for the quarter decreased to $92 million, which included $18 million and lower cost for market adjustments, $15 million of which related to our North American coal and then the remainder related to the Wabush inventories.

Our second quarter SG&A and exploration expenses were $56 million, excluding severance and proxy contest-related costs, second quarter 2014 SG&A and exploration expenses decreased $15 million, or 24% when compared to the year ago quarter.

Our second quarter miscellaneous net expense increased to $48 million and included $25 million in the Wabush related costs, $14 million related to the minimum take-or-pay volume commitments with the QNS& rail line as a result of our Bloom Lake's delayed expansion and $11 million related to unfavorable foreign currency exchange re-measurements.

Excluding some of the special items incurred during the quarter, EBITDA from our core operations was approximately $195 million. Second quarter 2014 results included an income tax benefit of $69 million versus an expense of $9 million reported in last year's second quarter.

The increase was mainly attributable to the operating loss in the quarter versus operating income in the prior year's second quarter. The magnitude of the tax benefit was driven by the accounting around how to record taxes when your interim period year-to-date loss is larger than what you expect full-year results will be.

This was primarily driven by the normal seasonality in our business and the weather's impact on the U.S. shipments during the first-half of the year. We still expect our cash tax rate to be approximately 24% for the full-year.

Turning to our business segment performance, revenues-per-ton decrease in all of our four business segments year-over-year primarily driven by 19% lower market pricing for iron ore and reduced market pricing for met coal. As expected, on a percentage basis, the decrease in U.S.

sales revenues-per-ton of 3% to $106 was the smallest compared to our seaborne expose iron ore segments. This was largely driven by long-term supply agreements that help to mitigate seaborne iron ore price volatility.

In addition to lower seaborne pricing, we realized lower pricing from certain customer contracts, which was partially offset by a favorable customer mix. In ECIO while revenue-per-ton decreased 21% to $87 per ton, Bloom Lake's revenue-per-ton only decreased 15% year-over-year.

ECIO's prior year revenue-per-ton included pellet premiums associated with Wabush's product. At Bloom Lake, the impact from lower market pricing was partially offset by the favorable effect of light pricing from Japanese customers of approximately $8 per ton.

Also Bloom Lake realized approximately $9 per ton for its premium iron content during the second quarter of 2014. In APIO, revenue decreased 26% to $80 per ton.

In addition to lower seaborne market pricing, revenue-per-ton was unfavorably impacted by more contracts being priced at the point of discharge versus loading, as well as foreign exchange hedging losses and higher freight rates. Also APIO realized an $8 per ton lump premium during the quarter, which makes up approximately 50% of its volume.

For our updated full-year revenue-per-ton look, we are using the year-to-date average iron ore price of $112 per ton as the underlying seaborne iron ore assumptions. In USIO, we have maintained our expected full-year revenue-per-ton range of $100 to $105.

The revenue sensitivity for every $10 per ton change in Platts seaborne iron ore pricing for the remainder of the year is approximately $1 per ton impact to our expected USIO revenue realization.

We are lowering both ECIOs and APIOs revenues-per-ton expectation by $10 per ton to $85 to $90, this decrease is largely driven by the lower year-to-date average iron ore price and a lower iron ore price assumption used for the reminder of the year.

Also ECIO's revenue per ton outlook excludes the expected increase in Wabush sales volume, which is currently selling at lower rates and higher discounts. APIO's outlook reflects the new market discounts of about $6 per ton that Gary mentioned earlier.

For North American Coal we are lowering our full-year revenue-per-ton expectation by $5 to $75 to $80 per ton, reflecting a lower market pricing for met coal. We currently have approximately 76% of our sales volume priced at approximately $80 per short ton at the mine.

Our segments cash cost results which Gary mentioned earlier were lower across the entire business. In USIO, second quarter cash costs were $67 per ton, down 1% from the prior year's comparable quarter. This was driven by the absence of idle costs at the Empire and Northshore mines which were partially idled in the second quarter of 2013.

This was slightly offset by increased energy rates and higher maintenance costs. For the full-year we are maintaining our cash cost expectation in USIO of $65 to $70 per ton. Second quarter cost in ECIO were $87 per ton and reflected a cost from both Wabush and Bloom Lake mines.

Bloom Lake's cash costs were $84 per ton, compared to $87 per ton in the prior year's comparable quarter. The per-ton decrease is primarily of result of favorable foreign exchange rate variances and the reduction in spending on external services.

This was partially offset by the impact of expensing approximately $8 per ton related to the west pit mine development during the second quarter of 2014 versus capitalizing these similar costs in the previous periods. In APIO, second quarter cash costs were $53 per ton, down 16% from the year-ago-quarter.

The decrease was primarily due to improvements across the operation including pit redesigns and overhaul of the mobile maintenance strategy, mining efficiencies and logistics costs, as well as the favorable foreign exchange rate variance of $2 per ton.

In our North American Coal segment, cash costs were $83 per ton, a 6% decrease from the prior year's first quarter and included $7 per ton in lower-cost-or-market inventory adjustments. Excluding this cash cost per ton decreased 14% to $76 which was driven by a continued focus on improving operating efficiencies.

We are maintaining our full-year cash cost per ton expectation of $85 to $90 per ton. On a consolidated basis we successfully reduced our second quarter capital expenditures by $210 million or 77% to $61 million.

The decrease was primarily driven by lower spending at Bloom Lake where the team remains very focused on extracting value from the operation's first phase. For the full year we are maintaining our recently lower capital expenditure outlook range of $275 million to $325 million.

We are also maintaining our expectation for full-year SG&A and exploration expenses of approximately $200 million excluding severance and proxy contest-related costs. In closing as CFO, I have continued to be impressed by the team's ability to deliver year-over-year cost savings.

Every quarter it seems like we're finding more ways to lower our overall cost profile. Looking ahead, I assure you that these cost cutting and asset optimization efforts will continue and we will successfully navigate business through the volatility and uncertainty. With that, Jess, I think we're ready to open the call for questions..

That concludes our prepared remarks for today's call. Michelle, please open the lines to begin our question-and-answer session..

(Operator Instructions) Your first question comes from Brian Yu from Citi. Your line is open..

Great, thanks. Good morning, Gary, Terry. I got a question just regarding your earlier comments on the strip ratio and how you revised life-of-mine plan. So, relative to the point of your fixed average, where are you guys now and where do you plan to be in the back-half of the year? Is that a contributing factor to taking cash cost below $80 a ton..

Yes. It's actually one of the biggest drivers, Brian. We start off the year just above $2 by the end of Q2 we're down at $1.6. The majority of the knock-down actually is into the second-half of this year where we'll be around $0.9 on strip. That's a big impact on a yearly value.

You're looking at about – on a year-over-year basis about 20 million tons of differential..

Okay. And then second question also on Bloom is that, as you look at where you could cash costs down to – price realizations tend to be somewhere around $25 give-or-take below IODEX index.

And then you've also got sustaining CapEx, is there a level that you guys have in mind where Bloom Lake could break-even on a free cash basis, in terms of the iron ore price, that would make you to kind of continue press forward with the mine..

Gary Halverson:.

So, again, I think just to put it in a nutshell we're just driving those costs down and keeping that capitalized level to a minimum and driving that forward..

Okay. Thanks..

Your next question comes from Timna Tanners from Bank of America Merrill Lynch. Your line is open..

Yes, hi, good morning..

Good morning..

Hey, Timna..

I wanted to just make sure I understood why the lower-end of volume, the U.S.

Iron Ore guidance and the higher-end of coal volumes given the potential closure of Pinnacle?.

Yes, the….

Usually at the lower-end of the coal volume..

Okay. But they didn't fall further, I guess, I was surprised. So is there any guidance on that? Is the iron ore in the U.S.

because of exports or is it because of domestic mills?.

Kelly?.

Yes, well, I think importantly we reaffirmed a bit at the low-end of the guidance but based on where we're seeing sales volumes in June and what we've seen so far in July we're very confident that we can meet the sales volume expectations that we've set out.

We'll still have little over 0.5 million tons of export but we're going to also keep the option if we can place that with some of our domestic customers. We'd certainly prefer to do that..

And as Jessica pointed out, Tim, on the coal volumes, it's really as a result of, we were at 7 million tons to 8 million tons and as a result of the idling of Pinnacle we're going to the lower end of that range at this point..

Okay..

Yes, you can imagine, we have inventory on the ground, so even if we do idle pinnacle we could sell out of the inventory of Pinnacle Mine..

Got you, okay. Just wanted to clarify that. Then my only other question was on, the U.S. Iron Ore segment which is an important part of your company.

There has been some developments, let's say, moving from potentially four customers to three with AK and Severstal looking to consolidate, and also some weakness with the recent filing from Algoma, so I'm just wondering if you could comment on your customer base?.

Sure, Tim, it's Kelly. I'd take the second one first. The Algoma filing actually we see that as an incremental positive. We've been working very closely with Algoma all year, given their challenged financial condition.

But the filing that they made which is really the firm up there, new capital structure, importantly doesn't reorganize or restructure our supply contract so we really think what we'll resolve is a healthier Algoma post-financial reorganization. So, again that's net of positive..

:.

Okay. Thanks..

The next question comes from Mitesh Thakkar from FBR Capital Markets. Your line is open..

Good morning, everybody..

Hi, good morning, Mitesh..

Good morning..

Just – you have made some progress with respect to Bloom and redoing the mine plan and improving the strip ratio and if you gave some color around reduction in the mine life.

Can you quantify that how much reduction in mine life are we talking about? And when you think about from a long-term cost perspective, iron ore prices have been coming down, and so the target is kind of little bit moving towards the lower end, how should we think about that, and as you put long-term cost into perspective?.

Sure, the net effect on the reserve base is on the order of 20% overall, so we were in 30 plus years on structure. So you could factor it down by that. I think the more important thing is it's fairly significant when you talk about a reduction over that time period of about 20 million less tons per year, on the order of $3 a ton.

It's pretty significant and combine that with other optimizations that we're doing, we do want to drive that number into the lower end of the – in the $70 to $80 market. So, are we done yet? No.

There is a number of other changes in optimizations that we'll look at and then the true unlocking of the value of this for the long-term is really about the partnering process and how we can take on the extra volume capacity knowing we have a high fixed overhead cost.

So as we get into that and unlock that value, that continues to drive down the pricing. That's how I look at it..

Great. And just looking at Australia again, you guys lowered the cost expectation there too. Can you fill in some of the buckets, how should we look at that $5 or so of change? How much of that is royalty and how much of that is changes to the maintenance and stuff like that..

Well, it's a combination. Majority of that was related to the optimization and that's been carrying on since we opt our profile there to 11 million tons per year as an annualized rate.

So lot of the change is again focusing on the open pit design changes and really steepening wall angles, reducing amount of material that we're moving and stockpile management has helped us to get a more consistent product and make sure that we're hauling the right materials.

Also our development – simple things like where original design work was for a two-lane haul road, we're going down to a single haul road with passing lanes and those things all just start adding up as you think differently like that and the other one was really we had set this up as a region.

It's set up now as a single mine and with that mine there is a – everybody is focused on the operational side. So there's – the overheads have really come down over the last six months.

I don't, if you have more, Terry?.

No, I think that's right, Gary. I think from a royalty perspective obviously as price comes down, it has a little impact, but the majority is what Gary talked about..

So is it fair to say. I'm sorry, go ahead..

Those $2 a ton of FX….

Favorable rates, well….

Yes..

Yes, is it fair to say most of these changes where you made a sustainable both in Australia and in Canada?.

Well, definitely. Yes, this is for like a mine, we're doing these changes, we're redesigning a pit optimizations, we're also heading into the U.S. operations and looking at some of those same features as well.

It's a common look at how we run sequencing of pit designs and updating those with current cost information as our pricing information allows us to continue to optimize those pits..

Perfect, thank you very much guys and good luck..

Thanks..

Thanks..

Your next question comes from Sal Tharani from Goldman Sachs. Your line is open..

I want to just go on your U.S. capacity, you have a long-term contract with AK Steel, Severstal, Algoma, and ArcelorMittal one contract I believe has been the rollover for couple of years and then one is coming up.

I was just wondering if all these contracts remain in place, what is – what capacity are we looking over the next few years, are you – if the demand increases, do you have capacity to raise your production in the U.S.?.

Yes, I'll speak. I mean, we've increased our capacity from 2013 to 2014 with the expansion and bringing our lines back on at certainly at Northshore and then the other one being Empire back online and depending on how we look at Empire with, the current plan is to run that into the 2017.

But along with that, there are different opportunities that we can take advantage off with our partners, but more detail maybe Kelly you can share that..

Yes.

So I mean, I think the other way to look at it is really where we do we end up in terms of mix going forward and where we place times and that's to say, we are looking still very optimistically at the DR pellet opportunity, which in due course we'll provide an option instead of placing tons in the export market, which is – which will be critical given where pricing is at, it’s a better economic equation to look at that.

So, I think it’s really – we'll focus as much as on where we best optimize the placing of the tons given our ample capacity..

The DRI, the BlueScope DRI project was canceled.

I'm wondering, when you talk about DR pellets, these for the existing plants which are either in the construction already running in the U.S., or are you talking to the new clients who maybe opting to go DRI route?.

Yes, more focused on the going forward and as you might guess, we're not going to comment on any particular opportunity, but I think the common denominator with all of the folks that we could be talking to is that, the question will be the go to iron ore supplier and question is whether we have simply DR-grade pellet supply contract opportunities or whether if the investment return criteria is right whether we might participate in a DRI through an equity JV, but those will be driven most importantly by capital allocation criteria and when the right option comes forward.

But certainly, we are talking more fully looking with all rather than the current players that are out there..

Yes, I just add to that. We are proceeding with our feasibility work on the conversion of our plant at Northshore to be able to be in a position where we want to make sure that we're in a lead position that people want to go to..

And one last if I may.

In Canada, until recently the talk was that Phase I is not feasible without Phase II, are we going to not think about Phase II at all, or is that just all the improvement you are doing is in a way that you are thinking of Phase I as the ultimate level where you are going to reach in terms of production and so forth?.

Yes, I described Phase I as something we haven’t optimized yet. And all the optimization that we put into Phase I actually improves the economics and the ability to drive Phase II numbers even better.

That’s both on the capitalization until we challenge people to improve what they have and understand the orebody, all those things that we gain on Phase I are totally transferrable into the Phase II thought process. So that’s how I tend to look at that..

Okay, great. Thank you very much..

Thank you..

Your next question comes from Tony Rizzuto from Cowen and Company. Your line is open..

Thank you, and good morning, everyone..

Hi, Tony..

I just want to follow on at similar line of questioning if I could.

So just looking at Phase I longer-term Gary, where do you think you can drive costs at Bloom Lake and what would be some of the bigger baskets there?.

Yes, we're – I mean, we're looking at, in the 70's we've – for us as I described the one big pieces on the order of $60 million that that translates into about $10 a ton just by itself, a number of the other inputs that we're still driving have the capability of another let's say $5 a ton..

So, there is a lot more to take advantage of, it’s going to come in a sequence, and I've got the guys just focused on Phase I and the capital work we're doing and the amount we're spending is, we're achieving our goals that laid out in front of us for this year..

Yes, Tony, I might just add from a commercial standpoint. We continue to be impressed with the appetite for trial cargoes out of Bloom Lake both in the Europe and Japan as customers are increasingly looking for that higher Fe content product.

So, again, I think the commercial appetite will be there when the project in the cost profile and the capital all match up..

Kelly, you think that, I think I heard you guys mentioned, you had an $8 pits on premium for your grades, I think your grades what at Bloom Lake is 66%, is that sustainable, could we even see that maybe a inch higher going forward based on some of the conversations you are having?.

Yes, Tony, actually it was $9 in the quarter, but….

Okay..

Yes, I mean, I think what you are saying or clearly saying the pressure as we saw at APIO with the sub-62 grades, the 58 grade kind of product is where the supply demand equation is being aggravated, but the 58 and the 66 that spread is, we think it’s going to continue.

We think there is a global degradation of quality out there and the Bloom product can be that that sweetener if you will to optimize some of the blends to offset some of the lower grade stuff. So in short, yes, we think that that spread differential should continue..

All right, great. And I was very intrigued by the comments Gary that you were making on Australia, and a lot of the things you are doing there, pit optimization and stockpile management going to smaller lane haul road profile, et cetera.

In the past you guys have talked about the potential opportunity to extend the reserve life there at relatively low CapEx.

I'm just wondering, can you bring us up-to-date with that status and what you see is some possible opportunities at low capital cost?.

Yes, the – we did extensive exploration drilling. And as of the end of last year, we had six years of mine life at Koolyanobbing, and that that’s still the case today. It does test the system in this $90 to $100 price environment, so our focus is really been on taking those numbers down and knocking the overhead on the head, which is going good.

We've done a lot of drilling and we don’t see a lot of upside potential given where we are at today..

Okay. And just one quick final question if I may, North American coal has been kind of a flurry of M&A activity going on. You've got your cost kind of right-sized, maybe, not a whole lot you can do from this point.

Coal mark is kind of at the bottom right now, but is this is a time, maybe a little bit more amenable to possibly testing the waters?.

As we continue to say, we believe our assets are great. We continue to push the cost curve down on what we control. We're in the lower third in the domestic cost profile of producers. A lot of other producers are swimming in deep water..

Yes..

But in terms of selling the assets at the low end of the commodity and we've see it technically bottomed out, we're seeing it lag on. We've seen 10 million tons to 16 million tons of announced product, 17 million I guess now that is supposedly coming out of the market. I want to run that to the upside, Tony.

I don't believe the – right now, there's bottom feeding going on and fire-selling things is not, that's not under – where we're at today, I'd rather preserve the asset and we want to – that's why we're talking about Pinnacle idling; it's worth more to us, we believe..

Yes, you Tony….

I hear you, Gary. Certainly understood..

You can see what Severstal – hey, Tony, you can see what Severstal did recently with recently with their coal acquisition what they just recently sold versus what they have bought it for and you can see, it's pretty low realized price..

Very, very, good. Thank you very much, guys..

Thanks..

Thanks..

Your next question comes from Kuni Chen from UBS. Your line is open..

I guess, Gary, just to start off, quick question on Bloom Lake. You have your data room open, and I guess, you're in a number of discussions this year.

You could just update us on how that process is going and I think you had mentioned that you'd potentially look to making the announcement on what happens with Phase II by the end of this year, is that still the right time frame?.

As you can appreciate, Kuni, it's been a tough environment with the huge drop in the iron ore seaborne pricing. It's not helping us one bit and then obviously with the shareholder activism creating uncertainty into the headwinds you already have that doesn't help us at all.

So we – we're having those discussions, we're also not going to give things away. So we're focused on the Phase I improvements and it is going to take what it takes to progress this thing..

Okay. Understood. And I guess just moving on to the coal side of the equation, if you could talk about any – severance or idling cost with Pinnacle if that goes forward. Also talk about maybe how long to restart the mine and what met coal price you would need to bring it back.

And then just lastly can you kind of contrast Pinnacle versus Oak Grove and these are both longwall mines, wouldn't they be similar from a cost perspective? Why not idle that one as well?.

So, Kuni, let me – this is Terry. Let me cover the idling cost, and we believe the idling cost from $40 million to $45 million on a full-year basis. So you look at that and looking at probably $10 million a quarter from an idle perspective.

And then from the standpoint of – the longer it sits idle the more challenging and more costly it becomes from the standpoint of restarting it up. So, that would be sort of the cost impact with the – for a Pinnacle idle. And it will be pretty similar if we did something at the Oak Grove if we would idle that facility as well..

Yes, just a comment. Pinnacle is setting some world records. On the one hand we were seeing some impressive unit costs out of Pinnacle.

The side that we're having issues with is where that product gets placed and the – it's got our lowest placement in terms of contracts and lot of that material goes into Asia and that's where we're suffering both on shipping in the types of contracts we'd have.

So the opportunity for that is really to look at and that's where we talked about commercially how we can improve ourselves into the 2015 nominations. That's one of the big drivers for this property. Oak Grove, again they're both longwall. Oak Grove has a better – I call it quality product that has a higher percentage sell into our typical marketplace.

And so it's in a better spot but we continue to look at both Oak Grove and Logan County, but every product we produce has different customer bases and it's a bit of feeding those feed sources and then looking at opportunistically taking some better customer contracts going forward. Maybe, Kelly, you can….

Yes, just quickly from a commercial standpoint, I mean, if we proceed and idle Pinnacle one of the things that we're going to be looking at as we move into the fall customer nomination season, one, we would start typically negotiating for 2015 contracts. We got to see some constructive movement in terms of pricing.

Now, we have seen few domestic customers indicate that they may come out earlier than sort of normal to seek pricing for 2015. So we're going to be looking at that closely. And again if we see enough constructive movement that – we can net-back to something that makes sense economically than we would bring Pinnacle back up if we idle it.

But if we don't see that constructive market condition then the better use of the asset is to idle it..

Okay.

And then one last quick one if I may, just on the 24% of the coal that you have un-priced if you could just speak to the type of grades there?.

It's all net..

(inaudible)?.

It's a mixed bag, Chen..

A mix of both..

Okay. Thanks..

Your next question comes from Nathan Littlewood from Credit Suisse. Your line is open..

Yes, hi, guys. Congratulations on the good set of operational numbers here, same about the iron ore price, but you can't help that. Look, I was just curious in exploring these product pricing differentials a little bit more and your comments on them. I was wondering if you could talk about the ability that you may have to sort of capitalize on that.

Do you, for example, have the ability to actually increase the iron content of what you're selling from Bloom Lake or the Asia-Pac business at all, and how are you thinking about the investments in capital or operating costs that that might require? Maybe, in answering that question you could also just touch on what is the current head-grade going into the Bloom Lake plant and also the mass recovery would be useful..

Gary Halverson:.

Grade right now, I would have to get to that number, I don’t have it right in front of me. It's around 30% but I'll confirm and get a physical number to Nathan later. Kelly, you want to….

Yes, Nathan, as we talked earlier, I mean, we saw $9 a ton in the second quarter and expect that $2 to $2.50 [ph] a ton per Fe unit to continue, and as Gary said, particularly when you're looking at Japanese steel mills, not only they being high Fe content but they're also very focused on silica levels.

But to get that right spot it's – we can I think serve a real niche in the market. There's obviously a lot of supply pressures out there, but our goal is to not be the largest supplier of any one of these Japanese mills, but be the complementary supplier of this sort of sweetener product..

:.

:.

Okay. So, I mean, I get this sort of market dynamics. What I'm more interested in is what you may or may not be doing to actually change your product specs. So I use, for example, looking at raising the iron content of what you sell out of either of these assets in order to sort of capitalize on what you know, they're pretty big spreads at the moment..

Yes, the way the circuit is configured, we're fixed on trying to optimize the tonnage throughput at 66% iron content. And that's the top-end for us and that's we're improving on the overall recovery of that. But 66% is a high-end, you start dropping off recovery rates pretty dramatically going above that.

And then your – if it's the contaminate level of silica in there that's – we got to meet that spec as well..

And the capital requirements that eek [ph] out an incremental amount, additional Fe probably wouldn't make sense from a capital allocation standpoint..

So, now….

Okay. That's exactly what I was after, thank you. The other question I had was just on the U.S. iron ore volumes, as you guys are probably aware we look at sort of activities on the Great Lakes pretty closely. And we now benchmark your tonnages for the quarter against what the boarder industry was doing..

:.

No, I think we got more than ample leverage if you will in terms of making sure our tons move, we work hand-in-hand with our customers during the – well, certainly first quarter and well under the second quarter but our – again our optimism in terms of shipping volumes for the balance of the year really build off of a very strong June and an equally strong July that would suggest on a pro-rata rate we should be able to meet our shipping targets in terms of moving volume.

So, I don’t think you can read much more than that. So it's….

Okay. Just finally with respect to Eastern Canada and U.S. iron ore, there's obviously been some pretty big differences recently between the sales or the ship tonnages and also the production numbers.

Could you just provide an update on where inventories currently sit at both of those assets? And looking forward should we be expecting sort of inventories that needs to be going up or down?.

Yes, Nathan, this is Terry. From an inventory standpoint I think other than the USIO business we're at a normal seasonalized level. As a result of only shipping perhaps the quarter we're probably up, what were shortfall in our volume may be $1.4 million tons of inventory at the USIO business. Other than that I think everything is in normal range..

Okay. Fantastic. Thank you very much..

Thanks..

So, we'll take one more question..

Okay. Then your final question comes from Aldo Mazzaferro from Macquarie. Your line is open..

Hello, can you hear me all right?.

Hello..

Yes..

Yes..

I am..

I was just wondering on, back to the issue on Casablanca. If you get a less than a majority stake of them on the board is there a risk that you just end up in gridlock and nothing happens? Or maybe you could just kind of detail what exactly is it that you would do? You say you don’t want to sell the assets.

I'm just wondering what strategy you might pursue if you get to the point where iron ore prices don't recover. And then I have a second question on Bloom Lake, if I could..

Yes, just with Casablanca. I won't speculate on specific results. However, like we said the shareholders are voting the white card. Casablanca will get four seats and the dynamics of the board will have changed.

So the majority of the board will have been known [ph] and it opens up a full and dynamic discussion on everything we do in these challenging times. So we look forward to those dynamics being put out to come up with the right values for driving the business forward for our shareholders..

Okay. If I could just ask quickly on Bloom Lake II, I saw you reduced your cash cost pretty nicely year-to-year.

Has there been any change in the cost of transport to the port or what is that running still, $25 or so per ton or is that a good ballpark estimate?.

The shipping – the rail contracts – a good rail contract that we have and then the port structure of our shipping to Asia. I think that's a good number to use….

No, I think the – mine to the ports is probably in the $13 to $15 range and then there would be handling charges. But it's lot lower than that $25 and then these shipping costs from Port of Sept-Îles over to Asia is probably in the $25 to $30 range depending on what the markets working on..

All right, thanks very much..

Thanks, Aldo..

Good luck. Okay..

So, just thanks for that. But I'd like to thank everybody. And really to just to conclude, our board and management team are really focused on our plan and they really enabled us to weather the current downturn and really emerge from this cycle as a stronger company.

And really the future of this company is really in the hands of all of our shareholders and I encourage all shareholders to vote the white proxy card so we continue our current momentum to protect and enhance our shareholder values over the long-term. So with that thank you very much..

Thanks, everybody..

Thanks..

Thank you, everyone. This concludes today's conference call. You may now disconnect..