Cliffs Plans Production Cuts at Empire Mine, Little Impact to Outlook

Cliffs Natural Resources’ (NYSE:CLF) recent announcement that it will cut iron ore production by 50 percent next year at its Empire Mine in Michigan came as no big surprise as ArcelorMittal (NYSE:MT), the prime consumer of iron ore from the mine, is shutting down its blast furnace for maintenance. ^[1] Even with the production cut, the company maintained its iron ore outlook for 2012, taking into consideration that it may have opportunities to ramp up production at other locations based upon demand. Cliffs is the largest producer of iron ore pellets in North America and a major supplier of direct-shipping lump and fines iron ore out of Australia. It is also a significant producer of metallurgical coal and competes with other international mining and natural resources companies including Vale (NYSE:VALE) and Rio Tinto (NYSE:RIO).

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Potential Production Impact at Empire Mine

The Empire mine has an annual capacity of close to 5.5 million tons of iron ore. Historically, production from the mine has ranged from 2.6 to 4.9 million tons of iron ore pellets. 79 percent of the production from the mine is attributable to Cliffs Natural Resources with the remaining 21 percent attributed to a subsidiary of ArcelorMittal USA. Cliffs now plans to produce 2.6 million tons of iron ore from the mine in 2012. The company previously estimated that it will produce close to 4.6 million tons of iron ore in 2011.

ArcelorMittal is planning to shut down one of its blast furnaces for maintenance in the second quarter of 2012, during which time production at the Empire mine will be halted too. Considering that the company produces close to 25 million tons of iron ore annually, a cut of 2 million tons effectively translates to a 7-8 percent decline in production. At an estimated average revenue per ton of $122 for North American iron ore, this decline implies a potential loss of close to $240 million for the company.

Years of Production at Empire Limited

While the shutdown doesn’t appear to be much of a cause for concern as it was a planned event, it may affect at least 600 of the company’s workers in Michigan. With only 10 million tons of proven reserves in the location, at its normal production capacity the mine will exhaust its resources over the next 3-4 years. If further reserves are not discovered in the area, it could lead to the permanent closure of the mine.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Cliffs Natural Resources Inc. Announces Anticipated Production Curtailment at Empire Mine in 2012, Cliffs Natural Resources [↩]