C. Lourenco Goncalves - Cliffs Natural Resources, Inc. Timothy K. Flanagan - Cliffs Natural Resources, Inc..

Michael F. Gambardella - JPMorgan Securities LLC Evan L. Kurtz - Morgan Stanley & Co. LLC Lucas N. Pipes - FBR Capital Markets & Co. Matthew Fields - Bank of America Merrill Lynch.

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

At this time, I would like to introduce Lourenco Goncalves, Chairman, President and Chief Executive Officer..

Thanks, Jodie. And thanks to everyone for joining us this morning. Before we start, I would like to introduce our new Chief Financial Officer, Tim Flanagan. In his previous position as our Controller and Treasurer, Tim has been a key player in our financial transformation over the last two years.

Now, as CFO, he will continue to carry out our strategy of derisking our balance sheet. And Tim is replacing Kelly Tompkins who, as of January 1, was promoted to Executive Vice President and Chief Operating Officer. As COO, Kelly will continue to be my second in command.

I feel comfortable that this new line-up will allow our company to expand upon the many successes of 2016, which we will discuss today. For now, I'll turn it over to Tim Flanagan for the financial review portion of the call.

Tim?.

Thanks, Lourenco. I appreciate your introduction and I truly look forward to taking on the responsibilities of CFO here at Cliffs. While the names have changed and its role, the mindset and the strategy have not.

Kelly, myself and all of us at Cliffs share the view that it's important for us to continue to derisk ourselves as much as possible when the right opportunities present themselves. The ultimate goal remains a bullet-proof balance sheet that can withstand the inherent cyclicality in our business.

This strategy has worked very well and much progress has been made, but we are not done yet. With that in mind, our focus on debt reduction and maturity extension will continue to be front and center as I begin my tenure as CFO. As I move to the discussion of our financials, I will lead with this very topic.

Our net debt as of year-end was $1.8 billion, over a $600 million reduction from last year and our lowest recorded level of net debt since early 2011.

Consistent with our priorities as well as what we have voiced throughout 2016, reducing our debt balance has been our number one focus and I can happily say that we have beat even our own aggressive targets. Now transitioning to our fourth quarter results. Our adjusted EBITDA of $174 million was the highest quarterly EBITDA result in two years.

This achievement was a direct consequence of the massive cost reduction initiatives we implemented over the past two years. Additionally, we experienced much healthier sales volume in response to increased customer demand and better realized pricing. Starting with the U.S.

business, we post $151 million adjusted EBITDA performance compared to $98 million in the prior year quarter. The increase is attributable mainly to a solid cash cost performance of $53 per long ton compared to $57 per long ton in the prior year quarter, driven mostly by the absence of idle costs this past quarter.

We also saw a big increase in sales volume to 6.9 million long tons this quarter from 4.5 million long tons in Q4 of 2015 as pellet demand from the steel mills we serve has largely improved. Additionally, prices for iron ore and steel, the two most important components of our contracts pricing formulas, climbed nicely during the fourth quarter.

However, due to the full year lag, customer realized the fixed-price nature of certain contracts, we haven't seen the full benefit of these reflected yet in USIO. If market prices persist at or even near these levels, you can expect to see substantial realized price improvement this year.

Also for 2017, consistent to what we have guided on previous calls we expect to achieve our total capacity of 19 million long tons on both sales and production volumes, representing a solid increase compared to 2016. As usual, sales volumes will be heavily weighted to the back half of the year.

As in the seasonally slower first quarter, we expect only about 2 million long tons of sales. Finally, our USIO cash costs for next year remain consistent with what we've guided to in 2016 despite introducing a more specialized pellet into the production mix.

Now, moving over to APIO, the $71 average IODEX price in Q4 drove $60 million in adjusted EBITDA, the strongest performance from this business in 10 quarters. With a much more rationale environment in the seaborne iron ore like market, we realized $57 per metric ton on our sales and a cash margin of 36%.

On the cost side, as operating conditions have improved, our mining footprint as well as our revenue-based royalty payments have increased driving a small increase in cash cost to $36 per metric ton for the quarter.

In 2017, sales and production volumes at APIO will remain pretty consistent with the prior year as we expect to sell and produce at our max capacity of 11.5 million metric tons.

We expect our cash cost to be in the $34 to $39 per metric ton range, reflecting a small increase due to the expanded footprint and increased royalties I mentioned previously.

SG&A expense during the quarter ticked up to $36 million due to a onetime accrual related to incentive compensation plan, as well as increased spending associated with the development of alternative iron unit technology. Clearly, the level of SG&A spending we saw in the fourth quarter will not be a continuing trend.

In 2017, we are expecting $100 million annual run rate, implying about $25 million per quarter. Capital spending for the quarter came in under budget at $23 million compared to our implied guidance of $29 million. For 2017, we are expecting about $105 million of total CapEx.

The components of this spend include the capital necessary to maintain our continuing operations and the $40 million required to finish the Mustang Project at United Taconite, which I must say is progressing nicely towards our plans for completion.

From a liquidity standpoint in Q4, we saw a major cash inflow, generating over $200 million in free cash flow during the quarter. Not only was this driven by our great operating results, but also a 2 million long ton inventory reduction in the U.S., which we have foreshadowed throughout 2016.

We ended the year with cash of $323 million, up nearly $200 million sequentially from Q3. Total liquidity at the end of the year was $550 million net of outstanding letters of credit, up $170 million sequentially.

Given the strong cash position at year-end and our encouraging outlook for 2017, we do not anticipate any borrowings against our ABL facility during the year. Finally, I want to make sure I acknowledge our new approach to guidance in 2017.

Previously, we provided a sensitivity table with various levels of iron ore pricing and our corresponding realized revenue rate, holding all other assumptions constant.

As Lourenco has indicated on previous calls, given the conflict that this presentation created, we realized that the table was not the optimal way for us to provide our investors or the analyst community an accurate picture of our forward-looking adjusted EBITDA.

In light of this, we decided to cut right to the chase and provide net income and adjusted EBITDA guidance as you saw in our press release earlier this morning.

Applying January's actual average iron ore price of $81 per metric ton and January's AMM hot-rolled coil price of $618 per net ton on a full-year basis, we expect 2017 adjusted EBITDA of $850 million.

This compares to our previous guidance of $500 million adjusted EBITDA, which was based on a $60 iron ore price and a $600 hot-rolled steel price in the United States for the entire year.

With these two guideposts as well as our continued practice of guiding to all other important metrics and factors that influence our business, we believe the analyst and the investors can construct an accurate EBITDA picture based on multiple pricing scenarios. These sensitivities will also become clearer as we progress through the year and beyond.

With that, I'll turn the call back over to Lourenco for his prepared remarks..

Thank you, Tim. In each of our quarterly calls, I share with our investors and research analysts my perspectives on Cliffs and my views on the entire iron to steel industry in the most honest and direct way possible. Let's briefly recap a few points I brought to your attention in our previous calls.

First, in this setting, last year for our Q4 2015 conference call, I told you that the principal executives of the major iron ore producers were hanging by their fingernails to their respective jobs, as a result of their reckless execution, which I call their strategy of self-destruction, allowing iron ore prices to deteriorate.

And as a direct consequence of their deliberate actions, decimating the equity value of their respective companies. Within a few months, one CEO and two Presidents of iron ore operations went on to, "pursue other opportunities". Since those departures, iron ore prices have doubled from $40 to over $80 per metric ton.

Second, in our Q1 conference call in April of 2016, I announced that we would start the deployment of capital toward the development of a customized pallet product, the Mustang Pellet, for our largest customer, ArcelorMittal; even though we had, at the time, not yet finalized our sales contract renewal with the customer.

Despite all of the naysayers telling us that we would not be able to renew the contract, we knew here, internally, the strengths of our codependent relationship with the client and that the renewal was only a matter of time. Within a couple of months, we had renewed our contract for the full tonnage amount for the next 10 years.

And at the time we signed the renewal, the Mustang Project was already underway.

Third, in August 2016, during our Q2 conference call, I told you that, at that time, our 2017 EBITDA guidance was $500 million or slightly above and qualified such guidance as a very conservative figure because it was based on then current prices of $60 for iron ore and $600 for domestic hot-rolled steel.

And these two values were both conservative assumptions for the numbers iron ore and hot-rolled steel should actually average in 2017.

Finally, in our Q3 call in October, I said that service centers were playing with fire by keeping steel inventories excessively low and for placing an excessive dependence on buying imported steel illegally dumped into the U.S. market.

Since then, inventory levels are up, imports are down, and the price of hot-rolled steel has risen from $490 to $630 per short ton in just three months. That brings us to today's call. The most important point I would like to make today, we finally have sanity back in the seaborne iron ore market.

I truly commend Rio Tinto and Vale for eliminating their reckless behavior that had infected the market for a number of years and destroyed several billions of dollars in equity value. Once the market analysts saw iron ore prices at $40, they believed that this was the new normal. Not the case.

For a controlled commodity like iron ore, in which only three big players have the ability to move market price up or down, this should never be the case. Iron ore at $40 is not, nor will it ever be normal.

The so-called experts defending this figure as a possible scenario or, even worse, as a sure thing should have learned a tough lesson between January 2016 and January 2017. Iron ore prices increased months after months after months during 2016. Please check the actual curve.

Furthermore, in January 2017, 62% Fe content iron ore price averaged $81 per metric ton, $81.08, to be precise. As of today, the same 62% Fe content, iron ore price is $84. Please check tonight when you receive your plats, $84.00.

On top of that, there is no new development in the marketplace other than the usual shallow talk about the Roy Hill ramp-up, the startup of S11D, or the accumulation of low Fe content iron ore inventory at the Chinese ports.

As these three arguments grew old and useless, the persistence on their utilization by the folks interest in denying reality became ridiculous. In conclusion, there is nothing out there to just fight lower iron ore prices going forward in 2017. And therefore, we predict that the price of iron ore will continue to be strong throughout the year.

Since the adoption of a more rational behavior by Rio Tinto after the departure of its former CEO, the other two major producers, Vale and BHP, followed suit and also adopt a more disciplined approach to selling iron ore.

Vale, for example, has made it abundantly clear that they have no intention to flood the international market with more iron ore than the markets can absorb. And that S11D, despite being a very high-grade ore, is construed as a replacement mine.

We expect this type of responsible behavior to carry on, which will continue to support strong iron ore prices and bear fruit for not only the three majors but also for Cliffs.

We have also encountered some new dynamics in the Chinese market, between the improved profitability of the Chinese steel mills, the elevated prices of coking coal, and most importantly the increasingly serious crackdown on pollution sponsored by the Chinese Government, demand for higher-grade iron ore has risen significantly.

As a consequence, low-grade 56% iron content ore is having a tougher time to find a home with good clients. This is evident as we observe the wider spread between the 62% Fe reference price in the price of low iron content ore.

Previously, when the Chinese mills were not being forced to pay attention to pollution and coking coal prices were extremely low, iron content didn't matter. Now, it does matter. And that's why we continue to see higher ore inventories at the ports. They stopped accumulate in port side; it's not the good ore.

It is pollution heavy, low-iron content material. In some, these port stocks could stay high or even go further up and that will continue to have a very limited influence on the 62% iron ore price index. And that's the index that our agreements are based on to price the products we sell to our clients.

Particularly, on this topic, please feel free to clarify any doubts you might have regarding port inventory during the Q&A portion of the call.

Here in the United States, thanks to the several trade cases initiated by the domestic steel producers and litigated in 2016, we now in 2017 have a much more leveled playing field in the domestic steel market for all flat rolled steel products, and that includes hot-rolled, cold-rolled, galvanized, and plate.

These are the products that our clients, the integrated steel mills, produce and sell to their clients.

Due to the nature of the trade cases and how the cases were litigated in 2016, the duties imposed on several steel mills from several different countries of origin will stay in place for several years until each case comes due for their respective sunset reviews.

In the meantime, the domestic steel mills have a real ability to price their steel sales at fair levels. As a consequence, the other factor affecting the contract price of our pellets, domestic hot-rolled steel price is also supported by a solid foundation.

With these two fundamental game-changing events positively affecting the two pillars of our pricing methodology – the seaborne iron ore prices and the domestic hot-rolled steel prices, and with the backdrop of the incredible amount of heavy lifting the Cliffs team has done here within our company, we are at a point in 2017 that we can reap the benefits of a more rational and predictable business environment.

In the U.S. market, on top of the reduction of imports associated with the positive outcome of the trade cases, a major event with a potential to positively impact the market in 2017 and beyond is the result of the presidential election.

All other matters aside, President Trump, delivers a message that is positive for Cliffs and for our customers, the domestic steel mills. The stated commitment of President Trump to create real conditions for the resurgence of manufacturing in America can only help and enhance the environment we are operating in.

While we cannot give the new president all or even most of the credit for this improved outlook as it's actually a result of the 2016 trade cases, President Trump's directives on buy American and build in America have the potential to multiply the benefits of the current positive environment for manufacturing in the United States.

On that note, with respect to the new administration, we are very pleased with the nominations of Wilbur Ross as Secretary of Commerce and Robert Lighthizer as U.S. Trade Representative.

Both of these men are, in different capacities, steel industry veterans that understand not only the importance of fair trade to our industry but also how to prevent circumvention and punish the bad actors through full enforcement of the rules on each trade case.

Talking about bad actors, foreign steel mills and trading companies benefiting from subsidies to produce steel and then dump it into the United States are not alone as perpetrators of this illegal activity.

A number of steel buyers within the boundaries of United States including, but not limited to, distributors and service centers have built their respective business on being the final recipients of illegally traded steel. With that, they benefit from an unfair advantage against other steel buyers in service centers that play by the rules.

Nobody had any doubts that buying stolen goods is illegal. Well, buying dumped steel should be seen as it is. And it is also illegal. We fully expect that the renewed emphasis on enforcement of trade cases to be implemented by the Trump administration will soon result in identifying and punishing the recipients of illegally traded steel.

From now on, I will devote a lot of time and effort to get this downstream folks treated the way they deserve. I believe that fighting for a level playing field in the U.S. market is a fight worth fighting and that the rule of the law must prevail and be enforced all the way downstream in the supply chain.

At this point, I have no doubt that with the focus of the Trump administration on illegal trade and full enforcement of our trade laws we'll be able to catch at least some of the bad players among the buyers of illegal steel, making them a clear example to the ones that were lucky enough not to be caught.

In sum, if President Trump delivers on, not all, but just a portion of what he promises he's going to deliver while in office regarding domestic manufacturing, and with the 2016 anti-dumping countervailing and circumvention trade cases in place and being strict to enforce it, Cliffs will benefit significantly in 2017 and beyond.

One more time, between the rational behavior of the major players in iron ore and a constructive business environment surrounding our domestic steel industry, we have plenty of confidence that 2017 will be a great year for Cliffs. When I last gave a projected 2017 EBITDA figure, it was based on then prevailing market conditions.

Our then guidance for 2017 was $500 million based on a $60 iron ore and a $600 hot-rolled steel. I also told you that this estimate was very, very conservative. Well, since then, prices have risen.

Given all of the factors mentioned above, we expect that iron ore and steel pricing averages for January should be at least sustained throughout the year, if not improved.

In our new base case scenario of these prices staying where they were in January, $617 per net ton hot-rolled steel and $80 iron ore, we expect to generate $850 million in adjusted EBITDA in 2017. This new guidance very importantly even takes into consideration that in Q1, we always are negatively affected by some factors.

This year, we are going to be affected by the cheaper pellets carried over from the expired 2016 contracts and steel delivered in Q1 2017. And of course, the seasonally lower sales volumes always associated with the winter months.

This new 2017 guidance of $850 million of EBITDA is a number that is more than double our actual 2016 EBITDA and would translate into over $550 million of free cash flow.

As Tim Flanagan mentioned in his remarks, given the conflicts that the revenue per ton sensitivity table presented, we thought it would be more beneficial to provide the number everyone is trying to get to anyway, instead of providing the information indirectly through the table.

Assuming that the major iron ore producers continue their rational behavior and the enforcement of illegally traded steel is strong, we should only have to worry about upside scenarios from here.

I should note that daily fluctuations in pricing would not have a material impact on our guidance as the data points we used represent full year average numbers. Tim and I will be glad to clarify your questions related to our 2017 guidance during the Q&A portion of today's call.

Wrapping up my prepared remarks, I want to go back to our call at this time last year when I laid out the three steps that would drive the Cliffs' turnaround. One, maintaining our non-stop focus on cost reduction. Two, using our strong market position in the United States to secure volumes and foster improved profitability.

And, three, promoting debt reduction through liability management exercises. On number one, cost reduction. When most people thought the well was dry and nothing else could be done, we continue to cut cost. In the U.S.

business, we cut cash cost by another $4 per ton compared to the previous year, adding over $50 million directly to our bottom line compared to 2015. Even more impressive, this came in a year when we have to bring two mines back from long idle, Northshore and UTac. We indefinitely idled a mine at its end of life, Empire.

And we execute the important (32:11) projects, as well as started a major construction project to produce the customized Mustang Pellet. The cost reduction continued at APIO as well even as market conditions improved in the back half of the year and our mining footprint became larger.

Our Australian team remained disciplined, cutting cash cost by another $3 per metric ton or 8% adding another $35 million to the bottom line. I applaud and congratulate, Jason, and our team in Australia for doing what had to be done in darker times, and we are now seeing the rewards of their hard work from the last two years.

Our number two commercial strengths in 2016, our strong market position in the Great Lakes was demonstrated on several different occasions. We locked in a 10-year supply contract with our largest customer.

We watched our potential competitive "threats," Essar and Magnetation both dissolved and picked-up volumes from customers who were unsatisfied with their previous supply source.

With the vast majority of our sales tonnage locked up for several years with ArcelorMittal, the liquidation of Magnetation and the additional volumes we got from AK Steel as a consequence, the additional tonnage we secured with Algoma through a new long-term agreement and the addition of a second customer for DR-grade pellets, Cliffs' business is indeed in very good shape.

Also, with solid demand and exclusive nature of our contracts, keeping wannabe competitors watching from the outside and talking a good game, at this point, we are sold out for 2017.

Finally, on number 3, the liability management exercise that we executed throughout the year have generated a lot of equity value through more than $300 million in that market discounts we are able to capture. On top of that, we have a clear debt runaway until 2020. And taking care of this maturity wall will be a priority in 2017.

In summary, our ability to execute in operations, sales, business development and strategy is what have set up us to thrive.

With much leaner costs, volume certainty in the United States, lower interest expenses, a lighter debt load and sanity restored to the market, we are in position to generate one of the best free cash flow years in the history of Cliffs Natural Resources. With that, I will now turn the call back to Jodie, the operator, for the Q&A portion of the call.

Jodie?.

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

Good morning, Lourenco..

Good morning, Mike..

I just wanted to say a couple of things. First of all, congratulations, but most of all, thank you for making my job so much easier in covering Cliffs. You've been so honest and you've given everyone the details of your analysis of the iron ore marketplace over the last year-and-a-half.

You've been spot-on and anyone who listen to you would be spot-on too with their call on Cliffs. So again, congratulations and thank you.

But I have to say listening to your comments this morning, I think you might've missed a positive point on the iron ore market and I'd like you to comment on it, and that is it seems like the market may be anticipating too much production out of Vale's Samarco operations from what I'm hearing.

What are you hearing on that?.

First of all, Mike, I can't thank you enough for your kind words about what I have done here in our interaction. I'm doing my job. I'm doing what I feel like is my obligation with not only the investors that are honest and fair in terms of their analysis and their ability to deploy their money and make it to grow like a real investor does.

But also I'm trying to educate these people because they are by and large very smart people. If they listen, if they pay attention, if they put their arguments on and you have an intelligent conversation. We will always be able to grow together and make money together. Anyway, moving to your point, Samarco. Well, Samarco at this point is (38:04).

The current scenario there is that they have an idled facility over there, that they're of course trying to bring back to operation, and in the process they need to bring along lots of different constituents that have different agenda. For the company, what they want is to be back in operation.

For the regions that were affected and for the towns that were shut down by that disaster, what they need is to be brought to life again, hasn't happened yet since November of 2015 when the incident happened. For the several people that lost their loved ones for a total of 19 deaths, they want to at least see justice be served.

The process of indemnifying the family members, cleaning up the region that was affected and doing good with everyone that was, one way or another, brought down by the Samarco disaster is a very costly one. And I don't know why people don't talk about that.

The Samarco doesn't have any money left on them, nor they have an ability to pay anything for the several tens of billions of dollars of the bill that's bouncing around. So, this will end up with the Vale and BHP, they're 50/50 owners of this thing.

Press forward, assuming that they are able to pay, which I fully believe that they might, Samarco apparently is pushing ahead with a strategy that is different from the way they operated before.

They used to operate like we operate here at Cliffs, the vast majority of, if not the totality of the big pellet operations in the world, operate with generating tailings and then building over time tailings ponds that are contained by tailings dams. That was the technique that they had before.

What we hear through the press, and at that point, I only have the public information that you have as well, they are planning to restart using for deposit in their tailings exhausted pits from mines that were used in the past and are no longer in operation.

So, it doesn't take a mining specialist to see that this type of attitude is, at the very least, limiting in terms of their ability to warehouse tailings, because no matter how big the hole is, one day the hole will be full. So, they are limited on that regard.

And in order to mitigate that, they say that if they come – when they come back – they don't say if. If is my word. They say that when they come back, there will be a much smaller operation. Instead of operating at 30 million tons, they will be operating at 16 million tons or 17 million tons. We hear different numbers.

So, long story short, Samarco is an unknown at this point. There is absolutely no certainty about if and when and how Samarco will come back. The only thing we know is that if Samarco comes back, it will not be the old Samarco. It will be a much smaller Samarco due to the self-imposed limitations on how they will deploy their tailings.

And on top of that, the two shareholders will have to bear – and that's regardless of coming back or not coming back in operation – will have to bear a big bill. How big is the bill? Hard to say. And in the meantime, 21 executives from Samarco, BHP and Vale are facing criminal charges, and they have to fight that as well.

I think I quoted all the points. And if I miss something, Mike, please let me know..

No. That's great. One last question. Could you discuss or give us your thoughts on how you feel the U.S. Steel, the restart of Keetac impacts you longer term. I know you're sold out this year..

That's a good question about Keetac. First of all, let me take one step back and think about why Keetac shut down in the first place. Keetac was the supplier of two U.S. Steel mills, one was Fairfield, the other one was Granite City.

Fairfield shut down with the assumption that they would replace blast furnaces with EAF and therefore they would not be using pellets anymore, they would be using scraps. So, Fairfield was never a player to be brought back to support Keetac. But Granite City was idled more than a year ago. I don't recall how long ago, but long time ago.

And they never said that they would shut down for good. So, it was easy to assume that Keetac would be supplying Granite City once Granite City comes back to operation. This being said, we heard the announcement of Keetac coming back and we did not hear the announcement of Granite City coming back yet.

While I fully believe that Granite City will come back, because otherwise there is no – well, it's a mathematical impossibility to have the output of Keetac allocated without having Granite City in operation. I also try to understand where U.S.

Steel is going to sell their pellets, because – certainly not to ArcelorMittal because I know the contracts we have in place. Certainly not to AK Steel Dearborn, because I also know the contract we have in place. And then I have to guess.

I guess that they're not selling to AK Steel Middletown, because AK Steel Middletown is very happy with our pellets and they don't seem to be the type of steel makers that replace good pellets with bad pellets, like Algoma did, when they did not have an option back in 2015, when I blew up the contract with Algoma and they had no option other than going to U.S.

Steel. So, once I reenacted the contract with Algoma, Algoma came back running. And they would have given the 100% business there, I elected not to take it, because on top of Keetac, U.S. Steel also has an equity position in Tilden and an equity position at Hibbing. So, I try to make sure that I know where these pellets are going.

So, by keeping Algoma, only occupying a portion, I pretty much define that Keetac – not Keetac, I'm sorry, that Tilden portion of the equity position that U.S. Steel has, in our mind, would go where it belongs and it belongs to Algoma. So, it's a big interesting question for you to ask U.S. Steel.

Where in hell are you putting your pellets? Because the numbers don't close. And one last thing on that, if U.S. Steel brings back Keetac, when U.S. Steel brings back Keetac – and I got to believe that that's what they are looking for, because the U.S.

Steel CEO is very vocal about a level-playing field, that if a level-playing field will be implemented in the United States, he said that he is going to bring back 10,000 jobs to U.S. Steel. So, I'm watching that. I'm watching that. So, when U.S. Steel – Granite City comes back to operation, these guys that are buying pellets from U.S.

Steel right now will have to find a new supplier. And guess who is the supplier? It's Cliffs. And of course, that will come with a price because, among other things, I'm a guy with a great memory..

All right. Thank you. Thank you, Lourenco..

You're very welcome, Mike..

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

Hey. Good morning, Lourenco, and congrats to Tim and Kelly; Kelly, if you're around listening..

Thanks..

Thank you very much, Evan. Appreciate it. Good morning..

Good morning. So, nice quarter. I just wanted to ask a couple of questions, maybe one following up on some of the last commentary there on Algoma. I know they're in the midst of a restructuring and the USW is now talking about, or threatening a strike. Maybe I'm sure you have some thoughts on this.

What's kind of your view on how that situation might play out, and is that a risk to you? How much of that 19 million is committed to Algoma at this point?.

We reenacted the old contract and the old contract covered for 1.5 million tons, and we signed an addition that was for 900,000 tons. So, the total January 1 through December 31 is 2.4 million tons. This being said, the union, the USW at Algoma, they are trying to get what they feel is fair, and I'm not going to give you any position on that.

But at the end of the day, they know what's feasible, they know what's real, they know what's true and they know what's a lie.

And then if you come back, the judge, the monitor – all the parts involved will end up realizing and I think that we are pretty much there that the best course of action is moving on and fixing what needs to be fixed, getting a new owner and working with Cliffs to continue to make their mill a strong mill. I feel that there is room for Algoma.

There is a future for the Algoma workers. But they need the right ownership over there. I'm not going to deal with Essar. I put very clear to the court and the court approved that thing was a difficult point to make and we made it. It's approved. It's behind us. I have the right to make that contract if Essar comes back as the owner of their facility.

So, that's my position in that situation..

Okay. Thanks for that. And then I just have a quick question on the guidance.

What are you assuming for pellet premium in that number?.

We use the reference of the pellet premiums in the Atlantic Basin. And that pellet premium today is $45. And just for a reference, just in case you need it, the average pellets in the same token is $54..

Great. Thanks. And maybe just one final one, if I may. I read an interesting article in Metropolitan (50:28) around on some of the work that you've been doing with the DRI plants. And you had mentioned that potentially, you could see a long-term customer in Trinidad. It was a little easier to get your pellets there versus Gulf Coast.

So, just curious, what are you selling there now and what size of opportunity do you there in the future?.

Look, DR-grade pellets for us is our future. And we continue to develop the product. We'll continue to produce and sell to our well established clients. And that's Nucor Trinidad. From the logistics standpoint, due to the design of the unloading dock at Louisiana, we can't get there by rail.

And it's impossible to get there through the sea because there's a thing called Jones Act that would take a long time to explain in the call, but we can chat offline, that makes departing to United States and arriving to United States a complicated thing. But departing from the United States and arriving Trinidad is unviable (51:41).

This being said, we continue to do business in Trinidad. We are very happy with the development and the relationship with Nucor.

They will always be my preferred clients for DR-grade pellets because they – when nobody knew what we'll be doing, they first listen (52:01), I really appreciate the support I got from John Ferriola, Joe Stratman and all the people at the plant.

And our people work very well with them to develop a project that now we are selling to another client at ArcelorMittal Canada. We just started doing business with them. So if the stock is small (52:22) like these things always start, but ArcelorMittal Canada owns two DRI facilities. And we are going to start supplying them soon..

Good to hear. Thanks. I'll hand it over..

Thank you, Evan..

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

Hey. Good. Good morning, everybody, and good job on the quarter and appreciate the guidance..

Thanks, Lucas..

Good morning..

So, one of the other – another company that I cover, they were asked about a year ago or so on the conference call very clearly about equity. And the response from the CEO was absolutely not, I think we've been very clear on the issue.

A common question I get is what are you going to do with the 2020 maturities? And I wondered if you could give a similarly clear message on equity, and if not maybe elaborate on the plans for addressing the 2020 maturity? Thank you..

Look, as you know that these maturities are taken care of here in the company very seriously and we move the right way at the right time. We have been addressing that 2018 and we are still in February of 2017. So, talking about 2020 and specific to your point, equity. I am a large shareholder. I am a large shareholder.

I bought a lot of stock in the open market. I bought stock with after-tax dollars. I bought stock at $5, I bought stock at $3.06. I bought a lot of stock in this company for cash, after tax dollars. Very few CEOs do that. I did and I plan to continue to do. So, being a shareholder, I feel that exactly the same things that all shareholders feel.

And I always have the shareholders front and center in my mind. Every single transaction that we will do, no matter if it's this or that, or that or more complex or less complex, have one thing in mind and one type of stakeholder in mind, the shareholder. I take dilution extremely seriously. But equity is a tool in the toolbox.

We only use equity if it's ultimately accretive to the shareholders. If there's no accretion, there is no deal. If there is accretion involved for the shareholders, we might do it. This being said, we are going to generate a lot of cash in this company in 2017, $550 million at the level of the current guidance.

So, that should also go toward addressing the 2020 tower. But everything that I'm telling you is just theoretical. I'm trying to share with you and all the investors in the call, how I feel about using another tool in the toolbox. There are several in the toolbox..

That's very helpful. I appreciate that and maybe one quick follow-up on that topic. Thinking about that 2020 maturity, do you have a certain timeframe in mind for when to address that maturity, or should we think like, look earlier in 2017? You gave a very strong guidance..

Absolutely. We do have a timeframe for that. It will be between February 9, 2017 and December 31, 2019. So, that'll be before 2020..

No. I understood. All right. Well, appreciate that. And maybe turning to the broader market, I appreciate it, the comments you provided on iron ore. I was curious how you're thinking about the demand side of the equation at this time.

Seems like economic activity is fairly robust, but what is your outlook? I think in the past you also commented and I think you did it, again, this morning, how China is transitioning away from the fines? What's your outlook on the demand side? I would appreciate that. Thank you..

Are you talking about demand in the United States specifically or....

Globally, please..

You mean steel demand globally?.

No, no. Iron ore demand globally..

Iron ore demand, okay. Well, China continues to perform. China is moving toward a more responsible way of performing.

The pollution combat in China is real now and we are going to see more and more and more and more moves toward China becoming a lot more like Japan, a lot more like South Korea, because don't forget, Japan and South Korea in the mid- to late-1990s transitioned from what China is now to what they are now. So, the dynamics will be exactly the same.

The difference is scale. The difference is size. So, I continue to believe that low-iron content iron ore will continue to accumulate in the port, and it will get to a point that it'll start to be pushed back by the end users, because S11D is a game-changer.

65%, 66%, 67% iron content is a game-changer, because that makes the life of the steel mills a lot easier. Take a look, Lucas, in the gap between the current IODEX that tonight would be $84 per metric ton for the 62% iron and the premium that the 66%, 67%, even the 65% iron content commands right now, it's increasing.

So, that's what needs to be seen in China. We're not going to see China not producing, not buying iron ore, not deploying fixed assets. It's the opposite. They will continue to grow fixed asset investments. They'll continue to buy iron ore, but they will be more selective.

So, the times of the so-called low-cost iron ore – and nobody talks about iron content, nobody talks about other properties, nobody talks about residuals – it's gone. China is no longer in elementary school. China is at least a senior in high school.

Wait until China gets to college, it will be impossible for this guy that produce black stuff, and they called it the black dirty iron ore, to continue to be called suppliers of iron ore. It's a different ballgame that's moving in China. But demand is phenomenal. It's great. We'll continue to support production of good stuff.

And the bad stuff, for now, we accumulate at the port. Very soon, we will be accumulating in Australia. That's the way I see it..

That's very helpful. And then, Lourenco, I was very impressed in the fourth quarter with your performance in Australia, both on the revenue as well as on the cost side. As I model that asset going forward, it has a limited reserve life on paper.

How do you think about the life of the asset in the current price environment? Should we still be modeling that the mine should be essentially closing down here in a couple of years? Or what is the opportunity for this asset given current iron ore prices? I would appreciate your comments..

Lucas, when I came to this company in August of 2004. APIO had a life of mine of four years. Two-and-a-half years later as of now, APIO has a life of mine of three-and-a-half years. We still have proved and probable reserves in Australia of 43 million metric tons.

So, we continue to develop tracts of land, continue to mine in adjacent areas that we can get material and process material and bring the material to the port of Esperance and sell to good clients.

So, as long as there is economic reward to mine, as long as the price level is sane and it's justifiable to continue to drill and explore in Australia, we will do it. At the very moment that we no longer have the ore, we will be done.

This being said, it doesn't take much for – in two years down the road, we are still with another three more years of life of mine. That's how we operate there. So, don't take the number of years as a picture. It's a movie.

My team in Australia is very active in getting the right piece of land and getting the right mines in operation at the right time to get to the right ore, which for the fact that we have a unique position in Australia producing 50% lump ore not just the 50% fines. So, we're in good shape..

That's helpful, Lourenco. I appreciate all the color and continued good luck. Great job..

Thanks a lot, Lucas. Jodie, I will take the last question now..

Certainly. Your final question comes from the line of Matthew Fields from Bank of America. Your line is open..

Hi, everyone. Congratulations on another very productive year. And Tim, congratulations on the new gig..

Thanks, Matt..

I just want to ask a couple of housekeeping questions real quick and then maybe somewhat thematical one.

It looks like you may have bought some bonds back in the fourth quarter, is that the case?.

I'll let Tim Flanagan handle that..

Yeah. So, we took out about $20 million of debt through a combination of open market purchases and a couple of equity swaps that we did, consistent what we've done in previous quarters..

Okay. Great. And then the $550 million free cash flow forecast seems to imply pretty neutral working capital.

Is that sort of what you're thinking or after two really strong working capital years, do you imagine you have to give some back in 2017?.

Yeah, no, I think if you think about the working capital that the big driver this year was the imbalance of our production and sales tons in the past two years and certainly to the benefit in 2016, especially in USIO. But as we guided to 19 million tons of sales and production in the U.S.

and 11.5 million tons in Australia both on the sales and production front, you won't see that same inventory depletion. So, when you think about all the other pieces and parts, AR, payables, things like that, that's just more of a timing issue, so pretty flat overall..

Okay, great. And then Lourenco, you previously – back in our conference, I guess, at the end of November, you said that you sort of had a $60 per ton iron ore IODEX forecast in your head for 2017.

It seems like maybe you're thinking about a higher price for this year?.

Look, like I said, it was end of November. We are now in mid-February and I continue to watch how things are developing in the marketplace. We are very pleased with how the majors are addressing the business, how they are selling.

The cancers that were the reasons why BHP and Rio Tinto were behaving the way they were behaving are now pursuing other opportunities. So, they need to continue to pursue as long as these opportunities are far away from the iron ore business where they don't belong.

And even the future guys that work on iron ore as if iron ore was not a physical commodity but just a virtual thing, they are starting to see the future. So, if you look at the numbers for the front-end months, March, they are indicating higher prices. If you look into their most traded contracts, that's the May contract, it indicates higher prices.

So, let's assume that it's just that. We are going to go with higher prices just through May and then price will go down again. Well, at that time, it will no longer be $84, it will be more. And then in order to get to my forecast, you need to average down. And I'm still at $80 iron ore and $630 hot-band.

So, that's the reason I'm still confident about $850 million. My $850 million EBITDA, Matt, at this point is my old $600 million. My $600 million I called is a very, very, very conservative guidance at that time, and I'm calling the $850 million a very, very, very conservative guidance at this time..

Okay. Thanks. And then, sort of lastly, just kind of you talked a lot about the majors and the bank, the investment bank price forecast. I was just sort of thinking about this from a different point of view.

It seems like the majors is bringing on supply or threatening to bring on supply, kind of scared everybody in the market including the banks to reduce forecast time and time again, which makes lending to start-ups like Atlas and Arrium and all the guys have kind of gotten scared away from the market made it impossible for them to secure financing for new operations or for capacity enhancements what-not.

Do you think it's kind of The Three Stooges, as some people have called them, kind of did everybody a favor, but they didn't live to see the fruits of their labor by scaring all the new entrants away from the market?.

Well, first of all, correction. The Three Stooges, it's not some people that called them, I called them Three Stooges, so this one is mine. I don't put a copyright on that but this is mine. But anyway, look at that. The Three Stooges at the end of the day, they are big, big, huge, enormous. They are big elephants. They can't be afraid of poodles.

They can't be afraid of pussycats. This is more than miners. Even if they all come together, let's assume that 10 miners will come to operation and each one of that, we'll produce 5 million tons. 10 times 5 is 50. It still doesn't move the needle.

Only someone that does not understand the business or has an agenda, that's not the agenda of his shareholders, can imagine that he will work to destroy $30 billion or $35 billion in market capitalization in one year to take away people that produce 5 million, 8 million, 6 million, 3 million tons a year.

So, let all this minor mining companies in Australia to come to operation, they still don't move the needle. Keep in mind, if you paid attention to my explanation about how low iron content iron ore is being treated in China and we will continue to be treated in China. Their window of opportunity at this point, time-wise, is very narrow.

They will not be able to sell that crap for too long. You'll never hear, for example, Fortescue nervous about a small mining company, because they understand their size. When you are big, you need to behave like you're big.

The problem is when someone is small and behaves like this someone is big because sometimes this small guy will be stopping in a rail track and a freight train like Cliffs will come and pass over. That's happening right now. In the United States pellet market between Cliffs and U.S. Steel.

But unfortunately time is up, and we are going to discuss that in the next chapter in three months. So, (1:10:20)..

Okay. Well, thank you for your perspective..

Okay. Jodie, we are done. Thank you, investors. I'll talk to you again..

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