Iron Monger
Phyllis Berman, 04.11.05
A venerable ore processor was becoming another casualty of the steel business. John Brinzo pulled it out of the crucible.
It wasn't a surprise--we could see it coming," says John S. Brinzo, chief executive of Cleveland-Cliffs, which has been supplying iron ore to the steel industry since 1847. Still, he recalls, the Dec. 29, 2000 demise of LTV Corp.--the nation's third-largest steelmaker and Brinzo's largest customer--was a disaster for Brinzo's company. The bankruptcy left Cleveland with 600,000 worthless LTV shares and an equally worthless ten-year contract to sell iron ore to LTV. It was also on the hook for managing LTV's high-fixed-cost iron ore mine in northern Minnesota, but left with virtually no takers for its ore pellets, what with the shrinking population of blast furnaces in the U.S. "We had ore piling up on our docks, but no one to ship to," sighs Brinzo, a 35-year veteran who had been at the top for less than a year. "It seemed there might be no other option but to start closing our own mines."
Instead, he started buying pieces of the mines of troubled steel producers in the hope that the industry would crawl back. It had to--or, as he testified before a Commerce Department hearing in 2001, "the ability of our nation to defend itself, to make the tanks, airplanes, bridges and tunnels, will disappear."
Self-serving, to be sure. At the time, Cleveland-Cliffs processed around half of all iron ore in the U.S. but owned little of the tonnage, making money mainly from management fees and royalties paid by steel companies that owned the mines. All ore coming out of the mines is low-grade, with iron content of around 35%. Pelletizing that ore--a laborious process of grinding, separating, concentrating, filtering, drying and heating--bumps that content up to 65% or so. That's good enough to go into a steelmaker's blast furnace to make unfinished slabs. But since it costs $100 million to reline an old furnace, steelmakers were shuttering their older furnaces and turning to cheaper imported slabs.
Brinzo, 63, hoped to change the dynamics of that game. While Cleveland's balance sheet was none too healthy (its debt was 66% of capitalization in 2001), it was able to pick up distressed assets for little or no cash, plus the assumption of the mines' liabilities, along with long-term contracts for ore. Increased stakes and acquisitions--five properties from 2000 to 2004, boosting its share of North American ore capacity above 30%--represented a radical departure from the company's traditional business. Instead of just processing all that ore, it decided to own a lot of it, too.
The rebound in ore prices didn't happen right away. But at least Brinzo found a client for his unused output. When LTV declared Chapter 11, he determined to buy, with financing from a private equity group, its Cleveland Works steel mill, which turned out 4 million tons of steel a year. In came the more deep-pocketed Wilbur Ross with the same idea, only he was willing to buy the liquidated assets of the entire LTV operation. Brinzo happily backed off.
The two men had met years back when Brinzo, a creditor in LTV's first brush with bankruptcy (1986-93), dealt with Ross, an investment banker at what was then Rothschild Inc. Now Ross approached Brinzo for an equity contribution. Cleveland-Cliffs would chip in $17 million in exchange for 7% of a new steel company about to be reorganized as International Steel Group and a contract to be ISG's primary supplier of ore. Cleveland offered to unload its accumulating iron ore onto ISG's docks--and to let ISGrun up a tab for 120 days.
Cleveland's luck eventually turned. One week after Ross closed on LTV the Bush Administration imposed a tariff on imported steel; over the next 18 months, until the duty was lifted, U.S. steel prices rose 25%. ISG turned into a vibrant business, thanks in part to Ross' deal to pick up assets without long-term pension and retiree obligations. The weak U.S. dollar and outsize Chinese demand also helped. By 2003 Cleveland had halved its net losses to $35 million from a year earlier while increasing revenue 39% to $858 million.
But Brinzo's troubles weren't over. Last June he started negotiating with the United Steelworkers union. A month later, as the talks faltered, he threatened to bring in scabs and went as far as moving residential trailers onto the parking lots outside his Minnesota and Michigan mines. With both the politicians and the press aligned against him, Brinzo stood firm. "I wasn't going to risk an interruption of the flow of pellets to those aging blast furnaces because that may well have resulted in [their] being shut down forever," he says. Soon after, a strike was averted and a settlement reached (it included $2-an-hour wage hikes over five years, plus some increases in pensions for current and retired workers in exchange for health care cutbacks and work-rule changes).
Last year Cleveland-Cliffs broke into the black for the first time since 2000, netting $107 million (before special items) on sales of $1.2 billion. A tightening of global supplies helped, enabling Brinzo to lift prices 20%. (This year, he thinks, price increases could translate into an additional $211 million in sales on the same tonnage.) So Cleveland, with $400 million in cash and its debt all paid off, intends to keep buying. Today it manages 38 million tons of North American iron ore capacity and directly owns 23 million tons of capacity. But Brinzo is missing out on a lot of action outside the U.S. Global demand for "seaborne" ore--shipped from one country to another--is 550 million tons a year. Four out of five tons are provided by only three companies--Brazil's CVRD and Australia's BHP Billiton and Rio Tinto.
Brinzo's path to that seaborne ore is to acquire Portman Mining, Australia's third-largest ore extractor, at 6 million tons a year. But his $480 million offer wasn't high enough. In late February CVRD hoisted its benchmark ore price by 71.5%, forcing Cleveland-Cliffs to raise its bid for Portman by 13%. With no rival bidders and a $6 million penalty promised to Cleveland if Portman walks away, Brinzo is confident. The deal, he says, will turn his once-ailing company into "an international merchant miner." That should enable it to weather the next 158 years.
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