P. Kelly Tompkins - Cliffs Natural Resources, Inc. C. Lourenco Goncalves - Cliffs Natural Resources, Inc..

Michael F. Gambardella - JPMorgan Securities LLC Anthony Young - Macquarie Capital (USA), Inc. Matthew Fields - Bank of America Merrill Lynch Evan L. Kurtz - Morgan Stanley & Co. LLC Anthony B. Rizzuto - Cowen & Co. LLC Lucas N. Pipes - FBR Capital Markets & Co. Brett M. Levy - Loop Capital Markets.

Good morning, ladies and gentlemen. My name is Melissa, and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources' 2016 Third 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.

The company reminds 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 the company 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. The company will also discuss results, excluding certain special items. Reconciliation for Regulation G purposes can be found in the earnings release, which was published this morning. Thank you.

At this time, I would like to introduce Kelly Tompkins, Executive Vice President and Chief Financial Officer. Please go ahead..

Thank you, Melissa, and thanks to everyone joining us on this morning's call. I'm joined today by our Chairman, President and CEO, Lourenco Goncalves. I'll lead off the call with a review of our third quarter results and related financial commentary before turning it over to Lourenco for his remarks.

This quarter's financial results reflect the solid execution of our operating plans in both the United States and Australia. Starting off with the review of the U.S. Iron Ore segment, we had a very eventful three months.

During the third quarter, we indefinitely idled the Empire mine, restarted our pellet-making operations at United Taconite, began construction activities related to producing the Mustang pellet, renewed our labor contract with the USW and signed a new agreement in Michigan that will provide us with clean and cost effective and highly efficient electrical power for the next 20 years.

Our production volumes and costs were in line with full-year guidance. As we expected and as was accounted for in our guidance, costs were up slightly during the quarter.

Gas production cost of $56 per long ton during the quarter was higher the than year-to-date average of $50 per long ton, given the restart of United Taconite and seasonally higher maintenance activities at Tilden. These activities were predicted and expected. As our analysts and investors are aware, we provide our guidance on a full-year basis.

And in that regard, we are pleased with our year-to-date cash production cost averaging at the low end of our $50 to $55 per long ton range. On the revenue side, I noted on our last quarter call that we expected to see a dip in our USIO realized rate due to anticipated customer mix.

With this quarter's reported rate of $74 per long ton, our year-to-date average revenues per ton are now more in line with what we have guided to in previous releases. From a sales volume standpoint, we sold 5.3 million long tons of pellets during the quarter and generated nearly $100 million in free cash flow from inventory reduction.

Segment adjusted EBITDA was $65 million, which included $8 million of idle expenses at Empire, which are reported in miscellaneous net. We expect a similar expense related to Empire in the fourth quarter.

Furthermore, as previously outlined in our Form 10-K and 10-Q, since early 2015, we have been involved in various proceedings before the Federal Energy Regulatory Commission, or FERC, including a dispute as to whether the reallocation of power costs for our Michigan operations in 2014 and 2015 can be applied retroactively.

Due to an administrative order from FERC in late September, supporting these retroactive surcharges, we booked a $12 million non-cash charge in USIO misc net as a reserve for this potential exposure. We are highly confident that our feel of this ruling will ultimately be successful and feel that this exposure will be mitigated.

Nevertheless, we must follow the appropriate accounting practices and book the reserve at this time. Our full-year sales volume forecast of 18 million long tons remains unchanged, implying approximately 6.5 million long tons of sales in the fourth quarter.

As long as shipping on the lakes is not prematurely slowed, this should be an achievable target given prior year volumes in the fourth quarter. We also anticipate another 1 million-plus long tons of inventory reduction in the fourth quarter, implying another nearly $100 million in working capital-related cash inflows.

Now moving over to APIO, a relatively stable IODEX in the $55 to $60 range resulted in $24 million of adjusted EBITDA in the quarter. Our operators in Australia were able to reduce year-over-year cash production costs by 3% to $26 per metric ton in spite of some headwind from the strengthening Aussie dollar.

For the full year, we are maintaining our Australian cash production cost guidance of $25 to $30 per metric ton, and our cash cost of goods sold expectation of $30 to $35 per metric ton. As the IODEX holds in the mid- to high-$50s and our operators continue to tightly manage costs, this business will continue to be a strong cash flow generator.

Total cash capital spending was $26 million during the quarter as we begin to use capital toward the build out of the Mustang pellet project. Our capital expenditure budget for the full year remains at $75 million. SG&A expense was $31 million for the quarter, which was above our full year run rate and higher than what our full year guidance implied.

This was primarily due to the fact that as part of our contract extension with the USW, we included a signing bonus totaling $4 million. Excluding this onetime expense, we were within our previous SG&A guidance of $100 million. Our full year SG&A guidance is now $104 million, reflecting this onetime item.

We ended the quarter with $132 million in cash and $247 million in ABL capacity net of letters of credit for a total of $379 million in total liquidity.

The major liquidity events this quarter were the receipt of proceeds from the common share offering which closed on August 16, and the corresponding repayment of the 2018 notes, which was funded primarily with those proceeds. So with that, I'll now turn the call over to Lourenco..

dig high iron content or crush it and ship it. However, as the high content ore in the United States began to disappear, Cliffs had to evolve by pioneering the process of beneficiating taconite into high quality iron ore pellets.

As the steel mills started to use pellets instead of sinter, the American steel industry became more efficient and more environmentally friendly. Now with the steel industry in the United States readily moving toward a different method of production, we need to evolve again.

I believe that DRI-fed EAFs is the future of steelmaking in this country, and Cliffs will play an active part on this process as well. We have made great progress on this so far, as at our Northshore mine, we have reduced and continue to produce DR-grade pellets for shipment to our client in Trinidad.

Cliffs' DR-grade pellets continued to perform exceptionally well in the customers' DRI facility. Unfortunately, this current arrangement can only bring us so far, due to the logistics disadvantage of going out the St. Lawrence Seaway and into the Atlantic Ocean.

Simple solution? We need a DRI facility in the Great Lakes and there are many EAFs that are eager to use DRI HBI as their feedstock. We have been exploring this option with potential partners and are encouraged by the progress we have made.

This is absolutely our next logical strategic stake and I will not stop in the next few years, until we are there. In closing my prepared remarks, I just want to acknowledge the Cliffs team for all we have accomplished in the last two years. Every single thing that the naysayers believed would be the end of Cliffs we took care off at the right time.

Like I always said, we would if we stay together and execute with great commitment and discipline. To my teammates, thank you very much for your great work. As we move forward, I know more obstacles will come our way. But I also know that we will take care of those just the same way.

Now before I get into Q&A, I have a couple comments on the other press release we issued earlier this morning. I am pleased to announce that Eric Rychel, Chief Financial Officer and Treasurer of Alaris, an aluminium producer headquartered here in Cleveland, has joined our Board of Directors.

I consider Eric to be one of the sharpest financial executives in the overall metals industry. Eric will not only strengthen our Boards financial depth, particularly in the capital markets arena, but he also brings highly relevant industry experience to the table, giving his many years as an investment banker in the metals industry.

I look forward to working hand-in-hand with Eric and the rest of the Board as we chart the future of Cliffs. With that, I will turn the call over to the operator for Q&A..

Thank you. Your first question comes from the line of Michael Gambardella from JPMorgan. Your line is open..

Thank you and good morning, and congratulations again on all the work on the balance sheet and on the operations, Lourenco..

Good morning. Thank you very much, Mike..

I have a question, what's the status of the Minnesota mineral rights that you were trying to get from SR?.

Mike, the mineral rights are still tied in proceedings of Chapter 11 with the criminal enterprise called SR Global, where this criminal enterprise has two branches. One is the Canadian family and the other one is the Minnesota mob. And these fellows are dealing with the Justice Department and also with the Chapter 11 Court in Delaware.

So these things take time but we know how these things end. The good guys also win. So we are going to get there.

We're on the ground and we have the support of the Governor Mark Dayton, we have the support of Senator Amy Klobuchar, we have the support of Senator Al Franken, we have the support of Congressman Rick Nolan and we are at the side of the good guys. We will get it. It'll take time..

Great. And one more question.

Just could you expand on your comments about the service centers taking a big risk on buying unfairly traded imported steel?.

I will be glad. These trade cases right now, Mike, are not the trade cases of the past, are not Section 201 and they are not something that will go away easily. On top of that, we have the ENFORCE Act. On top of that, we are expanding the definition of circumvention.

We are a lot smarter today to how these countries play and how they try to play with the laws of the United States. So we have a lot of safeguards and a lot of ways to enforce these trade cases. In one portion that hasn't been used yet is going one step beyond the importer of record.

There are a lot of service centers that hide behind the importer of record. And they buy because someone took the import risk and every now and then a trader gets burned. Well, it's like receiving stolen goods. Even if you have an invoice you are still receiving stolen goods. At this point, dumped steel is illegal stuff.

If you are a service center, your business model is based on buying illegal stuff, you are putting yourself in a situation that can be very, very dangerous for you, for your business and for yourself as an individual. We are getting evidence, and of course we are not going to hit a lot of people, we're going to hit just two or three.

You don't need to – when you are running from a lion, you don't need to be the fastest you just need to be faster than the other guys. So we're going to get the slowest guy, one more or two, but this is coming. And on top of that, I see a lot of service centers working with inventories below two years. That's crazy – two months, I'm sorry, two months.

You can't operate a service center business with inventories that low. Service centers are in the business of carrying inventory. If they don't want to carry inventory, they're in the wrong business.

So as prices start to go back up, even the guys that are not doing anything illegal, they are exposing themselves to price appreciation that can be extremely bad. So these are the main things about the current situation in service centers. Service centers provoked the weakness of prices one more time.

This time around, because of the type of steel that's involved in the pressure on prices, the illegal stuff, I envision a couple service centers or three being hit hard by the force of the law.

One last thing is that there's a couple of guys being very vocal about the fact that the import goods produced abroad are starting to come to the United States to compete in the marketplace. I will say just one thing about that. We know about that and we are paying a lot of attention to that.

Just don't use that to justify buying illegal stuff because that will not fly. I hope I covered the service center thing..

Yes. That's great, Lourenco. Thank you..

Well, I have a question for you. Not a question, just a quick comment. Our APIO costs were extremely within the guidance. We don't control your model, we don't control any model. And if your model is tighter than the guidance and we miss, but we guided, we can't tell you the number. We will never do that. We will never do that, as you know, Mike..

Sure..

But our costs were within the guidance in the APIO. So we did not miss the APIO cost. But we missed against the model, and because the model was tighter. And it's not your case, Mike, but we have situations here that there is one research analyst that had an EBITDA for the quarter of $132 million and a price target of $2, so it's impossible.

It's irreconcilable. We can't get there, because if I need to make $500 million a year or more and my price target is $2, it's just a trap to miss. So....

Yeah..

I think you understand what I'm saying. So I just wanted to clarify that we did not miss any numbers. Our guidance are yearly numbers. We do maintenance. That's the reason we are not Samarco. We do our maintenance the right way.

Every now and then we're going to have a quarter that we're going to have to spend more money here in the US and were exactly like this quarter was. But the guidance for the year is bulletproof and it was all predicted, there was no surprise, no bad performance..

Okay. Thanks, Lourenco..

All right, Mike. Thanks..

Your next question comes from the line of Anthony Young from Macquarie. Your line is open..

Good morning and thanks for the question..

Good morning, Anthony..

Maybe the first one for Kelly.

Just on the cash production cost of $55.69 for the quarter, were any of the one-time items in that cost?.

If you look at COGS, USIO as we reported we're higher on cash production costs. But when you net down the COGS and back up the idle expense, we were actually in good shape. So it's really a reflection of the idle expense.

We mentioned earlier in the comments that the $12 million FERC charge was a mis-mapped line item as were the $8 million of Empire idle expense that was also a mis-map. So....

So I'm sorry, the FERC charge....

I answer. Let me answer. Lourenco here. Let me complement, and also $12 million of you take (35:09) idle cost. So....

Okay.

So we can back those out – I mean, you said the Empire was going to roll into the fourth quarter but for 2017, we can back those out?.

We've got $8 million of idle expense for Empire that will hit in the fourth quarter.

And in terms of 2017, we'll be looking at roughly $20 million of idle expense for Empire, all of which is reflected in our guidance that we've provided in Q2, the $500 million EBITDA guidance based on the iron ore and steel price assumptions that we offered at that time. We would expect the Empire expense to trail down after that.

But $20 million next year is a pretty good estimate..

Okay. And then just with respect to that guidance that you guys have provided last quarter, I mean your steel prices are off $100 per ton.

You didn't make any commentary about it, but are you still pretty secure with that or how should we think about that going forward?.

I'm sorry, Anthony, can you repeat one more time?.

With respect to the guidance for 2017 that you had previously provided in the last call. I mean, steel prices have come off $100 per ton or so since then.

I mean, how should we think about that guidance going into 2017?.

Look, our guidance for 2017 implies the price that we expect for 2017. We continue to be very confident that prices in 2017 average for the year will be higher than the number that you are mentioning.

Because the number that you have mentioned is this artificially low number end up – even as of now, we are seeing the steel mills, at least three or four of them, already limiting the intake of new orders below $510. So prices are already in the US domestic market – hot rolled prices are already moving up, so our 2017 guidance is for 2017.

So the tail end of this year will be what the tail end of this year will be, but we're in transition to higher prices.

So don't get distracted by this temporary weakness in prices in the US domestic market because these service centers that are working with less than three months of inventory, two months of inventory on hand, they will have to restock and I don't see them to be able to even get all this – they need to restock all of them altogether, let alone to accommodate their typical double order, triple order that they do in situations like that.

So we are going to see a price movement up here in the United States, and this price movement up can be pretty significant, pretty aggressive. And then things will slow down a little bit and then they will stabilize. What we are now going to see next year in this domestic market is imported steel. Forget about it. That thing is over. That thing is over.

Illegal dumped imported steel in this country is over for 2017. It doesn't mean that prices will go to $1000 per ton, that's not what I'm saying. But they will go back to the high $500, $600 mark. Just to give an idea. It's public information. Even the union signed a contract so the steel mills, they have thresholds for hot rolled prices.

Above a certain level of hot rolled prices, the steelworkers receive a payment. Guess what, the union will push the steel mills to increase prices. So there will be a lot movement for price increase in the United States in 2017..

Right. Okay.

And what was the price for the union guys to get a bonus?.

In our case? In the mining side? You mean the USW – where the miners in the USW?.

Yes..

No. Just for the steel mills..

Okay..

Well, the bonus we gave them was the signing bonus and that has been accounted for..

Okay. All right. All right, thanks for the question..

I will talk about the context of the USW workforce with the steel mills..

Okay. Right. Thanks for the questions, guys..

All right, Anthony. Thank you..

Your next question is from the line of Matthew Fields from Bank of America. Your line is open..

Hey, everyone. Just wanted to echo Michael's congratulations on all the work you've done on the balance sheet. And then I just want to offer congratulations for bringing Eric Rychel on board. I think you'll find that he is fantastic and he'll be a great addition to your team..

Thank you, Matt. Appreciate your true comments. I agree with that. I knew Eric for more than 12 years, I think 13 years, and I'm very happy that he agreed to join my Board. So he will add to our talent pool here in our Board..

I wanted to ask a quick question about a comment you made in your prepared remarks.

You said you added some new business to your existing business, was there a new client brought on in any meaningful way in the quarter?.

Yeah. Look, remember, we were not for an extended period of time. Cliffs was not able to supply a company that was called U.S. Steel Canada because it was owned by U.S. Steel. And U.S. Steel, as you know, is long pellets. So despite the fact that U.S.

Steel continues to be long pellets, actually they are longer than ever in pellets, we were able to get that business so we became a very meaningful supplier of the Stelco, that was the old U.S. Steel Canada. It's still operating under CCAA. And so far it's helping our business.

As long as quality is the determinating factor, we get that business and we'll continue to get. That's one. While we get – we've got partners, we've got more business with the – even Algoma.

After we agreed to reinstate the contract, they asked us to supply more than the contract level because they were not very happy with the pellets that they got in the meantime when I was not supplying them. Just two examples of new business. We have a few others but these are the two most meaningful..

Was the business with U.S.

Steel Canada, was that a new long-term contract that was put in place, or is that on a more quarter-to-quarter basis?.

Companies that operate in CCAA buy in large. They tend to do short-term because everything is geared toward exiting CCAA. So we still do in a one quarter or two quarter basis with Stelco, but of course they are interested in a long-term arrangement. And at the time that they exit, we will be talking..

Okay, great. And then one last question just about the Nashwauk mine in Minnesota. I've been reading some press articles and I'm just a little confused about the plan ideally when the Chapter 11 proceedings sort of wind down.

Is it the intent to build a new pellet plant at the site or is it sort of get the mine, developed the mine and then process the pellets at your existing plants?.

Matt, at this point what I know is that I need more iron ore to produce DRI. And in order to reduce DRI, we need to produce the DR-grade pellets. We have some flexibility within our own footprint and we might not even need to buy a new pellet plant for that. But we will make this final decision at the time that we get our hands around that asset..

Okay. Thanks very much..

Thank you..

Your next question comes online of Evan Kurtz from Morgan Stanley. Your line is open..

Oh, hey. Good morning, Lourenco. I hope you're doing well..

I am, Evan.

How about you?.

Pretty good. Pretty good. Busy week. But yeah, pretty good. Thanks. So I had a question for you also on the DRI plan. I mean, it sounds like it's something you're very serious about. Could you maybe kind of share us your thoughts on a timeline there.

Are you waiting, basically, for a resolution of what happens at the Nashwauk site for that? And then how do you think about financing that? Will you look for partner, would you finance it with your equity? I know it's early on, but any thoughts?.

Yeah. Like you said, it's early. So we have a lot more to do to continue to pay down debt, extend maturities in our balance sheet. In the meantime, the Chinese moved toward more scrap, more EAF will play out. We anticipate scrap being a serious tradable commodity into China for a period of time.

That should change the mass balance of scrap inflows and outflows here in the United States. So the opportunity will be configured in the next few years. So it's very premature at this point to call how we are going to do and how we are going to finance. But directionally, that's what we are doing in our multi-year plan..

Okay, great. I'll stay tuned. And then you get lot of questions on just what USIO realizations are going to look like for next year. And I know that you probably have another quarter to wait before we get to the table, but one piece of it that I just kind of want, I know this year we have the sensitivity of about a $50 move in HRC.

It gives us about $2 on the realization. Is that something that's going to change significantly next year? I know there's different contract mix, you even have a new contract with Mittal.

Is that something you can comment on?.

No, not yet. Like you have said at the beginning of your – the progression of your question, we have one more quarter to go. We have more things to happen between now and then. Morgan Stanley will one day come to the realization that iron ore prices are not going to $47 or $42. What's the name of the guy with your organization, Tom Price.

Is that the guy that...?.

Yes. That's our guy. Yes..

Yeah. Tom Price is the Morgan Stanley iron ore guru. I don't know him. I believe that his middle initial is "W," right? This Tom W. Price. W as in wrong. So anyway, please tell Mr. Price that yesterday, iron ore price were $63.60 and today $63.10..

I'll make sure that I pass along the message, yeah..

Please. Please do it. Please do it. And the only thing I would tell about price realization in 2017, it will be higher than in 2016 for us here in USIO. How much higher? We will disclose that at the right time..

Okay. Thanks, Lourenco. Talk to you soon..

Thank you, Evan. Always a pleasure talking to you..

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

Hi, Lourenco and Kelly.

How are you guys?.

Good morning, Tony..

Good, Tony.

How are you?.

Good. Good.

Lourenco, I just want to pursue a little bit, given your comments on the importance of DRI going forward and as EAF production is growing, is that any commentary or should we take away any commentary as to your feeling about the domestic integrated industry? Do you think that there are structural changes with trade and a lot of other things? A lot of the companies are making great strides in terms of improving their – enhancing their capabilities, what would you say about the competitiveness for the integrated portion of the industry? Do you have concerns about that or has it been further emboldened from a positive standpoint with everything that's been going on?.

No, I don't have concerns, Tony. What I have to realize and I have to admit is that we are not growing in the integrated side of the business.

The last attempt to put a blast furnace in the United States was made by Nucor when they permitted and even bought or deployed – no, not bought but deployed some capital toward putting a blast furnace in Louisiana, and then they changed and put a DRI. So it's not going to happen. We are not going to have more blast furnaces in the United States.

This being said, the EAF side of the business, will continue to grow. But because of the limitations related to the quality restrictions of the most high value-added markets including automotive, they will not be able to grow based on scraps so they will have to grow based on iron substitutes.

So even though for us, at least, not having more blast furnaces is not a good thing. It's not necessarily a bad thing because we have the ability to produce the DR-grade pellets and we intend to produce DRI.

So we see Cliffs in the future producing a lot more DR-grade pellets, some DRI and less blast furnace pellets or the same level of blast furnace pellets, probably less in terms of blast furnace pellets because eventually, not all blast furnaces will even survive. We have no certainty. For example, if all blast furnaces in Canada will survive.

We are not 100% sure about that. And we have plans to play with Stelco and Algoma and Duferco and we have plans to play with just two of them or only one of them. So everything is possible. Cliffs is in the driver seat in terms of being the supplier of choice. The producer of high-quality pellets and the pellets that really work in all blast furnaces.

The pellets that don't have quality problems, the pellets that allow the operators to have flexibility on their cargos. They can use less coke, that's very expensive now. Lots of good things. So we understand this thing and we will play accordingly. So it's not like, uh-oh. We are preparing ourselves to produce the other side of the business, the EAFs.

That's what I am talking about..

Makes perfect sense, Lourenco..

Okay..

Thank you..

Thank you very much, Tony..

Your next question comes from the line of Lucas Pipes from FBR Company. Your line is open..

Hey, good morning, everybody..

Good morning, Lucas..

Lourenco, I have also a little bit of a higher-level question. Kind of looking back at your tenure at Cliffs, you and your team, you've been exceptionally successful in exiting some of the non-profitable business lines, getting a new supply agreement with Arcelor, taking out these near-term maturities in terms of – on the debt side.

And I was just wondering, it sounds like from here on out, kind of the cadence of events is a little less defined in terms of what investors can look forward to, what we can look forward to. When you think about your most pressing priorities, if you could kind of give me your to-do list, I would be very curious what we can look forward to..

I already did. We are going to continue to pay down debt. We are going to continue to work to extend the maturities of the debt. That's the day-to-day here. We are going to continue to work on our balance sheet. We are not done.

We are down to – at the end of the fourth quarter, at the end of this year, we are going to be solidly below $2 billion in net debt. So we're going to be one point something billion dollars in net debt. So we are making progress. We are confident. We are happy. But we will continue to work. But what you are asking me, Lucas, is depending on the investors.

How are they going to allow me to proceed? Through equity? Through debt? Are they going to tank my bonds one more time to allow me to retire bond cents on the dollar or they will continue to trick – just to give you an example. They 1.5 lien (53:21) yesterday trading at par.

The first lien trading at 108.4 (53:26), the second lien that was supposed to trade at $0.30 was trading at 96.9 (53:32), so it looks like that community believes in Cliffs. But let's see how the equity investors will do. My stock price goes down, I am a buyer.

I am the second biggest individual shareholder of this company, just below my good friend George Connell, but I will continue to buy. So as a company, we'll play accordingly. So we have several levers to pull and we will continue to pull these levers. But there is not a boring moment here, Lucas.

You're kind of inferring that everything that we could have done, we did. We did a lot, but there is a lot more to do..

No. No, I understand that. I was not trying to infer that. I was really just kind of curious in terms of how you might approach some of these things..

Yeah. Look, everything depends on how the financial markets will react to things. We don't have – the beauty about this management team is that we don't really have – we are not a one trick pony. No matter how things go, we will play accordingly. And we are going to find our way no matter how the deck of cards is dealt to us..

Got it. Well, Lourenco, again, my congrats on what you have accomplished – you and your team have accomplished. And best of luck in dealing with the market and what may come at you..

Thank you very much, Lucas. You got close with your EBITDA. You got $114. You still need to work better in your model because you were still a little too optimistic. But not as optimistic as the Credit Suisse guy that was $132 – the guy that gives me a $2 price target. It's funny because Credit Suisse underwrites all my deals, debt, equity, everything.

So I keep wondering how this guy – how his reports are read inside their organization because they need to – it shouldn't be strange. The right side loves Cliffs, and the left side hates Cliffs. And in between, there is a Chinese Wall. That shouldn't be a difficult situation for this guy.

Now I understand how the CEO of Wells Fargo did not know what was going on because they probably don't know anything. All right. I'm getting off message. Lucas, always a pleasure talking to you..

Yeah. Have a great one..

Your next question comes from the line of Brett Levy from Loop Capital. Your line is open..

Hey, guys. First off, congratulations on the quarter and certainly for the outlook for the fourth quarter. Talk a little bit about – I think people were afraid of the fact that there's some variability in the contracts for 2017.

Talk about the conversations you're having with your customers about 2017 and how you feel relative to the security of your 2017 guidance to free cash flow positive based on kind of locking in the very optimistic and positive dynamics that we're seeing right now in the iron ore market?.

First of all, good morning, Brett. It's a pleasure to hear from you again. You're probably the first guy that covered me since I came to the United States in 1998 when you were a debt analyst with a Canadian bank if I'm not – if I recall correctly..

It's been pleasure all along the way, Lourenco..

Yeah. So it's a long time, so almost 19 years now. So Brett, look, here's the thing, the contracts are stepping stones. We have two variables. One variable is domestic steel prices, hot rolled prices, published the prices. The idea is the price are far more.

So if you believe in Tom's wrong price from Morgan Stanley, my contracts don't work because if iron ore prices are $40, $38, $30, my contracts don't work. However, if iron ore prices are $55, $60, $63.10 like today, we are going to nail – we're going to hit all of the part. That's one. The second one is hot rolled prices.

If hot rolled prices are $350, $360, it doesn't work. However, if was hot rolled prices are $500, $520, $550, $600 -- by the way, $600 is the threshold for the USW, the bond of steel workers, not here but they still use them -- $620, $630, $650, we progressively hit out of the park harder and harder. That's the rationale of the contracts.

One more thing, if we have both the iron ore prices at $30 and the iron ore prices – I'm sorry, there's two prices at $350, we are toasted, ArcelorMittal is toasted, Nucor is toasted, U.S. Steel is toasted, AK is toasted, probably the United States of America is toasted.

So I don't care that my contracts don't work at these extremely stupid, crazy, irrational low price levels because these price levels will not going to happen. I haven't done – given more color in these 2017 numbers yet to anyone. You are the first..

No, we've always been bullish when I consult with our econometric people and our iron ore people. I have a conversation with myself so I'm good. Thank you for the response and I'll pass it on in the next person..

All right. So just one thing. I'm not bullish. You can be bullish. I can't. Because if I'm bullish and I'm wrong, we are going to hurt a lot of people, a lot of investors. A lot of money will be lost, money that's mine, money that's not mine, from my investors. So I'm never bullish. I'm always very, very, very protective over our thing.

That's the reason we have been so successful because I play with a lot of caution – with a lot of cushion in our forecasts. So our contract has only two variables. One is iron ore prices, the other one is steel price, hot bend in the United States. And even for various scenarios, the contract, they still work.

For the realistic scenario, works a lot better for the -- what you would call bullish scenario, we are in phenomenal shape. We can really start to celebrate. But we don't get there with – we are not going to go there, we are going to stay realistic here..

(01:01:25) free cash flow positive in a reasonably varied (01:01:28) scenario?.

We are anticipating $200 million cash flow in 2017..

Fantastic..

So we are extremely positive for 2017..

Thank you very much..

Thanks, Brett..

There are no further questions at this time. Mr. Goncalves, I turn the call back over to you..

Thank you very much. And we'll talk again in the fourth quarter. It was a pleasure as always. Thank you and have a great day. Bye now..

This concludes today's conference call. You may now disconnect..