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LETTER TO OUR SHAREHOLDERS Dear Fellow Shareholder:
A year ago, we told you that we were glad to put 1999
behind us. That statement was, of course, a reaction
to the very difficult year our Company had in 1999
when we had to cope with an unexpected dip in pellet
sales. We also told you we were anticipating a significant
improvement in year 2000 earnings that would be driven
by higher sales volume and better sales margins due
to higher production volumes and cost reduction. At
that time, our biggest uncertainty was the ramp-up
of production at the Cliffs and Associates Limited
(CAL) reduced iron plant in Trinidad. By the fourth quarter of 2000, deteriorating business conditions in the steel industry had reached catastrophic dimensions, and most of our partners and customers reported substantial losses for the quarter. A growing list of steel company bankruptcy filings demonstrated the severity of the crisis. Two filings in the fourth quarter were of particular significance to Cliffs – the November 16th filing by Wheeling-Pittsburgh Steel Corporation and the December 29th filing by LTV Corporation. Despite the rapid deterioration of the
North American steel business in the second
half of 2000, Cliffs-managed mines operated
at near-capacity levels and produced a
record 41.0 million tons. Cliffs' share
of production was 11.8 million tons versus
8.8 million tons in 1999. The Company
sold 10.4 million tons of iron ore pellets
in 2000. This was a major improvement
from the 8.9 million tons sold in 1999,
but less than our original sales expectation.
While we planned to build inventory in
2000 to meet projected demand in future
years, a steep decline in fourth quarter
shipments caused our year-end inventory
to increase to 3.3 million tons, well
beyond the planned level. Net income was $18.1 million in 2000 versus
$4.8 million in 1999. Excluding special
items, net income was $10.1 million, a
$9.7 million increase from the $.4 million
recorded in 1999, primarily due to significant
production curtailments in 1999 and higher
pellet sales volume in 2000. The margin
on pellet sales in 2000 was a major disappointment,
even as we operated at full production
and eliminated the high fixed cost penalties
incurred in 1999 when we curtailed production
by 3.0 million tons. While we made progress
in pursuing productivity and cost reduction
objectives, our successes were overwhelmed
by higher energy costs, notably natural
gas and diesel fuels, and cost inflation
in other areas such as medical costs.
Operating difficulties, particularly at
the Empire and Wabush Mines, also contributed
to the poor cost performance. Disappointments in 2000 were not restricted to our core iron ore business. After struggling with the start-up of its plant in Trinidad for more than a year, CAL decided in mid-May to suspend start-up activities in order to evaluate plant reliability and make modifications to portions of the plant. After several key modifications were completed, the plant was restarted and operated for a month to test the modifications and gain additional operating experience. The results of this test were very positive. Plant operations improved significantly, and we produced several thousand tons of high quality commercial HBI, despite the known flaws in a portion of the flowsheet. At the end of July, the plant was shut down again to evaluate on-going economics and decide whether or not to complete the remaining modifications. In the third quarter, LTV withdrew its financial support of CAL, and Cliffs and Lurgi decided to complete the plant modifications and acquire LTV's 46.5 percent share of CAL for a nominal upfront payment. For the balance of the year, the plant remained idle while modifications were undertaken. The decision to proceed was based on the successful July test, a favorable financial arrangement on the buyout of the LTV interest, and a comprehensive evaluation of the project economics. |
