Good morning, ladies and gentlemen. My name is Denise and I am your conference facilitator today. I would like to welcome everyone to the Cleveland-Cliffs’ 2018 Fourth Quarter and Full Year Ending Earnings 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’s 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..

Thank you, Denise and thanks to everyone joining us this morning. I will kick off the call with a financial review of the fourth quarter and full year 2018 and an overview of some important outlook items for 2019.

Before getting into the results, I wanted to make sure the audience was aware of the changes we have made to the names of our business units. In order to better represent what we do now at Cliffs and reflecting the strategic transformation of our company, the U.S.

Iron Ore segment will be referred to as mining and palletizing and our HBI business will officially fall into the new metallics segment. Until we actually produce and sell HBI, the metallics segment will be a minor component of earnings consisting of insurance and other administrative costs.

Now, for our financial results, we concluded in 2018 with a fourth quarter adjusted EBITDA of $188 million. This equated to adjusted EBITDA of $766 million for the full year, our highest market in 4 years. Our 2018 EBITDA represented a 67% increase from the prior year and more than tripled what we reported 2 years ago.

Our mining and pelletizing segments quarterly adjusted EBITDA of $217 million was driven by 6.5 million long tons of shipments, putting us at 20.6 million long tons of sales for the full year, a 10% increase from 2017.

Shipments fell slightly short of our previous yearly guidance of 21 million long tons due to shipping constraints arising from unusually strong gale force winds in the Great Lakes in October and early November bringing the activity of loading and unloading vessels to a halt for several days during that timeframe.

Our pellet price realization of $99 per long ton in the fourth quarter was negatively affected by the sharp fall in steel prices we saw in the United States during the later part of the year, when the index HRC benchmark fell from $830 per short ton at the beginning of Q4, down to $725 by the end of the quarter.

That causes to record an unfavorable revenue true-up adjustment in the fourth quarter. The true-up was a function of having to revalue our entire year sales at the full year average HRC rate as well as revise down the unconsumed and un-priced inventory value negatively impacting our Q4 rate.

With all of that, our full year revenue rate was $106 per long ton still within our expected range. Cash cost for the first quarter was $55 per long ton putting us just below $63 per long ton for the full year. Our fourth quarter rate was negatively affected primarily by an unfavorable $15 million LIFO impact.

Because sales volumes were lower than expected, a significantly lower cost LIFO inventory layer was not included in the COGS mix as it was previously expected to be, thus resulting in a higher average cost.

That being said, we finished the year within our initial cost guidance despite the higher royalty and profit sharing rates we experienced throughout 2018. And as we noted in our last call, our cost will be up this year effectively by just the inflation rate in the United States, which is around 3%.

Looking ahead to 2019, we expect to sellout our production capacity of 20 million long tons, including 500,000 long tons of DR grade pellets to be delivered to our HBI plant in Toledo, Ohio. As noted previously, we do not expect these sales to take place until the third quarter and their margins will be eliminated in the consolidated level.

In light of the meaningful change in the seaborne iron ore supply demand dynamics over the past 2 weeks, we are supplementing our historical practice of providing an indicative revenue range based on year-to-date averages with one based on recent spot pricing.

We thought this was necessary as January pricing did not reflect the long-lasting market impact of the recent catastrophic event with Vale in Brazil. Based on iron ore prices as of this morning, our revenue expectation is now a range of $113 to $118 per long ton.

Compared to with what was published in our press release this morning, these ranges are $11 higher than the January average and $2 higher than yesterday’s indicative range. As we always note, the figures that we have utilized do not reflect our internal view on pricing, they just represent points in time in the market.

While the seasonality of our business should be well understood by now, I want to highlight to any new analyst and investor that our first quarter is always extremely light in both tonnage and price due to the annual closure of the Soo Locks limiting shipment on the Great Lakes and forcing us to limit our deliveries to rail only.

As for the divestiture of the APIO business and the adoption of the new revenue recognition standards last year, Q1 numbers became even less relevant as they now represent less than 5% of the full year expected revenues.

On a final note, during the quarter we recorded a $490 million income tax benefit as our future profitability expectation has increased. Our projected future taxable income has increased as well. With that, we expect to fully utilize the deferred tax assets we have on our books related to U.S. net operating losses.

As such, during the quarter, we reversed our entire valuation allowance recorded against those DTAs, the primary driver of this large gain. With the ability to utilize these NOLs, we expect a 0% cash tax rate for the foreseeable future.

In other good news, new regulatory guidance on the sequestration of AMT credits gave us an additional $15 million cash boost in our expected tax refunds. We now expect $235 million in future tax refunds related to the AMT reversal, including $117 million cash flow anticipated in the third quarter of this year.

With that, I will turn the call over to Lourenco for his remarks..

$1.1 billion in net income, 67% EBITDA growth, HBI plant ahead of schedule as we have more capacity than originally projected, our exit from Australia, the payoff of multiple tranches of debt and reaching a financial comfort level that allowed us to start returning capital to our shareholders using 2 different avenues, buying back shares and paying a meaningfully yielded quarterly dividend.

As we compare our Cleveland-Cliffs of today with what we have here 4.5 years ago, we are very proud of our accomplishments, and we enjoy seeing how much our company has improved since August 2014. However, we absolutely believe that in 4 more years Cleveland-Cliffs will be even stronger and even more profitable than it is today.

A few years ago, in a quarterly call with investors like this one, I suggested that you should invest along with me in this great business and in this great company. If you did just that at that time, you made a lot of money.

Actually, a lot more than what you would have made investing in fancier or trendier companies, or if you have invested in a fund replicating the S&P 500.

I actually encourage each one of our shareholders, if you haven’t done so yet, to compare our stock price performance during the last year or in the last 3 years for that matter against the S&P 500 or against our peer companies in steel and mining or against the fancy stocks the press loves to talk about.

You will be shocked with how much better CLF performance is against virtually all these other stocks. Moving forward, we’ll continue to work very hard and very smartly to reward your investment exactly as we have done so far. During the next 4 years, we plan to continue to surprise each one of you with a lot of upside.

At this time, I would like to renew my suggestion in you to be good for the next 4 years, invest along with LG and enjoy the ride. With that, I will turn it over to Denise for your questions..

[Operator Instructions] Your first question comes from Michael Gambardella with JPMorgan. Your line is open..

Hi, good morning Lourenco and congratulations. Just a couple of questions. You mentioned that you have about 35% of your contracts that have not been renegotiated since you’ve been at the company.

Can you give us an idea when they’re coming due? And also, what the pricing is, say relative to the current contracts, just in general terms?.

Yes, in general terms, you know that I don’t review individual contracts, Mike. But they are clearly lower than what I have already renegotiated. They represent fewer tons because we being, very clear, we have already renegotiated our most important and most relevant contract with ArcelorMittal.

We combined the contract the different contracts we have before it was a very good contract. That supports Cliffs supports ArcelorMittal extremely well.

But I still have the stuff that came from the previous regime that is coming due very quickly, and we are starting to talk with these folks because as you know, Michael, I don’t have pellets for everybody. So even before we increase the size of our HBI facility, which by the way we are ecstatic, we are very, very happy with that.

We already running short on pellets to serve everybody. So, at this point, it’s even more clear that I don’t have. So, I’m seeing who is going to have it who is going to go be the have who are going to be the haves, and who are going to be the have-nots. That’s pretty much what’s happening as we speak..

Okay. And you mentioned that the market is - the results of the Vale disaster.

Can you explain what you see that the market’s not appreciating, and why you think that’s so?.

Too much of a spreadsheet reaction to things. So, when the new first popped, the business as well as them is related to us, an operation that is 8 million tons. 8 million tons is nothing. So, Vale will shut down 8 million tons here and open 8 million tons in Carajas. And that was the first reaction.

I even got a call from Platts asking to clarify, trying to pick out my brain, because as you know well, I’m Brazilian, and I’m very familiar with mining and immuniterize. I used to run one when I was with CSN. So, I know the area, I know the terrain. I know how they view the dams over there. I also know how we do here in United States, so I can compare.

So, I gave Platts my honest opinion, it’s published in the I think it was on January 26 or January 27, saying that what they were seeing was not the real size of things. And now we’re seeing every day, a new thing happens.

And this morning, we heard that ArcelorMittal mine in Brazil was under the threat of a hitting a town, and they had to evacuate the town. Vale had a problem with another mine. So, they are now starting to wake up for what they have there. They don’t have a great situation over there. That’s for sure. And that’s very unfortunate. But that’s the way it is.

So, I’m not trying to share the internal details of Vale, I wish them well. I feel bad as a Brazilian to see more than 300 people dead based on that, but that’s the nature of our business, Michael. Like I had been telling people for more than 4 years, this is not a cost-driven business. This is serious stuff. This is serious on operations.

This is a series on safety. This is serious on valuing use. These are the drivers, not cost, not cost. We need to stop behaving like bots, miss and beat and this. This might be good for websites, but it’s not good for the mining business. We have rain. We have soil movement. We deal with dynamite. We deal with the real stuff, and that’s Cleveland-Cliffs.

We have been around for 172 years. We are the benchmark technologically. And I’m already going way off. So, I’ll try to behave today, Michael. So, I’ll stop you..

Okay. Final question, on the HBI project, you increased your capacity from 1.6 million metric ton to 1.9 million metric tons.

Could you give us a few what is, that do I’m assuming you have a lower cost structure with the increased capacity, and can you review where you stand on the key fundamentals for the HBI project?.

Yes. Look, we envisioned first of all, we are receiving a lot of interest, a lot more than we’ll be able to handle. So that situation we have for pellets, we are going to have for HBI. The situation of producing less than the market would be able to absorb.

So, we saw a very simple solution to increase our capacity by adding equipment to the handling and of the plants to increasing the diameter of pipes, things like that. So simple changes that increase the process, increase the size of the plant, and we increase output.

And obviously, the fact that we are going to produce 300,000 tons more than initially anticipated will have a positive impact in our costs. Internal rate of return of the project now is going to start this year. Because you add 300,000 tons more to 1.6 million tons, the increase is phenomenal for IRR. So, it’s all positive. So, we are extremely excited.

And last but not least, we are the only ones that can do that because we are the only ones that can produce DR-grade pellets, without DR-grade pellets there’s no HBI.

And another thing that you’re going to see, Michael, in the world as, this, consequences of Vale’s problems, in Brazil will unfold, is that we are going to see not only a shortage of iron ore but a shortage of bells.

And we think pellets are shortage of DR-grade pellets, and we have countries in the Middle East and some others that rely on Vale in order to get fed with DR-grade pellets. So, you should anticipate that as well..

Your next question comes from Lucas Pipes with B. Riley FBR. Your line is open..

Thank you and good morning everyone. Lourenco, I wanted to follow-up on the increase in HBI capacity. It sounded like you had encouraging indicators from customers to take this step.

But can you refresh us on kind of what the commercial strategy is from here on out? When should we be looking forward to contract and maybe even some prices associated with that? Thank you..

Lucas, we first and foremost, we are developing the technical side of the business with each one of our main-core clients because introducing HBI in a massive scale in their burden will change their melting practices. So that proceeds everything. And we are working on that with these clients.

Once we are done with that, then we are going to go to more detailed contract language. But keep in mind, we’re not going to be delivering our first cast before June or July of 2020. So, we are in January of 2019, we’re going to have plenty of time to get to that point.

Before we are in a hurry and have done project finance for this, HBI, I would be paying a lot more than the way I financed with the high yield and converts. The converts are fantastic. The converts attract good shorts, and it kicked out the bad shots. The high yield, the way we did was fantastic. The combined cost of good this plant was just perfect.

And so far, so good, everything we did was proper at the right time and done the best way we could. And commercial is no different, but just generating a piece of paper, just to tell everybody else that I have a contract, that’s not me. I do things my way, and my way works so far, so good. We are discussing technically.

We are going to finalize this shortly. Commercial comes next, and price will come when they have to pay the goods for later..

That’s very helpful. Thank you. And then my second question is more on the modeling side, unfortunately.

But when I look at the kind of pricing indications for the North American mining business, at $76 iron ore midpoint is about $104.05 and then at $90 at $90.50 of iron ore and we are looking at a midpoint of roughly $113.05, so a lot of sensitivity there to higher iron ore prices.

First, I wanted to ask, is there something unique in, regards to the sensitivity when iron ore prices increase to that $90 level or are there may be some other moving parts that overlooked? I would appreciate your thoughts on that..

what will be the price in United States, iron ore prices in international markets translated by the IODEX and Atlantic Basin pellet premium, as published by Platts for the 62% iron content. So, I’ll let Tim Flanagan explain the sensitivities, and let’s see if he can resolve your question..

So, Lucas, I, thing to your question about the $90 threshold. No there’s nothing unique or special about $90 that increases that sensitively. I think if you look at what we previously guided to versus today, our sensitivity for HRC and iron ore is about $3 on a $50 or $5 move, respectively, and about $2.50 on the Atlantic basin pellet premium.

Those are slightly higher than what we had in 2018, predominantly driven by customer mix and the contracts that Lourenco was referencing before. So, if you use those as kind of a benchmark, or guidepost, you’ll should be able to get right to that midpoint of the range we gave on the call..

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

Good morning thank you for taking my questions today I had a couple on the HBI side, again, and then wanted to run back to the simple guidance for shipment and production, please. With respect regards to HBI, obviously, you’re going to be pulling a lot of material out of the pellet market, and you start to be in this internally.

How have you considered any opportunities to expand your internal mining operations and pelletizing operations in order to limit the downside to supply for some of your kind of long-term blast furnace customers? Is that attractive our simply something that you think is less attractive then tightening the market as you pull material away? And then secondly, when it comes to shipment and production guidance, can you just confirm how we should think about the 0.5 million ton of shipment that seems to be delayed from Q4 into Q1, given that you’re targeting both productions shipments this year.

20 million tons, does that imply you’re building about 0.5 million tons of inventory, and why would that be the case? Thank you..

Thanks, Seth, and good morning. Thanks for the question. Also, very good questions. I’ll start with HBI. The answer is yes. We are seriously considering increasing our pellet output. We have opportunities. We have one that’s actionable as we speak, and that’s Empire. We are finalizing our studies to bring back Empire. Remember, we never shut down Empire.

We put Empire on indefinite idle, and that means that at under the right circumstances, we would bring Empire back. So, we still have a few lines to dot, few t’s to cross.

But I am very pleased to inform for the first time actually in a public forum that we are close to announce the resurgence of Empire, and that should be great news for Michigan and for the great people of Michigan to know that Empire has a great chance of being brought back into operations in not so long future down the road because Empire would really mitigate a big portion of the hole that we are going to create in our supply of blast furnace pellets, as we supply DR-grade pellets to HBI.

That opportunity for expansion even though it would take longer, and it doesn’t depend only on Cleveland-Cliffs, is Nashwauk. We own half of the land of the pit. We own pretty much all of the land surrounding the pit.

Governor Tim Walz has been making very intelligent and very precise moves to get rid of that thing that has been infecting Minnesota because called [indiscernible], so that virus is going away hopefully, soon. And as soon as this virus is eradicated from Minnesota, we are ready to step in and take care of Nashwauk. But these things take long.

I might not be able to do Nashwauk ahead of Empire. Actually, Empire is ahead of Nashwauk at this point, but the good thing is that from both states, Michigan and Minnesota, we have the support of the workforce. We have the support of my employees. We have the support of the people in the land. We have the phenomenal support of United Steelworkers.

I can’t thank the President the local president of the USW, Chris Johnson, Joe Fredrickson; the USW, Michigan, Leo Gerard, Tom Conway. These guys are partners, and we are partners for life with the USW. We are going to bring back Empire. And hopefully, we are going to own Nashwauk.

So, for the next 10 years, we’re going to be busy, bringing more production to the United States of America. The other question was the tons that we could not ship in Q4. Well in this world, that’s not controlled be spreadsheets. In this world that’s controlled by real life. we have stuff like wind.

So, we have gale force winds in the Great Lakes, even above gale force. We had winds above 50 knots in the Great Lakes, late October, early November. So, carriers could not dock to get the ore. We had the ore. We produced the ore. The ore was available. And they could not put in the vessel.

The vessel had to be moved towards the center of the lake to wait for more convenient weather conditions to start loading. So, we missed the shipment that we did not have enough things left in the quarter the 92, base of Q4 to ship. Fortunately, we were able to enjoy better and nicer weather during the very first few days of January.

And a portion of what we did not ship in Q4, we shipped it before the closure of the Soo Locks. So roughly 150 tons 150,000 tons of the missed shipments were sent to the clients in a timely fashion. So, they’re all good for the winter. They are not missing ore for their needs during the times that we can’t ship at all during the winter months.

On the other hand, the balance 400 350,000 tons or so will be sold in 2019 and will be priced at 2019. That’s the beauty about pellets, they don’t deteriorate. So, we could not ship in 2018, but we ship in 2019. The only difference is that they will cost a little more. But the clients can pay. They’re in good shape.

They’ll increase steel prices, so they’ll make a lot of money, and we are going to make money as well.

You got it?.

Yes, thank you very much. Just to clarify, given that you have the extra 0.5 million ton available and production of still 20 million tons.

Why are your shipments not 20.5 million tons? And I apologize if it’s that’s simplistic?.

Yes, first of all, like I said, I don’t have the 500,000 tons available because 150,000 tons are gone because I shipped between the beginning of the year, and so it’s already done in January. So, it will count against January. And the reason why I did not add that is because we’re already dipping into inventory.

So that is already accounted for in 2019. I don’t know if I answered your question..

Yes. That’s helpful. So basically, you’re rebuilding some inventory that were to draw down early..

Exactly, absolutely. That’s correct. So, the 20 million already includes the tonnage not shipped in the fourth quarter. So, it’s already really part of the entire thing..

Your next question comes from Jeremy Sussman with Clarkson..

Hi thanks very much for taking my questions and Lourenco congratulations on a very successful year. So, if I think about the current pellet premium for February, it remained flat versus January at $67.50 a ton. And I think you noted that it was sort of a rollover and didn’t really yet reflect any impact from the Vale tragedy.

And Vale has publicly said they will lose at least 11 million tons of pellet supply from the tragedy, which I’d estimate is almost 10% of the seaborne market.

So, given these dynamics, I guess how much further do you think pellet premiums could go in the market digests everything?.

Jeremy, I’ll give a very honest answer to you, I don’t know. If I were negotiating, first of all, these negotiations had already been concluded. And I don’t know why they took so long, and now I understand why they can’t finish because they are busy with much more serious stuff.

But the fact of the matter is that, we’re going to have a double problem in the international market, one is what we have just mentioned, that’s capacity lost. And you’re saying 11 million tons. In my own calculation based on what I know about the Vale mines is to be at least double that.

But the other thing is that Brazil is demanding that the domestic mills are taken care first. So, we’re going to probably see Vale having to deliver to the mills in Brazil and leaving the international mills unattended for the most part. So, it will be a mess. But I don’t know where the pellet premiums will land, it will be a lot higher..

That’s fair, certainly a moving situation. And just if I want to follow up on the Empire comment, which was helpful earlier.

So, I guess just roughly speaking, what type of CapEx would it take to bring back the mine? And would the output be sort of similar to the 3 million tons or so annually that we saw the last year or 2 before the mine was idle? Thank you..

Jeremy, the numbers that we have right now are not refined yet, but we are talking something in the order of $600 million over the course of 3 years, and the production levels would be between 3.2 million and 3.5 million tons of pellets per year..

And just to clarify, is there anything, is it shovel-ready is – or are there permits or anything like that that you would need to wait on?.

We are good for permits, that’s the beauty about going Empire because we are good for permits. But again, it’s not an act. It’s not a – we are not producing yoga pants here like Lululemon. So, we are producing iron ore. We use dynamite things like that.

So, we have to remove a lot of overburden from where the iron ore is located, that’s why it takes 3 years. So, when you say shovel-ready, yes, the overburden is shovel-ready, but I need to shovel the overburden out and then get to the ore. So, its 3 years of digging. And then we’ll start reproducing pellets after that..

Understood. Well, thanks very much and good luck..

Thanks so much, Jeremy..

Your next question comes from Alex Hacking with Citi. Your line is open. Hello, Alex Hacking, your line is open..

Hi, sorry, I was on mute. Thanks for the question. I wanted to ask on the pellet premium. Firstly, Vale was obviously looking to move the contract to the 65% benchmark from 62%.

How mechanically would that affect Cliffs, would your contracts potentially roll over to 65%? And then how would you bridge the gap between 65% and 62%, because the price differential between those 2 indexes has varied very widely over the past few years. So, I guess how do you settle that in the short-term? Thanks..

Look, first of all, we don’t rely on what Vale does. We rely on what Platts does. We use the very reliable indexes produced in a daily basis by Platts, and Platts has been extremely good in terms of keeping up with the market’s needs. I commend them for that. So whatever Vale would do, it’s Vale’s decision.

But we will continue to follow the 62% pellet premium that – or – they are – the pellets what’s called the Atlantic Basin pellet premium that’s calculated over the 62% iron ore content. So, I don’t have anything to do with Vale’s doing. I only have to do with the indexes and the indexes are as reliable as, for example, the LIBOR.

It’s an international index and that’s how we treat our contracts..

Okay, thanks. And then you mentioned that pellet premiums directionally could well head higher from here and it certainly seems like that when you look at supply-demand.

But how do you – when you’re making capital allocation decisions and so on, how do you think about what should be more of a normalized level? Are you aware of any swing supply of pellets into the seaborne market? And how do you think about steel mills potentially reconfiguring their feedstock to use less pellets if premiums get too high? So, I’d be curious on your views on that.

Thank you..

Well let’s start with from the end. Mills are reconfiguring their way of doing business. Let’s speak about the steel mills in the United States, the integrated steel mills in the United States. Let’s assume that they decide not to use pellets.

They have a big problem because they can’t comply with environmental regulation for even 5 minutes, they will be out of business in a New York minute. So, in order to be able to continue to play with environmental compliance, integrated steel mills in the United States must use pellets and they know that.

So much so that there are only 3 sinter plants in the United States, and they are barely utilized. It’s just marginal operation grandfathered from the 60s, and they use more mill scale than iron ore sinter feed at their feedstock. So, it’s not an option for First World countries like the United States. Is this an option for China, absolutely.

That’s a country that has absolutely no commitment with anything civilized just yet, including pollution controls. And followed by the second largest in the world, that’s India.

India is the second largest producer in the world and they have a big similarity with China, they also don’t care about the environment, but they are both signatories of the Paris accord, don’t forget that, because they like to pretend that they are civilized and they like to play for the audiences. But here in the United States, we are for real.

We have PM-2.5 less than 10, which is green in the back in the Earth picture that you can see every day on the Internet. We have it every day, and these countries they don’t. So that’s the difference between using pellets and not using pellets. It’s not a cost thing, Alex. It’s a real life thing.

China is polluted among other things because they do not use pellets and our air here in Cleveland, Ohio, is clean because ArcelorMittal uses pellets. The air in Chicago is clean because all the mills in the surrounding areas of Chicago use pellets, and that’s the nature of the business.

It’s not a cost thing, it’s not a spreadsheet thing, it’s real life. When you talk about the environment, you’ll talk about lives, you’ll talk about people breathing, that’s what pellets are about.

Is that answer your question?.

Can I – yes, can I just follow up on that? So, if Vale then is going to sell 20 million tons less pellets, they sell very little into China.

In your opinion then you would have to see an equivalent amount of steel production closing?.

I didn’t say that. They sell very new into China because China will give you lip service about the environment, but they don’t do anything about it. But they sell a lot into Japan, they sell a lot into South Korea, they sell a lot into Germany, they sell a lot into France, they sell a lot into Belgium, they sell a lot into Luxembourg.

And these are all countries that produce a lot of steel through the blast furnace route. What are they going to do with their blast furnace, I don’t know, I don’t know.

Let’s see how the Europeans that are so serious about the environment will react, if mills in Germany or mills in Luxembourg or in Belgium, they start to say, hey, I don’t have pellets, I’ll have to use more lump, I’ll have to use more sinter feed. Let’s see, let’s see that would be interesting to watch.

Also the countries in the Middle East that rely 100% on DR-grade pellets from the international market, we’ll probably have the problem there instead and they don’t have scraps because they are in the middle of the desert, they are not in the middle of the manufacturing country like the United States.

So, scrap is not an easy thing to go by, so, scrap prices should go up as well. So, we are entering unchartered territories, interesting times, but it’s something that we here at Cleveland-Cliffs are absolutely prepared for.

So, what’s going to happen in the United States with all this mess, nothing, because we are the suppliers for the steel mills and we are good for the long, long haul, nothing’s going to change our course of business here..

Thank you. Appreciate the comment..

Thanks, Alex..

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

Hey Lourenco and Tim, congratulations on a lot accomplished this year..

Thank you, Matthew. Appreciate it..

Another sort of tricky modeling question.

In the quarterly cadence, should we expect 1Q ‘19 to be similar low volume quarter, I think it was 8% of your total volume last year, should we expect similar in 2019?.

Yes. Look, Matthew, first quarter, it’s rail only because we added in the 150,000 tons that we’re able to ship as commented previously. The rest is rail and the net debt on the rail contract is not as good for us as when we ship through vessels. So Q1 is almost a write-off in terms of the contribution to the year.

So, no matter what number, we are going to put in a model probably when we release results, but that worked for Associated Press and Reuters and these folks will say that we’d just – and then everybody else will repeat after this. So, in Q1, a mess again, so no worries. But for the year we are very great, we’re doing very well and we’ll do great..

Okay, great. And then just looking at the CapEx for the fourth quarter, you sort of were averaging about $65 million of CapEx a quarter and then 4Q was really low like $18 million.

Did something happen? Did construction pause at the pellet plant while you were making these decisions to expand or what sort of – what happened in the down tech in CapEx in 4Q?.

The answer is no in terms of the deployment of work on the field, but as far as the deployment of mining, I will see if Tim Flanagan can help with that..

Yes. Not sure where that number’s coming from. We actually spend just over $100 million in the fourth quarter and it actually was the highest quarter of spend we had on the year for HBI.

I mean, we continue to pick up the volume and then the work done on the project in Toledo and that will continue into next year as next year will be a peak CapEx year for us..

Okay.

And then just on the HBI plant expansion, I know you probably don’t want to name names and whatnot, but like are the – is the increased sort of demand that you saw to make this decision from some of the new capacity expansions announced this year? Are these kind of old – or not like old, but existing facilities that just sort of wanted more due to the compelling economics?.

It’s a combination. It’s a combination of both, because we have been receiving input from the usual suspects to deliver more, but we also – we are seeing the announcement and seeing what’s going to happen within the United States as we go forward.

And we have these folks that have a much stronger balance sheet and they have a long-term view for the business announcing mills that will really debut and they will be real and they will be competing for high spacing materials. So it’s a combination of both, Matthew, frankly..

Okay. And then maybe just a bigger picture question on I know you sort of said that the markets probably underestimating how many tons of iron ore and pellets supply maybe affected by the dam problems.

Given your insight into Brazil, how many upstream dams do you think maybe affected by these problems and bigger picture, where do you think this sort of shakes out, where everybody is kind of starting to look at their tailings dams?.

I think that is happening as we speak, frankly. Unfortunately, it’s happening more than 2 years – actually more than 3 years after it should have had, when the Samarco being hit, I thought that they would do a much more plural job in terms of reviewing their situation and not just one company but everybody.

Actually we here from the United States, even though we have a lot of serious things in terms of constantly undertaking a never ending loop of testing, field monitoring, reporting, assessment, we have the in-review. We have extensive third-party audits and we perform real-time deals in terms of situation of each one of our dams.

After Samarco, we humbly reassessed everything here at Cliffs. So, let’s pretend that we don’t know nothing that we are rookies here. We are at start. We are arriving to the business right now and trying to learn how to do things and we assessed everything. We didn’t find much.

But very honestly, we implemented some improvements, but to see that happening again, it makes me sick of my stomach. So I hope that this 300 plus lives will not be lost in vain and Brazil will move in the right direction..

Thanks very much, Lourenco..

Thank you, Matt. And look we are actually ahead of the cutoff time, so I will wrap up here. And I really appreciate you participating in our call and being with us for this 4.5 years for the ones that have been long with me since the day I said the investor along with the Lourenco and you are going to be happy, you should be happy now.

But for the ones that are not happy, you still can be happy. So happiness starts every day, including today. We are good for the next 4 to 5 years. So invest along with the LG and make a lot of money or short my stock and have [indiscernible]. Thank you very much and have a great day. Bye now..

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