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Cliff analysis paper

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Business

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Homework

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(1) Describe and evaluate the company's business strategy. Do you think it is viable?
The opening of the first mine in the Upper Peninsula of Michigan ,Cliffs has remained in the
vanguard of the steelmaking industry, successfully adapting operations to major changes that
drove many competitors out of business.
While North American operations have long provided the core of their business, in 2008 Cliffs’
strategic efforts increased exposure to seaborne markets and the high global demand for
steelmaking raw materials.
Diversifying into other end-markets and other steel-related minerals
Expanding geographically into low-political-risk geographies
Emphasizing cash-flow positive, profitable, commercial-stage businesses
Evaluating opportunities in the early stage of development
The execution of this strategy has positioned Cliffs as a top ten global producer of iron ore,
and one of the fastest-growing companies in the S&P 500 Index.
They have three customers which individually account for more than 10 percent of its
consolidated product revenue. Total revenue from these customers represents approximately $1.6
billion, $1.1 billion, and $1.0 billion of total consolidated product revenue in 2008, 2007 and
2006, respectively, and is attributable to North American Iron Ore and North American Coal
business segments.
The Company is organized through a global commercial group responsible for sales and delivery
of Cliffs products and a global operations group responsible for the production of the minerals
the Company markets. Cliffs operates iron ore and coal mines in North America and two iron ore
mining complexes in Western Australia. In addition, Cliffs has a major chromite project, in the
pre-feasibility stage of development, located in Ontario, Canada.
Cliffs operates under a strong framework of Core Values globally. These core values include:
• Safe Production
• Group and Individual Accountability
• Customer Focus
• Integrity
• Creating Economic Value
• Teamwork
• Bias for Action
• Recognize and Reward Achievement

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• Trust, Respect and Open Communicaon
• Environmental Stewardship
The company evaluate segment performance based on sales margin, defined as revenues less
cost of goods sold identifiable to each segment. This measure of operating performance is an
effective measurement as it focus on reducing production costs throughout the Company.
(2). Why did the attempt to purchase the company in late 2008 fail?
The attempt to purchase the company in late 2008 failed of the definitive merger agreement with
Alpha Natural Resources, Inc., under which cliff would have acquired all outstanding shares of
Alpha.
The cliffs Board of Directors and Alpha’s Board of Directors made the decision after
considering various issues, including the current macroeconomic environment, uncertainty in the
steel industry, shareholder dynamics, and the risks and costs of potential litigation. Considering
these issues, each board determined that termination of the merger agreement was in the best
interest of its equity holders.
Under the terms of the settlement agreement, the merger agreement terminated, Cliffs paid
Alpha $70 million, Alpha dismissed the Delaware litigation with prejudice and the parties
released each other from all obligations with respect to the proposed transaction as well as from
any claims arising out of or relating to the merger agreement.
(3.) How productive were the company's mines in 2008? What metrics are you using?
In Cliffs’ North American Iron Ore business segment, equity pellet production was 22.9 million
tons – up from the record 21.8 million tons posted last year. In Asia Pacific Iron Ore segment,
the planned maintenance shutdown of Portman’s processing plant and limited production from
our Cockatoo Island joint venture resulted in a decrease in output of approximately 700,000
tonnes to 7.7 million tonnes, from 8.4 million tones in the prior year. In North American Coal, it
produced 3.5 million tons versus 1.1 million tons in the final fi ve months of 2007. The Sonoma
Coal Project produced 2.4 million tonnes of coal in 2008, and is expected to increase that to 3-4
million tonnes in 2009. It continued to face challenges with its minority-owned Amapá Iron Ore
Project in Brazil, where ongoing construction and production delays restricted output to 1.2
million tonnes of iron ore concentrate in 2008.
In 2008, New economic reserve analyses were performed at Empire, Tilden, Hibbing and
Wabush. Each of the new reserve analyses incorporate updates to both iron ore pellet pricing and
operating costs. Changes in the reserve estimates are as follows:

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Empire – Pellet reserves are increased by 26 million tons net of 2008 production. The increased
reserves are obtained by an additional pit pushback.
Tilden – Pellet reserves are increased by 35 million tons net of 2008 production. The increased
reserves are obtained by an additional pit pushback of the hematite main pit.
Hibbing – Pellet reserves are decreased by 23 million tons net of 2008 production. The
decreased reserves are due to the inability of life of mine scheduling to accommodate all low
recovery ores while maintaining an 8.0 million ton annual pellet production rate. The previous
ore reserve estimate for Hibbing Taconite was based on a 7.8 million ton operating rate that
allowed maximum utilization of these ores.
Wabush – Pellet reserves were increased by 40 million tons net of 2008 production. The
increased reserves are obtained by optimizing manganese cut-off grades for pellet specifications
and operational improvements in pit dewatering allowing for deeper pit designs.
Net of 2008 mine depletion, Koolyanobbing ore reserves have increased by 3 million tonnes. The
increase is related to mine planning optimization and conversion of inferred mineralization to
indicated resources enabling their utilization in economic reserve analyses.
(4.) What types of accounting disclosures in the notes does this company have that do not
impact the income or balance sheet directly?
Domestic and foreign tax authorities periodically audited income tax returns. These audits
include questions regarding tax-filing positions, including the timing and amount of deductions
and allocation of income among various tax jurisdictions. When facts change or the actual results
of a settlement with tax authorities differs from its established reserve for a matter, It adjusted
tax contingencies reserve and income tax provision in the period in which the facts changed or
the income tax matter is resolved.
The company recorded estimated tax liabilities to the extent they were probable and could be
reasonably estimated. The company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (“FIN 48”).
Valuation Allowance
The company had a valuation allowance of $17.6 million against its deferred tax assets. In
determining the valuation allowance, the company assessed both negative and positive evidence
when measuring the need for a valuation allowance.
The company had intended to maintain a valuation allowance against their net
deferred tax assets until sufficient positive evidence exists to support the realization of such
assets.
Asset Retirement Obligations
The accrued mine closure obligations for their active mining operations provided for contractual
and legal obligations associated with the eventual closure of the mining operations. The
obligations are determined based on detailed estimates adjusted for factors that a market
participant would consider (i.e., inflation, overhead and profit), which are escalated at an

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