Project Report on Cliffs Natural Resources Inc. (NYSE: CLF) In partial fulfillment of the course Strategic Management-I

Submitted to: Submitted by:

Professor Veeresh Sharma Sourobh Das (15P052)

Section A, PGPM 2015-17

Management Development Institute, Mehrauli Road, Sukhrali, Sector 17, Gurgaon - 122007 [Type text] [Type text] [Type text]

Acknowledgements

I feel obliged in submitting this report in partial fulfillment of the course Strategic Management-I. I would like to take this opportunity to thank Prof. Veeresh Sharma for his timely suggestions, help, guidance and encouragement during the project. I would also like to express my gratitude towards my institution, MDI- Gurgaon for generous access to research material that helped me carry out this in-depth analysis without which this project would not have come to fruition. I would also like to express my gratitude towards my peers whose valuable and honest opinions and inputs helped me bring this project to conclusion.

Last but not the least, I would like to thank all the people who have been involved with me in the project directly or indirectly and who have supported me all throughout the course of this project. Executive Summary This report aims to unravel the corporate strategy and throw some light on the business aspects of one of the leading mining and natural resources companies in the United States, Cliffs Natural Resources. The report starts off with an overview of the company talking of its inception, the various milestones in its history, its mission and core values that help in determining what kind of company it has been over the years and where it aims to go forward.

In order to further understand the company, the report delves into the organizational structure of Cliffs, investigating the various groups that constitute the company and how they work together in unison to deliver results for the company. The employees have constantly rated Cliffs as a great place to work, over the years. I have analyzed the factors that drive the corporate culture of Cliffs and make it so attractive for existing and potential employees.

Next, we move on to analyze the external environment and examine the various factors that affect the performance of Cliffs. I have analyzed this keeping political, economical, environmental, social and legal factors in mind.With so many forces at play, I had to analyze them all to completely gauge the industry it is in. In addition to using various reports and making use of the data published in the journals and articles, I have also taken into account the entry and exit barriers to understand the profitability of the players of the iron ore mining industry.

With so many competitors of Cliffs, it becomes imperative to do a competitor analysis to get a comprehensive picture of where such global players stand financially and strategically and what are their strengths and weaknesses compared to Cliffs. Every competitor is different in terms of size and diversification and an understanding of their position in the iron ore mining value chain and their offerings is very necessary to devise a strategy for Cliffs Natural Resources going forward.

The report then analyzes the value chain of iron ore mining and beneficiation. The analysis is applicable for all players in the industry in general. We then move on to the TOWS (a variant of SWOT) analysis of Cliffs to gauge how it can use its inherent strengths to utilize the opportunities it is presented with in the current global scenario to the maximum.

The next part of the report goes into the financial analysis of Cliffs, exploring the financial condition of the company and how it has been faring over the past few years. The data has been taken from the NASDAQ website and the annual reports of the company.

Due to falling global demand, all the players in the industry are facing a really tough time and Cliffs is no different. The report tries to give a perspective of how the future shall unfold for Cliffs and how it needs to strategize to grow further in spite of the challenges it currently faces.

Cliffs Natural Resources 3 Table of Content

Acknowledgements...... 2 Executive Summary...... 3 Introduction...... 6 Milestones [16], [17]...... 6 Vision and Mission [1]...... 7 Core Values [1]...... 7 Products [1]...... 8 Operations [1]...... 8 Organization Structure...... 9 Culture...... 10 External Environment...... 10 1. Political Factors...... 10 2. Economic Factors...... 10 3. Social Factors...... 11 4. Technical Factors...... 11 5. Environmental Factors...... 11 6. Legal Factors...... 11 Industry Analysis...... 11 1. Threat of New Entrants...... 11 2. Threat of Substitutes...... 12 3. Bargaining Power of Suppliers...... 12 4. Bargaining Power of Buyers...... 12 5. Intensity of Competitive Rivalry...... 12 Entry and Exit Barriers...... 12 Entry Barriers...... 13 Exit Barriers...... 13 Competitor Analysis...... 13 1. Vale S.A...... 13 2. Arcelor Mittal...... 14 3. U.S. Steel Corporation...... 14 4. Peabody Energy Corporation...... 14 5. BHP Billiton Limited...... 14 6. Rio Tinto...... 15 Internal Audit...... 15 Value Chain Analysis...... 15 Financial Analysis...... 17 Income Statement...... 17 Balance Sheet...... 18 Cash Flow...... 19 Key Financial Ratios...... 19 TOWS Matrix...... 21 Recommendations...... 22 SPACE Matrix Analysis...... 23 Conclusion...... 24 References...... 25 Introduction

Cliffs Natural Resources, previously known as Cleveland-Cliffs, is a business firm that specializes in the mining and beneficiation of iron ore. Its headquarters are located in Cleveland, Ohio. Cliffs Natural Resources (NYSE: CLF) is one of the prominent mining and natural resources companies that supplies iron ore pellets to the North American steel industry from mines and plants located in Michigan and Minnesota. They also operate an iron ore-mining complex in Western Australia. [1]

Cleveland-Cliffs and Alpha Natural Resources merged in 2008 creating Cliffs Natural Resources.

The combined company became one of the largest U.S. mining companies. It was positioned as one of the leading diversified mining and natural resources companies. Cliffs Natural Resources' collection of mines included nine iron ore facilities and around 60-odd coal-mines spread across North America, South America and Australia till 2015. The company's noteworthy position in both iron ore and metallurgical coal made it a major supplier to the global steel industry, as well as provide a platform for additional broadening of its operations both geographically and in terms of the mineral and resource products it sold. It has now sold off its coal-mines and exited the coal business and the current strategy of the company is to single-mindedly focus on the US iron ore mining operations. Its current market cap is approximately $455 million. Cliffs' primary operations were organized and managed as per the product category and geographic location: U.S. iron ore, Asia Pacific iron ore, Eastern Canadian iron ore and North American coal. As of now, only its U.S. and Asia Pacific operations are functional.

Milestones [16], [17]

• 1847 Cliffs’ earliest predecessor Cleveland Iron Mining Company was founded • 1850 Chartered as a company by Michigan • 1855 First Soo Locks opened, allowing iron ore to be shipped between Lake Superior to Lake Erie • 1890 Merger with Cliffs’ Iron Company; name changed to Cleveland-Cliffs Iron Company • 1892 Lake Superior and Ishpeming Railroad built to carry iron ore from the mines directly to company-owned docks on Lake Superior. • 1925 618-foot-long (188 m) bulk cargo vessel William G Mather, named after company’s Chairman launched to carry Great Lakes commodities • 1933 Edward Greene replaced Mather as Chairman • 1940s Mather A Mine and Mather B shaft opened • 1954 First pellet plant built at Eagle Mills • 1960 First grate/kiln plant built at the Humboldt Mine • 1962-63 Other pellet plants at Republic Mine and Empire Mine added • 1970 High-grade iron-ore mine was opened in Western Australia with a 200- kilometre rail line for which the residential township of Wickham was built • 1974 Tilden Mine opened; only mine till date with the ability to produce both hematite and magnetite pellets • 1974-83 Recessionary period. Cleveland-Cliffs minimized its operations, closing the Mather B Mine and the Pioneer Pellet Plant and associated Ore Improvement Plant in 1979. The Humboldt Pellet Plant closed in 1981 and the Republic Mine was idled in 1981.

• 1984 Cleveland-Cliffs withdrew from Great Lakes shipping industry • 2002 Stocks plummeted. President George W. Bush enacted steel tariffs that helped domestically produced steel rebound. • 2000s A sharp increase in steel production in China and other developing countries led to a significant increase in the price of global iron ore. Cleveland-Cliffs benefitted and decided to expand globally and to diversify into other minerals, leading to the acquisition of iron-ore properties in Brazil and Australia and coal properties in Australia and the US • 2007 Cleveland-Cliffs purchased first domestic coal property • 2008 With its venture into coal, merged with Alpha Natural Resources and changed name to Cliffs Natural Resources • 2011 Acquired Consolidated Thompson Iron Mines Limited for US$4.9 billion • 2011 Cliffs added to Fortune 500 list of companies; ranked at 477 based on its performance in 2010 • 2013 CEO Joseph Carabarra retired; Gary Halverson, formerly interim chief operating officer of Barrick Gold Corporation Inc., was appointed President and CEO • 2014 Former Metals USA executive Lourenco Goncalves appointed as Chairman, President & CEO of Cliffs; company strategy moved away from global diversification to a renewed focus on strengthening its U.S. iron ore business; iron ore mines in Canada closed and idled off • 2015 Exited from coal business; sold its West Virginia and Alabama operations to Seneca Coal Resources, LLC

Vision and Mission [1] As per the Annual Report of Cliffs, the vision and mission is stated as such:

“Cliffs Natural Resources is an independent, owner-operator mining company supplying the global steelmaking industry.

• Operational Excellence Is Our Foundation – We have deep technical expertise and focus on safety, responsible stewardship and continuous improvement.

• Customer Excellence Is Fundamental – We succeed together with our customers. • Financial Discipline Enables Our Success – We achieve superior economic performance.

• People Are Our Strength – Attracting and developing industry-leading talent are vital differentiators in achieving our goals.

We are a mining company that customers seek to establish a long-term partnership, communities value us as a neighbour, and a place where employees want to work.”

Core Values [1] The core values of Cliffs’ Natural Resources that guides it forward (as given in the company website) are given below:

• Creating Economic Value – Doing the right things right the first time, elimination of waste and inefficiency, breakthroughs in productivity and technology.

• Customer Focus – Listening to the customer, being responsive and on time, meeting quality expectations, helping the customer succeed. • Environmental Stewardship – Going beyond compliance, being socially responsible, anticipating and addressing potential impacts before they occur, personal accountability, operating to preserve the environment for future generations. • Ethical Behaviour – Conducting business with honesty, fairness, integrity and full compliance with all applicable laws. • Group and Individual Accountability – Behaving in line with our core values, being responsible for our actions, providing plans/standards/expectations, holding yourself and/or the group to a high standard of performance, walk the talk. • Recognize and Reward Achievement – Celebrating successes, stress training and development, an effective appraisal of performance, expressing a simple thank you. • Safe Production – Record production with: lack of injuries, good housekeeping and orderly work areas, well-maintained equipment, proper training and procedures, looking out for and correcting each other, safe conditions and behavior, Sentinel of Safety qualification. • Teamwork – Actively involve others in decision-making, know when to take a leadership role and when to be an active member, recognize the value of teamwork and the synergy it creates. • Trust, Respect and Open Communication – Open access to information, constructive conflict, delegation to the appropriate level, toleration of failure in pursuit of business success, encouraging and accepting different views , feeling an obligation to explain your actions to those affected, gender and racial diversity.

Products [1] • Iron Ore Pellets (North American Market) • Lumps and Fines (International Market)

Operations [1] • US Iron Ore – Cliffs owns and runs interests in five U.S. Iron Ore mines that are located in Michigan and Minnesota. The Minnesota was closed in 2015 but it shall be functional again from April 2016.The U.S. Iron Ore mines yield from deposits situated within the Biwabik and Negaunee Iron Formation, categorized as Lake Superior type iron-formations formed under comparable sedimentary conditions in shallow marine basins approximately two billion years ago. • Asia Pacific Iron Ore – Cliffs' Asia Pacific Iron Ore business unit comprises of The Koolyanobbing Operation – a combined term for the operational hematite and goethite iron ore deposits at Koolyanobbing, Mount Jackson and Windarling. It is located in Western Australia, around 54km north of Southern Cross.Mining in the region began in the 1950s.BHP Billiton and Portman Iron Ore owned this operation earlier. Cliffs acquired Koolyanobbing from Portman in December 2008.Cliffs’ Asia-Pacific operations have a remaining life of about five years. The management does not have any plans of developing more of its iron ore reserves in the region. Thus, Cliffs plans to exit its Asia-Pacific operations once its Koolyanobbing mine in Australia stops production, unless a buyer can be found for the same. [6]

• Eastern Canada Iron Ore –Cliffs had operated two iron ore mines located in Eastern Canada. But both mines were idled and closed in 2014 and early 2015 due to unmanageable high cost structures, representing a widespread check of the company’s Eastern Canadian iron ore operations. In December 2015, Champion Iron Ltd revealed its intention to purchase Bloom Lake's mine and rail assets. During 2014, 2013 and 2012, Cliffs sold 7.2 million, 8.6 million and 8.9 million metric tons of iron ore pellets and concentrate, respectively, from its Eastern Canadian iron ore mines. [4]

• North American Coal – Cliffs had controlled two low-volatile metallurgical coal-mines situated in West Virginia and Alabama with a rated capacity of 6.5 million tons of production annually. Each mine is positioned near rail or barge lines for access to international shipping ports, which exports the product to global unified steel and coke producers in North America, Europe, China, India and South America. In December 2015, Cliffs stated that it had sold its West Virginia and Alabama operations to Seneca Coal Resources, LLC, thus exiting from the coal business. During 2014, 2013 and 2012, Cliffs sold 7.4 million, 7.3 million and 6.5 million tons of coal, respectively, from its North American Coal mines. [4] Organization Structure

Source: http://www.cliffsnaturalresources.com/EN/CorpResponsibility/Sustainability2013/OurCompany/Pages/default.aspx#globalcomm

The image above has been taken from the 2013 annual report of Cliffs. With the recent developments, Cliffs will no longer have the Coal Mining arm in its structure.

Cliffs is structured through a global commercial group, which is responsible for sales and delivery of its products and a global operations group, which is responsible for the production of the minerals that it markets.

• Global Commercial Group – The Global Commercial Group develops strategic customer relationships to aid the trade of iron ore, and runs the global transportation and logistics functions of the operations. On one hand, Cliffs is uniquely positioned as the principal provider of pellets to United States-based blast furnaces, its operations in Eastern Canada and Australia are positioned to supply the emergent Asian consumer base. It has readjusted sales and marketing management responsibilities from a local style to a global structure, permitting it to cope with the challenges and opportunities that arise from serving numerous customers in several markets. The global commercial structure allows it to enhance its customer service to existing customers and polish its superiority in targeting new customers. [1] • Global Exploration Group – The Global Exploration Group creates partnerships with mining and exploration companies, towards its objective to secure resources through direct venture and supportive investigation efforts. Cliffs’ relationships with exploration companies enable it to invest capital in prospects for many products throughout the world. [1]