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

Lucas Pipes - B. Riley FBR, Inc. Jeremy Sussman - Clarksons Platou Securities Seth Rosenfeld - Jefferies Group LLC Curt Woodworth - Credit Suisse Matthew Fields - Bank of America Merrill Lynch Derek Hernandez - Seaport Global Holdings LLC.

Good morning, ladies and gentlemen. My name is Lisa, and I am your conference facilitator today. I would like to welcome everyone to the Cleveland-Cliffs' 2018 Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

The company reminds you that certain comments made on today's call will include predictive statements that are intended to be made as forward-looking within the Safe Harbor protection 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 cleveland-cliffs.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 Tim Flanagan, Executive Vice President and Chief Financial Officer. Please go ahead..

Thanks, Lisa, and thanks everyone for joining us this morning. I'll start the call with some remarks on the quarter, before turning it over to Lourenco for his comments. For Q3, we reported total company adjusted EBITDA of $250 million, a 66% increase from our EBITDA performance in the prior year's third quarter.

Through just the first three quarters of 2018, we've already generated more EBITDA than we did in the full year for each of the last three years. Adjusted EBITDA from the U.S. Iron Ore business was $280 million, reflecting continued industry high margins and reliably healthy demand from our customers.

Sales volume of 6.5 million long tons came in line with our expectations as Great Lakes blast furnaces remain persistent in their need for our pellets. Shipments will pick up even further in the fourth quarter as the mills stock up ahead of winter and we expect to ship the remainder of our 21 million long ton full year sales outlook. Our Q3 U.S.

IO pellet price realization of $106 per long ton represented a 17% improvement over the prior year. This was down from the previous quarter, mostly because we had a couple of favorable onetime events last quarter and higher freight rates this quarter.

We are still at the higher end of the guidance range on a year-to-date basis, due to favorable customer mix, as well as the positive impact of HRC price adjustments we had in the first and second quarters.

As we always note, our revenue rate expectation calculation is for the full year and is unchanged from the prior quarter, as year to date average commodity prices remain pretty steady and freight rates have increased.

With about 80% of the year's index pricing in the books, we are fairly confident there won't be much volatility to this calculation for the rest of the year. That said, we expect fourth quarter realizations to bring the full year rate more towards the midpoint of that range.

The calculation is based on year-to-date averages of our relevant metrics applied to the full year. These averages are $839 per short ton of HRC, $69 per metric ton for the IODEX, and $58 per metric ton for the Atlantic pellet premium, as well as other management assumptions including customer mix, freight and PPIs.

From a cash cost standpoint, as we guided to in the previous quarter, we have tracked on the higher end of the $58 to $63 per long ton guidance range, both in Q3 and on a full year basis.

This is due primarily to the higher royalties we paid, driven by the higher pellet prices we are selling our products for, higher profit sharing due to the higher profits and increased insurance and pension costs.

That said, we remain in a stable cost position headed into the fourth quarter and expect our performance remain consistent with the last two quarters. In August, as previously announced, we completed the sale of our APIO segment, which drove a very meaningfully positive impact to our third quarter results.

Primarily, we benefited from the reversal of our currency translation adjustment, bringing a positive impact of $228 million to the P&L, also another $70 million benefit is related to the release of our asset retirement obligation, which Cliffs no longer will have to bear.

At this point, we don't expect any more significant activity in disc-ops going forward. In short, the book on APIO is now effectively closed. As for CapEx, we spent $80 million in the third quarter, $43 million of which were part of the ongoing construction of our HBI plant in Toledo, Ohio. We have now spent $123 million on our HBI project this year.

Our continued progress on securing more work packages has led to further refinement of the budget timeline and we have further reduced our expected spend on this year by another $25 million. This has not changed the overall budget or the completion timeframe of the project. It's merely a positive shift from the timing of cash deployment.

Clearly, the great progress we have made has led to numerous favorable outcomes from a cash perspective. As expected, we find ourself in a very comfortable position from a cash standpoint. At the end of the third quarter, we have approximately $900 million of cash in hand. Our profitability has become more predictable.

And we are realizing nearly 40% cash margins. And at this stage in the year, we are turning inventory into cash at a rapid rate. With all that, we decided to redeem, not refinance, our two tranches of bonds maturing in 2020, totaling more than $200 million.

This accomplished the dual goals of reducing our interest expense and extending our maturity schedule. Our first major outstanding note is now effectively not coming due until 2024.

On top of this, as we look into 2019, we will have a number of cash-related good guys compared to this year, including a large tax refund of a $110 million, the elimination of APIO cash losses, a more favorable working capital schedule, and reduced interest expense.

All else being equal these all add up to over $250 million in incremental cash compared to 2018.

With the combination of these items ahead of us, and the predictable cash generating business that has emerged with the execution of our strategy, the initiation of a dividend of $0.20 on an annualized basis was something that we are easily able to get comfortable with. I know Lourenco will be talking about this in his remarks.

So with that, I'll turn it over to him..

Good morning and thanks to everyone for joining us this morning. Before getting into my thoughts on our business, I'm going to pick up where Tim Flanagan let off, with a little background behind our decision to taking the important step of initiating our recurrent dividend payment to our shareholders.

Our the past four years, I have dedicated at least some time on our quarterly calls to explain the strategy we implemented in this company in August of 2014 and have been executing with great discipline since then.

The strategy centered in our unique strength of producing high grade iron units, customizing these iron units to each one of our clients and in maximizing the commercial leverage we have in the market.

The methodical implementation of this strategy, along with some well-timed liability management exercises has put us in the great cash flow position we are currently in. On top of molding this business into a predictable and consistent cash flow generator, we have also made it far enough along in the HBI project.

And at this point, any risk of a major cost overrun has been eliminated. With our balance sheet in good order, we have pressure-tested our free cash flow using a number of bearish assumptions and came to the conclusion that we are comfortable paying a dividend at the $0.20 per year level at any point in the cycle.

To those Cliffs shareholders who have been with me since near the beginning, and you know who you are, I have been waiting to get to this point for four years. Well, we have got there and it's now time to start returning some cash to you, our long-term shareholders. The HBI project and debt reduction continue to be our two top priorities.

But we have now reached the point from where we can dedicate resources to both and still can return capital to the owners of this company. The recurring dividend we announced today is a good start. But we have other tools in our tool box. And we will be ready to deploy each one of them as things develop.

In my time with Cliffs, we have updated the contracts covering about 70% of our sales tonnage. These new contracts reflect a pricing methodology that makes sense. Besides the global benchmark price for iron ore, we also included the domestic benchmark price for hot-rolled steel and reference to the pellet premium.

At this time, I'm extremely bullish on the market for all three of these components. China's push toward environmentally friendly ores should be further prop up seaborne 62% Fe content iron ore, and continue to push the price of lower grade ore further down during the winter heating months. IODEX is now at $74 per metric ton and trending up.

In the domestic steel market, thanks to a still very underappreciated tax reform implemented in the United States, which is supporting high economic growth and full employment in our country, healthy steel demand is a reality in nearly every single subsector. Last but not least, pellet premiums in Europe are being negotiated as we speak.

And it is abundantly clear that $58 number we have seen throughout 2018 will increase as we approach 2019. On top of that, early indications from some of our domestic clients point to a strong demand for blast furnace pellets into next year.

Especially since in 2019, we will be diverting approximately 500,000 long tons of DR-grade pellets to our own Toledo site. In preparation for the 2020 start-up of our HBI plant. A little more about the pellet premiums. Three, four years ago I was did only one predicting the moment of reckoning for the environment in China.

And how that would impact the Chinese demand for iron ore. Fast forward, China is now very hungry for high iron content iron units, particularly pellets, and that is happening in a world where pellets are scarce.

The difficult expense, lengths of time and proper conditions needed to bring pellets capacity online gives us the confident that this is not a short-term phenomenon. You need a certain type of iron ore, a substantial amount of freshwater like we have here in the Great Lakes, a lot of funding, time and technical knowledge.

This is not the bottleneck in logistics to bring another 20 or 30 million tons of commercial quality ore to the market. Our brand new pellets plant needs billions of dollars over several years to add just 5 or 6 million tons of pellets to the market. And on top of that, no major realistic project has even been announced yet, let alone developed.

With this as a backdrop, the Chinese paid almost $90 per metric ton for the pellets premium during the third quarter. The Atlantic Basin pellet premium, the index that our contracts linked to, has held steady since the beginning of the year at $58 per metric ton, as the European contracts are typically negotiated on an annual basis.

At this time, it is abundantly clear that the major pellet players in Europe, we will not accept $58 for next year. They will certainly push that number higher maybe much higher. As far as Cliffs is concerned even an increase to just $70 for next year.

In the pellet premiums would equates to more than $100 million in additional EBITDA for us, all things equal. I'll let you make the calculation on the impact of an $8 pellet premium on our EBITDA. That will be a good exercise for each one of you to do. In some, we are in very good shape as far as pellet premium is concerned.

As Tim alluded to establishing the divided was also driven by the progress, we have made on the HBI project and our full confidence in its own time and on-budget completion. At this point, this spend is over 70% contracted with no major negative deviations from our regional plant.

We have stayed under budget, while making zero cuts to our project scope. After several commitments, we have put in place, our expected spend remains the same at $700 million. It has been almost two years since the project started in-house and we haven't even tapped into the contingency.

This month, we began receiving steel for the erection of the 400-plus foot tower with our major critical past 0:06:44] items over the next year. We expect the tower to be completed by December of 2019. It won't be long before our mark on the Toledo's skyline is easily visible to everyone.

Our HBI customer discussions continue to advance, particularly at the technical level. There are several electric arc furnaces within close proximity of our Toledo plant. We have already spoken with several of them and they all have something in common. All of these EAFs, we have spoken with want our HBI.

Our value proposition for our new HBI customers is the same we have for our blast furnace pellet clients, tailor-made products and just in time deliveries.

There are 3.5 million metric tons per year of demand for imported pig iron and other ore-based metallics just within the Great Lakes plus several million tons of demand for Busheling scrap, and we'll only produce 1.6 million metric tons a year of HBI.

We did not need uptick agreements to finance the project last year, and we certainly do not need uptick agreements now. There is actually no reason to lock in commitments at this point, 18 months ahead of actual production. In other words, Cleveland-Cliffs does not want to sign uptick agreement at this time.

This project - product will sell out and it will sell out easily. In other very relevant news, on September 29, two days ahead of the expiration of the previous labor contract, we accomplished the important milestone of renewing our labor contract with United Steelworkers for another four years. Our relationship with the union is a real partnership.

We experience cyclicality together as partners. As I have already said, we have a lot more in common with the USW than these agreements. We are pleased that the unions' expectations of what was reasonable for their contract was in line with our own views and we were able to get the deal done without even having to sign an extension.

The new contract has a minimum impact relative to our operating costs. Just for the ones who need the numbers. The costs impact on us is less than $80 million over four years. In four years, we'll produce at least 80 million tons. Therefore, the impact on us is less than $1 per ton over the next four years. Totally acceptable and totally expected.

We are proud of our workforce and value our relationship with the union very much, this is an investment in our workforce that has a guaranteed payoff. We are very happy that the contract has already been ratified by the entire workforce at our union operations in Michigan and Minnesota.

By the way, the next time we speak on an earnings call, Minnesota will have a new governor. My conversations with both candidates have been extremely constructive. And it seems like both Commissioner Johnson and Congressman Walz understand the Nashwauk situation well. They both know that Cliffs is the employer of choice on the Iron Range.

They understand the full support we have from the USW local president and the union officials. The full support we have from virtually all the mayors of the almost two dozen towns of the Iron Range. The support we have from the current candidates for legislative office, both federal and in state.

And more than anything they know that our entire workforce of almost 2,000 Minnesotans and their families support Cliffs. During the last month, I had meetings with both candidates Walz and Johnson, and they heard directly from me a very clear message.

With the vast amount of land, we control within the entire Nashwauk iron strip, it's only possible to develop a real economically viable project in Nashwauk, if Cliffs is running the project.

Other than a couple of irrelevant local politicians and the lame duck governor and his departing crew, everyone else in Minnesota understands the reality of things in the Iron Range related to Nashwauk. I have no worries on that front. We are in good shape.

To wrap up, last quarter I laid out our capital location priorities going forward, and those remain in place. It's great to report to you that we made substantial progress on all three during the quarter. We stay on track with HBI, clearing out some legacy debt to reduce interest expense.

It goes next quarter for the ones that missed that, and initiating the dividend. Strategically, we remain steadfast in our value proposition. High-grade iron units both high-grade iron ore and pellets, as well as HBI is the direction the world is heading. The world needs more steel, but less pollution.

And Cliffs has the current and future product offering that satisfies both of these needs. As we move forward, these types of products will be the core of what we do. And any growth opportunities we seek out will fall under this category.

And in the meantime, I can't express how gratifying it is to reach the point that you can start to putting the shareholders' capital back in their pockets. With that, I will turn it over back to Lisa for questions..

Thank you. [Operator Instructions] And our first question comes from the line of Lucas Pipes from B. Riley FBR. Your line is open..

Thank you very much and good morning, everyone..

Good morning, Lucas..

Good morning..

Lourenco, congratulations on the initiation of a regular dividend, very exciting, and I know you've worked very hard and long towards this - one of these - towards this goal.

What I wanted to follow-up on with the dividend is it sounds like you're solving for kind of what is sustainable through the cycle, so kind of even if things were to soften a little bit you could keep it at that $0.05 per quarter level. But if I look out over the next year or so, I continue to see you generate a lot of cash in excess of this.

So what would be your goals for the allocation of that capital? I know you mentioned HBI and then deleveraging. But will we be looking at a special dividend at - maybe a share buyback? Could you maybe elaborate on some of these thoughts? Thank you..

Sure, I'll be glad. You're absolutely right. We are going to generate a lot of cash in Q4, a lot of cash in 2019, a lot of cash for the foreseeable future. In Q4, very first thing that the numbers we will show and that probably will surprise some of the - not you Lucas, but some of the analysts that can't read numbers.

They will see that we paid down the - that we paid off the two tranches of 2020. We received a [reverse enquiry] [ph] here this morning that despite the fact that we paid the 2020, our net debt is still at the same level. How come is this possible? It's unbelievable that these big banks, they still employ this type of people.

You guys should resign for your lack of knowledge of things, because it's not like you don't understand - not you Lucas, you are one of the best. It's not like you don't understand our business. You don't understand your own business. You are a disaster. You are an embarrassment to your parents.

With this being said, we are going to use money to reward the long-term shareholders. So if the stock continues to go down, based on these kids that play with computers and somebody else's money, we are going to buy back stock.

We are going to screw these guys so badly that I don't believe that they will be able to only resign; they will have to commit suicide. So we are going to screw these guys so badly that it will be fun to watch. That will be my first priority other than the two top priorities of finishing HBI and paying down debt. You are messing with the wrong guy.

That's my message to you. I'm going to do with you exactly what I have been doing in Nashwauk for a while. So you're going to be the next in line. Remember, I don't have a Chewbacca anymore to deal with. You are my next Chewbacca, short.

What else, Lucas?.

No, I appreciate that. And this is good to hear on the share repurchase opportunities down the road. Lourenco, I wanted to….

To deal - Lucas, it will all be done to inflict maximum pain to these guys. I will wake up in the morning every day, looking at these guys and I go to bed at night every day thinking about these guys. And that's a bad place to be. That's the message that I would like to deliver in this call. Sorry, Lucas, that I jumped on your question….

No, no, no, it's understandable. I wanted to follow-up on your comments regarding the tightness in the U.S. pellet market as we look into 2019. How you envision this to play out? Is it - are we going to see demand [construction] [ph] on the steel side or shift away from pellets to meet end-user demand or can the U.S.

supply base including you maybe ramp up production a little bit more? I'm just kind of trying to get a better sense for where the pressure points are in the system, where things could maybe [give a little way] [ph]. Thank you..

Lucas, the very first point of pressure is ourselves. We are going to take out of the market 500,000 tons of blast furnace pellets that are now available, blast furnace clients. So that from the get-go creates shortage.

All things being equal, 500,000 tons that now are being sold to blast furnace clients will not be sold to blast furnace clients; will be used in-house, because we are going to build our inventory for our HBI facility. And why we are prioritizing that? Because the mini mills.

Of course, they are not going to come, guys, and confess that they are craving our HBI, because they're not going to give that publically. Of course, if we're in their shoes, I would be even saying, no, I don't even need HBI, I don't like HBI, HBI sucks. I would be doing that actually. But at the end of the day we are their salvation.

The scrap in this country has become poisoned. They are trying to get into markets that control chemical elements like for example copper. In copper, if you compare copper now with copper 10, 20 years ago, it's so much higher that it's bad for what they already do, let alone for the stock that are planning and intending to do. So I am their salvation.

Our HBI will save the mini mills in terms of their growth strategies. So that's what we're doing. So we understand this thing in the long-term. We are the ones parked inside the Great Lakes. We have the sales contracts in place. We customize the products to our clients and you're absolutely right, we are making a lot of money.

We're generating a lot of cash flow and we are going to continue to generate a lot of cash flow, because this is a commercial enterprise. One more thing, we increased costs with our contract renewal with the USW, dollar per ton. So that's the impact on us.

Make no mistake, our sales price will go up at least $10, $20 per ton, just to compensate for that $1 per ton, that's the deal.

Anything else, Lucas?.

I could keep going. But this has been very helpful and I….

All right..

And continued best of luck. Thank you, Lourenco..

Thank you, Lucas..

Our next question comes from the line of Jeremy Sussman from Clarksons. Your line is open..

Hi, thanks for taking my question. And I'd - Lourenco, I'd echo Lucas' sentiment, congratulations on getting to where you've been able to establish a dividend..

Thank you, Jeremy..

You - earlier in the call, you talked about the $58 per ton pellet premium, currently and much of this past year, which is likely to go up next year. Look, you've been - have been an extremely accurate predictor of iron ore trends in the past.

So you have a good guess of sort of what levels we could see next year?.

Look, at this point, it's not even a matter of how high the price could be. At this point, I'm more concerned about the ones that are really leading this negotiation, that's not - definitely not Cliffs. We sell here in North America, United States and Canada, as you know well, Jeremy.

But the ones that sell pellets in Europe at this point, they need to be careful not to get to the point that they will kill the clients, because it got to a point that whatever price they put in front of these clients, they will take it, because they don't have the pellets. Pellets are scarce and they need pellets. They operate in Europe.

They can't just tell, let's do like the Chinese, let's buy from Fortescue, let's pollute this thing. That's not going to happen. If you are producing steel in Germany or in Luxemburg or in Belgium, you are going to buy pellets and you are going to pay the price for pellets.

So - let's put like this, Jeremy, if the negotiators are very incompetent it will be $70 per ton. If they are moderately competent, it will be $80. And if they can gauge how much the clients can pay before they die, it will be something between $80 and $100. Anything above $100 will be a little too much. That's just my opinion at this point.

What's the impact on us? If you go from $58 to $70, based on the contract that are already in place, the impact is another $100 million of EBITDA, $106 million to be precise. If it goes to $80, it's close to $200 million - $198 million, if I'm not wrong, extra million dollars. So I'll leave like that.

I put the pellet premium in our contracts a couple of years ago. At that time, that people did not even know what a pellet was, let alone a pellet premium. So thanks God, I see ahead, I'm just tapping my own back here. Can you hear me over the phone? That's me tapping my own back.

What else, Jeremy?.

Excellent. Thanks, Lourenco. Well, I guess, along the lines of sort of how you restructured your contracts or redid prior contracts that were put in place before you join the company, I guess, I should say. If I think about this past quarter, we saw a record premium of 29% premium on my calculations just on 65% Fe versus the 62% Fe fines.

I know, you're based on IODEX, a small portion of the contracts still have kind of the IODEX calculation in it. You think, we can get to a point perhaps where that portion could be based on more of a higher grade product? I'd be curious your thoughts around that..

Yeah, everything is possible. Look, no matter how you skin the cat, everything that's high iron content and high value use, we'll have - price will have to follow. And the ones that did not understand that from this business, they're all gone. The ones that are running the business are out of the major right now, apparently, they got it.

So it's very difficult to speculate how they will ultimately position the numbers. But you make no mistake, high iron content, 65%, 66%, 67% iron ore, 65% concentrate pellets, they are in high demand and they will cost a very high price, and rightfully so, because at the end of the day that's the value use.

In remember, throughout the entire world, we don't have any more, thanks to Section 232, thanks to the actions taken by the U.S. Government. We don't have any more throughout the world, the dumping effect of dumping Chinese steel, because we not only put these guys out of here, but we also back our little kids, little brothers.

Japan is benefiting so much from Section 232, because the Japanese cannot stand up against the Chinese on their own. And their domestic market is benefiting from the fact that price is went up in Japan. Germany, benefiting a lot. All of these effects are benefiting a lot. They complain, because it looks good on paper, looks good on TV.

But at the end of the day, everybody throughout the entire world benefiting from tariffs. Mexicans, they are benefiting a lot. Canadians, right now with the quota, with hurricane, with the U.S. MCA benefiting a lot. So we recovered our leadership in the world in the steel business. Thanks to President Trump.

Thanks for his courageous actions supporting the resurgence of manufacturing in the United States of America. That's what happening. By doing that, we stood up against the bully and the bullish China. So China is in deep trouble right now, because their plan fell apart.

Their plan was predicated in the United States never reacting and allowing our economy to be decimated by their actions no more..

Thanks, Lourenco. I appreciate the color, and good luck..

Thanks, Jeremy. Lisa, before you call the next question, are there a guy named Matthew Korn waiting line to ask a question. He's a - he calls himself an analyst and he works for Goldman Sachs..

There is not..

Matthew Korn, if you are in the call, it is still 10:42, why don't you ask a freaking question? I'll be happy to answer.

Okay, who's next, Lisa?.

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

Good morning. Thank you for taking the question today. Just a follow-up to start out on outlook for shareholder returns and a couple of operational questions after. Thank you for the earlier comments on shareholder returns, interestingly you highlight $0.20 as kind of a reasonable through cycle level of the dividend.

How can we better think about the timing and scale of potential dividend growth in the future? In the past, you highlighted $1 billion net debt is reasonable target only after which, you were than planning to re-launch shareholder returns. Curious it came early.

Is the $1 billion is still a reasonable target? After which, we should expect dividend growth? Or is that just off the table and we can expect something more linear in the interim? I'll state there, please..

Sure. Thanks, Seth. Look, shareholder returns a function of based on two things. One is the availability of cash to do that, and the other is how the market is reacting to the actions we will take. We know, what we are doing. We know, what we are doing. We know, our ability to generate cash, so the first one has been taking care of.

The second one is not in my hands. So if I do everything that I have to do here with my team. If the markets moving the right direction, if my biggest problem now is, I have a lot more cash than I can use, you make no mistake. This cash will go back to the owners of the company. Example, being more objectives and specific.

The stock price tanks, I'm going to buy stock back. But I'm going to buy stock back with two hands, and it would be announced in the middle of the night and it will be done before sun comes to the sky, because in this company, we make decisions fast. We have a board that understands the company.

We have a board that's invested in the company with stock ownership. So we act on behalf of the shareholders. And by doing that, we are defending our shareholders, we are defending our bondholders, we are defending our employees, we are defending our business. You asked about the debt target of $1 billion, net debt. Yes, it's still out there.

But it's a moving target, because our net debt of $1 billion is very important, when you're making $450 million, $500 million of EBITDA. If we started making $800 million, $900 million and $1 billion then that net debt no longer is representative of our needs.

We are going to continue to be protecting our company, protecting our business and protecting our shareholders. So that's what I have in mind at this point. I don't know, if it's clear, if it's not, I'll be more than happy to clarify..

That's very helpful. Separately, on the operational front.

Can you just give us a little bit of sense in terms of how you deal cost pressures going into 2019? And obviously, the new union agreement, and then also you've flagged in the release today increased freight cost pressure there as well? Can you give us a sense of how those two might in aggregate impact expectations into 2019?.

Seth, I'm going to have Tim - I'll ask Tim to take this one.

Tim, please?.

Thanks, Seth. I appreciate the question. We've talked a little bit about the union contract already and what that will do to our cost structure going forward, the dollar per ton that Lourenco mentioned in his commentary previously. As we look forward into 2019, we're still finalizing that budget.

But I will tell you that we continue to have well-maintained assets. Our operators continue to be diligent in all their efforts across the board to reduce costs where we can. But as everybody kind of an macro basis is facing some inflationary pressures, we'll see some of that, but we'll continue to work to offset that.

A couple of areas that I probably point you to that are favorable one would be the energy rates that we see. We have long-term supply agreements that will help us heading and porter off in our energy rate and inflation.

But conversely, Lourenco just spent a lot of time talking about the market dynamics and the new for pellets and pressure, the rate increases we'd expect to see on the pellet premium going forward that will drive further profits, that drives royalties and profit sharing, again, a good problems to have as we head out.

So I think, as we get into the fourth quarter finalize that 2019 budget, we'll provide a little bit more prescriptive guidance at that time. But generally speaking that should give you a fairly good direction..

Great. Thank you very much..

Our next question comes from the line of Curt Woodworth from Credit Suisse. Your line is open..

Hey, good morning, Lourenco..

Good morning, Curt..

Given your logical CEO strategy to squeeze the shorts, you may want to contemplate getting a Twitter account. It didn't work as well from us, but I'm sure we would certainly appreciate some of your views. First question is just thinking about the impact. You talked about 500,000 tons coming out of your volume this year to go to intersegment to HBI.

So would it be correct from a modeling perspective to take that out of your sales volumes forecast for next year? Or are there other things that you can mitigate that, be it inventory or capacity accretive?.

Well, we are going to move those 500,000 tons to our facility in Toledo. And we have ways to move that thing around, because we have several contracts expiring soon. And we'll have actually more tonnage expiring short-term, then we are going to be able to renew.

So we're going to have some tension during those negotiations because it'll be like more people trying to get pellets from us, then we have pellets available to sell to them. So the mitigation will be all done in the dollar line, I mean, I'm not going to be able to produce the tonnage that I'm going to remove from my own Toledo plant.

But my pledge is to replace the dollar amount with a dollar amount that will be higher. And then for us, for Cliffs, we will compensate that. For the market, yes, we're going to create a big hole. Yes, life is a bitch..

And maybe Curt, I will just add as we look specifically into 2019. We're still working through our nomination process with our customers, so we don't have that order book fully vetted and baked at this point in time.

But I will tell you, if you think about what we took out in inventory next year, we still have some flexibility as we had into next year to take some tons out of inventory. It won't be to the same order of magnitude, but we do still have some flexibility there from meeting those needs as we head out to next year..

Yeah. Well, look, that's the CFO stand. The CEO's stand is like that. My phone is open to receive calls for people trying to negotiate ahead of that, because someone is going to die and it's not going to be me, so..

And then just given the amount of new EAF capacity that's going to be built in the U.S. in the next three to four years coupled with a pretty significant increase and value-add rolling capacity would suggest a pretty big step function change in the need for version metallics, DRI, HBI.

Do you think that there would be the ability at some point over the medium term, say two to three years to add another HBI plant into the Midwest market or would you contemplate any sort of modification or ability to get more capacity out of your current Midrex configuration?.

Look, Curt. Here is the thing, I am very focused on the first HBI plant at this point. We are doing everything right. We are a little bit ahead of schedule. We are on budget. We are in fantastic shape. And we are not going to have any operational problems in our hot commissioning and startup, we are going to be okay.

So that's what we are focused on right now. The new capacity that we're talking about, yeah, it should be a lot into the commercial type of - commercial grade type of steels. And we don't see this new entrants being a big factor for the high end market.

They'll create some pressure in the scrap market and there will be more mouths to feed that should have a positive impact of higher price on the scrap. But at the end of the day, it's not going to change the configuration of the high-end where our HBI will be used, so we might do that in the future.

But at this point, the only thing I see is that for the 3.5 million metric tons of DR-grade pellets that we are going to start producing onshore next year, 2019, we are going to use 500 to start building inventory for Toledo. We're going to sell DR-grade pellets to clients. We are not going to sell DR-grade pellets to other people.

If someone decides to build an HBI plant, we are not going to sell DR-grade pellets to these people. Our DR-grade pellets will be sold only through ourselves or to clients that have in-house HBI production. So that's pretty much what we have in mind..

Makes sense. And then just one final quick one, I think HBI sort of commercial startup is mid-2020.

So is it fair to assume there won't be any real sort of cost, startup cost that would come into the OpEx for next year?.

I'm sorry. I'm not sure if I understood your question..

Are there any cost items that will come into play next year from HBI in terms of the P&L?.

No, no, not next year. Next year we still be finishing construction of the plant..

Yeah, okay. Thank you..

Thank you..

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

Hey, Lourenco. Hey, Tim..

Hi, Matt..

Hi, Matt..

Just sort of tracking production and sales, it looks like if we were squaring up with your guidance you should produce about 1.5 million tons less than you sell in Q4.

Is that the way to think about it or are you going to be producing a little more to fund that, that 500 KT of inventory for 2019?.

Matt, the inventory for [2019 will be 2019] [ph]. We are at this point of finalizing shipments for the year. We are on track to ship the number that so need to complete our 20 million tons of sales. And production-wise it will be 20 million and we are going to produce the balance for that.

And the difference between what we are going to sell more than what we produce is basically the amount of tons that we're taking out of inventory on the ground..

Okay, great.

And then the 25 million of HBI CapEx shifted out of 2018, is that going to go into 2019 or even into 2020?.

Yeah, we are moving it to 2019, but we are also moving stuff from 2019 to 2020. So our - at this point, our number for 2019 is unchanged. But it's unchanged because what we pushed in terms of expansion into 2019 also forced the others things from 2019 to 2020. The total amount did not change. And we are executing on time.

But we are delaying the deployment of capital, which is a good thing..

Okay. And then I appreciate the specifics on the new USW contract.

Is that $80 million even over the four years or does it start small and then is it back-end weighted, just trying to figure out how to model that?.

Yeah, we are giving a 4.3% increase on year one and then 3.3% in year two, 3.2% in year three and 3.1% in year four. So over the course of four years, the total increase for the guys and girls is 14.6% in four years. And just to give an idea, during the last six years, our workforce had only 2% in total increase for the last six years.

So during the time that we were having a hard time, they were having a hard time with us. So right now, we are in great shape. We're generating a lot of cash. So it's more than reasonable to share with them the benefits of their hard work together with us. But that's pretty much it.

So all in, less than $80 million in four years are going to be producing more than 80 million tons, so less than a $1 per ton all in..

All right. I appreciate that detail. And then lastly, just sort of bigger picture, I know it's not your market anymore. But the seaborne 62% prices have seen higher than I guess the market expected in recent weeks.

What do you think you would attribute that to? Is that falling Chinese production or less severe than expected winter cuts?.

Look, I believe that the longer that the old way of doing business, it stays out of the picture, the more the iron ore miners will charge for their products. So at the end of the day the surprise is not that prices are now at $74 and trending up, the IODEX. The surprise was that the price went to the numbers that they went before.

The factor that people are not really taking into consideration is that China would have to address pollution. And that's what I have been talking about for a long, long time. You can't have the same performance on a blast furnace using 56% iron content ore and using pellets or using 65% concentrate. It's complete night and day.

It's completely different. So if you understand the business, you could predict that. So there is a lot less 62% available in the market, less than you believe, when people believe. So the trend is that even 62% will be sought after and that should help price to continue to go up.

So it's the same thing that's happened with pellets on a smaller scale and with less intensity. But it's the same thing. So pellet premiums will go up a lot. But they are - they still continue to go up. To how much? It all depends on how competent the guy who negotiates in that area. They have the opportunity.

By having the opportunity it doesn't mean that they'll take advantage of the opportunity. That's what I'm trying to say..

Okay, I appreciate your thoughts as always. Thanks a lot, Lourenco. Thanks, Tim..

All right, Matt. Thanks..

Our final question today will come from the line of Derek Hernandez from Seaport Global Securities. Your line is open..

Thank you very much for taking my question and congratulations on a very strong quarter and outlook. I wanted to start with a quick question on your contracts as you're renegotiating them forward.

Do you have any interest at this time to build these, to incorporate higher grade premiums beyond simply the IODEX?.

the IODEX, the 65% and the amount of stupidity in Wall Street. So I can use all three and add the pellet premium on top. And the result will be good for Cliffs. Did I leave speechless, Derek? Derek, are you there? I think he had a heart attack. So, Lisa, with that….

We have no further questions in queue..

Yeah, with that, we are done. And Matthew Korn from Goldman Sachs you can run, but you can't hide. I will see you at the Goldman Sachs conference very soon. And bring your commodity that guy, because you owe me that for last year. It will be easier for you if you have the commodity that guy with you interviewing me.

If you are alone, it will be a lot worse. It will be bad no matter what. But it will be a lot worse if you are alone. Bring the commodity that guys or girls with you, because I promised you last year that I will take care of him/her next time and next time is coming. The problem with time is that the clock doesn't stop. I will see you guys soon.

Thanks for joining me this call today. Bye now..

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