Tim Flanagan - Executive Vice President and Chief Financial Officer Lourenco Goncalves - President and Chief Executive Officer.

Lucas Pipes - B. Riley FBR Seth Rosenfeld - Jefferies Matthew Fields - Bank of America Merrill Lynch Nick Jarmoszuk - Stifel Nicolaus.

Good morning, ladies and gentlemen. My name is Liandra, and I am your conference facilitator today. I would like to welcome everyone to Cleveland-Cliffs’ 2018 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’s Web site. Today’s conference call is also available and being broadcast at cleveland-cliffs.com.

At the conclusion of the call, it will be archived on the Web site 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 Tim Flanagan, Executive Vice President and Chief Financial Officer..

Thank you, Liandra, and thanks to everyone joining us this morning. I’ll start the call with the discussion of our second quarter results and outlook before turning it over to Lourenco for his remarks.

For Q2, we reported total company adjusted EBITDA of $276 million, representing more than doubling of EBITDA performance in the prior year second quarter. It was our best quarterly result since 2014. For the first time in over a decade, adjusted EBITDA only had two components, U.S. iron ore, corporate/other.

With the sale of the Asia Pacific assets announced in June those results have been moved to discontinued operations and are no longer included in our current or historical consolidated revenue, COGS and adjusted EBITDA. This leaves USIO as our sole EBITDA generating segment for the time being until the Toledo HBI plant comes online in 2020.

USIO generated $301 million in adjusted EBITDA for the quarter, a five year high watermark for this business compared to $162 million in the prior year quarter. This remarkable improvement was a result of increased sales volume due to higher actual demand for pellets from our customers, as well as the higher prices customers pay for pellets.

These improved pellet prices are the direct result of the more advantageous contract structure we implement, which deemphasizes the influence of the IODEX as a metric and magnifies the impact of the strong market conditions for both pellet premium and domestic steel prices.

While the Great Lake shipping pace typically doesn’t hit its stride until later in the third quarter, we are pleased with the demand for pellets during Q2, selling about 6 million long tons during the quarter, slightly ahead of our previous expectation due to increase appetite from certain customers.

You recall some of our customers elected to reduce their nominations for the fourth quarter of last year and therefore were light in inventory at the end of the winter. In light of this strong demand for pellets, we have again increased our full-year sales volume expectation at this time, from 20.5 million to 21 million long tons.

We expect to sell between 6 million and 6.5 million long tons in the third quarter with the remaining balance to that 21 million ton total to be sold in the fourth quarter. Our Q2 pellet price realization of $113 per long ton represented 16% improvement over the prior year.

This amount also came in higher than our current your guidance range, largely due to significant increase in hot rolled coil steel pricing from previous guidance and the associated adjustment required to true up the number with the much higher full-year expectation.

We also saw a favorable customer mix in the quarter relative to what we expect on a full year basis. The positive impact of higher HRC pricing and the favorable customer mix were slightly offset by higher freight rates and a lower IODEX average price during the quarter.

Year-to-date averages for our relevant metrics are; $826 per short ton of HRC; $69 per metric ton for the IODEX; and $58 per metric ton for the Atlantic pellet premium.

Assuming these averages would carry forward for the rest of the year, our full year USIO revenue realization would be approximately $105 to $110 per long ton, representing a $3 per long ton increase from our previous guidance on each end of the range.

As we noted in the past, these figures do not reflect our internal view on pricing and therefore should not be considered guidance. Cost wise, our cash cost was $62 per long ton compared to $59 per long ton in last year's comparable quarter. The increase in cash cost was mainly driven by favorable shift in product mix.

Due to increased customer demand, we are producing a higher percentage of the higher cost, but also, higher margin Mustang pellet than we originally expected. Cash cost was also impacted by higher energy, labor and royalty rates. This said, our original cash cost guidance of $58 to $63 per long ton is unchanged.

And for the back half of the year, we expect cash cost to remain reasonably consistent with our Q2 performance. As we enter into the heavier half of the shipping season, we’ll begin the work off to finish with inventory that we built in the first half of the year.

With this favorable working capital release, after all expenditures, including the monies we’ll invest in the HBI project, we expect to generate around $400 million in free cash flow in just the back half of this year.

As for the Asia Pacific sale, closure related charges for contract terminations and severance, as well as actual operating losses from our remaining sales during the quarter, made up a majority of $64 million loss from discontinued operations shown on our income statement.

With that, nearly all the closure related charges have been recorded and we recorded our final shipments in June.

Next quarter with the closing of the sales of Mineral Resources and primarily due to the positive effects of the reversal of our currency translation adjustment, which is currently on the books for approximately $230 million, we expect to book a positive contribution to discontinued operations, which should be in excess of $200 million.

As for CapEx, we spent $44 million in the second quarter, $23 million of which related to the HBI project. We have now spent $81 million towards HBI this year. As we progress with the placement of the bit packages, we receive more favorable terms in our payment schedule than we originally expected.

The overall project budget remains the same but we have lowered our expected outflow this year to $200 million, down from our previous assumption of $225 million. This is a positive result of our negotiations on the timing of disbursements, and does not affect the expected timing of completion and the start up of the plan in mid-2020.

From a tax standpoint, we recorded $2 million income tax benefit in the second quarter related to the reversal of reserve for uncertain tax positions due to lapse in the statutory limitations. And last but not least, our sizable NOL position.

The unlimited deductibility of those NOLs and the ability to use percentage depletion as an offset to earnings has put us into an extremely enviable tax position. For the foreseeable future, we expect to be a 0% taxpayer both on the cash and effective rate basis in nearly all net income scenarios.

On top of this, starting next quarter, we’ll begin to receive cash refunds related to the AMT credits. Next quarter’s refund will be about $10 million with the following years being approximately $110 million and then another $110 million cumulatively over the next three years beyond that.

These refunds, combined with our current and expected robust free cash flow generating ability, put us in a phenomenal position to not only bring our net debt below $1 billion but also to allow us to return meaningful capital to our shareholders over the coming years. With that, I'll now turn it over to Lourenco..

Thank you, Tim. And thanks to everyone for joining us this morning. Our second quarter results provide a clear picture of what Cleveland-Cliffs has become and what it will continue to be; a simple, clean, cash flow generating powerhouse.

Manufacturing in United States has been reestablished and everything we have done to improve and evolve this Company over the past four years has set us up to thrive during this manufacturing renaissance. Our U.S.

iron ore business as it is today well protected by geographic and contractual barriers is sustainable and will carry us through the next two years as a money print machine. Beyond that point, we’ll be adding HBI to the mix, a game changer event that will further strengthen the foothold we already have in our core Great Lakes markets.

During the second quarter, we announced the sale of our Asia Pacific iron ore business likely to close this quarter. After four years of successful asset divestitures, including all five coal mines, Wabush, Blue Lake, chromite, nickel and all other smaller projects. The sale of APIO was the final piece of our strategy driven transformation.

We have said from the beginning that our objectives are clean exit from Australia with minimization of liabilities. This transaction allows us to accomplish both. We not only reduced our expect cash obligations by $70 million but we also reduced the asset retirement obligations by another $15 million.

The divestiture eliminated some of the uncertainty surrounding these obligations, and gave us cash in the door from the equipment sales right away. With the sale of APIO and with the recent court approval of the Blue Lake and Wabush CWA reorganization plan, we can now move forward completely focused and undistracted.

From now Cleveland-Cliffs is a U.S. centered business and a very profitable and sustainable U.S. centric business, actually the best one among all out there, including both private and publicly traded companies. Cleveland-Cliffs is a central and vital component of the U.S.

manufacturing sector, and we are the only company of our kind that does what we do. Our $276 million in Q2 EBITDA; our $113 per long ton revenue realization; and our 45% EBITDA margin, let me repeat this one; our 45% EBITDA margin, are clear evidence of our profit generating power.

By the way, these results were achieved in a quarter that the IODEX averaged just $65 per metric ton, clearly demonstrating that our business is not a proxy for the IODEX.

Cleveland-Cliffs’ current and future results are all about the commercial contracts we have in place with our customers; the domestic steel prices that are here to stay and pellet premiums that will continue to reflect high demand for pellets for the foreseeable future.

Regarding the sustainability of the business going forward, the steel market in United States is in great shape. Every single subsector is showing year-over-year growth, in some cases substantial growth.

The actions taken by the Trump administration, mainly tax reform, have brought a massive positive impact to the economy in general and to the steel business, in particular. Even without Section 232, the domestic steel market would be doing well.

As far as Cleveland-Cliffs is concerned, because of how we have constructed our contracts, we have benefited directly and immediately from the rise in bench market steel prices that we have seen this year.

I can actually make the case that Cliffs benefits from this steel price rise more and more immediately than most domestic steelmakers and service centers.

Based on the role we play in this industry and the ongoing dialogue we have with downstream steel manufacturers, I can tell you that the current strength in the market is not a one-time thing; manufacturing in the United States is back; tax reform is driving industry resurgence; and the base case scenario for steel pricing must be re-rated much higher than what we have seen so far, because demand for pellets continue to increase.

As we did last quarter, we once again increased our sales volume forecast and now expect to sell 21 million long tons of pellets this year. With our sales volume and pricing outlook both increased again, the ranges that we have provided imply EBITDA generation north of $800 million for this year.

This $800 million number represents 60% increase from 2017, which was actually a good year with $500 million EBITDA. Similarly, our forecast for 2019 is very positive. On top of our favorable contracts, we will have a large tax refund and no taxes to pay, thanks to tax reform, and no more negative impact from APIO.

This will leave us with a lot of free cash flow to allocate both this year and next. With that, I'd like to make clear to the investment community what our capital allocation priorities are.

Our first priority, the HBI project, this project along with the corresponding Northshore upgrade, will provide better returns than anything else we can possibly do with our cash at this time. The project is fully funded. It’s on time and on budget. The HBI project remains the number one focus of the entire Cliffs’ management team.

Our second priority, the balance sheet, we have long said that our goal is to reach a net debt level of $1 billion, a long way from what we have in this company when I first started here four years ago. We like the $1 billion level because it gives us the comfort that we can navigate any cyclicality that the market throws at us.

With our current cash on hand, combined with what we expect to bring in over the coming years, it doesn’t make a lot of sense to refinance our three tranches of notes maturing, two in 2010 and one in 2021. Our bias at this point is to outright, retire all these notes.

Our third priority, capital return to shareholders, our special dividend, our recurring dividend or a share buyback should be considered not too far in the distance. The route we will ultimately take will continue to be evaluated and will depend on the market at the time we decide to move forward.

That said, each day that to bring in more cash and make progress on HBI, we get step closer to starting to return capital to our shareholders. It’s my plan for next week in the board meeting to start making proposals to my board on how and when we will start to return cash to the shareholders.

And one more I want to mention would be any strategic opportunities that could present it-self unexpected. This happened three times last year with our purchases of the respective minority interest in our Empire and Tilden mines in Michigan, as well as land in Nashwauk Minnesota.

During the last four years, we have built a strong track record of high return capital deployment and we will approach any future opportunities with the same discipline. At this point, we do not see a whole lot of logical opportunities out there. But if an enticing one somehow pops up, we will be ready.

With that, I would like to drill down priority number one, the HBI project. The second quarter was another successful one, as we continue to execute on our plan is staying ahead of schedule and under budget. The primary accomplishment in Q2 was mostly foundational work.

We installed the necessary underground utilities on site, finished the piling work for the first tower and begun laying concrete, all of this to put us in a position to begin action in the third quarter.

Unlike other projects completed in the United States, during the past several years, the same team of Cliffs’ employees in charge of the construction will be the team running the operations once we move into production in 2020. This helps us ensure that everything is being done right in a safe and environmentally friendly manner.

Not just a contractor cutting corners to get the job done and then handing the keys over to the operators. Furthermore, we are not undertaking a science project by any means. This is very much an off-the-shelf Midrex project, proving out by decades of several other successful Midrex plants.

For starters, Midrex is the unquestionable market leader in DRI and HBI technology. Our upfront feasibility study on this project completed by Cleveland-Cliffs over a year ago was clearly done right. It’s now over a year since we announced the site selection, and our budget of $700 million remains intact.

On top of that our cash outflow schedule is more friendly than originally anticipated. We have $444 million of the total construction costs, or 65% already contracted. And work packages and contractor bids have come in at or below our original expectations.

At this point, it is already very evident that Cleveland-Cliffs is executing on a well detailed plan to build the most efficient and most environmentally compliant Midrex plants in the world, and everything is going extremely well.

In the mean time, our conversations with our future customers continue to give us comfort and excitement about the introduction of our HBI to the markets. This is something that is desired by the customers and very much needed in the Great Lakes.

And let's make it abundantly clear, Cliffs is the only company that can do it, because we are the only proven and capable producer of DR grade pellets in United States.

Cliffs is on the only one that has full control over feedstock, DR grade pellets and that’s a decisive factor; the most important element in actually being able to produce a high-quality and cost-effective DRI, HBI.

In the EAF space, we are seeing a migration to higher quality HBI like feedstock similar to what we have seen with blast furnace toward higher grade sinter feed ore and the ore pellets. The markets for pig iron and buchling scrap continue to be healthy.

With the market share of EAFs in the United States now approaching 70% of the overall steel making production and with their further advancement into higher margin sophisticated steel grades our HBI will be essential.

Not to mention the source of our units at Great Lakes EAFs are currently forced to rely upon from place like Russia, Ukraine, Brazil and Venezuela, are all undependable not caution made like ours will be and cost up to $75 per metric ton, just to transport to the point of use.

All of this considered, HBI is an overwhelmingly accretive opportunity for us, in both good and bad markets. First, we’ll have a major margin contribution from HBI. With where pig iron and buchling prices are, both above $400 and with the benefit of cheap and easily available natural gas, our cash margin for HBI would be north of $150 per ton.

But 1.6 million metric tons of HBI isn’t paying market price for DR grade pellets. Second, our HBI segment will be paying our USIO business unit market price, more money for DR grade pellets than what we currently sell conventional blast furnace pellets for.

So not only will we be getting a huge EBITDA contribution from the HBI plant itself, but our USIO margins will further expand by replacing some of the blast furnace pellet business with a higher margin sales of DR grade pellets to our own facility.

With our remaining blast furnace pellets, we will continue to support some integrated mills that will do well while other steel mills not served by Cliffs will lag behind. In summary, Cleveland-Cliffs is now the company I envisioned four years ago; simple, efficient, focused, environmentally compliant, safe and with a healthy and solid balance sheet.

Investors should take notice that we commend the highest margins are more all comparable and competing investments among all U.S. based businesses and that includes all mills, all integrated mills and all service centers in United States.

Furthermore, based on the letter of the contracts we have in place, this scenario will not change, it is here to stay. We are hitting multiyear highs in selling price even while the IODEX iron ore price sets. We will continue to rip the benefits of the healthy steel market while it lasts.

And that is certainly the case for the rest of 2018 and the entire 2019. And by 2020, we will have a new business segment, HBI with a higher and less volatile sales margin that will further enhance our earnings power. With that, I will turn it over to the operator for questions..

[Operator Instructions] And your first question comes from the line of Lucas Pipes with B. Riley FBR. Your line is now open..

Good morning everybody, and congrats on fantastic quarter; the progress in Australia executing that very nicely; and then the good news on HBI. So I wanted to maybe first ask a question on your sales versus production guidance, great to see that you're able to sell a little bit more in this environment.

And some of the questions I think adding is can you put a multiple on that? In other words, would you be able to maybe increase production in 2019 close to the 21 million ton figure given that the demand is currently there. Thank you..

As far as the sales versus production guidance, we are increasing sales, basically because our clients -- if you recall at the end of last year. In the fourth quarter of last year, we were caught by surprise when a cup of clients decided to reduce their nominations within their allowance of the contracts give them.

So they will not do anything out of the ordinary. It was just something that I was not expecting, because everybody knew in the business that 2018 would be a good year. So I thought they would be preparing themselves for that. But anyway, I am not questioning or complaining about their decision.

Everybody does what they feel like what’s the right thing to do. Maybe they decided to reduce their nominations and they bought fewer pellets than they were planning to originally. So when 2018 came and came the way it came for the domestic producers, they needed more pellets.

So we are basically selling them the same pellets that we would be selling then in Q4 of 2017 and charging 2018 prices. So they are paying more for the same pellets that they could get for last year. But hindsight is 2020, so I am sure that they are not going to make the same mistake again.

So it all depends on how our clients will behave at the end of 2018 and then we’ll see how much we’re going to sell. At this point, they are really coming for the pellets and we are happy to supply them with everything that we can possibly do. We need to wait a little more to see how the nominations will play and then we’ll see how 2019 will be.

It will be a good year no matter what but it all depends on nomination in Q3 and Q4..

And maybe just to follow-up really quickly on this point, if you -- let’s say the nominations continue to be strong, you cannot sell more indefinitely than you produce.

So do you have the ability to squeeze out more tons from your mines?.

We always have planned to produce more. We always have the ability to produce more and this comes with costs associated. If you recall, last year, we acquired the minority positions in both the Tilden and Empire mines. Tilden is operational, so now we have full control at Tilden and Empire is an investment.

Michigan has been extremely helpful in terms of what it does to bring Empire back to operations, and we are giving serious consideration to that. At the same time, we acquired land in the Nashwauk.

And coming October-November, Minnesota will be a lot better, because we’re going to have a new governor with new people taking care of business in that state, no matter the new government will be a democrat or a republican I already know that the government will be better than the one that is there right now.

So we bought land over there to put it to use, but I'm not going to do anything with this -- governor that cannot make a decision that make sense. So I will wait for the new one and am already talking to both sides. So we are preparing ourselves. So make no mistake we will take care of the market..

And maybe for me to wrap-up, I think Lourenco, in your prepared remarks you said HBI was ahead of schedule and on budget. Maybe you could just confirm that quickly.

And then on those two -- on that point, can you remind us about the critical project pathways, does that occur only early ‘19, mid ‘19 later in the year maybe? And then secondly, you addressed commercial strategy in your prepared remarks as well.

But can you maybe share some thoughts as to when is a good time to enter into your first commercial contract for HBI? Thank you, and that’s it from me..

Those are very comprehensive questions. Lucas, I will try if my memory is good. First of all, we are ahead of schedule and below budget, so we said ahead of schedule and on budget. We say on budget, because we don’t want to start patting ourselves on the back too much but we are ahead of schedule and below budget at this point.

And our budget was very conservative and well done, because after more than a year, we haven’t changed the number. We haven't done anything to complicate the outcome of the cash disbursements, so it looks like it’s all in. And at this point with more than 65% of orders placed, I can tell you that this budget will not change.

So we are ahead of schedule and below budget to finish this ahead of schedule and on budget at the very least. As far as my response, all the infrastructural and foundation work is being concluded as we speak. We are going to start erecting steel in Q3 and we should start commissioning of the plant ahead of schedule.

We are going to see the tower being started to be erected sometime later this year. And we are very confident that with the market so eager to start buying our product.

We have all incentives to finish ahead of schedule; doing everything correctly; everything in a safe manner; taking care of the environment; taking care of Toledo and the surrounding towns; making everybody happy in the area. But we are working hard to be able to start delivering HBI a little earlier than the original schedule of August 2020.

As far as commercial contracts, we are in deep negotiations with the most important clients that we are going to have and the conversations are going extremely well. I have been keeping commercial very close to that and I will continue to do so.

But at this point, it’s clear that the material is needed, the shift toward high-strength steel and also mode of use and things like that for many mills is reality.

And they can’t do it without our feedstock, particularly in the Great Lakes, because there are no real high quality iron substitutes arriving in the Great Lakes, or being produced in a way that Great Lakes’ many mills can enjoy. So the conversations are going well. They know exactly what they are going to get.

We are in discussions, not only with commercial people but also technical people, within this -- future clients. And the operations people are already working with us in terms of detailing the specs that they want and everything that they are going to get from us, so going good.

And we are very confident that this product, our HBI will not only be a big technological success, a great true event for this many mills that are pursuing higher specs in the steel food chain. But also we have huge commercial, call it a, huge profitable products for Cleveland-Cliffs..

Your next question comes from the line of Seth Rosenfeld with Jefferies. Your line is open..

Starting out on outlook for cash costs please, we’ve obviously seen those costs creep higher over the past couple of quarters.

Can you give us a little more color to better understand the mix of areas where you’re seeing upward cost pressure, and how much of the step up can be attributed specifically to the higher cost Mustang shipments? I’ll start there please?.

Seth, a lot of these costs are related to product mix because we are producing more -- in the second quarter, we produced more of the Mustang pellets than we have originally anticipated. And the Mustang pellets have a cost component that is higher than acid pellets for obvious reasons. We have to add -- it's a super flux pellet.

So we are doing more work. We’re adding more raw material to produce the Mustang pellet. This being said, the margin of the Mustang pellets is positive. So the costs are higher but the price is much higher than the blast furnace. So at the end of the day, as a net-net, very positive for us, but I’ll let Tim Flanagan elaborate on few other things..

Seth, the other pieces beyond the production mix of the Mustang, higher diesel prices with oil increasing, you’re seeing higher labor rates specifically around profit sharing and then our royalty rates, in particular based on our realized revenue rates. So as profits go up that higher sales price drives a higher royalty rate.

Outside of that, the one comment I would make on the diesel front, don’t forget that certain of our customer contracts are tied to PPIs. And so that was steel related increases we see a benefit on the revenue side as well, offsetting some of that cost inflation..

Seth, one more thing about the Mustang pellet, at this point, the Mustang pellet is a big success in the market, it’s considered the best pellet probably in the entire world.

So we are trying and selling Mustang pellets, not only trying but selling commercially, Mustang pellets to other customers outside of the original customer that was designed -- the Mustang pellets were designed for. That’s also the reason why we’re producing more Mustang pellets.

So it’s not limited by only one blast furnace of the one client anymore, it’s now a flagship product to sell to the ones that really want the best pellet available in the entire world..

And the separate question please. I think you mentioned earlier in discussing the realized price strength in Q2, there is a true up again on higher prices. Can you just help us understand the size of this? I think it’s a derivative gain. Just help us better understand the mechanics there..

Tim Flanagan will give you an explanation to that, Tim please..

So as all of our contracts are based on full year annual average pricing, as we look out over the course of the year and the HRC prices have taken a step change from Q1 to Q2, that drives up our full year expected realized price.

So therefore, we not only record that for the tons sold in the second quarter, but we have to look at the 1.6 million tons that we’ve sold in Q1. So that’s that true up adjustment that we’re talking about there..

Can you confirm the size of that gain in Q2?.

It’s about $4 ton impact on that realized revenue rate..

Your next question comes from the line of Matthew Fields with Bank of America Merrill Lynch. Your line is open..

Lourenco, congratulations on the progress in realizing your vision for the company..

Thank you, Matt..

A couple of housekeeping questions and then a couple bigger picture ones, I saw on the cash flow statement there was about $15 million used to repurchase debt in the quarter.

Would you tell us what tranches of funds you went after in the quarter?.

We are basically pursuing the 2020 that we have two tranches in 2020, one in March and one -- matures in March, the other one matures in October. So we went after those. And we also deal with the 2021, the tranche that matures in April 2021. We think of three that as the short-term ones.

And at this point, we are going to generate so much cash that we are going to pay this one out of cash flow generation. So there is no transaction to refinance this thing by any stretch of imagination. We’re going to continue to pay down. But every time someone calls in the treasure and offers a deal, if the deal is good we take it.

So we’re able to bring down another $15.5 million and that saving some money and interest expenses and continue to chip away the short-term debt, which is in the bag. It’s a -- for me, it’s a thing of the past revision -- the cash flow that we’re going to generate..

And just to clarify Tim’s remark, the $105 to $110 per ton revenue guidance is based on an average year-to-date hot roll price of $826.

Is that right?.

That’s correct..

I read in some Minnesota papers that Chippewa was able to get there mineral leases reinstated, because they secured some funding. But when I looked at the Switzerland based Riverdale commodities lender, it looks like there is a lot of overlap personnel with SR. I know you might not want to comment a whole lot.

But can you just comment a little bit about is that really what Tom Clark is supposed to be doing and any dynamic for how you see that playing out?.

With this entire ordeal the most surprising thing that I saw and read -- by the way, the way the finance came along did not surprise me at all, because who else would give money to a loser, like Chewbacca. So there’s no way he can get money from real sources, so it’ll be something like that. So no surprise.

That’s exactly what I was anticipating that would happen. With this being said, the most surprising thing is having the assistance commissioner of the DNR, Barb Naramore going on record, saying that Essar is not banned from doing business in Minnesota, that’s amazing, that’s unbelievable.

How come the guy that stole money from Minnesota -- from Minnesotans, from the people of Minnesota, for the number of years that they did and procrastinate and did what they did and now they’re not ban it from doing business in Minnesota, that’s pretty intriguing. So there’s no finance at the end of the day. There’s is nothing over there at safety.

And there is no plan. There’s no engineering. There’s no nothing. And even if they had, they do have to execute and executing a product of that magnitude is not for amateurs, it’s not for fly by nights, it’s for real companies, look what we have been doing with our HBI, that how things are done.

And to make matters even worse, think about the scenario for competition for pellets in the United States. You’ll remember Matt when U.S. steel brought back Keetac to operations without bringing back any blast furnaces.

I am sure that other than ourselves here at Cliffs, everybody else that follows the industry believe with conviction that there’re long pellets and they would come and compete against Cliffs and that would affect our business.

Guess what, they’ve brought back Keetac without blast furnaces on their own to use their pellets and they did not sell pellets to anyone in the Great Lakes. Why is that? Number one because we have context that precludes them from doing that. And second, because at the end of the day, our clients like our pellets, our pellets work.

So we are still likely so and started exporting pellets outside the United States. And rightfully so brought back their blast furnace, now they have fewer pellets to export out of the United States, god bless them, they’re doing the right thing, but they were not able to create any problem for us.

So I don't see absolutely any problems coming from there. And don’t forget the land that we acquired in Nashwauk is still under consideration by the judge; the deal is there, we pay the money, the POP cash the check, the deal was recorded and we pass the county. And the land is mine until someone else tells me that it’s not.

If someone else tells me that it’s not, we will act accordingly, we will appeal, we will go to another level of court of law. But I am going to fight that thing until hell freezes over, and that’s it. That’s the deal/ I don’t know if I am clear or not but if I left anything not explained, I would be more than happy to clarify..

I appreciate that color, and if you’ll indulge me, one more bigger picture thing. A few analysts have written recently that they expect that the discount for low grade iron ore is overdone and expect I mean reversion maybe, which signals that it’s not nor necessarily a secular shift in China towards higher quality pellets.

Do you care to comment on that dynamic at all?.

The first time I spoke about that probably, I think it was in March of 2015 in Perth, Australian. And I anticipated that China would move toward higher grade iron ore contents in there feed and Perth, that was March of 2015.

At that time, the only conversation that was going on was low-cost producer who is the lowest cost producer in the world the championship of stupidity that BHP, Rio Tinto and Vale were engaged. And they all three want that championship. They went back to Perth in March of 2016.

I let them know that in that one year since I have explained how things really work in the iron ore business, they had already destroyed $100 billion combined, all three, $100 billion in market cap on Vale, BHP and Rio Tinto.

Just after that, coincidently -- this business so many coincident Sam Walsh was fired from Rio Tinto, Andrew Harding was fired from Rio Tinto, Jim Wilson was fired from BHP, and [indiscernible] was fired from Vale. After that, Rio Tinto implemented the value over volume theory. The new COO of Vale came to implement a shift toward higher grade ore.

And BHP continues to create driverless things, the driverless truck, driverless trains, driverless CEO suite. So they continue to be driverless everywhere. And China continues to try to be first world super power, and first world super powers don’t pollute to produce steel. So long story short, the shift toward higher grade is there to stay.

The shift toward pellets is there to stay. And BHP and Rio Tinto are on thepath to become the next Fortescue. And Fortescue is already on the path to become the next Atlas.

Do I need to be more clear?.

No, I think that’s pretty good. Thank you very much for the color. I appreciate it, Lourenco..

Your next question comes from the line of Daniel Knauff with Citi. Your line is open..

I just wanted to ask one more, maybe on the broader iron ore market. Obviously, for a couple quarters now, pellets premiums have been very high level. I was just curious what your thoughts are in terms of what’s the sustainable level for pellet premiums? I know there is some limit.

So what regions are able to produce pellets due to water concern or iron ore? But I’d be curious to see if your thoughts on if there's additional capacity that might come on and what you think the current premium price do in terms of bringing that investment?.

BHPs ban that you need to look in terms of pellets and pellet premiums, it’s not capacity, its demand.

Remember half of the steel produced in the world is produced in China; more than 800 million tons a year in a market that’s a little more than 1.6 billion tons a year; more than half of the steel produced in China -- the steel produced in the world is produced in China; the rest of the world is comprised by big chunks like Japan, more than a 100; United States close to 100, and South Korea and Taiwan, and Germany and Italy, and the UK and Luxemburg.

And these are the places Belgium -- these are the places where pellets are favored. In our case, almost 100%, pretty much 100% here in the U.S., and Canada. So the Chinese side of the pie. Imagine a pizza that half is pepperoni and the other half is pollution. So the pepperoni pizza is well established, it’s not going to change.

And the pollution pizza will become pepperoni, think about as pollution becomes pepperoni, demand will increase so much. And that’s why the pellet premium in China was $18 per ton not too long ago, then went to $35, then went to $45, then went to $52, then went to $62.5, and that’s what it is right now, that’s China.

For the pepperoni pizza -- well established pepperoni size of the pizza hasn’t changed yet, wait until the pollution pizza becomes pepperoni that will be fun to watch.

You get it?.

Just one more to follow-up, just quickly on APIO, I was wondering if you could break out what portion of the cost in the quarter came from closing and severance cost versus the sale of the remaining inventory? And then maybe what portion was cash versus non-cash?.

Tim Flanagan will take that.

Tim please?.

So for the quarter, again, we said majority of the costs that you saw come through disc ops related to APIO, about 50 million of the 64 million were associated with Australia, 30 million of that loss was related to the sale of the inventory and the shipments we made during the second quarter.

And then the other pieces would be contract termination of about 30, severance of about 10, offset by the liquidation of the mobile fleet that we completed at the end of June, and we had a gain of about 15 million there. So that gets you to that roughly $50 million we saw come through during the quarter..

Your next question comes from the line of Nick Jarmoszuk with Stifel. Your line is open..

Obviously, the U.S. mills are benefiting from Section 232. I was hoping you’d comment whether your Canadian customers are seeing any headwinds from 232 and whether longer term, you see any risks to downstream steel demand in the U.S. arising from the trade policies? Thanks..

Nick, our Canadian customers are in Canada and they are of course extremely excited about the treatment that Canadians are getting from the current 232 consequences. But that’s a fact of life at this point.

From where Cleveland-Cliffs sits and from our standpoint, it’s more or less like this, so far so good; they are buying, they are paying, they are suffering, they are crying, we’re helping them with but life doesn’t change for me, we are just lending them a friendly shoulder for them to cry.

If they go beyond that, if they no longer buy, the steel that they used to produce will be produced by my American clients, and I will be happy to supply the same pellets to my American clients, or new clients and we will not be affected. So we thought elaborating too much what’s going to happen or what’s not going to happen.

I will tell you, no matter what happens, the same pellets are being consumed today at the Canada side of the Great Lakes can easily become soon be here at the American side of the Great Lakes, and we will be absolutely unaffected no matter what outcome we get from 232..

And then in terms of downstream demand, are you seeing any risk there with the elevated steel prices?.

Downstream, it’s actually exactly the opposite of your concern, because it’s unquestionable at this point. I’m not telling, you like Trump you don’t like Trump, it doesn’t matter. It’s unquestionable that Donald Trump brought back the resurgence of American manufacturing. Let’s take automotive.

The car manufactures that have been very vocal about against everything are running at record pace, people don’t talk about that. I don’t see that in headlines at it should be. The car manufactures are producing at a record pace. They have never produced and sold as many cars as they are selling right now.

And that’s just one you only need to drive by Toledo or any other mid-western little town to see that there is hope out there; there are jobs out there, the restaurants are open, the drycleaners are selling service; the cab drivers are working again. We are seeing American jobs being generated.

Instead of generating jobs in China, in Taiwan, in Malaysia, in Thailand, we are generating jobs in Ohio, in Pennsylvania, in Indiana, even in Wisconsin despite of these spineless politicians from Wisconsin, all of them.

So we are generating jobs in the Midwest, thanks to tax reform, not section 232, not anything else other than pure play book of tax report, long overdue. Countries are no longer taking advantage of the United States in trade thanks to [indiscernible], Peter Navarro, this guy that has been expanding United States out there, and we appreciate that.

And I appreciate what President Trump did as far as supporting trade. And it’s not a Republican thing. Here in Ohio, we have a set of democrats, Sherrod Brown, his speech is exactly the same as Donald Trump, because he understands, he gets.

So we are not at any risk or problem downstream then logic will prevail at the end, we’ll continue to be geared toward more and more production in America. That’s why I spent the last four years of my life out of retirement to bring Cleveland-Cliffs back to life as a supplier, as an enabler of steel making in United States, as a supporter of U.S.

manufacturing, because that’s what I believe, I believe in middle class, I believe in jobs, I believe in a strong economy and I believe in doing things here in the U.S., and that’s what’s going on. So the risks of things not going well, going forward, are zero.

With that, I will call the day because we already got two minutes beyond the 11 o’clock mark. I will appreciate the support and following from you guys, the research analysts during the last four years. I am here to stay.

I am going to be here for a long-long time, so better going along well than not going along well, because we are going to have to deal with each other for the foreseeable future.

And I would like to particularly thank the investors that have been with me from the very first moments of our very difficult path, but very well plotted out of the woods that started on August 7, 2014. We have accomplished a lot and we thank you all very much for the support. There's a lot more to come.

There's a lot more wells to be generated in this company, the upside is in the equity. And stay with me because we are going to make a lot of money together. Have a great day. Bye now..

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