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

Lucas N. Pipes - FBR & Co. Michael F. Gambardella - JPMorgan Securities LLC Novid Rassouli - Cowen and Company, LLC Nicholas Jarmoszuk - Stifel, Nicolaus & Co., Inc..

Good morning, ladies and gentlemen. My name is Emily and I am your conference facilitator today. I would like to welcome everyone to Cliffs Natural Resources 2017 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.

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 on the earnings release, which was published this morning.

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

Thanks, Emily and thanks to everyone for joining us this morning. I'll start the call with a discussion of our results and outlook before turning it over to Lourenco for his remarks. During the second quarter, we reported total company adjusted EBITDA of $137 million, a 35% increase over the prior year quarter.

This significant year-over-year increase is attributable to the U.S. iron ore business and more specifically to our realized prices in this segment. USIO adjusted EBITDA was $162 million. Our best quarterly performance out of this business unit since 2014. As we mentioned last quarter, we have now worked off all of the carry over tons from 2016.

The $97 per long ton realized pricing we reported is now reflecting the new 2017 formulas, thus promoting the sizable lift that we foreshadowed relative to both Q1 and prior year realizations.

Despite seeing a bit of volatility in both iron ore and steel pricing during the quarter, the formulaic and yearly average nature of our contracts protected us from these swings and ultimately gave us the strong improvement which carried the quarter for us.

From a cost standpoint, higher employee related costs as well as increased energy rates drove cash costs higher compared to the year ago quarter. Based on this and with the use of our standard cost methodology we expect cash costs to land at the higher end of our guidance range for the remainder of the year.

As for our sales 4.3 million long ton – 4.3 million long ton quarter was stronger than originally anticipated as our customers' increased appetite for pellets earlier in the shipping season led to higher volumes.

For the full year, we are maintaining our guidance of 19 million long tons of sales, with the remaining 11.5 million tons more weighted to the fourth quarter than to the third quarter.

Now moving over to Australia, adjusted EBITDA for the quarter was just $3 million, as reduced volumes, lower realizations and higher costs drove a weaker year-over-year performance despite the higher IODEX average.

Last quarter, Lourenco and I pointed out the now well-known trend of the growing difference between the IODEX price and realizations for the sub 62% iron content material and other market driven discounts impacting our cooling [having] product. As you can see in our results, this trend persisted through the second quarter.

Our realization was a $38 per metric ton net back from an average $63 IODEX. Although rising lump premiums will to a small extent help mitigate these discounts, we do not expect this trend to improve significantly going forward.

APIO cash costs of 36.50 per metric ton directly at the midpoint of our guidance represented a 10% increase from the prior year quarter, as strip ratios having tripled over the past year from 0.75 to 2.3.

Lower sales volume of 2.5 million long tons reflects both timing of vessels and our decision to terminate certain shipments because of unfavorable stock market conditions. As a result, we are bringing down our sales volume guidance slightly to 11 million metric tons, of which like the U.S.

business, the remaining 5.5 million metric tons will be more heavily weighted to the fourth quarter. Overall, we still remain confident in the near-term cash flow generating ability of this business, especially with the steadily higher lump premiums and the recent positive move we've seen in iron ore prices.

That said, we'll keep our eye on the discounting phenomenon and staying nimble so we can react appropriately based on market conditions. SG&A expense for the quarter ticked up to $28 million due to higher incentive compensation accruals as well as pre-feasibility spending related to the development of the HPI production plant.

Due to these items, we are increasing our full year SG&A expense expectation by $10 million to $110 million. Going forward, our HBI spend will largely be capitalized and we can expect 2018 SG&A levels to return back to more normalized levels.

Also during the quarter, we reported a $46 million noncash loss from discontinued operations, primarily related to the ongoing Canadian CCAA process. As many of you have been following, we have reported for some time a current asset of approximately $50 million associated with our expected receivable from the estate.

This past quarter we became aware of the likelihood of a potential preference claim against us from the CCAA estate. Of course, we have vigorously objected to the basis for such a claim and will continue to defend our position.

However, should the monitor decide to proceed with this unassertive claim against us, we expect that the potential loss would approximate that of our current receivable. Hence the offsetting liability recorded during the quarter. Now for CapEx, we spent $22 million in the quarter as we began commercial production of our new superflux pellet Mustang.

I'm pleased to report that this project was completed on time and on budget. We now have our sights set on the $700 million HBI project.

While early stage engineering, procurement and construction spend related to the Toledo plant will go on over the next 12 months, the major spend will take place between the summer of 2018 and the summer of 2020, concluding in that point with the commercial production of HBI.

To incorporate some of the early spend for this year, we have increased our total 2017 CapEx budget by $10 million to $115 million. As discussions with potential financial partners are ongoing, the portion of the $700 dollars at Cliffs as a majority partner will be responsible for is still to be determined.

The ultimate outcome of these negotiations will determine which route we take on financing the project. Lourenco and I will keep the investment community updated on this process in all of our future quarterly calls.

As for outlook, now that we have more than a half years' worth of actuals in place, we have transitioned our methodology to using year-to-date prices as guideposts for our full year EBITDA guidance.

Applying the year-to-date average IODEX price of $70 per metric ton and the hot-rolled coil price of $620 per short ton for the remainder of the year, we would expect a 2017 adjusted EBITDA of approximately $650 million.

Along with these downward revisions to pricing, this guidance also reflects other revised assumptions impacting EBITDA, including those for pellet premiums, cash costs, realization rates in APIO and SG&A. In closing, the cash generation engine we saw in the back half of 2016 will be revved up again this year.

Between this 1.6 million long tons of pellet build up to be released, the realized prices we expect to achieve in 2017, and our sizeable U.S. NOL position which minimizes our future tax burden, we expect an influx of cash unlike anything we've seen for a number of years.

Based upon the adjusted EBITDA and other outlook we have provided, net debt at the end of the year will reach below the $1 billion mark. With that, I'll now turn it over to Lourenco..

Thank you, Tim. And thanks to everyone for joining us on this morning's call. This quarter results were remarkable for a number of reasons. But what I am most proud of is that we were able to show the true earnings power of the U.S. iron ore business. The outstanding results achieved in the second quarter were so driven by the strengths of our U.S.

iron ore business, which consists of supplying customized pellets to blast furnaces located in the Great Lakes. In the second quarter of 2017, Cliffs reported total Company adjusted EBITDA of $137 million. That is as much as we made in the entire first half of last year. Thanks to a significant increase in realized prices in our U.S.

iron ore business, our adjusted EBITDA for the first half of 2017 easily passed the $200 million mark, achieving $229 million. Our U.S. iron ore business is a beast. In the second quarter, we reported a realized revenue rate of $97 per long ton, with an adjusted EBITDA margin of 39%.

This generated $162 million in adjusted EBITDA on just 4.3 million long tons sought. The power of this business is what attracted me to Cliffs, because it's exactly what the previous management and the previous Board of Directors neglected, to the point that an outsider had to come in and stop them from wasting something so special.

Well, Cliffs is in great shape now. How is this business able to achieve EBITDA margins of nearly 40% in the metals and mining industry in the United States where EBITDA margins of 9.5%, 10% are considered to be very good and 15% are considered great. Number one, cost to enter.

Cliffs is the only real merchant supplier within the Great Lakes markets, and we have all the good clients under long-term contracts, covering pretty much all their pellet requirements. In spite of that even if a steel mill would like to let say import pellets, because a source is located in Eastern Canada.

However, even the Eastern Canadian mines are located outside the Great Lakes system, and selling their pellets to muse located in the Great Lakes comes with a big logistical cost that Cliffs is not subjected too.

Importing pellets is not only expensive logistically, but also presents an unfavorable opportunity cost to the pellet producers relative to their other options in Europe and other markets, in what is currently a scarce global pellet market. This advantage allows Cliffs to capture the logistical penalty within our margin.

Number two, technical advantages. Our blast furnace operates a lot better when it's fed with pellets of consistent quality and narrow specs. Give it the wrong of variable raw material, and it will not perform in a way that allows the furnace to achieve optimum quality, efficiency, environmental compliance or all the above.

With our longstanding technical interactions with each one of our customers, their respective furnaces received from Cliffs, a reliable and consistent pellet that is tailor made for each particular operation. Therefore, it is difficult for that feedstock to be changed without compromising quality, productivity or environmental performance.

Number three, barriers to entry. It is very difficult and expensive to develop any project in our line of business. Building in places that have difficult winters, that are not friendly for construction is not easy if you don't have the experience.

And then, even if you are able to finish construction, you still need to operate efficiently and sell your product for a profit. Which means you must have good supply agreements in place with good performing clients. Magnetation failed and Essar failed. Newcomers would like to be Cliffs, but they are not Cliffs and never will be.

For us, they are not even a distraction. We know their game plan and why they can't fly. We are Cliffs. They are walking eagle. And number four, a simple one. The fact that we are in the United States. The American business environment is predictable, and we operate in a very mature economic and legal environment.

The most recent example of our country taking real action was the implementation during the last year of the Obama administration of several anti-dumping and countervailing duties, imposed against illegally traded steel from several different countries.

While some countries and some players within the United States did not get the underlying message of these three cases and continue to find ways to cheat the system, the next thing is a Section 232 investigation, self-initiated by the Trump administration.

The Department of Commerce recognized the importance of steel to our national security, not just on defense-related products, but on a lot of other things, from infrastructure to energy.

While the 232-final determination has been delayed for reasons completely unrelated to the issue itself, we remain confident that some level of restrictive measure will be recommended soon.

Even though Cliffs already has a strong business in the United States, going into the second half of the year, Section 232 should help our clients and make the second half even better for them. And that would be a positive for Cliffs as well.

With these advantages in place, we feel better than ever about our competitiveness in the Great Lakes for the years to come. Looking to the future, we realize that we should not be limited to supplying only blast furnaces.

The Great Lakes region also needs alternative iron units that are primarily used as high-quality feedstock for electric arc furnaces. As I discussed on our last call, in order to thrive for the next several decades, Cliffs needs to adapt its business to the ever-shifting, the steel making environment.

This brings us to our major announcement this quarter, which is the development of 1.6 million metric ton per year HBI facility in Toledo, Ohio, to be completed by 2020.

Hot briquetted iron, more commonly known as HBI, is a feedstock used in the electric arc furnaces steel making process, as a higher cost alternative to scrap, allowing the EAFs to move their finished steel products further up the value chain.

Our HBI will be produced by feeding the Toledo plant with our own low-silica DR grade iron pellets, reducing the iron oxide with natural gas and producing a 90-plus percent iron briquette.

Right now, there a over 3 million metric tons of alternative iron units imported into the Great Lakes every year, mostly, in the form of pig iron from countries like Brazil, Russia and Ukraine, or as HBI mainly from Venezuela.

Not only is this feed cost costly to import from unreliable sources, but it comes in varying qualities, that the American buyer currently have no choice but to accept.

The EAFs in the Great Lakes region have long been craving a local supply of these iron units, and likely would consume even more than the current 3 million metric tons per year if they could get their hands on it. Cliffs was not a producer of DR grade pellets before, but now we are.

And we also have access to affordable natural gas in the United States, particularly, in the Great Lakes. HBI has always been part of my roadmap to take Cliffs into the future. But we just did not have the balance sheet to make this type of investment. Now we do. The same advantage that make our U.S.

iron ore pellet business so powerful will make our HBI business powerful as well. Just like our pellets, we will be the only merchant supplier of virgin iron units in the region. So right off the bat, we have a huge logistical advantage over the competition. And certainly, the mills will value the shorter supply chain.

Just as we customize our pellets for the needs of our existing blast furnace clients, we will take the same approach to HBI and our future EAF clients. And let's not forget, this facility will be in the United States, the only place that we are totally comfortable doing business.

The site we selected is centrally located amongst all our future customers, and also has easy access to natural gas and a dock to receive our pellet feedstock.

As a brownfield site, the infrastructure from our rail, power and shipping and unloading standpoint is already in very good shape, saving us over $100 million in project costs relative to other sites we considered. The project cost is $700 million, and our conversations with potential financial partners are ongoing.

We have seen a lot of excitement from these potential financial partners thus far, as well as from the partners we already have; the State of Ohio and the local agencies, who have already committed $30 million to the construction of our plant.

And on a final and important note about our HBI initiative, with this project, besides expanding our customer base to the full spectrum of the steelmakers, including both integrated and EAFs, we are creating ourselves another high-margin outlet for almost 2.5 million metric tons of our pellets.

I will be more than happy to answer any questions you may have about this great initiative in the Q&A portion of the call. Now moving on to another major event during the quarter. In May, we began production of the Mustang pellets at our United Taconite mine.

That was a $75 million CapEx project, built in less than a year, through the Minnesota winter, with zero accidents, on time and on budget. The initial results of the utilization of the Mustang superflux pellets by the clients are very good, and the upgrade of our United Taconite plant was a huge success.

It came with the secondary benefit of the plant now running standard pellets even more productively than it was doing pre-Mustang. Turning to APIO. The discounts for iron content and quality adjustments that we saw in the first quarter came in even more negative in Q2.

While Cliffs only produces 11 million metric tons per year in Australia, and we only sell to blast furnace operators, Fortescue, BHP and Rio Tinto combined sell several million of tons of finds to middleman, to traders, every month.

That explains the ever-increasing port inventories in China, another self-inflicted wound by the Australian majors to themselves. First, BHP and the other Australian miners sell iron ore to the traders, to the middleman. Then the traders accumulate portside, the material that they acquired from the miners.

Then the traders borrow more money from the Chinese banks to acquire even more iron ore from their three enablers. Actually, four, as we should include the smaller one, Roy Hill.

Then, the only customers for these traders to sell their iron ore sitting at the ports are the blast furnace operators, the very same ones that would otherwise buy iron ore directly from the miners.

How smart is that? While we continue to see Rio Tinto and Vale clearly behaving better and are hopeful that BHP will get religion soon, we keep alternative plans for our APIO, just in case condition happen to worsen. The advantage that we have in the U.S. do not apply to our presence in Australia.

However, given its low CapEx burden, APIO is still is, for now, a cash flow generating asset for us. We will continue to operate this asset for cash. But at this time, we have no real plans to expand the life of mine beyond the current proven and probable iron ore reserves.

The way we plan it and are executing our strategy, HBI coming online in 2020 will more than offset the EBITDA and cash flow coming from Australia, which, at that time, would theoretically be arriving at its end of life.

Based on our realistic view of the international market, while we cannot count on APIO to be on ATM for Cliffs every single quarter, we definitely expect our Australian business to continue to be a positive cash flow generator for us, until the time comes, and we finally let APIO rest in peace.

Unlike the vast majority of the experts and commodities desk, I continue to see a lot more reasons for iron ore prices to go up than to go down. There will be always volatility, even extreme volatility, as we have seen during the last six months. But I definitely recognize the conditions for iron ore prices to trend upward.

Goldman Sachs got to this conclusion during the night today. That's good to know. China will continue to need iron ore to meet their production and employment needs, not even consider the impact of the one-belt, one-road initiative.

And last but not least, with all the geo-political issues we see in the world right now, iron ore becomes that much more important, as it pertains to several countries' defense and military endeavors. Again, I will be more than happy to elaborate on that in the Q&A, if you feel like doing so.

The only thing that I could see causing iron ore prices to go down, is if BHP keeps the same failed playbook that they have been operating under for way too long. By now, they should have learned that their way of doing business is not working.

There is a reason why Rio Tinto and Vale, who has been not only preaching, but practicing value over volume, do not have activists at their door, and BHP does. When all is said and done, I have faith that more intelligent people will prevail at BHP, bringing great benefits to themselves and to everyone else.

My thesis on future iron ore pricing leads us to believe that our $650 million EBITDA guidance for 2017 might prove to be conservative by the end of the year.

Also, driving our EBITDA slightly lower than our previous guidance is the adoption of the year-to-date hot-rolled price of $620 per net ton as a representative number for the balance of the year. While during the second quarter, we saw prices dip below $600, the back of the year is looking stronger.

Underlying steel demand continues to improve, but service centers insist in keeping inventories dangerously low.

As the bad players continue to understand the threats of a Section 232 to themselves, and imports continue to disappear from the market, panic buying from service centers and other steel consumers could drive the steel prices in United States sharply up and very quickly. Again, explore that in Q&A. I'll be happy to go back to my Metals USA base.

To wrap-up, I have never been more excited about the future of Cliffs, than I am right now. The neglect of the U.S. iron ore business by previous management and board is totally behind us, and the company is back to the power it once was with EBITDA margins at the peak of the industry in the United States.

It's nice to finally talk about growth into new products and new end markets, rather than just cleaning up the mess left behind by the previous regime. Going forward, our strategy will remain focused on the area where we operate best, the Great Lakes, selling one-of-a-kind products to the steelmakers that rely upon us, both blast furnace and EAFs.

With that, I would turn it over to the operator to direct the Q&A portion of the call..

[Operating Instructions] Your first question comes from the line of Lucas Pipes with FBR and Company. Your line is open. Please go ahead..

Yes. Thank you very much for taking my question, and Lourenco, congratulations on another strong quarter. So I wanted to ask about the announcement in regards to the HBI capacity in Toledo.

And specifically, I wanted to, maybe, get a little bit more detail, in terms of how you think about the financing for the project? So I think, in the past, you spoke about bringing in equity partners.

Are you still talking to potential partners on that level? And if so, what sort of equity partners have shown the greatest interest? And would you, for example, also consider though, borrowing at the corporate or at the project level? Thank you..

Thanks for the question, Lucas. Look, we are discussing with potential passive financial partners. We are. We like the idea of having financial technical partners that could add to the project and be adding value to the entire thing. Do we need them to do this? Not really.

We would be mitigating the cash out of the door by having one or two minority partners. But we will also be share – allowing someone to share in the profits after we are done. And depending on how prices will go in United States, and iron ore prices will go in the world, we might not even need them.

But because we're being so selective, and we're discussing with companies that really like – the possibility of having them together with us, we are continuing to do that.

It's not open to anyone, and it's not something that I'm going to share our numbers and our IRR, and everything that we're going to do with everyone that wants to show up at the door. Because we're not desperate for partners. We don't want partners that are not completely in line with our goals and what we're going to accomplish with this project.

The reason why they are so attracted to the project is the IRR. It's a phenomenal IRR. It's very impressive, very good. I don't know, if I've covered all the things you'd like to hear about that. If not, please ask a follow-up..

Yes, no, no. That's helpful. And you mentioned the attractive project economics. And I understand that you maybe don't want to get into all the details. But if you were to, kind, of think about cost ASP, in the current environment.

So we'd be thinking about, maybe on the HBI side, a $20 margin, $50 margin? Where would the, kind of, – I've put out some numbers, but kind of, if I had go to back to the drawing board and revisit those, what sort of margins would you guide to?.

Look, like I said last quarter, when we were discussing the Q1 results, so that would be the last time that you would be – you guys would be seeing the dollars per ton margin for pellets in United States at the level that we saw, because that was a carryover; the last carryover months from the previous year, and the previous calculations, based on the previous contracts.

So take the margin per ton that we got this quarter, and multiply it by 2, 2.5, and that's what the HBI project took before us. I'm giving the margin and dollars per ton, not the IRR or anything like that..

That's very helpful. Great. Well, I will leave it here. I appreciate it and good luck with everything..

Thanks, Lucas..

Your next question comes from the line of Michael Gambardella with JPMorgan. Your line is open. Please go ahead..

Good morning, Lourenco. Congratulations again on another good quarter..

Thanks, Mike..

A question – another question on the HBI project. I'm assuming that you could get more attractive financing if you had a partner with – that was a customer or a take-or-pay contract with some customers.

Yet, a lot of the customers, especially, on the EAF side in America, have their own captive – direct reduced iron source or some similar – something similar to the DRI source.

Could you talk a little bit on potential for customers being partners or take-or-pay contracts? And also, how you're going to entice these customers who have their own DRI projects to buy from you?.

Okay. Mike, let's start from the end. Customers with the DRI project these days are only one, Nucor. Nucor has a DRI facility in Trinidad, and another DRI facility in Louisiana. They are both on the coast, so they are positioned to receive seaborne pellets.

And they are both in locales that are very good to serve the mini-mills that they own, that are located in the south of United States. They do not produce anything in the Great Lakes. So am I expecting Nucor to be a client? Absolutely.

Because they have several other mini-mills now, up north there, that are out of reach for that – from their own locations in the south. So that's number one in terms of how I want the customers to be positioned in our project. As far as take-or-pay contracts and stuff like that, honestly, I don't like that. I don't like that.

I don't like that, but then you might say, oh, but that's exactly what you have at Cliffs. Well, there are historical reasons for that. And it goes back several decades. It goes through the bankruptcy of LTV, Bethlehem, Stelco, Acoma, long, long, long ago.

So, there are historical reasons for the configuration that we have, which we like and which we enjoy.

But starting fresh, starting from scratch, it's better to do – to position the customers to continue to be customers, to be treated like customers, to improve their ability to produce better and to accomplish their goals in terms of their product mix that they would like to produce out of their EAFs. So, money is money.

The money coming from a customer, the money coming from a financial partner or a technological partner, they're exactly the same. And these other guys don't buy the products for their own use. So I like to separate things, and that's the way we are treating this thing.

And even more important, I will emphasize this one more time, these financial partners are not something that we must have. It might be a nice to have. But it's not must have. The projects can happen with or without the partnership..

So I'm assuming – I just want to understand; I'm assuming, you would not focus on these take-or-pay contracts, because you feel that your cost structure to the customers up in the Midwest will be very attractive versus alternative material coming in from the Gulf, or coming in through the Saint Lawrence Seaway just like they have a problem bringing iron ore through the Saint Lawrence Seaway, they have a problem bringing [local design] through the Saint Lawrence Seaway.

Is that why you're not focused on these take-or-pay contracts?.

That's part of the reason. Not the entire reason, because of – like I said, in my prepared remarks, we will of course have the logistic advantages of being inside the Great Lakes, whereas everyone else is outside the Great Lakes. So we are able to be enjoy the logistics advantage within our market.

But on top of that, you go for take-or-pay contracts when you don't have an alternative to position your product to another client. We're talking about 1.6 million metric tons a year production in a market, just Great Lakes, not the entire United States, just Great Lakes, in a market that, as of today, is 3 million metric tons.

So if mill A doesn't want the product, I'll sell to mill B. The only thing is that mill A will have it or mill B will have it and mill A will not have it. And so I don't need a take-or-pay. I'm going to the sell to the ones that are willing to buy. My market is bigger than my production. Life is good. Don't need to take or pay.

We're not going to have take-or-pays..

And when do you think first production will start?.

July 2020. I will invite you for the groundbreaking ceremony..

Okay. Thanks, Lourenco. Thank you. Have a great day..

You are going to enjoy a beautiful summer day in Ohio..

Take care.

You too..

Your next question comes from the line of Novid Rassouli with Cowen. Your line is open, please go ahead..

Good morning, guys. Thanks for taking my questions. First off, I just wanted to drill down into the guidance. So the $50 million cut to guidance, I wanted to see if the majority of that move is being driven by the change in HRC.

So, in April, which I believe was – your last guidance was based on April HRC average of around 650 And now the year-to-date average is $620 Just wanted to see if that kind of $30 delta is the primary driver of the reduction?.

Good morning, Novid. I will let Tim Flanagan answer that, but before he does that, I just would like to make sure you understand that during my prepared remarks, I said very loud and very clearly that this might prove itself conservative. We are being conservative here. It's about under promise and over delivery.

We are taking a lot of conservative assumptions. And that's why, even though we're increasing a lot, our forecast above consensus, it's a reduction of $50 million over previous guidance. So Tim, please go ahead..

Yes. And I'll add to my prepared remarks as well, in terms of just – there's a number of factors playing in. And certainly, first and foremost, the lower HRC and IODEX prices from guidance to guidance does have an impact on that.

But we're also looking at the APIO discounting that we talked about, the sales volume expectation for APIO coming down slightly. U.S. IO costs, we've guided to a slightly higher SG&A number. And all of those numbers are offset by, really higher-than-expected pellet premiums as well as lump premiums out of the Australian business.

So when you look at those all those factors, is how you get to that $50 million Delta..

Novid, it's important that you clarify these things. Because you know these days, there's big agencies, associated press Reuters, when they read the press release, the computers read the press release, and they print line by line, the bullets. And after that, it becomes the only reality.

Since important that people – that it's not artificial intelligence, it's natural intelligence because artificial intelligence will fight more like a natural ignorance. So I need – natural intelligence to process these things and come up with something that makes sense.

Remember, we have a bunch of guys out there that they make a living just screwing up companies. So if you allow these guys to continue to make a living, these guys will continue to screw up companies forever. And these guys belong to jail. I'm working on one right now.

So anyway, just do your homework; Gambardella, and Brett Levy and Jerry Sussman and Evan Kurtz, and Seth Rosenfield and Lucas Pipes and Jerry Sussman, Phil Gibbs, these guys have a brain. Let these other idiots who die with no money, and probably, if the SEC does their job, behind bars. So go ahead, Tim. Please.

I do know anything about that..

Okay. All right..

Let's go to the second question, guys. So the second question, and Lourenco, you said that you were happy to elaborate on this in your prepared remarks. But I'm just curious, you're very confident in higher iron ore prices.

I just want to see, does the rationalization of Chinese steel production, does that play into kind of your thought process? Or does that worry you as the large consumer of iron ore, that that could ultimately pressure prices, maybe not today or tomorrow, but longer term?.

Look, the only rationale for prices, iron ore prices to go down, is to believe that Australia will continue to produce more iron ore. And when I say Australia, include Vale. So Australia plus Vale. So every time I say Australia is Australia plus Vale because all the rest is irrelevant.

So the only way for iron ore prices to go down, anytime, any day in the future, is if Australia plus Vale, that I'll for now call Australia, will continue to produce more iron ore than China is able to digest. And digest is not buying. Digest is putting inside a blast furnace and getting at the bottom as liquid pig iron. That is digesting.

But what these guys are doing, these guys mean, for abundance of clarity, Fortescue, BHP and Rio Tinto, Vale and even the midget, Roy Hill, they sell to traders. And these traders do not have blast furnaces. They buy because it's cheap to borrow money in Chinese banks. Then they put that iron ore in the ground, not in a blast furnace, at the port.

And then they go back to the banks, and say, hey, I have collateral, can I borrow more? And the banker say, yes, and they borrow more, and they buy more for the same idiots. And then their port site keeps growing because there is no blast furnace over there. But they need to open space for more. It's not because they want to sell anything.

They're in the business of buying more, borrowing more because they use money for other things besides iron ore. But they need to open space. Then they go ahead and sell for any price to the blast furnace, the same blast furnace that the miners would sell to. That's my problem with the business in Australia.

Then comes the question, will this be happening forever? Yes or no? Of course, the answer is no. One day, this bubble will burst. And on that day, people will say, oh, we are surprised that we are not seeing iron ore inventories going up. So companies don't move altogether.

So first, Rio Tinto, the new CEO of Rio Tinto made the bold move of announcing that it was going from stupidity to value over volume. And he did that in the very first month of his tenure as CEO.

Then, Vale since S11D came on in operations, is clearly, moving towards selling more of the high iron content material and a lot less of the low iron content material. Actually, as they announced the results, they made it abundantly clear, so that makes two. And then, you have Fortescue. Fortescue has a problem.

Fortescue has only low iron content to sell. So for them, they don't have anything to blend with, like Vale does, like Rio Tinto does. For them to blend, they need someone else to blend with. And Vale did not play ball with them. If you remember, they tried, but didn't fly, it didn't work.

So they are left with their low iron content, 170 million tons of their low iron content to sell. If they stop selling to traders, one, they will not be supporting their stockpiles and the port will continue to grow. But two, they will be selling fewer tons. So that's a decision for my good friend Andrew Forrest, and my good friend Nev Power to make.

That's not my decision to make. But the lay off the land is right there. That's it. And then Roy Hill, doesn't matter. It's just a disturbance. It's just a bunch of low in periods lumps that nobody wants. For a while, they disrupted the lump market a lot. Now they are gone. Lump premiums are back up. But that's it.

So if you believe that BHP will have no change in their course of action, that's on them. If you believe that BHP is getting good at the hanging by the fingernail situation, with the activist that is there, that or me, I don't know if I can be more specific about that..

Got it. Thanks guys..

Thank you. My name is Lourenco, not guys. Just kidding.

Emily, whose next?.

Your next question comes from the line of Nick Jarmoszuk from Stifel. Your line is open. Please go ahead..

Hi, Lourenco..

Hi, Nick..

I wanted to ask you about the Toledo financing. Given that you want to start construction in, roughly, a year, when would you like to have the financing in place? And I know, it sounds like there is a push, pull between generating cash flow and not bringing somebody in, versus bringing somebody and having the financing in place.

So how do you think about that?.

Look, we have the cash flow that we need for the project, pretty much, designed and in place. We are going to have something like 35% of our expenditures next year and then, 50% in 2019 with the remainder in 2020. So we believe that we're going to need the money, more or less, between the first and second quarter of 2018.

So that's what we have in mind at this point..

Okay. And then, regarding the discount for the lower grades, how do you guys think about that? Because it's obviously lower than it has been historically. Fortescue put out that they're expecting, I believe, 75% to 80% for their upcoming fiscal year.

So what do you think is causing this and what can bring it back to more normalized level?.

One thing that can help that is the usual suspects, at least reduce their sales to traders, that won't add any real consumption. They just add low-quality – low price material to the marketplace that comes back one quarter later to complicate our lives when we sell the new material in the marketplace. But that's something that I do not control.

They need to do that. I was very – I give you guys a lot of details in my previous answer. As far as we are concerned, in our APIO, our plan is the same, as it always has been. We continue to operate as long as the APIO is cash flow positive. At this point, APIO is still a cash flow generator.

Even in that quarter that was horrible, like Q2, we were still able to generate $3 million of EBITDA. We had to cancel a couple of shipments that will result in negative EBITDA. But that's what management should be doing. We manage for cash, that thing. So right now, the life of mine is three years. I can't wait to get out of that place.

And then let them have fun, selling to traders and stuff like that if between now and then, they don't fix their act..

That's all I had. Thank you..

Thanks, Nick..

There are no further questions at this time. I'll now turn the call back over to our presenters..

Thank you very much, and we will continue to be in touch. Have a great day..

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