Cleveland-Cliffs Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2014

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following represents the assets and liabilities of the Company measured at fair value at June 30, 2014 and December 31, 2013:



	(In Millions)
	June 30, 2014
Description	Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash equivalents	$	84.0	$	—	$	—	$	84.0
Derivative assets	—		3.6		33.0		36.6
Available-for-sale marketable securities	27.1		—		—		27.1
Foreign exchange contracts	—		12.1		—		12.1
Total	$	111.1	$	15.7	$	33.0	$	159.8
Liabilities:
Derivative liabilities	$	—	$	—	$	20.2	$	20.2
Foreign exchange contracts	—		0.5		—		0.5
Total	$	—	$	0.5	$	20.2	$	20.7



	(In Millions)
	December 31, 2013
Description	Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash equivalents	$	85.0	$	—	$	—	$	85.0
Derivative assets	—		—		58.9		58.9
Available-for-sale marketable securities	21.4		—		—		21.4
Foreign exchange contracts	—		0.3		—		0.3
Total	$	106.4	$	0.3	$	58.9	$	165.6
Liabilities:
Derivative liabilities	$	—	$	2.1	$	10.3	$	12.4
Foreign exchange contracts	—		26.9		—		26.9
Total	$	—	$	29.0	$	10.3	$	39.3

Financial assets classified in Level 1 at June 30, 2014 and December 31, 2013 include money market funds and available-for-sale marketable securities. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.

The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable. Level 2 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At June 30, 2014 and December 31, 2013, such derivative financial instruments included our existing foreign currency exchange contracts and interest rate swaps. The fair value of the foreign currency exchange contracts is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk and liquidity risks associated with current market conditions.

The derivative financial assets classified within Level 3 at June 30, 2014 and December 31, 2013 included a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing at the time the product is consumed in the customer’s blast furnaces. We account for this provision as a derivative instrument at the time of sale and adjust this provision to fair value as an adjustment to Product revenues each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the annual realized price of hot-rolled steel at the steelmaker’s facilities, and takes into consideration current market conditions and nonperformance risk.

The Level 3 derivative assets and liabilities also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers at June 30, 2014 and to certain provisional pricing arrangements with our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customers at December 31, 2013. These provisional pricing arrangements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined.

The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:

Qualitative/Quantitative Information About Level 3 Fair Value Measurements

($ in millions)

Fair Value at June 30, 2014

Balance Sheet Location

Valuation Technique

Unobservable Input

Range or Point Estimate

(Weighted Average)

Provisional Pricing Arrangements

20.2

Derivative liabilities

Market Approach

Management's

Estimate of 62% Fe

$93

Customer Supply Agreement

33.0

Derivative assets

Market Approach

Hot-Rolled Steel Estimate

$635 - $665 ($650)

The significant unobservable input used in the fair value measurement of the reporting entity’s provisional pricing arrangements is management’s estimate of 62 percent Fe price based upon current market data, including historical seasonality and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.

The significant unobservable input used in the fair value measurement of the reporting entity’s customer supply agreement is the future hot-rolled steel price that is estimated based on current market data, analysts' projections, projections provided by the customer and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.

We recognize any transfers between levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three and six months ended June 30, 2014 or 2013. The following tables represent a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2014 and 2013.



	(In Millions)
	Derivative Assets (Level 3)
	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Beginning balance	$	43.3		$	53.3		$	58.9		$	62.4
Total gains
Included in earnings	33.0			32.4			62.0			60.4
Settlements	(43.3		)	(40.6		)	(87.9		)	(77.7		)
Transfers into Level 3	—			—			—			—
Transfers out of Level 3	—			—			—			—
Ending balance - June 30	$	33.0		$	45.1		$	33.0		$	45.1
Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date	$	33.0		$	32.4		$	62.0		$	60.4



	(In Millions)
	Derivative Liabilities (Level 3)
	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Beginning balance	$	(7.4	)	$	(6.8	)	$	(10.3	)	$	(11.3	)
Total gains
Included in earnings	(12.8		)	(25.2		)	(20.2		)	(32.0		)
Settlements	—			—			10.3			11.3
Transfers into Level 3	—			—			—			—
Transfers out of Level 3	—			—			—			—
Ending balance - June 30	$	(20.2	)	$	(32.0	)	$	(20.2	)	$	(32.0	)
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date	$	(12.8	)	$	(25.2	)	$	(20.2	)	$	(32.0	)

Gains and losses included in earnings are reported in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2014 and 2013.

The carrying amount for certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Accrued expenses) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at June 30, 2014 and December 31, 2013 were as follows:



		(In Millions)
		June 30, 2014				December 31, 2013
	Classification	Carrying Value		Fair Value		Carrying Value			Fair Value
Long-term debt:
Senior notes—$700 million	Level 2	$	699.5	$	756.6	$	699.4		$	718.2
Senior notes—$1.3 billion	Level 2	1,289.8		1,537.4		1,289.6			1,404.9
Senior notes—$400 million	Level 2	398.5		450.2		398.4			432.1
Senior notes—$500 million	Level 2	496.9		532.4		496.5			523.8
Revolving loan	Level 2	275.0		275.0		—			—
Equipment loan facilities	Level 2	130.0		130.0		140.8			140.8
Fair value adjustment to interest rate hedge	Level 2	3.3		3.3		(2.1		)	(2.1		)
Total long-term debt		$	3,293.0	$	3,684.9	$	3,022.6		$	3,217.7

The fair value of debt is based on the fair market yield curves for the remainder of the term expected to be outstanding. The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The revolving loan is variable rate interest and approximates fair value. See NOTE 8 - DEBT AND CREDIT FACILITIES for further information.

Items Measured at Fair Value on a Non-Recurring Basis

The following table presents information about the impairment charges on both financial and nonfinancial assets that were measured on a fair value basis at December 31, 2013. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value. We had no financial assets and liabilities measured at fair value on a non-recurring basis at June 30, 2014.



	(In Millions)
	December 31, 2013
Description	Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Assets:
Goodwill impairment - Ferroalloys reporting unit	$	—	$	—	$	—	$	—	$	80.9
Other long-lived assets - Property, plant and equipment	—		—		46.3		46.3		155.4
Other long-lived assets - Intangibles and long-term deposits	—		—		1.6		1.6		14.5
Investment in ventures impairment - Amapá	—		—		—		—		67.6
	$	—	$	—	$	47.9	$	47.9	$	318.4

Financial Assets

In light of the March 28, 2013 collapse of the Santana port shiploader and subsequent evaluation of the effect that this event had on the carrying value of our investment in Amapá as of June 30, 2013, we recorded an impairment charge of $67.6 million in the second quarter of 2013. The sale of Amapá was completed in the fourth quarter of 2013.

Non-Financial Assets

During the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. The impairment charge was primarily a result of the decision to indefinitely suspend the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online. Based on our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.

We also recorded impairment charges to property, plant and equipment during 2013 related to our Wabush operation within our Eastern Canadian Iron Ore operating segment, our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Other reportable segments and certain mineral lands at our Asia Pacific Iron Ore operating segment to reduce the related assets to their estimated fair value as we determined that the cash flows associated with these operations were not sufficient to support the recoverability of the carrying value of these assets. Fair value was determined based on management's estimate of liquidation value, which is considered a Level 3 input, and resulted in a charge of $155.4 million.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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