ÐÇ¿Õ´«Ã½

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

CLEVELAND-CLIFFS INC

(Exact Name of Registrant as Specified in Its Charter)

Ohio		34-1464672
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1100 Superior Avenue, Cleveland, Ohio 44114-2589

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (216) 694-5700

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ                    Accelerated filer o                    Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

As of July 21, 2006, there were 41,661,253 Common Shares (par value $.25 per share) outstanding.

 

 

TABLE OF CONTENTS

Page No.
PART I — FINANCIAL INFORMATION
		Item 1 — Financial Statements
2		Definitions
3		Statements of Condensed Consolidated Operations Three Months Ended June 30, 2006 and 2005 and Six Months Ended June 30, 2006 and 2005
4		Statements of Condensed Consolidated Financial Position June 30, 2006 and December 31, 2005
5		Statements of Condensed Consolidated Cash Flows Six Months Ended June 30, 2006 and 2005
6		Notes to Condensed Consolidated Financial Statements
35		Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
55		Item 3 — Qualitative and Quantitative Disclosures About Market Risk
56		Item 4 — Controls and Procedures
PART II — OTHER INFORMATION AND SIGNATURES
57		Item 1 — Legal Proceedings
60		Item 1A — Risk Factors
60		Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
61		Item 4 — Submission of Matters to a Vote of Security Holders
62		Item 6 — Exhibits
63		Signature
64		Exhibit Index
EX-31(a) — Section 302 Certification of Chief Executive Officer
EX-31(b) — Section 302 Certification of Chief Financial Officer
EX-32(a) — Section 906 Certification of Chief Executive Officer
EX-32(b) — Section 906 Certification of Chief Financial Officer
EX-10.F
EX-31.1 Certification
EX-31.2 Certification
EX-32.1 Certification
EX-32.2 Certification

Definitions

The following abbreviations or acronyms are used in the text. References in this report to the “Company”, “we”, “us”, “our” and “Cliffs” are to ÐÇ¿Õ´«Ã½ Inc and subsidiaries, collectively. References to “A$” refer to Australian currency, “C$” to Canadian currency and “$” to United States currency.

Abbreviation or acronym		Term
Algoma		Algoma Steel Inc.
APB		Accounting Principles Board
APBO		Accumulated other postretirement benefit obligation
ARS		Auction rate securities
Cade		Cade Struktur Corporation
CAL		Cliffs and Associates Limited
CERCLA		Comprehensive Environmental Response, Compensation and Liability Act
Cliffs Australia		ÐÇ¿Õ´«Ã½ Australia Pty Limited
Cockatoo Island		Cockatoo Island Joint Venture
Consent Order		Administrative Order by Consent
EITF		Emerging Issues Task Force
Empire		Empire Iron Mining Partnership
EPA		United States Environmental Protection Agency
EPS		Earnings per share
FASB		Financial Accounting Standards Board
FIN		FASB Interpretation Number
F.O.B.		Free on board
GAAP		accounting principles generally accepted in the United States
HBI		Hot Briquette Iron
Hibbing		Hibbing Taconite Company
HLE		HLE Mining Limited Partnership
ISG		International Steel Group Inc.
KHD		KHD Humboldt Wedag International Ltd.
KK Group		Kinnickinnic Development Group
Kobe Steel		Kobe Steel, LTD.
LIFO		Last-in, first-out
LTVSMC		LTV Steel Mining Company
Mittal Steel USA		Mittal Steel USA Inc.
NDEP		Nevada Department of Environmental Protection
NRD		Natural Resource Damages
Notice		Notice of violation
OPEB		Other postretirement benefits
PBO		Projected Benefit Obligation
PCB		Polychlorinated Biphenyl
Portman		Portman Limited
PPI		Producers Price Indices
PRP		Potentially responsible party
PSD		Prevention of Significant Deterioration
RONA		Return on net assets
RTWG		Rio Tinto Working Group
SAB		Staff Accounting Bulletin
SEC		United States Securities and Exchange Commission
SFAS		Statement of Financial Accounting Standards
Steel Dynamics		Steel Dynamics, Inc.
Stelco		Stelco Inc.
Tilden		Tilden Mining Company L.C.
Tonne		Metric ton
TSR		Total Shareholder Return
United Taconite		United Taconite LLC
USW		United Steelworkers of America
VEBA		Voluntary Employee Benefit Association trusts
Wabush		Wabush Mines Joint Venture
WCI		WCI Steel Inc.
WEPCO		Wisconsin Electric Power Company

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
(UNAUDITED)

		(In Millions, Except Per Share Amounts)
		Three Months Ended								Six Months Ended
		June 30								June 30
		2006				2005				2006				2005
REVENUES FROM PRODUCT SALES AND SERVICES
Iron ore		$	420.2			$	424.5			$	664.7			$	643.3
Freight and venture partners’ cost reimbursements			66.0				60.8				127.9				113.2
			486.2				485.3				792.6				756.5
COST OF GOODS SOLD AND OPERATING EXPENSES			(357.5	)			(348.4	)			(608.5	)			(575.9	)
SALES MARGIN			128.7				136.9				184.1				180.6
OTHER OPERATING INCOME (EXPENSE)
Casualty insurance recoveries							10.6								10.6
Royalties and management fee revenue			3.0				3.5				5.6				6.2
Administrative, selling and general expenses			(13.3	)			(10.3	)			(23.1	)			(21.6	)
Miscellaneous — net			(2.0	)			(1.8	)			(4.0	)			(2.8	)
			(12.3	)			2.0				(21.5	)			(7.6	)
OPERATING INCOME			116.4				138.9				162.6				173.0
OTHER INCOME (EXPENSE)
Interest income			3.5				3.1				7.8				7.0
Interest expense			(.8	)			(1.7	)			(1.8	)			(1.9	)
Other — net			(1.3	)			.4				(.8	)			(9.3	)
			1.4				1.8				5.2				(4.2	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST			117.8				140.7				167.8				168.8
INCOME TAX EXPENSE			(29.6	)			(36.8	)			(39.5	)			(44.0	)
MINORITY INTEREST (net of tax)			(5.2	)			(3.9	)			(7.6	)			(3.9	)
INCOME FROM CONTINUING OPERATIONS			83.0				100.0				120.7				120.9
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (net of tax)			.1				(.3	)			.3				(.2	)
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE			83.1				99.7				121.0				120.7
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (net of tax $2.8)															5.2
NET INCOME			83.1				99.7				121.0				125.9
PREFERRED STOCK DIVIDENDS			(1.4	)			(1.4	)			(2.8	)			(2.8	)
INCOME APPLICABLE TO COMMON SHARES		$	81.7			$	98.3			$	118.2			$	123.1
EARNINGS PER COMMON SHARE — BASIC
Continuing operations		$	1.91			$	2.27			$	2.73			$	2.72
Discontinued operations							(.01	)			.01
Cumulative effect of accounting change															.12
EARNINGS PER COMMON SHARE — BASIC		$	1.91			$	2.26			$	2.74			$	2.84
EARNINGS PER COMMON SHARE — DILUTED
Continuing operations		$	1.53			$	1.80			$	2.19			$	2.18
Discontinued operations							(.01	)			.01
Cumulative effect of accounting change															.09
EARNINGS PER COMMON SHARE — DILUTED		$	1.53			$	1.79			$	2.20			$	2.27
WEIGHTED AVERAGE NUMBER OF SHARES (IN THOUSANDS)
Basic			42,720				43,434				43,209				43,316
Diluted			54,445				55,604				54,899				55,457

See notes to condensed consolidated financial statements.

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED FINANCIAL POSITION

		(In Millions)
		June 30				December 31
		2006				2005
ASSETS		(Unaudited)
CURRENT ASSETS
Cash and cash equivalents		$	123.6			$	192.8
Marketable securities			3.7				9.9
Trade accounts receivable — net			80.4				53.7
Receivables from associated companies			22.7				5.4
Product inventories			246.3				119.1
Work in process inventories			62.1				56.7
Supplies and other inventories			65.9				70.5
Deferred and refundable taxes			13.2				12.1
Recoverable electric power payments			15.6				73.0
Other			48.1				42.8
TOTAL CURRENT ASSETS			681.6				636.0
PROPERTIES			1,019.9				979.3
Allowances for depreciation and depletion			(183.8	)			(176.5	)
TOTAL PROPERTIES			836.1				802.8
OTHER ASSETS
Long-term receivables			46.3				48.7
Prepaid pensions			80.4				80.4
Deferred income taxes			52.7				66.5
Deposits and miscellaneous			63.4				53.8
Other investments			23.4				34.0
Intangible pension asset			13.9				13.9
Marketable securities			22.7				10.6
TOTAL OTHER ASSETS			302.8				307.9
TOTAL ASSETS		$	1,820.5			$	1,746.7
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	140.8			$	122.9
Accrued employment costs			40.4				47.4
Pensions			45.3				45.3
Other post-retirement benefits			29.6				36.6
Accrued expenses			28.6				28.9
Income taxes			37.6				29.1
State and local taxes			22.3				22.2
Environmental and mine closure obligations			11.5				13.4
Payables to associated companies			3.1				7.7
Other			12.4				9.2
TOTAL CURRENT LIABILITIES			371.6				362.7
PENSIONS, INCLUDING MINIMUM PENSION LIABILITY			129.5				119.6
OTHER POST-RETIREMENT BENEFITS			82.1				85.2
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS			88.5				87.3
DEFERRED INCOME TAXES			112.4				116.7
OTHER LIABILITIES			70.4				79.4
TOTAL LIABILITIES			854.5				850.9
MINORITY INTEREST			98.9				71.7
3.25% REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK — ISSUED 172,500 SHARES			172.5				172.5
SHAREHOLDERS’ EQUITY
Common Shares — par value $.25 a share Authorized — 112,000,000 shares; Issued — 67,311,764 shares			16.8				16.8
Capital in excess of par value of shares			93.8				93.9
Retained earnings			932.5				824.2
Accumulated other comprehensive loss, net of tax			(109.4	)			(125.6	)
Cost of 25,418,674 Common Shares in treasury (2005 — 23,480,770 shares)			(243.1	)			(164.3	)
Unearned compensation			4.0				6.6
TOTAL SHAREHOLDERS’ EQUITY			694.6				651.6
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,820.5			$	1,746.7

See notes to condensed consolidated financial statements.

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)

		(In Millions,
		Brackets Indicate
		Cash Decrease)
		Six Months Ended
		June 30
		2006				2005
CASH FLOW FROM CONTINUING OPERATIONS
OPERATING ACTIVITIES
Net income		$	121.0			$	125.9
Cumulative effect of accounting change							(5.2	)
(Income) loss from discontinued operations			(.3	)			.2
Income from continuing operations			120.7				120.9
Depreciation and amortization:
Consolidated			30.3				22.0
Share of associated companies			3.2				2.1
Minority interest			7.6				3.9
Deferred income taxes			1.2				7.6
(Gain) loss on currency hedges			(1.4	)			9.8
Excess tax benefit from share-based compensation			(1.2	)
Environmental and closure obligations			(1.0	)			2.2
Share-based compensation			(.6	)
Gain on sale of assets			(.3	)			(.4	)
Pensions and other post-retirement benefits			(.2	)			8.3
Other			1.8
Changes in operating assets and liabilities:
Sales of short-term marketable securities			9.9				182.7
Purchases of short-term marketable securities			(3.7	)
Product inventories			(127.2	)			(51.4	)
Other			53.3				17.3
Net cash from operating activities			92.4				325.0
INVESTING ACTIVITIES
Purchase of property, plant and equipment:
Consolidated			(62.9	)			(46.1	)
Share of associated companies			(6.4	)			(4.6	)
Investment in Portman Limited							(409.7	)
Payment of currency hedges							(9.8	)
Proceeds from sale of assets			1.6				.5
Net cash used by investing activities			(67.7	)			(469.7	)
FINANCING ACTIVITIES
Borrowing under Revolving Credit facility							175.0
Repayment under Revolving Credit facility							(125.0	)
Contributions by minority interest			1.2				1.1
Excess tax benefit from share-based compensation			1.2
Proceeds from stock options exercised			.6				3.5
Repurchase of Common Stock			(81.0	)
Common Stock dividends			(9.9	)			(4.3	)
Preferred Stock dividends			(2.8	)			(2.8	)
Repayment of capital leases			(2.2	)			(.6	)
Issuance costs of Revolving Credit			(1.0	)			(1.9	)
Repayment of other borrowings			(.8	)
Net cash from (used by) financing activities			(94.7	)			45.0
EFFECT OF EXCHANGE RATE CHANGES ON CASH			.5				(.4	)
CASH USED BY CONTINUING OPERATIONS			(69.5	)			(100.1	)
CASH FROM (USED BY) DISCONTINUED OPERATIONS — OPERATING ACTIVITIES			.3				(.8	)
DECREASE IN CASH AND CASH EQUIVALENTS			(69.2	)			(100.9	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			192.8				216.9
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	123.6			$	116.0

See notes to condensed consolidated financial statements.

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

NOTE 1 — BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting and do not include all information and footnotes required by GAAP for complete financial statements. This Form 10-Q should be read in conjunction with the financial statement footnotes and other information in our 2005 Annual Report on Form 10-K. In management’s opinion, the quarterly unaudited condensed consolidated financial statements present fairly our financial position, results of operations and cash flows in accordance with GAAP.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and assumptions, including those related to revenue recognition, the fair value of share-based compensation, valuation of inventories, valuation of long-lived assets, post-employment benefits, income taxes, litigation and environmental liabilities. Management bases its estimates on historical experience, current business conditions and expectations and on various other assumptions it believes are reasonable under the circumstances. Actual results could differ from those estimates.

     The condensed consolidated financial statements include the accounts of the Company and its controlled subsidiaries, including: Tilden, in Michigan, 85 percent ownership; Empire, in Michigan, 79 percent ownership; United Taconite, in Minnesota, 70 percent ownership; and Portman, in Western Australia, 80.4 percent ownership. All

significant intercompany balances and transactions have been eliminated in consolidation.

     On May 9, 2006, the Company’s Board of Directors approved a two-for-one stock split of its Common Shares with a corresponding decrease in par value from $.50 to $.25 per Common Share. The record date for the stock split was June 15, 2006 with a distribution date of June 30, 2006. Accordingly, all Common Shares, per share amounts, stock compensation plans and preferred stock conversion rates have been adjusted retroactively to reflect the stock split.

     On April 19, 2005, Cliffs Australia, a wholly owned subsidiary of the Company, completed the acquisition of 80.4 percent of Portman’s common stock. The acquisition was initiated on March 31, 2005 by the purchase of approximately 68.7 percent of the outstanding shares of Portman. The Statements of Condensed Consolidated Financial Position of the Company as of June 30, 2006 and December 31, 2005 reflect the acquisition of Portman, effective March 31, 2005, under the purchase method of accounting. See NOTE 3 for further discussion.

     The Company also owns a 26.83 percent interest in Wabush Mines, an unincorporated Joint Venture, in Canada; and a 23 percent interest in Hibbing Taconite Company, an unincorporated Joint Venture in Minnesota. Additionally, Portman owns a 50 percent interest in Cockatoo Island Joint Venture. Investments in joint ventures which we do not control, but have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method.

     Quarterly results historically are not representative of annual results due to seasonal and other factors. Certain prior year amounts have been reclassified to conform to the current year presentation, including amounts related to discontinued operations and the cumulative effect of an accounting change.

NOTE 2 — ACCOUNTING POLICIES

     In June 2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by defining a criterion that an individual tax position must meet for any part of the

benefit of that position to be recognized in an enterprise’s financial statements. Additionally, the Interpretation provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We do not expect adoption of this Interpretation to have a material impact on our consolidated financial statements.

     In March 2006, FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 establishes the accounting for all separately recognized servicing assets and servicing liabilities. This Statement amends Statement No. 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This statement is effective January 1, 2007. We do not expect adoption of this standard to have a material impact on our consolidated financial statements.

     On February 16, 2006, FASB issued Statement No. 155, “Accounting for Certain Hybrid Instruments” (“SFAS 155”), which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect adoption of this standard to have a material impact on our consolidated financial statements.

     On March 17, 2005, the EITF reached consensus on Issue No. 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry”, (“EITF 04-6”). The consensus clarifies that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the cost of inventory. The consensus, which is effective for reporting periods beginning after December 15, 2005, permitted early adoption. At its June 29, 2005 meeting,

FASB ratified a modification to EITF 04-6 to clarify that the term “inventory produced” means “inventory extracted.” We elected to adopt EITF 04-6 in 2005. As a result, we recorded an after-tax cumulative effect adjustment of $5.2 million or $.09 per diluted share, and increased product inventory by $8.0 million effective January 1, 2005.

Marketable Securities

     We determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluate such designation as of each balance sheet date. At June 30, 2006, we had $3.7 million of six-month term deposits at Portman. At December 31, 2005, we had $9.9 million in highly-liquid auction rate securities (“ARS”), classified as trading with changes in market value, if any, included in income. The ARS were fully liquidated in the first quarter of 2006. We invested in ARS to generate higher returns than traditional money market investments. Although these securities have long-term stated contractual maturities, they can be presented for redemption at auction when rates are reset, which is typically every 7, 28 or 35 days. As a result, we classify these securities as current assets. We had no realized or unrealized gains or losses related to these securities during the first six months of 2006 and 2005. All income, including any gains or losses related to these investments, was recorded as interest income. In accordance with our investment policy, we only invest in ARS with high quality credit issuers and limit the amount of investment exposure to any one issuer.

     We had $22.7 million and $10.6 million at June 30, 2006 and December 31, 2005, respectively, of non-current marketable securities, classified as “available for sale”, which are stated at fair value, with unrealized holding gains and losses included in other comprehensive income.

Inventories

     North America

     Product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is made. Maintaining iron ore products at ports on the lower Great Lakes reduces risk of non-

payment by customers, as we retain title to the product until payment is received from the customer. We track the movement of inventory and have the right to verify the quantities on hand. Supplies and other inventories reflect the weighted average cost method.

     Australia

     At acquisition, the fair value of Portman’s inventory was assigned value at estimated selling price less costs of realization and an appropriate margin for selling efforts and costs to complete, with the exception of lower grade stockpiles. The net realizable value has been discounted to present value using a weighted average cost of capital where appropriate. Optimal use of lower grade stockpiles of high phosphorous ore is dependent on future production of standard ore for blending into saleable product. These stockpiles are scheduled to be utilized in the mine plan progressively over the life of the mine. Given the nature of these stockpiles and their dependence on future production, they have been assessed on the same basis as mineral rights associated with mining operations adjusted for the costs incurred to date to extract the ore and to reflect the benefits to Portman of having this ore available as an alternative to in-ground reserves. We maintain ownership of the inventories until title has transferred to the customer at the F.O.B. point, which is generally when the product is loaded into the vessel.

Share-Based Compensation

     Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R using the modified prospective transition method. Because we elected to use the modified prospective transition method, results for prior periods have not been restated. Under this transition method, share-based compensation expense for the first six months of 2006 includes compensation expense for all share-based compensation awards granted prior to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Accordingly, the revised compensation costs are being amortized on a straight-line basis over the remaining service periods of the awards.

     Prior to the adoption of SFAS 123R, we recognized share-based compensation expense in accordance with SFAS 123. As prescribed in SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”), we elected to use the prospective method. The prospective method requires expense to be recognized for all awards granted, modified or settled beginning in the year of adoption. In accordance with SFAS 123 and SFAS 148, we provided pro forma net income or loss and net income or loss per share disclosures for each period prior to adoption of SFAS 123R as if we had applied the fair value recognition provisions to all awards unvested in each period.

     In March 2005, the SEC issued SAB 107, which provides supplemental implementation guidance for SFAS 123R. We have applied the provisions of SAB 107 in our adoption of SFAS 123R. See NOTE 10 for information on the impact of our adoption of SFAS 123R and the assumptions we used to calculate the fair value of share-based employee compensation.

Derivatives

     In the normal course of business, we use various instruments to hedge our exposure for purchases of commodities and foreign currency.

     We enter into forward contracts for the purchase of commodities, primarily natural gas and diesel fuel, which are used in our North American operations. Such contracts are in quantities expected to be delivered and used in the production process and are not intended for resale or speculative purposes.

     Portman uses forward exchange contracts, call options, collar options and convertible collar options to hedge its currency exposure for a portion of its sales receipts denominated in United States currency. The primary objective for the use of these instruments is to reduce the volatility of earnings due to changes in the Australian/United States currency exchange rate, and to protect against undue adverse movement in these exchange rates. All hedges are tested for effectiveness at inception and at each reporting period thereafter.

Income Taxes

     Income taxes are based on income for financial reporting purposes calculated using our expected annual effective rate and reflect a current tax liability (asset) for the estimated taxes payable (recoverable) on the current year tax return and expected annual changes in deferred taxes. Deferred tax assets or liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax laws and rates. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized.

Revenue Recognition

     Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified terms of each term supply agreement. Generally, our North American term supply agreements provide that title transfers to the customer when payment is received. Under some term supply agreements, we ship the product to ports on the lower Great Lakes and/or to the customer’s facilities prior to the transfer of title. Certain sales contracts with one customer include provisions for supplemental revenue or refunds based on annual steel pricing at the time the product is consumed in the customer’s blast furnaces. We estimate these amounts for recognition at the time of sale when it is deemed probable that they will be realized. Estimated supplemental payments (on approximately .8 million tons), which at estimated pricing would have amounted to approximately $12.9 million related to 2005 sales to one of the customer’s indefinitely idled facilities, were not included in 2005 revenue. Supplemental payments related to pellets sold to this facility are due and will be recognized when the pellets are consumed or upon other disposition. Revenue in the first six months of 2006 included approximately $12.9 million of additional revenue on 2005 sales due to such changes, including $4.0 million for .3 million tons related to the idled facility. Revenue for the first six months of the year from product sales includes reimbursement for freight charges ($37.1 million in 2006 and $38.5 million in 2005) paid on behalf of customers and venture partners’ cost reimbursements ($90.8 million in 2006 and $74.7 million in 2005) from minority interest partners for their share of North American mine costs.

     We do not recognize revenue on North American iron ore products shipped to some customers until payment is received. Generally, our North American term supply agreements specify that title and risk of loss pass to the customer when payment for the pellets is received. This is a revenue recognition practice utilized to reduce our financial risk to customer insolvency. This practice is not believed to be widely used throughout the balance of the industry.

     Where we are joint venture participants in the ownership of a North American mine, our contracts entitle us to receive royalties and management fees, which we earn as the pellets are produced. Revenue is recognized on services when the services are performed.

     Portman’s sales revenue is recognized at the F.O.B. point, which is generally when the product is loaded into the vessel. Revenues denominated in a foreign currency are converted to Australian dollars at the currency exchange rate in effect at the time of the transaction.

Foreign Currency Translation

     Results of foreign operations are translated into United States dollars using the average exchange rates during the applicable periods. Assets and liabilities are translated into United States dollars using the exchange rate on the balance sheet date. Resulting translation adjustments are recorded in “Accumulated other comprehensive loss” in Shareholders’ Equity on our Statements of Condensed Consolidated Financial Position.

Goodwill

     Based on our final purchase price allocation for the Portman acquisition, we identified approximately $8.4 million of excess purchase price over the fair value of assets acquired and liabilities assumed. As required by SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS 142”), goodwill was allocated to our Australia segment. SFAS 142 requires us to compare the fair value of the reporting unit to its carrying value on an annual basis to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is

recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

Preferred Stock

     In January 2004, we completed an offering of $172.5 million of redeemable cumulative convertible perpetual preferred stock, without par value, issued at $1,000 per share. The preferred stock pays quarterly cash dividends at a rate of 3.25 percent per annum, has a liquidation preference of $1,000 per share and is convertible into our common shares at an adjusted rate of 65.5068 common shares per share of preferred stock, which is equivalent to an adjusted conversion price of $15.27 per share at June 30, 2006, subject to further adjustment in certain circumstances. Each share of preferred stock may be converted by the holder if during any fiscal quarter ending after March 31, 2004 the closing sale price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding quarter exceeds 110 percent of the applicable conversion price on such trading day ($16.80 at June 30, 2006). The threshold was met as of June 30, 2006. The satisfaction of this condition allows conversion of the preferred stock during the fiscal quarter ending September 30, 2006 only. The conversion right may continue after such quarter if certain conditions set forth in the terms of the preferred stock are satisfied. The preferred stock was also convertible during each of the past six quarters due to the satisfaction of this condition during each of the immediately preceding quarters.

NOTE 3 — PORTMAN ACQUISITION

     On April 19, 2005, Cliffs Australia completed the acquisition of 80.4 percent of the outstanding shares of Portman, a Western Australia-based independent iron ore mining and exploration company. The acquisition was initiated on March 31, 2005 by the purchase of approximately 68.7 percent of the outstanding shares of Portman. The assets consisted primarily of iron ore inventory, land and mineral rights and iron ore reserves. The purchase price of the 80.4 percent interest was $433.1 million, including $12.4 million of acquisition costs. Additionally, we incurred $9.8 million of foreign currency hedging costs related to this transaction, which were included in “Other-net” in

the first quarter 2005 Statements of Condensed Consolidated Operations. The acquisition increased our customer base in China and Japan and established our presence in the Australian mining industry. Portman’s full-year 2005 production (excluding its .6 million tonne share of the 50 percent-owned Cockatoo Island Joint Venture) was approximately 6.0 million tonnes. Portman’s $66 million expansion project is in the production ramp up mode. Portman expects to be shipping at nearly the eight million tonne production rate in the third quarter of 2006. The production is fully committed to steel companies in China and Japan for the next four years.

     The acquisition and related costs were financed with existing cash and marketable securities and $175 million of interim borrowings under a three-year $350 million revolving credit facility. The outstanding balance was repaid in July 2005. See NOTE 4.

     The Statements of Condensed Consolidated Financial Position of the Company as of June 30, 2006 and December 31, 2005 reflect the acquisition of Portman, effective March 31, 2005, under the purchase method of accounting. Assets acquired and liabilities assumed have been recorded at estimated fair values as of the acquisition date as determined by the results of an appraisal of assets and liabilities, which was finalized at the end of the first quarter of 2006.

NOTE 4 — DEBT AND REVOLVING CREDIT FACILITY

     On June 23, 2006, we entered into a five-year unsecured credit agreement with a syndicate of 16 financial institutions. The new facility provides $500 million in borrowing capacity under a revolving credit line, with no scheduled maturities other than the five-year term of the agreement; loans are made with a choice of interest rates and maturities, subject to the term of the agreement. The new credit agreement replaced an existing $350 million unsecured revolving credit facility scheduled to expire in March 2008. The facility has financial covenants based on earnings, debt and fixed cost coverage. Interest rates are either (1) a range from LIBOR plus .75 percent to LIBOR plus 1.50 percent based on debt and earnings, or (2) the prime rate. As of June 30, 2006, we were in compliance with the covenants in the credit agreement. We did not have any borrowings outstanding against this facility as of June 30, 2006.

     Portman is party to a A$40 million credit agreement. The facility has various covenants based on earnings, asset ratios and fixed cost coverage. The floating interest rate is 80 basis points over the 90-day bank bill swap rate in Australia. Under this facility, Portman has remaining borrowing capacity of A$28.5 million on June 30, 2006, after reduction of A$11.5 million for commitments under outstanding performance bonds. As of June 30, 2006, Portman was in compliance with the covenants in the credit agreement.

     In 2005, Portman secured five-year financing from its customers in China as part of its long-term sales agreements to assist with the funding of the expansion of its mining operation. The borrowings, which total $7.0 million at June 30, 2006, accrue interest annually at five percent. The borrowings require a $.7 million principal payment plus accrued interest to be made each January 31 for the next three years with the remaining balance due in full in January 2010.

NOTE 5 — SEGMENT REPORTING

     As a result of the Portman acquisition, we have organized into two operating and reporting segments: North America and Australia. The North America segment, comprised of our mining operations in the United States and Canada, represented approximately 81 percent of our consolidated revenues for the six-month period ended June 30, 2006. The Australia segment, comprised of our 80.4 percent Portman interest in Western Australia represented approximately 19 percent of our consolidated revenues for the same period. There have been no intersegment revenues since the acquisition.

     The North America segment is comprised of our six iron ore mining operations in Michigan, Minnesota and Eastern Canada. We manufacture 13 grades of iron ore pellets, including standard, fluxed and high manganese, for use in our customers’ blast furnaces as part of the steelmaking process. Each of the mines has crushing, concentrating and pelletizing facilities used in the production process. More than 97 percent of the pellets are sold to integrated steel companies in the United States and Canada, using a single sales force.

     The Australia segment includes production facilities at the Koolyanobbing operations and a 50 percent interest in a joint venture at Cockatoo Island, producing lump ore and direct shipping fines for our customers in China and Japan. The Koolyanobbing operation has crushing and screening facilities used in the production process. Production is fully committed to steel companies in China and Japan for the next four years.

     We primarily evaluate performance based on segment operating income, defined as revenues less expenses identifiable to each segment. We have classified certain administrative expenses as unallocated corporate expenses.

     The following table presents a summary of our segments for the three-month and six-month periods ended June 30, 2006 and 2005 based on the current reporting structure.

		(In Millions)
		Three Months								Six Months
		Ended June 30								Ended June 30
		2006				2005				2006				2005
Revenues from product sales and services:
North America		$	393.9			$	417.5			$	640.1			$	688.7
Australia			92.3				67.8				152.5				67.8
Total revenues from product sales and services		$	486.2			$	485.3			$	792.6			$	756.5
Segment operating income:
North America		$	100.1			$	128.3			$	147.5			$	173.7
Australia			27.8				18.8				35.4				18.8
Segment operating income			127.9				147.1				182.9				192.5
Unallocated corporate expenses			(11.5	)			(8.2	)			(20.3	)			(19.5	)
Other income (expense)			1.4				1.8				5.2				(4.2	)
Income from continuing operations before income taxes and minority interest		$	117.8			$	140.7			$	167.8			$	168.8
Depreciation, depletion and amortization:
North America		$	8.3			$	8.5			$	16.3			$	15.8
Australia			10.9				8.3				17.2				8.3
Total depreciation, depletion and amortization		$	19.2			$	16.8			$	33.5			$	24.1
Capital additions:
North America		$	7.4			$	17.4			$	28.3			$	34.1
Australia			7.6				9.8				22.4				9.8
Total capital additions		$	15.0			$	27.2			$	50.7	*		$	43.9

     A summary of assets by segment is as follows:

		(In Millions)
		June 30				December 31
		2006				2005
Segment assets:
North America		$	1,130.9			$	1,079.6
Australia			689.6				667.1
Total consolidated assets		$	1,820.5			$	1,746.7

NOTE 6 — COMPREHENSIVE INCOME

     Following are the components of comprehensive income for the three-month and six-month periods ended June 30, 2006 and 2005:

		(In Millions)
		Three Months								Six Months
		Ended June 30								Ended June 30
		2006				2005				2006				2005
Net income		$	83.1			$	99.7			$	121.0			$	125.9
Other comprehensive income (loss):
Unrealized gain on marketable securities - net of tax			2.3				.2				7.8				.2
Foreign currency translation gain (loss)			14.8				(6.7	)			5.5				(8.9	)
Derivative instrument hedges, mark to market gains (losses) arising in period			3.2				(3.6	)			2.9				(3.6	)
Total other comprehensive income (loss)			20.3				(10.1	)			16.2				(12.3	)
Total comprehensive income		$	103.4			$	89.6			$	137.2			$	113.6

NOTE 7 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS

     The components of defined benefit pension and OPEB expense for the three-month and six-month periods ended June 30, 2006 and 2005 were as follows:

Defined Benefit Pension Expense

		(In Millions)
		Three Months								Six Months
		Ended June 30								Ended June 30
		2006				2005				2006				2005
Service cost		$	2.9			$	3.0			$	5.9			$	6.0
Interest cost			10.7				10.1				21.3				20.2
Expected return on plan assets			(12.1	)			(11.1	)			(24.2	)			(22.3	)
Amortization:
Unrecognized prior service costs			.7				.6				1.5				1.3
Net actuarial losses			4.1				3.1				8.2				6.3
Amortization of net obligation			(.6	)			(1.0	)			(1.2	)			(2.0	)
Net periodic benefit cost		$	5.7			$	4.7			$	11.5			$	9.5

OPEB Expense

		(In Millions)
		Three Months								Six Months
		Ended June 30								Ended June 30
		2006				2005				2006				2005
Service cost		$	.7			$	.9			$	1.4			$	1.8
Interest cost			4.4				4.5				8.8				9.0
Expected return on plan assets			(2.3	)			(1.8	)			(4.5	)			(3.6	)
Amortization:
Unrecognized prior service credits			(1.6	)			(2.0	)			(3.2	)			(3.6	)
Net actuarial losses			2.9				3.7				5.8				7.2
Net periodic benefit cost		$	4.1			$	5.3			$	8.3			$	10.8

     Historically, the U.S. discount rate has been set for all plans using the Moody’s Aa corporate bond index. As of December 31, 2005, this rate was 5.4 percent. The Company, through an independent consultant, matched the projected cash flows used to determine the PBO and APBO to a projected yield curve of approximately 400 Aa graded bonds in the 10^th to 90^th percentiles. These bonds are either noncallable or callable with make-whole provisions. The duration matching produced rates ranging from 5.5 percent to 5.6 percent for the Company’s U.S. pension plans. Based on these results, the Company selected a discount rate of 5.5 percent for its U.S. plans at December 31, 2005, compared with a rate of 5.75 percent at December 31, 2004.

     The Canadian discount rate is set based upon a model by an independent consultant. The model discount rates for Canada are determined by calculating the single level discount rate that, when applied to a particular cash flow pattern, produces the same present value as discounting the cash flow pattern using spot rates generated from a high-quality corporate bond yield curve. Based on the cash flow patterns and liability duration for the Canadian plans, which are dependent on the demographic profile of each plan, the December 31, 2005 discount rate was 5.00 percent, compared with a rate of 5.75 percent at December 31, 2004.

NOTE 8 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS

     At June 30, 2006, the Company, including its share of unconsolidated ventures, had environmental and mine closure liabilities of $112.8 million, of which $11.5 million was classified as current. Payments in the first six months of 2006 were $7.9 million (2005 — $1.1 million). Following is a summary of the obligations:

		(In Millions)
		June 30				December 31
		2006				2005
Environmental		$	15.0			$	17.8
Mine closure
LTVSMC			29.4				30.4
Operating mines			68.4				64.8
Total mine closure			97.8				95.2
Total environmental and mine closure obligations*		$	112.8			$	113.0

Environmental

     Our mining and exploration activities are subject to various laws and regulations governing the protection of the environment. We conduct our operations so as to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities of $15.0 million at June 30, 2006, including obligations for known environmental remediation exposures at active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost can only be estimated as a range of possible

amounts with no specific amount being most likely, the minimum of the range is accrued in accordance with SFAS No. 5, “Accounting for Contingencies.” Future expenditures are not discounted, and potential insurance recoveries have not been reflected. Additional environmental obligations could be incurred, the extent of which cannot be assessed.

     The environmental liability includes our obligations related to five sites that are independent of our iron mining operations, three former iron ore-related sites, two leased land sites where we are lessor and miscellaneous remediation obligations at our operating units. We recorded $3.8 million of additional clean-up expense related to a PCB spill at Tilden ($5.2 million was previously accrued in December 2005) in the second quarter of 2006 as “Miscellaneous — net” in the Statements of Condensed Consolidated Operations.

     The obligation also includes Federal and State sites where the Company is named as a PRP: the Rio Tinto mine site in Nevada, the Milwaukee Solvay site in Wisconsin, and the Kipling and Deer Lake sites in Michigan.

Milwaukee Solvay Site

     The Kinnickinnic Development Group (“KK Group”) is pursuing the acquisition of the Milwaukee Solvay property. Pursuant to the Liability Transfer and Indemnity Agreement entered into between KK Group and Cliffs Mining Company, the KK Group has agreed to acquire our mortgage interest in the property for $2.25 million, assume all environmental liabilities in connection with the property and place $4.0 million in escrow to secure the KK Group’s obligations. The KK Group has agreed, upon closing, to purchase a $5.0 million environmental insurance policy. The estimated premium for the insurance policy is expected to be placed in escrow in the near future to be utilized when the policy is issued. The Company received the $2.25 million payment for the assignment of the mortgage in June 2006 as a deposit to be held pending closure on the global agreement.

Rio Tinto

     The Rio Tinto Mine site is a historic underground copper mine located near Mountain City, NV, where tailings were placed in Mill Creek, a tributary to the Owyhee River. Remediation work is being conducted in accordance with a Consent Order between the Nevada Department of Environmental Protection (“NDEP”) and the Rio Tinto Working Group (“RTWG”) composed of the Company, Atlantic Richfield Company, Teck Cominco American Incorporated, and E. I. du Pont de Nemours and Company. The Consent Order provides for technical review by the U.S. Department of the Interior Bureau of Indian Affairs, the U.S. Fish & Wildlife Service, U.S. Department of Agriculture Forest Service, the NDEP and the Shoshone-Paiute Tribes of the Duck Valley Reservation (collectively, “Rio Tinto Trustees”). The Consent Order is currently projected to continue through 2006 with the objective of supporting the selection of the final remedy for the site. Costs are shared pursuant to the terms of a Participation Agreement between the parties of the RTWG, who have reserved the right to renegotiate any future participation or cost sharing following the completion of the Consent Order.

     The Rio Tinto Trustees have made available for public comment their plans for the assessment of Natural Resource Damages (“NRD”). The RTWG commented on the plans and also are in discussions with the Rio Tinto Trustees informally about those plans. The notice of plan availability is a step in the damage assessment process. The studies presented in the plan may lead to a NRD claim under CERCLA. There is no monetized NRD claim at this time.

     During 2005, the focus of the RTWG was on development of alternatives for remediation of the mine site. A draft of an alternatives study has recently been reviewed with the Rio Tinto Trustees and the alternatives have essentially been reduced to three: (1) no action; (2) long-term water treatment; and (3) removal of the tailings. The estimated costs range from approximately $1 million to $27 million. In recognition of the potential for an NRD claim, the parties are exploring the possibility of a global settlement that would encompass both the site decision and the NRD issues and thereby avoid the lengthy litigation typically associated with NRD. The Company’s recorded reserve of approximately $1.0 million reflects its estimated costs for

completion of the existing Consent Order and the minimum “no action” alternative based on the current Participation Agreement.

Northshore Mine Notice of Violation

     On February 10, 2006, Northshore mine received a Notice of Violation (“Notice”) from the EPA. The Notice cites four alleged violations: (1) that Northshore violated the Prevention of Significant Deterioration (“PSD”) requirements of the Clean Air Act in the 1990 restart of Furnaces 11 and 12; (2) that Northshore mine violated the PSD Regulations in the 1995 restart of Furnace 6; (3) Title V operating permit violations for not including in the Title V permit all applicable requirements (including a compliance schedule for PSD and Best Available Control Technology requirements associated with the furnace restarts); and (4) failure to comply with calibration of monitoring equipment as required under Northshore’s Title V permit. The alleged violations relating to the restart of Furnaces 11 and 12 occurred prior to our acquisition of Northshore (formerly Cyprus Northshore Mining Company) in a share purchase in 1994. We have investigated the allegations and have communicated our position to the EPA. In accordance with SFAS No. 5, we have not recorded an environmental liability related to this Notice.

Mine Closure

     The mine closure obligation of $97.8 million includes the accrued obligation at June 30, 2006 for a closed operation formerly known as LTVSMC, for our six North American operating mines and for Portman. The LTVSMC closure obligation results from an October 2001 transaction where subsidiaries of the Company received a net payment of $50 million and certain other assets and assumed environmental and certain facility closure obligations of $50 million, which obligations have declined to $29.4 million at June 30, 2006, as a result of expenditures totaling $20.6 million since 2001 ($1.0 million in the first six months of 2006).

     The accrued closure obligation for our active mining operations of $68.4 million at June 30, 2006 reflects the adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations”, to provide for contractual and legal obligations associated with the eventual closure of the mining operations. We determined the obligations, based

on detailed estimates, adjusted for factors that an outside third party would consider (i.e., inflation, overhead and profit), escalated to the estimated closure dates and then discounted using a credit-adjusted risk-free interest rate of 10.25 percent (12.0 percent for United Taconite and 5.5 percent for Portman). The estimates for the North American operations were revised at December 31, 2005 using a three percent escalation factor and a six percent credit-adjusted risk-free discount rate for the incremental increases in the closure cost estimates. The closure date for each location was determined based on the expected exhaustion date of the remaining economic iron ore reserves. The accretion of the liability and amortization of the property and equipment are recognized over the estimated mine lives for each location.

     The following summarizes our asset retirement obligation liability, including our share of unconsolidated associated companies:

		(In Millions)
		June 30				December 31
		2006				2005
Asset retirement obligation at beginning of year		$	64.8			$	52.2
Accretion expense			3.0				5.7
Portman acquisition							5.1
Minority interest			.6				.2
Revision in estimated cash flows							1.6
Asset retirement obligation at end of year		$	68.4			$	64.8

NOTE 9 — INCOME TAXES

     Our total tax provision from continuing operations for the first half of 2006 of $39.5 million is comprised of $29.0 million related to North American operations, primarily the U.S., and $10.5 million related to Australian operations. Our expected effective tax rate for 2006 related to North American operations reflects benefits from deductions for percentage depletion in excess of cost depletion.

     Through our acquisition of Portman in 2005, we have $11.1 million of deferred tax assets related to Australian capital loss carryforwards of $37.0 million. Under Australian income tax law, capital losses are deductible from taxable capital gains, not from ordinary taxable income, but can be carried forward indefinitely. Due to uncertainty as to when, if ever, Portman may be able to utilize these Australian capital

loss carryforwards, we continue to maintain a full valuation allowance against this deferred tax asset.

     At June 30, 2006, cumulative undistributed earnings of our Australian subsidiaries included in consolidated retained earnings continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for deferred taxes related to a future repatriation of these earnings, nor is it practicable to determine the amount of this liability.

NOTE 10 — SHARE-BASED COMPENSATION PLANS

Description of Share-Based Compensation Plans

     The 1992 Incentive Equity Plan, as amended in 1999, authorizes us to issue up to 6,800,000 Common Shares to employees upon the exercise of Options Rights, as Restricted Shares, in payment of Performance Shares or Performance Units that have been earned, as Deferred Shares, or in payment of dividend equivalents paid on awards made under the Plan. Such shares may be shares of original issuance, treasury shares, or a combination of both. Stock options may be granted at a price not less than the fair market value of the stock on the date the option is granted, generally are not subject to repricing, and must be exercisable not later than ten years and one day after the date of grant. Common Shares may be awarded or sold to certain employees with disposition restrictions over specified periods.

     The following is a summary of our Performance Share Award Agreements for each of the past three years:

Performance

Performance

Share

Shares

Grant

Performance

Plan Year

Outstanding

Forfeitures*

Date

Period

2006

75,246

28,724

May 8, 2006

1/1/2006-12/31/2008

2005

89,184

8,908

March 8, 2005

1/1/2005-12/31/2007

2004

214,664

23,536

March 11, 2004

1/1/2004-12/31/2006

     For all three Agreements, each performance share, if earned, entitles the holder to receive a number of Common Shares within the range between a threshold and

maximum number of shares, with the actual number of Common Shares earned dependent upon whether the Company achieves certain objectives established by the Compensation Committee of its Board of Directors. The performance payout is determined primarily by the Company’s Total Shareholder Return (“TSR”) for the period as measured against a predetermined peer group of mining and metals companies. For the 2006 and 2005 Agreements, the TSR calculated payout may be reduced by up to 50 percent in the event that the Company’s pre-tax return on net assets (“RONA”) for the incentive period falls below 12 percent. The 2004 Agreement includes a discrete performance measure and payout based on the Company’s pre-tax RONA. Additionally, the payout for both the 2005 and 2004 Agreements may be increased or reduced by up to 25 percent of the target based on management’s performance relative to the Company’s strategic objectives over the performance period as evaluated by the Compensation Committee. The final payout may vary from zero to 175 percent of the performance shares awarded for both the 2005 and 2004 Agreements subject to a maximum payout of two times the grant date price. The final payout for the 2006 Agreement varies from zero to 150 percent of the performance shares awarded.

Impact of the Adoption of SFAS 123R

     Under existing restricted stock plans awarded prior to January 1, 2006, we will continue to recognize compensation cost for awards to retiree-eligible employees without substantive forfeiture risk over the nominal vesting period. This recognition method differs from the requirements for immediate recognition for awards granted with similar provisions after the January 1, 2006 adoption of SFAS 123R. Accordingly, compensation expense of $1.6 million related to restricted stock awards to retiree-eligible employees granted on March 14, 2006 was recognized in the first quarter of 2006.

     Our income from continuing operations for the six months ended June 30, 2006 includes approximately $4.4 million in pre-tax share-based employee compensation calculated under the provisions of SFAS 123R, which compares with $4.0 million of pre-tax expense had we accounted for share-based compensation under the provisions of SFAS 123 for the comparable period.

     The following table summarizes the share-based compensation expense that we recorded for continuing operations in accordance with SFAS 123R for the three month and six month periods ended June 30, 2006:

		(In Millions, except
		per common share)
		Three Months				Six Months
		Ended June 30				Ended June 30
		2006				2006
Administrative, selling and general expenses		$	2.0			$	4.4
Reduction of operating income from continuing operations before income taxes and minority interest			2.0				4.4
Income tax benefit			(.5	)			(1.1	)
Reduction of net income		$	1.5			$	3.3
Reduction of earnings per share:
Basic		$	.04			$	.08
Diluted		$	.03			$	.06

     Prior to the adoption of SFAS 123R, we presented all tax benefits for actual deductions in excess of compensation expense as operating cash flows on our Statements of Condensed Consolidated Cash Flows. SFAS 123R requires the cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense to be classified as financing cash flows. Accordingly, we classified $1.2 million in excess tax benefits as cash from financing activities rather than cash from operating activities on our Statements of Condensed Consolidated Cash Flows for the six-month period ended June 30, 2006.

Determining fair value

     We estimated fair value using a Monte Carlo simulation to forecast relative TSR performance. Consistent with the guidelines of SFAS 123R, a correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies.

     The expected term of the grant represented the time from the grant date to the end of the service period for each of the three performance Agreements. We estimated the volatility of our common stock and that of the peer group of mining and metals companies

using daily price intervals for all companies. The risk-free interest rate was the rate at the valuation date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.

     The assumptions utilized to estimate the fair value of the Agreements incorporating the Company’s relative TSR and the calculated fair values are as follows:

		2006				2005				2004
		Agreement				Agreement				Agreement
Average expected term (years)			2.65				2.81				2.80
Expected volatility			46	%			48	%			47	%
Risk-free interest rate			4.96	%			3.72	%			1.94	%
Dividend yield			1.04	%			0	%			0	%
Fair value — percent of grant date market price			27.73	%			118.53	%			61.88	%

We adjusted the number of shares awarded under our share-based equity plans concurrent with our June 30, 2006 two-for-one stock split. Management has concluded that the equity anti-dilution adjustments were required and accordingly, the adjustments did not require the recognition of incremental compensation expense.

     Stock option, restricted stock, deferred stock allocation and performance share activity under our Incentive Equity Plans and Nonemployee Directors’ Compensation Plans are as follows:

										Weighted
						Weighted				Average
						Average				Remaining
						Exercise				Contractual				Aggregate
						Price				Term				Intrinsic
		Shares				per Share				(in years)				Value
Stock options:
Options outstanding at beginning of year			54,268			$	14.69
Granted during the period Excercised			(36,468	)			16.79
Cancelled or expired Options outstanding at end of period			17,800				11.55				1.5			$	205,590
Options exercisable at end of period			17,800				11.55				1.5				205,590
Restricted awards:
Awarded and restricted at beginning of year			193,180
Awarded during the period			162,178
Vested			(30,072	)
Cancelled Awarded and restricted at end of period			325,286								2.6
Performance shares:
Allocated at beginning of year			822,118
Awarded during the period			103,970
Issued			(202,518	)
Forfeited/cancelled			(306,844	)
Allocated at end of period			416,726								1.1
Directors’ retainer and voluntary shares:
Awarded at beginning of year			1,856
Awarded during the period			1,082
Issued			(2,388	)
Awarded at end of period			550								.5
Reserved for future grants or awards at end of period:
Employee plans			1,348,436
Directors’ plans			86,774
Total			1,435,210

The intrinsic value of options exercised during the six-month periods ended June 30, 2006 and 2005 was $.6 million and $3.5 million, respectively.

     A summary of our non-vested shares as of June 30, 2006 and changes during the six months ended June 30, 2006 is as follows:

						Weighted
						Average
						Grant
						Date Fair
		Shares				Value
Nonvested, beginning of year			1,017,154			$	16.66
Granted			267,230				45.05
Vested			(270,732	)			10.62
Forfeited/expired			(306,844	)			5.07
Nonvested, end of period			706,808			$	34.74

The total compensation cost related to non-vested awards not yet recognized is $11.2 million.

Comparable disclosures

     As discussed in NOTE 2, we accounted for share-based employee compensation under SFAS 123R’s fair value method during the three-month and six-month periods ended June 30, 2006. Prior to January 1, 2006, we accounted for share-based compensation under the provisions of SFAS 123. The following table illustrates the pro forma effect on our net income and earnings per common share as if we had applied the fair value recognition provisions of SFAS 123 to all awards unvested for the three-month and six-month periods ended June 30, 2005:

		(In Millions, except
		per common share)
		Three Months				Six Months
		Ended June 30				Ended June 30
		2005				2005
Net income as reported		$	99.7			$	125.9
Stock-based employee compensation, net of tax:
Add expense included in reported results			.4				4.2
Deduct fair value based method			(.4	)			(1.8	)
Pro forma net income		$	99.7			$	128.3
Earnings attributable to common shares:
Basic — as reported		$	2.26			$	2.84
Basic — pro forma		$	2.26			$	2.90
Diluted — as reported		$	1.79			$	2.27
Diluted — pro forma		$	1.79			$	2.31

NOTE 11 — EARNINGS PER SHARE

     We present both basic and diluted EPS amounts. Basic EPS is calculated by dividing income applicable to common shares by the weighted average number of common shares outstanding during the quarter. Diluted EPS is calculated by dividing net income by the weighted average number of common shares, common share equivalents and convertible preferred stock outstanding during the period, utilizing the treasury share method for employee stock plans. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect.

     A summary of the calculation of earnings per common share on a basic and diluted basis follows:

		(In Millions, except EPS)
		Three Months								Six Months
		Ended June 30								Ended June 30
		2006				2005				2006				2005
Net income		$	83.1			$	99.7			$	121.0			$	125.9
Preferred stock dividends			1.4				1.4				2.8				2.8
Income applicable to common shares		$	81.7			$	98.3			$	118.2			$	123.1
Weighted average number of shares:
Basic			42.7				43.4				43.2				43.3
Employee stock plans			.4				1.0				.4				1.0
Convertible preferred stock			11.3				11.2				11.3				11.2
Diluted			54.4				55.6				54.9				55.5
Earnings per common share — Basic		$	1.91			$	2.26			$	2.74			$	2.84
Earnings per common share — Diluted		$	1.53			$	1.79			$	2.20			$	2.27

We increased our quarterly common share dividend to $.125 per share from $.10 per share on May 9, 2006 and to $.10 per share from $.05 per share on July 12, 2005. During the second quarter, we settled 2.3 million of the 2.5 million common shares re-purchased under a May 2006 authorization by Cliffs’ Board of Directors at a cost of $81.0 million. On July 11, 2006, the Board of Directors authorized an additional two million common share repurchase program. Common stock repurchased in accordance with these programs will be accumulated as treasury shares and used for general corporate purposes.

NOTE 12 — LEASE OBLIGATIONS

     The Company and its ventures lease certain mining, production and other equipment under operating and capital leases. Future minimum payments under capital leases and non-cancellable operating leases, including our share of ventures, at June 30, 2006, are expected to be:

		(In Millions)
		Company Share								Total
		Capital				Operating				Capital				Operating
		Leases				Leases				Leases				Leases
2006 (July 1 - December 31)		$	3.0			$	9.1			$	4.9			$	13.1
2007			5.9				12.5				8.4				15.7
2008			4.4				7.0				6.3				7.8
2009			4.3				6.3				6.2				6.5
2010			3.5				5.6				4.7				5.6
2011 and thereafter			18.5				5.0				18.7				5.0
Total minimum lease payments			39.6			$	45.5				49.2			$	53.7
Amounts representing interest			9.5								10.3
Present value of net minimum lease payments		$	30.1							$	38.9