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MANAGEMENT'S DISCUSSION Iron Ore The Company ended the year 2000 with 3.3
million tons of iron ore pellet inventory,
an increase of 1.9 million tons from 1999.
Increased pellet sales of 1.5 million
tons in 2000 were more than offset by
an increase in the Company’s share
of 2000 production. The six mines managed by the Company produced
41.0 million tons of iron ore in 2000,
compared to production of 36.2 million
tons in 1999. The Company’s share
of production was 11.8 million tons in
2000 versus 8.8 million tons in 1999.
The increase was mainly due to production
curtailments in 1999 which were undertaken
to reduce inventory levels because of
lower sales volume. The Company expects
production at its five active mines in
2001 to be significantly below the combined
34.1 million ton capacity. The Company’s iron ore pellet sales
were 10.4 million tons in 2000 versus
8.9 million tons in 1999. The increase
in iron ore pellet sales in 2000 was mainly
due to the return of blast furnace operations
at two customers that were out for most
of 1999. The Company’s sales volume
is largely committed under multi-year
sales contracts, which are subject to
changes in customer requirements. International
iron ore pellet price changes impact certain
of the Company’s multi-year sales
contracts, which use international prices
as price adjustment factors. Other factors
impacting the Company’s average price
realization under various sales contracts
include mine operating costs, energy costs,
and steel prices. A wholly-owned subsidiary of LTV is a 25
percent partner in the Company-managed
Empire Mine in Michigan. Since the bankruptcy
filing, LTV has remained current with
its Empire obligations. At the time of the bankruptcy filing, LTV
owed the Company approximately $2.3 million
related to the Company’s management
of LTVSMC in Minnesota, which amount the
Company has reserved. In May 2000, LTV
announced its intention to close LTVSMC
in mid-2001 and later the intended closing
date was advanced to February 22, 2001.
Subsequent to its bankruptcy filing, LTV
ceased operations at LTVSMC on January
5, 2001, more than a month ahead of schedule,
due to conditions in the steel market
and cost reduction efforts associated
with the bankruptcy filing. The Company signed a long-term agreement
in May, 2000 to supply LTV with the majority
of the iron ore it will need to purchase
as a result of the closing of LTVSMC.
Sales over the 10-year contract term could
total more than 50 million tons if LTV
continues to produce at or near current
levels and performs under the contract
terms. To date in the bankruptcy proceeding,
LTV has neither affirmed nor rejected
this agreement. Sales under the contract
were less than .2 million tons in 2000;
expected sales in 2001 will be impacted
by the liquidation of LTVSMC’s remaining
pellet inventory and business conditions.
The Company had no trade accounts receivable
exposure to LTV at the time of bankruptcy
filing. In May, 2000, LTV granted the Company an
exclusive option to purchase the LTVSMC
assets in exchange for assumption of environmental
and reclamation obligations and other
consideration at LTVSMC. The Company has
until March 31, 2001 to exercise the option.
The Company does not believe iron ore
pellets can be produced there economically,
but is investigating whether alternative
uses or the disposition of the assets
would be advantageous. Prior to Wheeling-Pittsburgh’s filing
for protection under Chapter 11 of the
U.S. Bankruptcy Code on November 16, 2000,
the Company exercised its rights under
existing agreements to acquire Wheeling-Pittsburgh’s
12.4375 percent indirect interest in Empire
Mine. The acquisition of Wheeling-Pittsburgh’s
interest in the Empire Mine increased
the Company’s ownership share to
35 percent and share of production capacity
from 1.8 million tons to 2.8 million tons.
Subsequent to its Chapter 11 filing, Wheeling-Pittsburgh
has requested an accounting for the acquisition
transaction. At the time of the filing,
the Company did not have a term sales
contract with Wheeling-Pittsburgh and
the Company’s trade receivable exposure
was negligible. In 1998, Acme Metals Incorporated and its
wholly-owned subsidiary Acme Steel Company
(collectively “Acme”), a partner
in Wabush and an iron ore customer, petitioned
for protection under Chapter 11 of the
U.S. Bankruptcy Code. The Company had
a $1.2 million pre-petition trade receivable
from Acme, which has been fully provided.
Since its filing, Acme has continued its
relationship with Wabush and the Company.
Sales to Acme in 2000 represented 3 percent
of total sales volume. The major business risk faced by the Company
in iron ore is lower customer or venture
partner consumption of iron ore from the
Company’s managed mines which may
result from competition from other iron
ore suppliers; use of iron ore substitutes,
including imported semi-finished steel;
steel industry consolidation, rationalization
or financial failure; or decreased North
American steel production, resulting from
increased imports or lower steel consumption.
Loss of sales and/or royalty and management
fee income on any such unmitigated loss
of business would have a significantly
greater impact on earnings than revenue,
due to the high level of fixed costs in
the iron mining business. In 1999, the Company lost more than one
million tons of iron ore pellet sales
to Rouge Industries as a result of the
extended shutdown of two blast furnaces
following an explosion at the power plant
that supplies Rouge. In 2000, the Company
recorded a pre-tax insurance recovery
and received proceeds on the claim of
$15.3 million ($9.9 million after-tax).
The Company continues to pursue modest
additional recoveries, but given the complexity
of the insurance issues, any additional
amounts will not be recorded until all
outstanding matters are resolved. The Company held 842,000 shares of LTV
common stock, which were originally valued
at $11.5 million, or $13.65 per share.
As of June 30, 2000, the investment was
reclassified to “trading” and
accordingly changes in market value were
recognized in earnings as they occurred.
The Company has recognized a reduction
to 2000 earnings of $10.9 million pretax
($7.1 million after-tax) related to the
investment. In August 2000, the Company
commenced a program to reduce its investment
in the LTV common stock and through December
31, had sold 300,000 shares, with the
remaining shares sold in January, 2001. Five-year labor agreements between the United Steelworkers of America (“USWA”) and the Empire, Hibbing, and Tilden mines were ratified in August 1999. The agreements, which were patterned after agreements negotiated by major steel companies, provide employees with improvements in pensions, wages, and other benefits. The agreements also commit the mines and the union jointly to seek operating cost improvements. The Wabush Mine in Canada also settled on a five-year contract in July, 1999. |