UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-8944

Cleveland-Cliffs Inc

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (216) 694-5700

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

NONE

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o          No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o          No þ

     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 if disclosure of delinquent filers pursuant to Item 405 of the Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes þ         No o

     Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer.

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 June 30, 2005, the aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based on the closing price of $57.61 per share as reported on the New York Stock Exchange — Composite Index was $1,223,691,317 (excluded from this figure is the voting stock beneficially owned by the registrant’s officers and directors).

     The number of shares outstanding of the registrant’s Common Shares, par value $.50 per share, was 21,918,001 as of February 16, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 9, 2006 are incorporated by reference into Part III.

PART I

Introduction

      Founded in 1847, Cleveland-Cliffs Inc (the “Company,” “we,” “us,” “our,” and “Cliffs”) is the largest producer of iron ore pellets in North America. We sell the majority of our pellets to integrated steel companies in the United States and Canada. On April 19, 2005, Cleveland-Cliffs Australia Pty Limited, an indirect wholly owned subsidiary of the Company, completed the acquisition of 80.4 percent of Portman Limited (“Portman”), the third-largest iron ore mining company in Australia. The acquisition was initiated on March 31, 2005 by the purchase of approximately 68.7 percent of the outstanding shares of Portman.

      Our headquarters are located at 1100 Superior Avenue, Cleveland, Ohio 44114-2589, and our telephone number is (216) 694-5700. Our website address is www.cleveland-cliffs.com. Information contained on our website does not constitute part of this Form 10-K. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments to those reports, as soon as reasonably practicable after we file such reports with, or furnish such reports to, the Securities and Exchange Commission (the “SEC”).

North America

      We manage and operate six North American iron ore mines located in Michigan, Minnesota and Eastern Canada that currently have a rated capacity of 37.5 million tons of iron ore pellet production annually, representing approximately 46 percent of total North American pellet production capacity. Based on our percentage ownership of the North American mines we operate, our share of the rated pellet production capacity is currently 23.0 million tons annually, representing approximately 28 percent of total North American annual pellet capacity.

      The following chart summarizes the estimated annual production capacity and percentage of total North American pellet production capacity for each of the North American iron ore pellet producers as of December 31, 2005:

North American Iron Ore Pellet

Annual Rated Capacity Tonnage

We sell our share of North American iron ore production to integrated steel producers, generally pursuant to term supply agreements with various price adjustment provisions.

      For the year ended December 31, 2005, we produced a total of 35.9 million tons of iron ore pellets, including 22.1 million tons for our account and 13.8 million tons on behalf of the steel company owners of the mines.

Australia

      Portman was founded in 1925 and had undergone a number of management and business changes before establishing itself as a mineral producer in the early 1990’s. Following the sale of its Queensland based coking coal operations in 1999, Portman focused on its Western Australia iron ore deposits at the Koolyanobbing operations and Cockatoo Island. Portman’s 100 percent owned Koolyanobbing mining operations and its 50 percent interest in the Cockatoo Island Joint Venture represent Portman’s only significant operations. Portman serves the Asian iron ore markets with direct-shipping fines and lump ore. Portman’s 2005 production (excluding its .6 million metric ton (“tonne”) share of the Cockatoo Island joint venture) was approximately six million tonnes. Portman currently has a $61 million project underway that is expected to increase its wholly owned production capacity to eight million tonnes per year by the end of the first quarter of 2006. The production is fully committed to steel companies in China and Japan for approximately four years.

      The Company’s acquisition of Portman represents another significant milestone in our long-term strategy to seek additional iron ore mine investment opportunities and to continue our transition from primarily a mine management company and mineral holder to an international merchant mining company.

Business Segments

      As a result of the Portman acquisition, we have organized into two operating and reporting segments: North American and Australian. The North American segment, comprised of our mining operations in the United States and Canada, represented approximately 86 percent of our consolidated revenues for the nine-month period following the Portman acquisition. The Australian segment, comprised of our acquired 80.4 percent Portman interest in Western Australia, represents approximately 14 percent of our consolidated revenues for the same period. There have been no intersegment revenues since the acquisition.

North American Segment

      The North American 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 steel-making process. The variation in grades results from the specific chemical and metallurgical properties of the ores at each mine and whether or not fluxstone is added in the process. Although the grade or grades of pellets currently delivered to each customer are based on that customer’s preferences, which depend in part on the characteristics of the customer’s blast furnace, in most cases our iron ore pellets can be used interchangeably. Industry demand for the various grades of iron ore pellets depends on each customer’s preferences and changes from time to time. In the event that a given mine is operating at full capacity, the terms of most of our pellet supply agreements allow some flexibility to provide our customers iron ore pellets from different mines.

      Standard pellets require less processing, are generally the least costly pellets to produce and are called “standard” because no ground fluxstone (i.e., limestone, dolomite, etc.) is added to the iron ore concentrate before turning the concentrates into pellets. In the case of fluxed pellets, fluxstone is added to the concentrate, which produces pellets that can perform at higher productivity levels in the customer’s specific blast furnace and will minimize the amount of fluxstone the customer may be required to add to the blast furnace. “High manganese” pellets are the pellets produced at our Canadian operation, Wabush Mines (“Wabush”), where there is more natural manganese in the crude ore than is found at our other operations. The manganese contained in the iron ore mined at Wabush cannot be entirely removed during the concentrating process. Wabush produces pellets with two levels of manganese, with the lower manganese content being preferred by our customers.

      It is not possible to produce pellets with identical physical and chemical properties from each of our mining and processing operations. The grade or grades of pellets purchased by and delivered to each customer are based on that customer’s preferences and availability.

      Each of our North American mines is located near the Great Lakes or, in the case of Wabush, near the St. Lawrence Seaway, which is connected to the Great Lakes. Iron ore is transported via railroads to loading ports for shipment via vessel to Canada, the United States or other international destinations or shipped as concentrates for sinter feed.

North American Iron Ore Customers

      More than 97 percent of our North American revenues are derived from sales of iron ore pellets to the North American integrated steel industry, consisting of 10 current or potential customers. Generally, we have multi-year supply agreements with our customers. Sales volume under these agreements is largely dependent on customer requirements, and in many cases, we are the sole supplier of iron ore pellets to the customer. Each agreement has a base price that is adjusted annually using one or more adjustment factors. Factors that can adjust price include measures of general industrial inflation, steel prices and international pellet prices. One of our supply agreements has a provision that limits the amount of price increase or decrease in any given year.

      During 2005 and 2004, we sold 22.3 million and 22.6 million tons of iron ore pellets, respectively, from our share of the production from our North American iron ore mines. Sales in 2005 were to eight North American, one European and one Chinese steel producer.

      The following five customers together accounted for a total of 93 percent and 94 percent of North American “Product sales and services” revenues for the years 2005 and 2004, respectively:

      Our term supply agreements expire between 2006 and 2018. The weighted average duration is eight years.

      Our sales are influenced by seasonal factors in the first quarter of the year as shipments and sales are restricted by weather conditions on the Great Lakes. During the first quarter, we continue to produce our products, but we cannot ship those products via lake freighter until the Great Lakes are passable, which causes our first quarter inventory levels to rise. Our practice of shipping product to ports on the lower Great Lakes and/or to customers’ facilities prior to the transfer of title has somewhat mitigated the seasonal effect on first quarter inventories and sales.

      In 2005, 68 percent of our North American product revenues (80 percent in 2004) were derived from sales to our U.S. customers. See “Operations and Customers” in Item 7, “Management’s Discussion and Analysis of Financial Conditions and Operations” for further information regarding our customers.

Australian Segment

      The Portman operations include 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 facility has crushing and screening facilities used in the production process. Production is fully committed to steel companies in China and Japan for approximately four years.

      The Koolyanobbing operations are located 425 kilometers east of Perth and approximately 50 kilometers northeast of the town of Southern Cross. All of the ore mined at the Koolyanobbing operations is transported by rail to the Port of Esperance, 578 kilometers to the south for shipment to Asian customers. Cockatoo Island is located off the Kimberley coast of Western Australia, approximately 3,000 kilometers north of Perth. Portman sells its ore into the global seaborne trade market.

Australian Iron Ore Customers

      A limited spot market exists for seaborne iron ore as most production is sold under long-term contracts with annual benchmark prices driven from negotiations between the major suppliers and the Chinese and Japanese steel mills. The three major iron ore producers, Companhia Vale do Rio Doce (“CVRD”), Rio Tinto and BHP Billiton (“BHP”), dominate the seaborne iron ore trade and together account for approximately three-fourths of the global supply to the seaborne market.

      Portman has long-term supply contracts with steel producers in China and Japan that account for approximately 73 percent, and 27 percent, respectively, of sales. Sales volume under the agreements is partially dependent on customer requirements. Each agreement is priced based on the benchmark pricing established for Australian producers. The rapid growth in Chinese demand, particularly in more recent years, was underestimated by the major producers and has led to demand outstripping supply. This market imbalance has recently led to high spot prices for iron ore and a 71.5 percent increase in 2005 benchmark prices for Brazilian and Australian producers for iron ore lump and fines.

      Since the acquisition, we sold 4.9 million tonnes of iron ore to 15 Chinese and three Japanese customers. No customer comprises more than 15 percent of Portman sales or 10 percent of our consolidated sales. Portman’s five largest customers account for approximately 50 percent of Portman’s sales.

Segment Results

      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.

      Additional information regarding our segment performance is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K. In addition, selected financial data for our segments is available in Note 5, “Segment Reporting,” included in Item 8, “Financial Statements and Supplementary Data.”

Strategy

      Almost all iron ore is used in steelmaking. Iron ore consumption is concentrated in a few areas of the world with the top five regions/countries accounting for almost 85 percent of world demand for iron ore. While steel production in many of these areas has been relatively static over recent years, China has experienced double digit growth in its crude steel production. As a consequence, China has accounted for most of the growth in world steel production over the past five years.

      The rapid growth in steel production in China has not been met by a corresponding increase in domestic Chinese iron ore production. Chinese iron ore deposits, although substantial, are of a lower grade (approximately half of the equivalent iron content) than the current iron ore produced in Brazil and Australia. China

has moved from a position where demand was largely satisfied by domestic supply in the early 1990’s to being a net importer of iron ore in 2005.

      While iron is an abundant element, iron ore production is concentrated within five regions/countries (China, South America (Brazil), Australia, Commonwealth of Independent States and India) accounting for 83 percent of current annual production. Brazil, Australia and to a lesser extent, India, are the principal exporters into the global seaborne iron ore market. These countries account for 80 percent of the current global seaborne iron ore market. The increase in demand has largely been met by expansion of supply from Brazil and Australia, which together maintain dominance of supply to this market and have the largest global reserves of high iron content ores.

      We advanced our strategic objective of serving high-growth steel markets with the completion of our acquisition of 80.4 percent of Portman in April 2005. This acquisition gives us a more diversified customer base and a foothold in the world’s fastest growing steel markets with opportunities for additional international growth. Portman is the third-largest iron ore producer in Australia.

      The North American integrated steel industry continues to undergo a restructuring process. This process is producing a stronger, more productive industry principally through consolidation with some rationalization of less efficient capacity. The North American iron ore industry also has been restructuring to meet the changing needs of its customers. It has been our strategy to lead this consolidation process and to continue to improve the competitiveness of our operations.

      We have repositioned ourselves from a manager of iron ore mines on behalf of steel company owners to primarily a merchant of iron ore to steel company customers. For example, in December 2003, together with Laiwu Steel Group, Ltd. (“Laiwu”) of China, we, through our newly formed joint venture, United Taconite Mining Company LLC (“United Taconite”), purchased the assets of Eveleth Mines LLC (“Eveleth Mines”) out of bankruptcy. In 2005, we completed an expansion project at United Taconite to expand annual capacity by approximately 1.0 million tons. Our plan to restart an idled furnace to increase capacity by .8 million tons at our wholly owned Northshore mine has been deferred until market conditions warrant increased pellet production.

      Our challenge in North America is to improve performance at all of our mining operations. We have initiated programs to achieve enterprise-wide cost savings through initiatives teams focusing on all aspects of our cost structure. Key areas of focus include maintenance spending, energy usage and procurement. We have also implemented a new safety program with the objective of becoming an injury-free place of employment. We are also initiating comprehensive personnel plans that will address current talent needs, meet future hiring requirements and identify specific succession plans for key management positions.

Our strategic objectives are to:

      We intend to continue to pursue investment and management opportunities to broaden our scope as a supplier of iron ore or other raw materials to the integrated steel industry through the acquisition of additional mining interests to strengthen our market position. We are particularly focused on expanding our international investments to capitalize on global demand for steel and iron ore.

      Much of the current increase in global demand for steel is due to industrialization in countries such as China. China is seeking foreign supplies of the raw materials it needs to produce steel to build infrastructure, factories, hotels and other buildings and to manufacture motor vehicles and appliances. China’s increased demand for those materials, including iron ore pellets, has been a factor in increasing raw material prices around the globe. Currently, China is the world’s largest steel producer, with approximately 30 percent of global steel production, and China’s steel production is expected to continue to grow. Chinese iron ore imports rose in excess of 30 percent in 2005 and are expected to further increase in 2006. China has overtaken the United States as the largest consumer of iron ore, steel and copper, and currently accounts for 40 percent of

the world’s consumption of iron ore. We are attempting to capitalize on China’s industrial growth by acquiring additional well-located iron ore properties and obtaining agreements to supply China with iron ore on terms favorable to us.

      We have substantially restructured the ownership interest in our mines largely by converting mine partners into customers with term supply agreements. Under our operating strategy, royalty and management fee income has largely been replaced by profit margin on pellet sales. It is our goal to continue to expand our leadership position in the industry by focusing on high product quality, technical excellence, superior relationships with our customers and partners and improved operational efficiency through year-over-year cost savings. By developing creative solutions for our customers during the recent industry restructuring, we have been able to generate term supply agreements with many of these companies, which have benefited our market position. Our creative solutions included acquisition of our partners’ interests in the mines largely for the assumption of certain mine liabilities, thereby allowing partners to focus on their core steelmaking business and become our customers by entering into term supply agreements with us.

      Rising costs are a threat to profits and limit our strategic flexibility. Our mining costs have increased 57 percent between 2003 and 2005. In particular, we have seen large increases in energy, capital and employment costs. This recent trend has affected the global mining industry as well. To mitigate the effect of these surging costs, we have implemented an aggressive cost savings program through a number of “Initiatives Teams”.

      With the overall goal of achieving cost savings and quality improvements through pioneering process development at the mines that we manage, we operate a fully-equipped research and development facility located in Ishpeming, Michigan. Our research and development group is staffed with experienced engineers and scientists and is organized to support the geological interpretation, process mineralogy, mine engineering, mineral processing, pyrometallurgy, advanced process control and analytical service disciplines. Our research and development group is also utilized by iron ore pellet customers for laboratory testing and simulation of blast furnace conditions.

      Currently, almost all North American iron ore pellets are consumed in blast furnaces, which is the first step in the steelmaking process. The blast furnaces produce iron in molten form, which is further processed in basic oxygen furnaces where carbon is removed and steel scrap and other alloys are added to produce molten steel. The molten steel is then cast into steel shapes.

      As part of our efforts to develop alternative metallic products, we participated in Phase II of the Mesabi Nugget Project (“Project”) to test and develop Kobe Steel, Ltd.’s technology for converting iron ore into nearly pure iron in nugget form. The high-iron-content material could be used as a steel scrap supplement as a raw material for electric steel furnaces and blast furnaces or basic oxygen furnaces of integrated steel producers or as feed-stock for the foundry industry. See “Other Related Items — Mesabi Nugget Project” in Item 7 for a further discussion of the Project.

      Information regarding Operations, Competition, Environment, Energy, Research and Development and Employees is presented under the captions “Operations,” “Competition,” “Environment,” “Energy,” “Research and Development” and “Employees,” respectively, all of which are included in Item 2 and are incorporated by reference and made a part hereof.

If the rate of steel consumption in China slows, the demand for iron ore could decrease.

      The world price of iron ore is strongly influenced by international demand. The current growing level of international demand for iron ore and steel is largely due to the rapid industrial growth in China. A large quantity of steel is currently being used in China to build roads, bridges, railroads and factories. If the economic growth rate in China slows, which may be difficult to forecast, less steel may be used in construction and manufacturing, which could decrease demand for iron ore. This could adversely impact the world iron ore market, impact the North American and Australian iron ore market, and adversely impact Portman, where approximately 73 percent of our Australian revenues are generated. It could also adversely impact our United Taconite joint venture with Laiwu and our Wabush mine. A slowing of the economic growth rate in China could also result in greater exports of steel out of China, which if imported into North America could decrease demand for domestically produced steel, thereby decreasing the demand for iron ore produced in North America. China became a modest net exporter of steel products in 2005.

Excess global capacity and the availability of competitive substitute materials may result in intense competition in the steel industry, which may reduce steel prices and decrease steel production and our customers’ demand for iron ore products.

      More than 97 percent of our North American revenues are derived from the North American integrated steel industry. From time to time, global overcapacity in steel manufacturing has a negative impact on North American steel sales and reduces the production of steel and consequently the demand for iron ore. China’s domestic crude steel capacity is expected to climb to 360 million tonnes in 2006 from 340 million tonnes in 2005, according to the Chinese Securities Journal. Further, production of steel by North American integrated steel manufacturers may be replaced to a certain extent by production of substitute materials by other manufacturers. In the case of certain product applications, North American steel manufacturers compete with manufacturers of other materials, including plastic, aluminum, graphite composites, ceramics, glass, wood and concrete. Most of our term supply agreements for the sale of iron ore products are requirements-based or provide for flexibility of volume above a minimum level. Reduced demand for and consumption of iron ore products by integrated steel producers have had and may continue to have a significant negative impact on our sales, margins and profitability.

Increased imports of steel into the United States could adversely impact North American steel sales, which could adversely affect demand for our products and our sales, margins and profitability.

      From time to time, global overcapacity in steel manufacturing and a weakening of certain foreign economies, particularly in Eastern Europe, Asia and Latin America, may negatively impact steel prices in those foreign economies and result in increased levels of steel imports from those countries into the United States at depressed prices. Based on the American Iron and Steel Institute’s Apparent Steel Supply (excluding semi-finished steel products), imports of steel into the United States constituted 21.6 percent (estimated), 22.3 percent and 16.5 percent of the domestic steel market supply for 2005, 2004 and 2003, respectively. Significant imports of steel into the United States could substantially reduce sales, margins and profitability of North American steel producers, and consequently, reduce demand for iron ore. Decreased North American steel sales could decrease demand for North American iron ore products and have a substantial negative impact on our sales, margins and profitability. The purchase by North American steel producers of semi-finished steel products from foreign suppliers could also decrease demand for our iron ore products.

The North American and global steel industries continue to undergo a restructuring process that has resulted in industry consolidation that could result in a reduction of integrated steelmaking capacity over time, and thereby reduce iron ore consumption.

      The North American steel industry has undergone consolidation, and that consolidation is likely to continue as evidenced by the acquisition of International Steel Group by Mittal Steel USA ISG Inc. (“Mittal

Steel USA”). Consolidation is also occurring globally, as evidenced by Mittal Steel’s offer to acquire Arcelor S.A. and Arcelor S.A.’s pending acquisition of Dofasco Inc (“Dofasco”). Consolidation of the North American and global steel industries will result in fewer customers for iron ore. The restructuring process may reduce integrated steelmaking capacity, which would reduce demand for our North American iron ore products and may adversely affect our sales. Further, if the steel producers that have captive iron ore mines obtain a larger share of North American steel production, they may obtain iron ore from their own mines, if they have excess capacity, rather than from us. These factors could adversely affect our sales, margins and profitability.

Our sales and earnings are subject to significant fluctuations as a result of the cyclical nature of the North American steel industry.

      In 2005 and 2004, 21.9 million and 22.2 million tons, respectively, of our iron ore pellet sales were sold to North American steel manufacturers, while only .4 million tons of our pellets were sold outside of North America in each year. The North American steel industry has been highly cyclical in nature, influenced by a combination of factors, including periods of economic growth or recession, strength or weakness of the U.S. dollar, worldwide demand and production capacity, the strength of the U.S. automotive industry, levels of steel imports and applicable tariffs. The demand for steel products is generally affected by macroeconomic fluctuations in North America and the global economies in which steel companies sell their products. For example, future economic downturns, stagnant economies or currency fluctuations in the United States or globally could decrease the demand for steel products or increase the amount of imports of steel or iron ore into the United States.

      In addition, a disruption or downturn in the oil and gas, gas transmission, construction, commercial equipment, rail transportation, appliance, agricultural, automotive or durable goods industries, all of which are significant markets for steel products and are highly cyclical, could negatively impact sales of steel by North American producers. These trends could decrease the demand for North American iron ore products and significantly adversely affect our sales, margins and profitability.

If steelmakers use methods other than blast furnace production to produce steel, or if their blast furnaces shut down or otherwise reduce production, the demand for our iron ore products may decrease, which would adversely affect our sales, margins and profitability.

      Demand for our iron ore products is determined by the operating rates for the blast furnaces of steel companies. However, not all finished steel is produced by blast furnaces; finished steel also may be produced by other methods that do not require iron ore products. For example, steel “mini-mills,” which are steel recyclers, generally produce steel by using scrap steel, not iron ore pellets, in their electric furnaces. Production of steel by steel “mini-mills” was approximately 55 percent of North American total finished steel production in 2005. Steel producers also can produce steel using imported iron ore or semi-finished steel products, which eliminates the need for domestic iron ore. Environmental restrictions on the use of blast furnaces also may reduce our customers’ use of their blast furnaces. Maintenance of blast furnaces can require substantial capital expenditures. Our customers may choose not to maintain their blast furnaces, and some of our customers may not have the resources necessary to adequately maintain their blast furnaces. If our customers use methods to produce steel that do not use iron ore products, demand for our iron ore products will decrease, which could adversely affect our sales, margins and profitability.

Natural disasters, equipment failures and other unexpected events may lead our steel industry customers to curtail production or shut down their operations.

      Operating levels at our steel industry customers are subject to conditions beyond their control, including raw material shortages, weather conditions, natural disasters, interruptions in electrical power or other energy services, equipment failures, and other unexpected events. Any of those events could also affect other suppliers to the North American steel industry. In either case, those events could cause our steel industry customers to curtail production or shut down a portion or all of their operations, which could reduce their demand for our North American iron ore products. For example, in 2005, Mittal Steel USA permanently shut down its

Weirton blast furnaces. Similarly, in September 2005, Steel Dynamics, Inc. suspended orders for some steel products that require the use of hydrogen gas due to the effects of hurricane Katrina on its hydrogen gas supplier. Also, in late 2003, a fire occurred in a mine of a major coal supplier to U.S. Steel, which supplies a majority of the coke, a processed form of coal, used by our steel industry customers to operate their blast furnaces. The fire caused U.S. Steel to curtail its production of coke, and to reduce its coke shipments to at least two of our steel industry customers. As a result, one of our steel industry customers had to curtail its steel production, and its demand for our iron ore products decreased. Decreased demand for our iron ore products could adversely affect our sales, margins and profitability.

We operate in a very competitive industry.

      The iron mining business is highly competitive, with producers in all iron-producing regions. Some of our competitors may have greater financial resources than we have and may be better able to withstand changes in conditions within the steel industry than we are. In the future, we may face increasing competition. As a result, we may face pressures on sales prices and volumes of our products from competitors and large customers.

Capacity expansions could lead to lower global iron ore prices.

      The increased demand for iron ore, particularly from China, has resulted in the major iron ore suppliers increasing their capacity. In 2006, CVRD’s board of directors approved a capital expenditure budget of $4.6 billion, the highest in its history, to expand production capacity in iron ore and other materials. BHP announced expansion projects in Western Australia and Brazil to increase iron ore capacity by a combined 28 million tonnes. An increase in our competitor’s capacity could result in excess supply of iron ore, and subsequently downward pressure on iron ore prices. A decrease in pricing would adversely impact our sales, margins and profitability.

Our sales and competitive position depend on the ability to transport our products to our customers at competitive rates and in a timely manner.

      Our competitive position requires the ability to transport iron ore to our markets at competitive rates. Disruption of the lake freighter and rail transportation services because of weather-related problems, including ice and winter weather conditions on the Great Lakes, strikes, lock-outs or other events, could impair our ability to supply iron ore pellets to our customers at competitive rates or in a timely manner and, thus, could adversely affect our sales and profitability. Portman is in direct competition with the major world seaborne exporters of iron ore and its customers face higher transportation costs than most other Australian producers to ship its products to the Asian markets because of the location of its major shipping port on the south coast of Australia. Further, increases in transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, could make our products less competitive, restrict our access to certain markets and have an adverse effect on our sales, margins and profitability.

If a substantial portion of our term supply agreements terminate and are not renewed, and we are unable to find alternate buyers willing to purchase our products on terms comparable to those in our existing term supply agreements, our sales, margins and profitability will suffer.

      A substantial majority of our sales are made under term supply agreements, which are important to the stability and profitability of our operations. In 2005, more than 96 percent of our North American sales volume was sold under term supply agreements. All of Portman’s sales are made under existing contracts that have approximately four years remaining. Portman’s sales pricing is primarily based on the benchmark pricing established for Australian producers. If a substantial portion of our term supply agreements were modified or terminated, we could be materially adversely affected to the extent that we are unable to renew the agreements or find alternate buyers for our iron ore at the same level of profitability. We cannot assure you that we will be able to renew or replace existing term supply agreements at the same prices or with similar profit margins when they expire. A loss of sales to our existing customers could have a substantial negative impact on our sales, margins and profitability.

We depend on a limited number of customers, and the loss of, or significant reduction in, purchases by our largest customers would adversely affect our sales.

      Five customers together accounted for a total of 93 percent and 94 percent of our North American sales revenues measured as a percent of “Product sales and services” for the years ended 2005 and 2004, respectively.

      If one or more of these customers were to significantly reduce their purchases of iron ore products from us, or if we were unable to sell iron ore products to them on terms as favorable to us as the terms under our current term supply agreements, our sales, margins and profitability could suffer materially due to the high level of fixed costs and the high costs to idle or close mines. The majority of the iron ore we manage and produce is for our own account, and therefore we rely on sales to our joint venture partners and other third-party customers for most of our revenues. Mittal Steel USA idled its Weirton facility in 2005 and is contesting its minimum purchase requirement under our supply agreement. The Weirton facility accounted for approximately two percent of our North American sales in 2004. In addition, WCI and Stelco are operating under bankruptcy protection, as discussed below, and the bankruptcy or reorganization of our customers could affect our sales, margins and profitability.

Changes in demand for our products by our customers could cause our sales, margins and profitability to fluctuate.

      Our North American term supply agreements generally are requirements contracts, the majority of which have no minimum requirement provisions, and some of which provide for flexibility of volume above minimum levels. Portman’s sales contracts are for fixed annual tonnages with customer options to increase or decrease annual purchases. A decrease in one or more of our customers’ requirements could cause our sales to decline, as we may not be able to find other customers to purchase our iron ore products as evidenced by Mittal Steel USA’s decision to idle its Weirton facility in 2005. In addition, if our customers’ requirements decline, since many of our production costs are fixed, our production costs per ton may rise, which may affect our margins and profitability. Unmitigated loss of sales would have a greater impact on margins and profitability than on revenues, due to the high level of fixed costs in the iron ore mining business and the high cost to idle or close mines.

The provisions of our term supply agreements could cause our sales, margins and profitability to fluctuate.

      Our term supply agreements typically contain force majeure provisions allowing temporary suspension of performance by the customer during specified events beyond the customer’s control, including raw material shortages, power failures, equipment failures, adverse weather conditions and other events. For example, one of our large customers notified us in January 2004 that it was reducing its requirements for iron ore pellets in the first quarter of 2004 by 180,000 long tons pursuant to the force majeure provisions of its term supply agreement with us. That customer invoked the force majeure provision due to a failure of U.S. Steel to ship the quantity of coke that the customer had ordered due to shortages caused by a fire at a mine that supplied coal to U.S. Steel.

      Price escalators in our term supply agreements also expose us to short-term price volatility, which can adversely affect our margins and profitability. Our term supply agreements also contain provisions requiring us to deliver iron ore pellets meeting quality thresholds for certain characteristics, such as chemical makeup. Failure to meet these specifications could result in economic penalties. All of these contractual provisions could adversely affect our sales, margins and profitability.

We may have contractual disputes with our customers or significant suppliers of energy, materials, or services that could significantly impact our sales, revenue rates, production or operating costs.

      Most of our North American and Australian sales are under multi-year term sales agreements. Australian benchmark prices are driven from negotiations between the three major iron producers, CVRD, Rio Tinto and BHP, and the Chinese and Japanese steel mills. More than 97 percent of our North American revenues are

derived from sales of iron ore pellets to the North American integrated steel industry, consisting of 10 current or potential customers. Sales volume under these agreements is largely dependent on customer requirements, and in many cases, we are the sole supplier of iron ore pellets to the customer. Each agreement has a base price that is adjusted annually using one or more adjustment factors. Factors that could result in price adjustment include measures of general industrial inflation, steel prices and international pellet prices. One of our supply agreements has a provision that limits the amount of price increase or decrease in any given year. Contractual disputes with any of our significant customers could result in lower sales volume or lower sales prices.

      Additionally, we have significant contracts with suppliers of energy, materials and services in North American and Australia. Contractual disputes with significant suppliers could result in production curtailments or significant cost increases which could adversely impact our profitability.

Mine closures entail substantial costs, and if we close one or more of our mines sooner than anticipated, our results of operations and financial condition may be significantly and adversely affected.

      If we close any of our mines, our revenues would be reduced unless we were able to increase production at any of our other mines, which may not be possible. The closure of an open-pit mine involves significant fixed closure costs, including accelerated employment legacy costs, severance-related obligations, reclamation and other environmental costs, and the costs of terminating long-term obligations, including energy contracts and equipment leases. We base our assumptions regarding the life of our mines on detailed studies we perform from time to time, but those studies and assumptions do not always prove to be accurate. We recognize the costs of reclaiming open pits, stockpiles, tailings ponds, roads and other mining support areas based on the estimated mining life of our property. If we were to reduce the estimated life of any of our mines, the mine-closure costs would be applied to a shorter period of production, which would increase production costs per ton produced and could significantly and adversely affect our results of operations and financial condition. Further, if we were to close one or more of our mines prematurely, we would incur significant accelerated employment legacy costs, severance-related obligations, reclamation and other environmental costs, as well as asset impairment charges, which could materially and adversely affect our financial condition.

      A North American mine closure would significantly increase employment legacy costs, including our expense and funding costs for pension and other postretirement benefit obligations. First, retirement-eligible employees would be eligible for enhanced pension benefits under certain pension plans upon a mine closure. Second, the number of employees who are eligible for retirement under the pension plans would increase under special eligibility rules that apply upon a mine closure. Third, all employees eligible for retirement under the pension plans at the time of the mine closure also would be eligible for postretirement health and life insurance benefits, thereby accelerating our obligation to provide these benefits. Fourth, a closure of the Empire or Tilden mine likely would trigger withdrawal liability to the pension plan covering hourly employees there. Finally, a mine closure could trigger significant severance-related obligations. As a result, the closure of one or more of our mines could adversely affect our financial condition and results of operations.

      The Cockatoo Island operation in Australia is scheduled to close in 2007 and plans are in process to obtain all required governmental approvals. Since all of the employees are contractors, the cost of closing is significantly lower in Australia than in North America. Performance bonds are in place covering the estimated closure costs.

      Applicable statutes and regulations require that mining property be reclaimed following a mine closure in accordance with specified standards and an approved reclamation plan. The plan addresses matters such as removal of facilities and equipment, regrading, prevention of erosion and other forms of water pollution, revegetation and post-mining land use. We may be required to post a surety bond or other form of financial assurance equal to the cost of reclamation as set forth in the approved reclamation plan. The establishment of the final mine closure reclamation liability is based upon permit requirements and requires various estimates and assumptions, principally associated with reclamation costs and production levels. Although our management believes, based on currently available information, we are making adequate provisions for all expected reclamation and other costs associated with mine closures for which we will be responsible, our business,

results of operations and financial condition would be adversely affected if such accruals were later determined to be insufficient.

We have significantly reduced our ore reserve estimates for the Empire mine and may close the Empire mine sooner than we had anticipated, which could materially and adversely affect our results of operations and financial condition.

      We significantly decreased our ore reserve estimates for the Empire mine from 116 million tons at December 31, 2001 to 63 million tons at December 31, 2002 and further to 29 million tons at December 31, 2003. As of December 31, 2005, Empire’s estimated ore reserves decreased to approximately 17 million tons as a result of production in 2004 and 2005.

      If we were to close the Empire mine sooner than currently anticipated, we would incur significant mine closure costs, employment legacy costs, severance-related obligations, reclamation and other environmental costs and the costs of terminating long-term obligations, including energy contracts and equipment leases. A closure of the Empire mine sooner than we anticipate could materially and adversely affect our results of operations and financial condition.

We rely on the estimates of our recoverable reserves, and if those estimates are inaccurate, our financial condition may be adversely affected.

      We regularly evaluate our iron ore reserves based on revenues and costs and update them as required in accordance with SEC Industry Guide 7. Portman has published reserves which follow the Joint Ore Reserves Code (“JORC”) in Australia, which is similar to United States requirements. Changes to the reserve value to make them comply with SEC requirements have been made. There are numerous uncertainties inherent in estimating quantities of reserves of our mines, many of which have been in operation for several decades, including many factors beyond our control. Estimates of reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as production capacity, effects of regulations by governmental agencies and future prices for iron ore, future industry conditions and operating costs, severance and excise taxes, development costs and costs of extraction and reclamation costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of mineralized deposits attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of future net cash flows prepared by different engineers or by the same engineers at different times may vary substantially as the criteria change. Estimated ore reserves could be affected by future industry conditions, geological conditions and ongoing mine planning. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and if such variances are material, our sales and profitability could be adversely or positively affected.

The price adjustment provisions of our North American term supply agreements may prevent us from increasing our prices to match international ore contract prices or to pass increased costs of production on to our customers.

      Our North American term supply agreements contain a number of price adjustment provisions, or price escalators, including adjustments based on general industrial inflation rates, the price of steel and the international price of iron ore pellets, among other factors, that allow us to adjust the prices under those agreements generally on an annual basis. Our price adjustment provisions are weighted and some are subject to annual collars, which limit our ability to raise prices to match international levels and fully capitalize on strong demand for iron ore. Most of our North American term supply agreements do not allow us to increase our prices and to directly pass through higher production costs to our customers. An inability to increase prices or pass along increased costs could adversely affect our margins and profitability.

Our ability to collect payments from our customers depends on their creditworthiness.

      Our ability to receive payment for iron ore products sold and delivered to our customers depends on the creditworthiness of our customers. In North America, we ship iron ore products to some of our customers’

yards in advance of payment for those products. Our rationale for shipping iron ore products to customers in advance of payment for, and transfer title for the product is to more closely relate timing of payment to consumption, thereby providing additional liquidity to our customers, and to reduce our financial risk to customer insolvency as title and risk of loss with respect to those products does not pass to the customer until payment for the pellets is received. Accordingly, there is typically a period of time in which pellets, as to which we have reserved title, are within our customers’ control. As discussed below, several of our customers have petitioned for protection under bankruptcy or other similar laws, and most of our North American customers have below-investment grade or no credit rating. Failure to receive payment from our customers for products that we have delivered could adversely affect our results of operations.

Our change from a manager of iron ore mines on behalf of steel company owners to primarily a merchant of iron ore to steel company customers has increased our obligations with respect to those mines and has made our revenues, earnings and profit margins more dependent on sales of iron ore products and more susceptible to product demand and pricing fluctuations.

      Until recent years, we had principally acted as a manager of iron ore mines on behalf of steel company owners, and in that capacity had been generally entitled to management fees, royalties on reserves that we have leased or subleased to the Empire and Tilden mines, and income from our sales of iron ore products to our customers, including the other mine owners. Our current business model is increased ownership in our co-owned mines. In accordance with our revised business model, in 2002 we increased our ownership in (1) the Empire mine from 47 percent to 79 percent, (2) the Tilden mine from 40 percent to 85 percent, (3) the Hibbing mine from 15 percent to 23 percent, and (4) the Wabush mine from 23 percent to 27 percent. While we have gained greater control of the mines we operate, we have also increased our share of the operating costs, employment legacy costs and financial obligations associated with those mines. Our increased ownership of those mines has caused the management fees and royalties due to us from our partners in the mines to decline from $29.8 million in 2001 to $13.1 million in 2005. The decline in royalties and management fees has made our revenues, earnings and profit margins more volatile and more dependent on sales of our iron ore products to third-party customers.

We rely on our joint venture partners in our mines to meet their payment obligations, and the inability of a joint venture partner to do so could significantly affect our operating costs.

      We co-own five of our six North American mines with various joint venture partners that are integrated steel producers or their subsidiaries, including Dofasco, Mittal Steel USA, Laiwu and Stelco. While we are the manager of each of the mines we co-own, we rely on our joint venture partners to make their required capital contributions and to pay for their share of the iron ore pellets that we produce. Most of our venture partners are also our customers and are subject to the creditworthiness risks described above. If one or more of our venture partners fail to perform their obligations, the remaining venturers, including ourselves, may be required to assume additional material obligations, including significant pension and postretirement health and life insurance benefit obligations. On January 29, 2004, Stelco applied and obtained bankruptcy-court protection from creditors in Ontario Superior Court under the Companies’ Creditors Arrangement Act. Stelco is a 44.6 percent participant in the Wabush Mines Joint Venture, and U.S. subsidiaries of Stelco (which have not filed for bankruptcy protection) own 14.7 percent of Hibbing and 15 percent of Tilden. Stelco has met its cash call requirements at the mining ventures to date. The premature closure of a mine due to the failure of a joint venture partner to perform its obligations could result in significant fixed mine-closure costs, including severance, employment legacy costs and other employment costs, reclamation and other environmental costs, and the costs of terminating long-term obligations, including energy contracts and equipment leases.

Unanticipated geological conditions and natural disasters could increase the cost of operating our business.

      A portion of our production costs are fixed regardless of current operating levels. Our operating levels are subject to conditions beyond our control that can delay deliveries or increase the cost of mining at particular mines for varying lengths of time. These conditions include weather conditions (for example, extreme winter

weather, floods and availability of process water due to drought) and natural disasters, pit wall failures, unanticipated geological conditions, including variations in the amount of rock and soil overlying the deposits of iron ore, variations in rock and other natural materials and variations in geologic conditions and ore processing changes. Portman’s Cockatoo Island operation is located in an area affected by tropical storms and operates a pit below sea level that is protected by a constructed seawall. Storms in this area could affect both our operation and the operations of our major Australian competitors. These conditions could impair our ability to fulfill our plan to operate our mines at full capacity, which could materially adversely affect our ability to meet the expected demand for our iron ore products.

Many of our mines are dependent on a single-source energy supplier, and interruption in energy services may have a significant adverse effect on our sales, margins and profitability.

      Many of our mines are dependent on one source for electric power and for natural gas. For example, Minnesota Power is the sole supplier of electric power to our Hibbing and United Taconite mines; Wisconsin Energy Corporation is the sole supplier of electric power to our Tilden and Empire mines; and our Northshore mine is largely dependent on its wholly owned power facility for its electrical supply. A significant interruption in service from our energy suppliers due to terrorism, weather conditions, natural disasters, or any other cause can result in substantial losses that may not be fully covered by our business interruption insurance. For example, in May 2003, we incurred approximately $11.1 million in fixed costs relating to lost production when our Empire and Tilden mines were idled for approximately five weeks due to loss of power stemming from the failure of a dam in the Upper Peninsula of Michigan. One natural gas pipeline serves all of our Minnesota and Michigan mines, and a pipeline failure may idle those operations. Any substantial unmitigated interruption of our business due to these conditions could materially adversely affect our sales, margins and profitability.

Our mines and processing facilities have been in operation for several decades. Equipment failures and other unexpected events at our facilities may lead to production curtailments or shutdowns.

      Interruptions in production capabilities will inevitably increase our production costs and reduce our profitability. We do not have meaningful excess capacity for current production needs, and we are not able to quickly increase production at one mine to offset an interruption in production at another mine. In addition to equipment failures, our facilities are also subject to the risk of loss due to unanticipated events such as fires, explosions or adverse weather conditions. The manufacturing processes that take place in our mining operations, as well as in our crushing, concentrating and pelletizing facilities, depend on critical pieces of equipment, such as drilling and blasting equipment, crushers, grinding mills, pebble mills, thickeners, separators, filters, mixers, furnaces, kilns and rolling equipment, as well as electrical equipment, such as transformers. This equipment may, on occasion, be out of service because of unanticipated failures. In addition, many of our mines and processing facilities have been in operation for several decades, and the equipment is aged. For example, in November 2003, our Tilden facility experienced a crack in a kiln riding ring that required the shutdown of that kiln in its pelletizing plant, resulting in a production loss of approximately .3 million tons in 2003. In the future, we may experience additional material plant shutdowns or periods of reduced production because of equipment failures. Material plant shutdowns or reductions in operations could materially adversely affect our sales, margins and profitability. Further, remediation of any interruption in production capability may require us to make large capital expenditures that could have a negative effect on our profitability and cash flows. Our business interruption insurance would not cover all of the lost revenues associated with equipment failures. Further, longer-term business disruptions could result in a loss of customers, which could adversely affect our future sales levels, and therefore our profitability.

We are subject to extensive governmental regulation, which imposes, and will continue to impose, significant costs and liabilities on us, and future regulation could increase those costs and liabilities or limit our ability to produce iron ore products.

      We are subject to various federal, provincial, state and local laws and regulations on matters such as employee health and safety, air quality, water pollution, plant and wildlife protection, reclamation and restoration of mining properties, the discharge of materials into the environment, and the effects that mining

has on groundwater quality and availability. Numerous governmental permits and approvals are required for our operations. We cannot be assured that we have been or will be at all times in complete compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators.

      Prior to commencement of mining, we must submit to, and obtain approval from, the appropriate regulatory authority of plans showing where and how mining and reclamation operations are to occur. These plans must include information such as the location of mining areas, stockpiles, surface waters, haul roads, tailings basins and drainage from mining operations. All requirements imposed by any such authority may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. See “Item 2. Properties. — Environment.”

      In addition, new legislation and/or regulations and orders, including proposals related to the protection of the environment, to which we would be subject or that would further regulate and/or tax our customers, namely the North American integrated steel producer customers, may also require us or our customers to reduce or otherwise change operations significantly or incur costs. Such new legislation, regulations or orders (if enacted) could have a material adverse effect on our business, results of operations, financial condition or profitability. In particular, we are subject to the rules promulgated by the United States Environmental Protection Agency (“EPA”) that will require us to utilize Maximum Achievable Control Technology (“MACT”) standards for our air emissions by 2006. The costs, including capital expenditures that we will incur in order to meet the new MACT standards may be substantial. See “Item 2. Properties. — Environment.”

      Further, we are subject to a variety of potential liability exposures arising at certain sites where we do not currently conduct operations. These sites include sites where we formerly conducted iron ore mining or processing or other operations, inactive sites that we currently own, predecessor sites, acquired sites, leased land sites and third-party waste disposal sites. While we believe our liability at sites where claims have been asserted will not have a material adverse effect on our financial condition, liquidity or results of operations, we may be named as a responsible party at other sites in the future, and we cannot assure you that the costs associated with these additional sites will not be material. See “Item 2. Properties. — Environment.”

      We also could be held liable for any and all consequences arising out of human exposure to hazardous substances used, released or disposed of by us or other environmental damage, including damage to natural resources. In particular, we and certain of our subsidiaries are involved in various claims relating to the exposure of asbestos and silica to seamen who sailed on the Great Lakes vessels formerly owned and operated by certain of our subsidiaries. The full impact of these claims, as well as whether insurance coverage will be sufficient and whether other defendants named in these claims will be able to fund any costs arising out of these claims, continues to be unknown. Based on currently available information, however, we believe the resolution of currently pending claims in the aggregate would not reasonably be expected to have a material adverse effect on our financial position. See “Item 3. Legal Proceedings.”

Our expenditures for postretirement benefit and pension obligations could be materially higher than we have predicted if our underlying assumptions prove to be incorrect, if there are mine closures or our joint venture partners fail to perform their obligations that relate to employee pension plans.

      We provide defined benefit pension plans and other postretirement benefits (“OPEB”) to eligible union and non-union employees, including our share of expense and funding obligations with respect to unconsolidated ventures. Our pension expense and our required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the rate of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the rate that future obligations are discounted to a present value (“discount rate”).

      We cannot predict whether changing market or economic conditions, regulatory changes or other factors will increase our pension expenses or our funding obligations, diverting funds we would otherwise apply to other uses.

      We calculate our total accumulated postretirement benefit obligation (“APBO”) for our OPEB benefits under Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The unfunded APBO obligation had a present value of $231.7 million at December 31, 2005. We have calculated the unfunded obligation based on a number of assumptions. Discount rate, return on plan assets, and mortality assumptions parallel those utilized for pensions.

      If our assumptions do not materialize as expected, cash expenditures and costs that we incur could be materially higher. Moreover, we cannot assure that regulatory changes will not increase our obligations to provide these or additional benefits. These obligations also may increase substantially in the event of adverse medical cost trends or unexpected rates of early retirement, particularly for bargaining unit employees for whom there is currently no retiree healthcare cost cap. Early retirement rates likely would increase substantially in the event of a mine closure.

      Additionally, our pension and postretirement health and life insurance benefit obligations, expenses and funding costs would increase significantly if one or more of the mines in which we have invested is closed, or if one or more of our joint venture partners at one or more mines are unable to perform its obligations. A mine closure would trigger accelerated pension and OPEB obligations, and the failure of joint venture partners to perform its obligations could shift additional pension and OPEB liabilities to us. Any of these events could significantly adversely affect our financial condition and results of operations.

We are a related party to certain companies that were operators and are required under the Coal Industry Retiree Health Benefit Act of 1992 (the “Coal Retiree Act”) to make premium payments to the United Mine Workers Association Combined Benefit Fund (the “Combined Fund”), and our obligations to the Combined Fund could increase if other coal mine operators file for bankruptcy protection or become insolvent.

      We are a related-party to certain companies that were coal mine operators. As a result, we are subject to the Coal Retiree Act and are obligated to make premium payments to the Combined Fund for health and death benefits paid by the Combined Fund to retired coal miners. At December 31, 2005, the net present value of our estimated liability to the Combined Fund was $5.6 million. We are assessed premiums for unassigned or “orphan” retirees on a pro rata basis with other coal mine operators and related parties. If other coal mine operators and related parties file for bankruptcy protection or become insolvent, our pro rata portion of the liability to the Combined Fund could increase, which could have an adverse effect on our results of operation and financial condition, sales, margins and profitability.

Our profitability could be negatively affected if we fail to maintain satisfactory labor relations.

      The USWA represents all hourly employees at our Empire, Hibbing, Tilden and United Taconite mines, as well as Wabush in Canada. A four-year labor agreement was reached in August 2004 with our U.S. labor force and a five-year agreement that runs until March 2009 was reached with our Canadian work force. Hourly employees at the railroads we own that transport products among our facilities are represented by multiple unions with labor agreements that expire at various dates. If the collective bargaining agreements relating to the employees at our mines or railroad are not successfully renegotiated prior to this expiration, we could face work stoppages or labor strikes.

Our operating expenses could increase significantly if the price of electrical power, fuel or other energy sources increases.

      Operating expenses at our mining locations are sensitive to changes in electricity prices and fuel prices, including diesel fuel and natural gas prices, which represent 27 percent of our North American operating costs. Prices for electricity, natural gas and fuel oils can fluctuate widely with availability and demand levels from other users. During periods of peak usage, supplies of energy may be curtailed and we may not be able to purchase them at historical market rates. While we have some long-term contracts with electrical suppliers, we are exposed to fluctuations in energy costs that can affect our production costs. Although we enter into forward fixed-price supply contracts for natural gas and diesel fuel for use in our operations, those contracts

are of limited duration and do not cover all of our fuel needs, and price increases in fuel costs could cause our profitability to decrease significantly.

Equipment and supply shortages may impact our production.

      We have recently experienced longer lead times on equipment, tires, and supply needs due to the increased demand for these resources. As our competitors increase their capacity, demand for these resources will increase, potentially resulting in higher prices, equipment shortages, or both.

We may encounter labor shortages for critical operational positions, which could affect our ability to produce iron ore products.

      At our North American locations, many of our mining operational employees are approaching retirement age. As these experienced employees retire, we may have difficulty replacing them at competitive wages. In Western Australia, the large number of expansion projects currently in progress has created turnover principally for our contractor’s employees. As a result, wages are increasing to address the turnover.

Our profitability could be affected by the failure of outside contractors to perform.

      Portman uses contractors to handle many of the operational phases of its mining and processing operations and therefore is subject to the performance of outside companies on key production areas. Portman’s Cockatoo Island operation is a joint venture with Henry Walker Eltin (“HWE”), a company that entered receivership in late 2004. As of February 1, 2006, HWE’s mining assets were sold to Leighton Contractors Pty Ltd (“Leighton”), an Australian-based mining and construction contractor. Leighton also purchased HWE’s subsidiary that owned its 50 percent interest in the Cockatoo Island joint venture and is continuing to manage the operation. The inability of any contractor to perform will directly impact our financial results.

Our profitability could be affected due to uncertainties related to the appraisal of acquisitions and the related allocation of purchase price to the acquired assets and assumed liabilities.

      In April 2005, we completed the acquisition of 80.4 percent of Portman. As part of the purchase accounting process, we retained an outside consultant to perform an appraisal of Portman and the related acquired assets and assumed liabilities. The allocation, which is preliminary and subject to change, is expected to be finalized prior to March 31, 2006. Any subsequent changes to the allocation could adversely impact our reported earnings.

Our profitability and liquidity could be adversely impacted by a failed auction in the securities market.

      We hold investments in highly liquid auction rate securities (“ARS”) in order to generate higher returns than typical money market investments. ARS typically are high credit quality, generally achieved with municipal bond insurance. Credit risks are eased by the historical track record of bond insurers, which back a majority of this market. Although rare, sell orders for any security traded through a Dutch auction process could exceed bids. Such instances are usually the result of a drastic deterioration of issuer credit quality. Should there be a failed auction, we may be unable to liquidate our position in the securities in the near term.

      We have no unresolved comments from the SEC.

      The following map shows the locations of our North American mines:

      We directly or indirectly own and operate interests in the following six North American iron ore mines:

We increased our ownership in these mines (other than Northshore and United Taconite) in 2002 through assumption of the liabilities associated with the mine interests from their steel company owners.

      Empire Mine. The Empire mine is located on the Marquette Iron Range in Michigan’s Upper Peninsula approximately 15 miles west-southwest of Marquette, Michigan and is accessed via a paved road off State Highway 35. The mine has been in operation since 1963. We entered into an agreement with Ispat Inland Inc. (“Ispat”) effective December 31, 2002 that restructured the ownership of the Empire mine. Under the agreement, we acquired the 25 percent interest rejected by LTV Corporation in its chapter 11 bankruptcy proceedings and a 19 percent interest from Ispat. Currently, we manage the mine and have a 79 percent interest; Mittal Steel USA has a 21 percent interest in the mine and has the right to require us to purchase all of its interest under certain circumstances after 2007. We and Mittal Steel USA take our respective share of production pro rata; however, provisions in the partnership agreement allow additional or reduced production to be delivered under certain circumstances. We own directly approximately one-half of the remaining ore reserves at the Empire mine and lease them to Empire. The Empire mine leases the balance of its reserves from the other owners of such reserves. Over the past five years, the Empire mine has produced between 3.6 million and 5.7 million tons of iron ore pellets annually.

      Tilden Mine. The Tilden mine is located on the Marquette Iron Range in Michigan’s Upper Peninsula approximately five miles south of Ishpeming, Michigan. The main entrance to the Tilden mine is accessed by means of a paved road off of County Road 476. The Tilden mine has been in operation since 1974. On January 31, 2002, we increased our ownership of the Tilden mine to 85 percent by acquiring Algoma Steel Inc.’s (“Algoma”) 45 percent interest in the mine and executing a term supply agreement under which we are Algoma’s sole supplier of iron ore pellets for 15 years. Currently, we manage the mine and have an 85 percent interest, and Stelco has a 15 percent interest in the mine. See “Operations and Customers” in Item 7 for further information regarding Algoma and Stelco. Each partner takes its share of production pro rata; however, provisions in the partnership agreement allow additional or reduced production to be delivered under certain circumstances. We own all of the ore reserves at the Tilden mine and lease them to Tilden. Over the past five years, the Tilden mine has produced between 6.4 million and 7.9 million tons of iron ore pellets annually.

      The Empire and Tilden mines are located adjacent to each other. Our increase in ownership of our Michigan mines facilitated consolidation of operations and management, which offer operational and cost benefits that were not achievable under the previous ownership structure. These benefits include a consolidated transportation system, more efficient employee and equipment operating schedules, reduction in redundant facilities and workforce and best practices sharing.

      Hibbing Mine. The Hibbing mine is located in the center of Minnesota’s Mesabi Iron Range and is approximately ten miles north of Hibbing, Minnesota and five miles west of Chisholm, Minnesota. The main entrance to the Hibbing mine is accessed by means of a paved road and is located off County Road 5. The Hibbing mine has been in operation since 1976. In 2002, we acquired from Bethlehem Steel Corporation an eight percent interest in the Hibbing mine, which increased our ownership to 23 percent. Currently, we manage the mine and have a 23 percent interest. Mittal Steel USA has a 62.3 percent interest and Stelco has a 14.7 percent interest in the mine. Each partner takes its share of production pro rata; however, provisions in the joint venture agreement allow additional or reduced production to be delivered under certain circumstances. Over the past five years, the Hibbing mine has produced between 6.1 million and 8.5 million tons of iron ore pellets annually.

      Northshore Mine. The Northshore mine is located in northeastern Minnesota, approximately two miles south of Babbitt, Minnesota on the northeastern end of the Mesabi iron formation. Northshore’s processing facilities are located in Silver Bay, Minnesota, near Lake Superior, on U.S. Highway 61. The main entrance to the Northshore mine is accessed by means of a gravel road and is located off County Road 20. The Northshore mine has been in continuous operation since 1990. The Northshore mine began production under our management and ownership on October 1, 1994. Currently, we own 100 percent of the mine. Over the past five years, the Northshore mine has produced between 2.8 million and 5.0 million tons of iron ore pellets annually.

      The Northshore mine has a long history. It was first discovered in 1871 and operated in the 1920’s as the Mesabi Iron Company, one of the first commercial attempts at mining taconite. The property was operated for over 30 years by Reserve Mining Co. (“Reserve”), one of the two pioneering large scale pellet operations in Minnesota. Poor economic conditions in the steel industry forced the shutdown and bankruptcy of Reserve in 1986. The Reserve assets were purchased by Cyprus Minerals in 1989, and the property restarted operation in 1990. We purchased the property from Cyprus Minerals in 1994.

      United Taconite. The United Taconite mine is located on Minnesota’s Mesabi Iron Range in and around the city of Eveleth, Minnesota, west of U.S. Highway 53. The main entrance to the United Taconite mine is accessed by means of a paved road and is located off Route 37. The mine has been operating since 1965. On November 26, 2003, the U.S. Bankruptcy Court for the District of Minnesota approved the purchase of the assets of Eveleth Mines by United Taconite. Eveleth Mines ceased mining operations earlier in 2003 and was acquired by United Taconite effective as of December 1, 2003. Currently, we manage the mine and hold a 70 percent interest; Laiwu holds a 30 percent interest. Over the past five years, the United Taconite mine has produced between 1.6 million and 4.9 million tons of iron ore pellets annually.

      Wabush Mines. The Wabush mine and concentrator is located in Wabush, Labrador, Canada, and the pellet plant is located in Pointe Noire, Quebec, Canada. The main entrance to the Wabush mine is accessed by means of a paved road and is located on Highway 530, about three miles west of the town of Wabush. The pellet plant is accessed by a paved road off Highway 138, about ten miles west of the town of Sept-Iles, Quebec. The Wabush mine has been in operation since 1965. In 1997, we acquired Ispat’s interest in the Wabush mine. In August 2002, we acquired our proportionate share (approximately 4.05 percent) of the 15.09 percent interest rejected by Acme Metals Incorporated in its bankruptcy proceedings. As a result of these two events, we increased our ownership in the mine from 7.7 percent to 26.8 percent. We also manage the mine. Stelco has a 44.6 percent interest and Dofasco has a 28.6 percent interest in the mine. Over the past five years, Wabush has produced between 3.8 million and 5.2 million tons of iron ore pellets annually. Wabush currently has initiated actions to increase annual pellet production to a 5.7 million ton rate by the end of 2006. Production for 2006 is estimated at approximately 5.3 million tons.

      The following map shows the locations of our Australian mines:

      Koolyanobbing. The Koolyanobbing operations are located 425 kilometers east of Perth and approximately 50 kilometers northeast of the town of Southern Cross. Koolyanobbing produces lump and fine iron ore with a current capacity of approximately six million tonnes annually. The capacity of the Koolyanobbing operations is in the process of being expanded to eight million tonnes per year. This expansion is primarily driven by the development of iron ore resources at Mt. Jackson and Windarling, approximately 100 kilometers north of the existing Koolyanobbing operations. The upgrade in capacity is expected to be completed by the end of the first quarter of 2006.

      Cockatoo Island. The Cockatoo Island operation is located six kilometers to the west of Yampi Peninsula, in the Buccaneer Archipelago, and 140 kilometers north of Derby in the West Kimberley region of Western Australia. The island has been mined for iron ore since 1951, with a break in operations between 1985 and 1993.

      Portman commenced a beneficiation project in 1993 that was completed in mid-2000. Portman and HWE Cockatoo Pty Ltd then formed a 50:50 joint venture to mine remnant iron ore deposits on mining tenements held by BHP and mined by BHP from 1951 to 1985. Mining from this phase of the operation commenced in late 2000 and is expected to continue, based on current reserves, until the first quarter of 2007. The current phase of this operation involved construction of a seawall and mine pit dewatering to enable access to ore located below sea level. Ore is hauled by haul truck to the stockpiles, crushed and screened and then transferred by conveyor to the shiploader. Annual production since 2000 has ranged from .3 million tonnes to 1.1 million tonnes at the 100 percent ownership level.

     Transportation

      Two railroads, one of which is wholly owned by us, link the Empire and Tilden mines with Lake Michigan at the loading port of Escanaba, Michigan and with the Lake Superior loading port of Marquette, Michigan. From the Mesabi Range, Hibbing pellets are transported by rail to a shiploading port at Superior, Wisconsin. United Taconite pellets are shipped by railroad to the port of Duluth, Minnesota. At Northshore, crude ore is shipped by a wholly owned railroad from the mine to processing facilities at Silver Bay, Minnesota. In Canada, there is an open-pit mine and concentrator at Wabush, Labrador, Newfoundland and a pellet plant and dock facility at Pointe Noire, Quebec. At the Wabush mine, concentrates are shipped by rail from the Scully mine at Wabush to Pointe Noire where they are pelletized for shipment via vessel to Canada, the United States and other international destinations or shipped as concentrates for sinter feed.

      All of the ore mined at the Koolyanobbing operations is transported by rail to the Port of Esperance, 578 kilometers to the south for shipment to Asian customers. Direct ship premium fines mined at Cockatoo Island are loaded at a local dock.

      We have a corporate policy relating to internal control and procedures with respect to auditing and estimating ore reserves. The procedures include the calculation of ore reserves at each mine by mining engineers and geologists under the direction of our Chief Mining Engineer. Our General Manager-Technical Services compiles, reviews, and submits the calculations to Corporate Accounting, who prepares the disclosures for our annual and quarterly reports based on those calculations and submits the draft disclosures to our General Manager-Technical Services of Mine Technology for further review and approval. The draft disclosures are then reviewed and approved by our Chief Financial Officer and Chief Executive Officer before inclusion in our annual and quarterly reports. Additionally, the long-range mine planning and ore reserve estimates are reviewed annually by our Audit Committee. Furthermore, all changes to ore reserve estimates, other than those due to production, are documented by our General Manager-Technical Services and are submitted to our President and Chief Operating Officer for review and approval. Finally, we perform periodic reviews of long-range mine plans and ore reserve estimates at mine staff meetings and senior management meetings.

Operations

      During 2005, 2004 and 2003, we produced 22.1 million tons, 21.7 million tons and 18.1 million tons of pellets, respectively, for our account and 13.8 million tons, 12.7 million tons and 12.2 million tons, respectively, on behalf of the steel company owners of the mines. The 4.0 million ton increase in our share of tons produced in 2005 compared to 2003 principally reflected the acquisition in December 2003 and full-year production in 2005 of United Taconite and increased customer demand. The following is a summary of total North American production and our share of that production:

At Portman, we produced 5.2 million tonnes since the March 31, 2005 acquisition. Following is a summary of total Australian production:

Our business is subject to a number of operational factors that can affect our future profitability. Significant mining challenges include the following:

A more detailed description of these risks is contained in Item 1A — Risk Factors.

      Mine Capacity and Iron Ore Reserves. The following tables reflect expected current annual capacity and economic ore reserves for our North American and Australian iron ore mines as of December 31, 2005. The estimated ore reserves and full production rates could be affected by, among other things, future industry conditions, geological conditions, and ongoing mine planning. Maintenance of effective production capacity of the ore reserves could require increases in capital and development expenditures. Alternatively, changes in economic conditions or in the expected quality of ore reserves could decrease capacity or mineral reserves. Technological progress could alleviate such factors or increase capacity or ore reserves. Our 2006 ore reserve estimates for our iron ore mines as of December 31, 2005 were estimated from fully-designed pits developed using three-dimensional modeling techniques. These fully designed pits incorporate design slopes, practical mining shapes and access ramps to assure the accuracy of our reserve estimates.

General Information about the Mines

      Leases. Mining is conducted on multiple mineral leases having varying expiration dates. Mining leases are routinely renegotiated and renewed as they approach their respective expiration dates.

      Exploration and Development. All mining operations are open-pit mines that are well past the exploration stage and are in production. Additional pit development is underway at each mine as required by long-range mine plans. Drilling programs are conducted periodically for the purpose of refining guidance related to ongoing operations. An exploration program targeting extensions to Portman’s known iron ore resources as well as regional exploration targets in the Yilgarn Mineral Field was active in 2005 and will continue in 2006.

      The Biwabik, Negaunee, and Wabush Iron Formations are classified as Lake Superior type iron-formations that formed under similar sedimentary conditions in shallow marine basins approximately two billion years ago. Magnetite and/or hematite are the predominant iron oxide ore minerals present, with lesser amounts of goethite and limonite. Chert is the predominant waste mineral present, with lesser amounts of silicate and carbonate minerals. The ore minerals readily liberate from the waste minerals upon fine grinding.

      The mineralization at the Koolyanobbing operations is predominantly hematite and goethite replacements in greenstone-hosted banded iron-formations. Individual deposits tend to be small with complex ore-waste contact relationships. The Koolyanobbing operations reserves are derived from 14 separate mineral deposits distributed over a 100-kilometer operating radius. The mineralization at Cockatoo Island is predominantly friable, hematite-rich sandstone that produces premium high grade, low impurity direct shipping fines.

      Geologic models are developed for all mines to define the major ore and waste rock types. Computerized block models are then constructed that include all relevant geologic and metallurgical data. These are used to generate grade and tonnage estimates, followed by detailed mine design and life of mine operating schedules.

      Mine Facilities and Equipment. Each of the North American mines has crushing, concentrating, and pelletizing facilities. There are crushing and screening facilities at Koolyanobbing and Cockatoo Island. The

facilities at each site are in satisfactory condition, although they require routine capital and maintenance expenditures on an ongoing basis. Certain mine equipment generally is powered by electricity, diesel fuel or gasoline. The total cost of the property, plant and equipment, net of applicable accumulated amortization and depreciation as of December 31, 2005, for each of the North American mines is set forth in the chart below.

We directly own approximately one-half of the remaining ore reserves at the Empire mine and approximately three percent of the reserves at the Hibbing mine, and lease or sublease the balance of the reserves from their owners. We own all of the ore reserves at the Tilden mine. The ore reserves at Northshore, United Taconite and Wabush Mines are owned by others and leased or subleased directly to those mines. The Koolyanobbing operations and Cockatoo Island ore reserves are derived from Crown lands owned and managed by the Western Australia state government.

      In 2005, there were modest reductions to the estimated ore reserve at Empire, United and Wabush and an increase in the ore reserves at Hibbing Taconite. The ore reserves at Empire were reduced by 2 million tons to eliminate difficult processing ore having a high stripping ratio in the CD-II deposit. At United Taconite, the ore reserves decreased by 2 million tons reflecting minor adjustments and corrections to the previous estimate completed in 2004. The ore reserves at Wabush were reduced by less than 1 million tons due to higher than anticipated operating costs. At Hibbing Taconite, a completely revised and updated ore reserve estimate increased the reserve by 4 million tons.

      The reduction in our ore reserve estimates for the Empire mine is due to the inability to develop effective mine plans that produce cost-justified combinations of production volume, ore quality and stripping requirements with our 2003 reserve base. A more detailed description of the reduction in ore reserve estimates for the Empire mine is contained in Item 1A — Risk Factors. The reduction in our ore reserve estimates for Wabush is largely a reflection of increased operating costs, the impact of currency exchange rates and a

reduction in maximum mining depth due to dewatering capabilities based on a hydroanalysis evaluation. Partially offsetting these impacts was the impact of higher Eastern Canadian pellet pricing. A more detailed description of the reduction in ore reserve estimates for Wabush is contained in Item 1A — Risk Factors.

Competition

      We compete with several iron ore producers in North America, including Iron Ore Company of Canada, Quebec Cartier Mining Company and U.S. Steel, as well as other steel companies that own interests in iron ore mines may have excess iron ore inventories. In addition, significant amounts of iron ore have, since the early 1980s, been shipped to the United States from Brazil and Venezuela in competition with iron ore produced by us.

      As the North American steel industry continues to consolidate, a major focus of the consolidation is on the continued life of the integrated steel industry’s raw steelmaking operations, i.e., blast furnaces and basic oxygen furnaces that produce raw steel. Some steelmakers are importing semi-finished steel slabs as an alternative to using blast furnaces and basic oxygen furnaces to produce steel because of the costs associated with relining blast furnaces and maintaining coke ovens. These imported steel slabs can be converted and finished in the steelmaker’s downstream finishing facilities. If the trend continues, and more slabs are imported, the demand for pellets that are used primarily in blast furnaces would diminish. In addition, other competitive forces have become a large factor in the iron ore business. Electric furnaces built by “mini-mills,” which are steel recyclers, generally produce steel by using scrap steel, not iron ore pellets, in their electric furnaces.

      Competition among the sellers of iron ore pellets is predicated upon the usual competitive factors of price, availability of supply, product performance, service and transportation cost to the consumer.

      Portman is the third largest iron ore mining company in Australia and exports iron ore products to China and Japan, in the world seaborne trade. Portman competes with major iron ore exporters from Australia, Brazil and India.

Environment

      In the construction of our facilities and in their operation, substantial costs have been incurred and will continue to be incurred to avoid undue effect on the environment. Our North American capital expenditures relating to environmental matters were $8.3 million in 2005 and $7.3 million in 2004. It is estimated that approximately $17.3 million will be spent in 2006 for capital environmental control facilities.

      Various legislative bodies and federal and state agencies are continually promulgating new laws and regulations affecting us, our customers, and our suppliers in many areas, including waste discharge and disposal, hazardous classification of materials and products, air and water discharges, and many other environmental, health and safety matters. Although we believe that our environmental policies and practices are sound and do not expect that the application of any current laws or regulations would be reasonably expected to result in a material adverse effect on our business or financial condition, we cannot predict the collective adverse impact of the expanding body of laws and regulations.

      The iron ore industry has been identified by the EPA as an industrial category that emits pollutants established by the 1990 Clean Air Act Amendments. These pollutants included over 200 substances that are now classified as hazardous air pollutants (“HAP”). The EPA is required to develop rules that would require major sources of HAP to utilize MACT standards for their emissions. Pursuant to this statutory requirement, the EPA published a final rule on October 30, 2003 imposing emission limitations and other requirements on taconite iron ore processing operations. We must comply with the new requirements no later than October 30, 2006. Our projected capital expenditures in 2006 to meet the MACT standards are approximately $4.4 million. In December 2003, we filed a Petition to Delist Taconite Iron Ore Processing from MACT under Section 112 of the Clean Air Act based upon extensive data analyses, human health and ecological risk assessments that are believed to demonstrate that a MACT regulation for taconite operations is not warranted.

Typically, the EPA’s consideration of a petition is an iterative process extending over several months, with a longer period for controversial subjects. On January 23, 2004, the National Wildlife Federation, Minnesota Conservation Federation, Lake Superior Alliance and Save Lake Superior Association filed a petition for review of the EPA’s final MACT rule in the United States Court of Appeals for the District of Columbia. This petition challenges the EPA’s decision not to impose standards for mercury and asbestos and monitoring of formaldehyde from taconite indurating furnaces. We filed a petition to intervene in this case. Subsequently, the Court remanded to EPA the asbestos and mercury rules. The National Wildlife Federation also voluntarily dismissed the petition with respect to the formaldehyde rules.

      Our environmental liability includes our obligations related to five North American sites which 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. Included in our December 31, 2005 obligation is $5.2 million for the estimated remaining clean-up costs related to a PCB spill at the Tilden Mine in the fourth quarter of 2005. The obligation also includes federal and state sites where we are named as a potentially responsible party (“PRP”), such as the Milwaukee Solvay site and the Rio Tinto mine site in Nevada, described in “Item 3. Legal Proceedings,” and where significant site cleanup activities have taken place, and the Kipling and Deer Lake sites in Michigan.

      On February 10, 2006, our 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 (“BACT”) 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 are currently investigating the allegations contained in the Notice.

Australia

      Portman achieved significant progress in environmental management during 2005. As production activity from the new operations at Mt. Jackson and Windarling consolidated, the emphasis in environmental management shifted from control of mine establishment and construction activities to implementation and ongoing development of the Koolyanobbing Project Environmental Management System and conservation initiatives.

      The key elements of a number of environmental management plans that were required under governmental approvals were consolidated into one system manual in 2005. The environmental management system was reviewed in October 2005 and determined to be on schedule to achieve certification to the ISO14001 Standard within the following 18 months.

      For additional information on our environmental matters, see “Item 3. Legal Proceedings” and Note 6 in the Notes to our Consolidated Financial Statements for the year ended December 31, 2005.

Energy

      Electricity. The Empire and Tilden mines each have electric power supply contracts with Wisconsin Electric Power Company (“WEPCO”) that are effective through 2007 and include an energy price cap and certain power curtailment features. We are currently in dispute with WEPCO regarding certain pricing provisions of our contract. See “Item 3. Legal Proceedings.”

      Electric power for the Hibbing mine and the United Taconite mine is supplied by Minnesota Power, Inc., under agreements that continue to December 2008 and October 2008, respectively.

      Silver Bay Power Company, an indirect wholly owned subsidiary of ours, with a 115 megawatt power plant, provides the majority of Northshore’s energy requirements, has an interconnection agreement with

Minnesota Power, Inc. for backup power, and sells 40 megawatts of excess power capacity to Northern States Power Company under a contract that extends to 2011.

      Wabush owns a portion of the Twin Falls Hydro Generation facility that provides power for Wabush’s mining operations in Newfoundland. We have a 20-year agreement with Newfoundland Power, which continues until December 31, 2014. This agreement allows an interchange of water rights in return for the power needs for Wabush’s mining operations. The Wabush pelletizing operations in Quebec are served by Quebec Hydro on an annual contract.

      Koolyanobbing and its associated satellite mines draw power from independent diesel fuelled power stations and generators. The primary Koolyanobbing power supply contract has been extended beyond its original term, with temporary additional power being installed to assist with immediate expansion requirements. Portman’s longer term power supply options are currently under review.

      Electrical supply on Cockatoo Island is diesel generated. The powerhouse adjacent to the processing plant powers the shiploader, fuel farm and the processing plant. The workshop and administration office is powered by a separate generator.

      Process Fuel. We have contracts providing for the transport of natural gas for our United States iron ore operations. The Empire and Tilden mines have the capability of burning natural gas, coal, or, to a lesser extent, oil. The Hibbing and Northshore mines have the capability to burn natural gas and oil. The United Taconite mine has the ability to burn coal, natural gas and coke breeze. Although all of the U.S. mines have the capability of burning natural gas, with higher recent natural gas prices, the pelletizing operations for the U.S. mines utilize alternate fuels when practicable. Wabush Mines has the capability to burn oil and coke breeze.

Research and Development

      We have been a leader in iron ore mining technology for more than 150 years. We operated some of the first mines on Michigan’s Marquette Iron Range and pioneered early open-pit and underground mining methods. From the first application of electrical power in Michigan’s underground mines to the use today of sophisticated computers and global positioning satellite systems, we and our managed mines have been leaders in the application of new technology to the centuries-old business of mineral extraction.

      We maintain research facilities in Ishpeming, Michigan at our Cliffs Technology Center. It was at these facilities that the current concentrating and pelletizing process was developed in the 1950s. This successful development allowed for what was once considered millions of tons of useless rock to be turned into an iron ore reserve that provides the basis for our operations today. Today our engineering and technical staffs are engaged in full-time technical support of our operations and improvement of existing products.

      As part of our efforts to develop alternative metallic products, we participated in Phase II of the Mesabi Nugget Project to test and develop technology for converting iron ore into nearly pure iron in nugget form. See “Other Related Items — Mesabi Nugget Project” in Item 7 for a further discussion of the Project.

      Portman does not have any material research and development projects.

Employees

      As of December 31, 2005, there were a total of 4,085 employees:

      Hourly employees at our North American mining operations (other than Northshore) are represented by the USWA under collective bargaining agreements. In August 2004, four-year labor agreements were ratified between each of the Hibbing, Tilden, United Taconite and Empire mines and the USWA covering the period to August 1, 2008. Also, in October 2004, we entered into a five-year agreement with the USWA covering the employees of the Wabush mine, which expires on March 1, 2009. Hourly employees of one of our wholly owned railroads are represented by six unions with labor agreements expiring at various dates.

      As part of Cleveland-Cliffs Inc Core Values, the Company continues to pursue safety through the enterprise-wide safety initiatives. A reportable incident rate of 2.0 was established as our North American safe production goal for 2005. Although the target was not achieved at all of our mines, the overall incident rate of 2.56 was the second best safety performance in the Company’s history as defined by the MSHA for total reportable incidents. According to MSHA, the industry frequency rate for total reportable incidents for U.S. mines, mills and shops (excluding coal) was 3.96 per 200,000 employee hours worked in 2005. Our frequency rate for lost-time incidents in 2005 was the best in company history at 1.3 per 200,000 employee hours worked. Unfortunately, during the year a tragic accident occurred at one of the Michigan mining operations when an employee was fatally injured while working at the production plant.

      At the Koolyanobbing operation, the Lost Time Injury Frequency Rate (“LTIFR”) for the year was 4.0, which is slightly below the Australian metalliferous open pit mining average of 4.1. During 2005, four Lost Time Injuries (“LTI’s”) were recorded, regrettably including one fatality. At Cockatoo Island, two LTI’s were incurred, resulting in a LTIFR of 7.29 for the year.

      Wisconsin Electric Power Company. Two of the Company’s mines, Tilden and Empire (“the Mines”), currently purchase their electric power from WEPCO pursuant to the terms of special contracts specifying prices based on WEPCO’s “actual costs”. Effective April 1, 2005, WEPCO unilaterally changed its method of calculating the energy charges to the Mines. It is the Mines’ contention that WEPCO’s new billing methodology is inconsistent with the terms of the parties’ contracts and a dispute has arisen between WEPCO and the Mines over the pricing issue. On September 20, 2005, the Mines filed a Demand for Arbitration with the American Arbitration Association with respect to the dispute as provided for in their contracts with WEPCO. WEPCO filed its reply on October 8, 2005, which included a counterclaim for damages in an

amount of in excess of $4.1 million resulting from an alleged failure of Tilden to notify WEPCO of planned production in excess of seven million tons per year. We consider WEPCO’s counterclaim to be without merit and intend to defend the counterclaim vigorously. Pursuant to the terms of the relevant contracts, the undisputed amounts are being paid to WEPCO, while the disputed amounts are being deposited into an interest-bearing escrow account maintained by a bank. For the period ending December 31, 2005, the Mines have deposited $75.8 million into the escrow account, of which $5.3 million was deposited in January 2006. An amount of $73.0 million, of which $61.3 million is included in the escrow deposit and $11.7 million has been paid directly to WEPCO, is expected to be recovered in early-2006; however, we have been advised by WEPCO that they will oppose any release of these recoverable amounts from the escrow until completion of the arbitration.

      Maritime Asbestos Litigation. Two new maritime asbestos cases were brought against subsidiaries of the Company in the third quarter of 2005. As has been previously disclosed, The Cleveland-Cliffs Iron Company (“Iron”) and/or The Cleveland-Cliffs Steamship Company have been named defendants in 483 actions brought from 1986 to date by former seamen (or their administrators) in which the plaintiffs claim damages under federal law for illnesses allegedly suffered as the result of exposure to airborne asbestos fibers while serving as crew members aboard the vessels previously owned or managed by our entities until the mid-1980s. All of these actions have been consolidated into multidistrict proceedings in the Eastern District of Pennsylvania, whose docket now includes a total of over 30,000 maritime cases filed by seamen against ship-owners and other defendants. All of these cases have been administratively dismissed without prejudice, but can be reinstated upon application by plaintiffs’ counsel. The claims against our entities are insured, subject to self-insured retentions by the insured in amounts that vary by policy year; however, the manner in which these retentions will be applied remains uncertain. Our entities continue to vigorously contest these claims and have made no settlements on these claims.

      Milwaukee Solvay Coke. In September 2002, we received a draft of a proposed Administrative Order by Consent from the EPA, for clean-up and reimbursement of costs associated with the Milwaukee Solvay coke plant site in Milwaukee, Wisconsin. The plant was operated by a predecessor of ours from 1973 to 1983, which predecessor we acquired in 1986. In January 2003, we completed the sale of the plant site and property to a third party. Following this sale, an Administrative Order by Consent (“Solvay Consent Order”) was entered into with the EPA by us, the new owner and another third party who had operated on the site. In connection with the Solvay Consent Order, the new owner agreed to take responsibility for the removal action and agreed to indemnify us for all costs and expenses in connection with the removal action. In the third quarter of 2003, the new owner, after completing a portion of the removal, experienced financial difficulties. In an effort to continue progress on the removal action, we expended approximately $.9 million in the second half of 2003 and $2.1 million in 2004. In September 2005, we received a notice of completion from the EPA documenting that all work has been fully performed in accordance with the Consent Order.

      On August 26, 2004, we received a Request for Information pursuant to Section 104(e) of CERCLA relative to the investigation of additional contamination below the ground surface at the Milwaukee Solvay site. The Request for Information was also sent to 13 other PRPs. On July 14, 2005, we received a General Notice Letter from the EPA notifying us that the EPA believes we may be liable under CERCLA and requesting that we, along with other PRPs, voluntarily perform clean-up activities at the site. We have responded to the General Notice Letter indicating that there had been no communications with other PRPs but also indicating our willingness to begin the process of negotiation with the EPA and other interested parties regarding a Consent Order. Subsequently, on July 26, 2005, we received correspondence from the EPA with a proposed Consent Order and informing us that three other PRPs had also expressed interest in negotiating with the EPA. At this time, the nature and extent of the contamination, the required remediation, the total cost of the clean-up and the cost sharing responsibilities of the PRPs cannot be determined, although the EPA has advised us that it has incurred $.5 million in past response costs, which the EPA will seek to recover from us and the other PRPs. We increased our environmental reserve for Milwaukee Solvay by $.5 million in 2005 for potential additional exposure.

      On December 23, 2005, we entered into a letter of intent with Kinnickinnic Development Group LLC (“KK Group”) pursuant to which the KK Group would acquire and redevelop the Milwaukee Solvay site.

Under the terms of the letter of intent, KK Group would acquire our mortgage on the site in consideration for the assumption of all our environmental obligations with respect to the site and a cash payment of $2,250,000. In addition, KK Group would be required to deposit $4 million into an escrow account to fund any remaining environmental clean-up activities on the site and to purchase insurance coverage with a $5 million limit. We are currently drafting definitive agreements documenting this agreement. Closing of the transaction would occur within sixty-one days of signing definitive agreements.

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”) located downstream on the Owyhee River. 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 has been 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 $1.2 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 Notice of Violation

      On February 10, 2006, our Northshore mine received a Notice from the EPA. The Notice cites four alleged violations: (1) that Northshore violated the 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 BACT requirements associated with the furnace 12 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 are currently investigating the allegations contained in the Notice.

      None.

EXECUTIVE OFFICERS OF THE REGISTRANT

      There is no family relationship between any of our executive officers, or between any of our executive officers and any of our Directors. Officers are elected to serve until successors have been elected. All of the above-named executive officers were elected effective on the dates listed below for each such officer.

      The business experience of the persons named above for the last five years is as follows:

PART II

Stock Exchange Information

      Our Common Shares (ticker symbol CLF) are listed on the New York Stock Exchange. The shares are also listed on the Chicago Stock Exchange.

Common Share Price Performance and Dividends

      All per-share information has been adjusted retroactively to reflect the two-for-one stock split effective December 31, 2004.

      At February 14, 2006, we had 1,631 shareholders of record.

Unregistered Sales of Equity Securities and Use of Proceeds.

      On September 30, 2005, October 14, 2005, and November 15, 2005, pursuant to the Cleveland-Cliffs Inc Voluntary Non-Qualified Deferred Compensation Plan (“VNQDC Plan”), the Company sold a total of 25 shares of common stock, par value $.50 per share, of Cleveland-Cliffs Inc (“Common Shares”) for an aggregate consideration of $2,195.50 to the Trustee of the Trust maintained under the VNQDC Plan. These sales were made in reliance on Rule 506 of Regulation D under the Securities Act of 1933 pursuant to an election made by one managerial employee under the VNQDC Plan.

Issuer Purchases of Equity Securities

Summary of Financial and Other Statistical Data

Cleveland-Cliffs Inc and Consolidated Subsidiaries

Overview

      Cleveland-Cliffs Inc (the “Company,” “we,” “us,” “our,” and “Cliffs”) is the largest producer of iron ore pellets in North America. We sell the majority of our pellets to integrated steel companies in the United States and Canada. We manage and operate six North American iron ore mines located in Michigan, Minnesota, and Eastern Canada that currently have a rated capacity of 37.5 million tons of iron ore pellet production annually, representing 45.9 percent of the current North American pellet production capacity. The other iron ore mines in the U.S. and Canada have an aggregate rated capacity of 22.9 million tons and 21.2 million tons, respectively. Based on our percentage ownership in the mines we operate, our share of the rated pellet production capacity is currently 23.0 million tons annually, representing approximately 28 percent of total North American annual pellet capacity.

      On April 19, 2005, Cleveland-Cliffs Australia Pty Limited (“Cliffs Australia”), an indirect wholly owned subsidiary of the Company, completed the acquisition of 80.4 percent of Portman Limited (“Portman”), the third-largest iron ore mining company in Australia. The acquisition was initiated on March 31, 2005 by the purchase of approximately 68.7 percent of the outstanding shares of Portman. Portman serves the Asian iron ore markets with direct-shipping fines and lump ore from two iron ore projects, both located in Western Australia. Portman’s full-year 2005 production (excluding its .6 million metric ton (“tonne”) share of the 50 percent-owned Cockatoo Island joint venture) was approximately 6.0 million tonnes. Portman currently has a $61 million project underway that is expected to increase its wholly owned production capacity to eight million tonnes per year by the end of the first quarter of 2006. The production is committed to steel companies in China and Japan for approximately four years.

      The Portman acquisition represents another significant milestone in our long-term strategy to seek additional iron ore mine investment opportunities and to transition our Company from primarily a mine management company and mineral holder to an international merchant mining company.

      The purchase price for the 80.4 percent interest in Portman was $433.1 million, including $12.4 million of acquisition costs. Additionally, we incurred $9.8 million of foreign currency hedging costs related to the transaction, which were charged to operations in the first quarter of 2005.

      The acquisition and related costs were financed with existing cash and marketable securities and $175 million of interim borrowings under a new three-year $350 million revolving credit facility. The outstanding balance was repaid in full on July 5, 2005.

      Our statement of consolidated financial position as of December 31, 2005, reflects 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 our management based on the information currently available. An appraisal of assets and liabilities has not yet been finalized, and is expected to be complete by March 31, 2006. While we do not expect any material changes, the purchase price allocation remains subject to revision through the allocation period ending in the first quarter of 2006. A significant portion of the purchase price was allocated to iron ore reserves, which will be depleted on a unit-of-production basis over the productive life of the reserve.

      As a result of the Portman acquisition, we now operate in two reportable segments: the North American segment and the Australian segment, also referred to as Portman.

      Prior to 2002, we primarily held a minority interest in the mines we managed, with the majority interest in each mine held by various North American steel companies. Our earnings were principally comprised of royalties and management fees paid by the partnerships, along with sales of our equity share of the mine pellet production. Faced with marked deterioration in the financial condition of many of our partners and customers, we embarked on a strategy to reposition ourselves from a manager of iron ore mines on behalf of steel company partners to primarily a merchant of iron ore through increasing our ownership interests in our managed mines.

      Our successful navigation of numerous customer and partner bankruptcies and the corresponding consolidation of the industry in recent years have resulted in our emerging with new long-term supply agreements, at more favorable pricing, with steel company partners and customers that are financially stronger than their predecessors. One premier example is the former International Steel Group, Inc. (“ISG”), which consolidated several bankrupt steel companies. In 2002, we invested $13.0 million in ISG to support its acquisition of bankrupt LTV Corporation’s idled steelmaking assets, receiving a seven percent stake in return. We also entered into a 15-year term sales agreement to supply all of ISG’s pellet requirements for its Cleveland and Indiana Harbor plants. Later in 2002, we invested another $4.4 million to support ISG’s acquisition of the steelmaking assets of Acme Metals Incorporated (“Acme”) and invested another $10.7 million of pension trust assets in 2003 to support ISG’s acquisition of Bethlehem Steel Corporation’s (“Bethlehem”) assets. In conjunction with its acquisition of Bethlehem, ISG acquired Bethlehem’s 62.3 percent equity interest in the Hibbing Taconite Company — Joint Venture (“Hibbing”). Through these investments, we received 5.9 million shares (5.1 million shares of directly-held and .8 million shares held in

our pension trust) in return for our original investment. In 2004, we realized a $152.7 million pre-tax ($99.3 million after-tax) gain on the sale of our 5.1 million shares of directly-held ISG common stock. Also in 2004, ISG acquired the bankrupt assets of Weirton Steel Corporation (“Weirton”) and Georgetown Steel Corporation. In conjunction with its acquisition of Weirton, ISG assumed our term supply agreement with Weirton with some modifications.

      ISG agreed to merge with Mittal Steel Company N.V. (“Mittal”), the parent company of Ispat Inland Inc. (“Ispat”), in 2005, resulting in the world’s largest steel company. Effective January 3, 2006, Ispat was merged with and into Mittal Steel USA ISG Inc. and renamed Mittal Steel USA Inc. (“Mittal Steel USA”).

      In 2004, we also significantly improved our liquidity initially through our January, 2004 offering of $172.5 million of redeemable cumulative convertible perpetual preferred stock. The proceeds from the issuance were utilized to repay the remaining $25 million balance of our unsecured notes and to fund $76.1 million into our underfunded salaried and hourly pension funds and retiree healthcare accounts (“VEBAs”). Additionally, the proceeds from the sale of ISG stock and cash flow from operations provided us with the liquidity for capital expenditures to maintain and expand our production capacity and to complete the acquisition of Portman. We intend to continue to pursue investment and operations management opportunities to broaden our scope as a supplier of iron ore to the integrated steel industry through the acquisition of additional mining interests to strengthen our market position. We are particularly focused on expanding our international investments to capitalize on global demand for steel and iron ore.

      Our strategic redirection and acceptance of additional risks of increased mine ownership followed by significant increases in iron ore demand and pricing culminated in record operating income in 2004 and again in 2005, solid financial condition, and a strong base for future growth.

      Our share of North American production in 2005 was a record 22.1 million tons. Mine operating costs on a per-ton basis increased by approximately 14 percent in 2005 versus 2004 primarily due to higher energy, supply pricing and royalties. From a safety standpoint, 2005 was the second best safety performance in the company’s 158 year history at 2.56 per 200,000 employee hours worked as defined by the Mine Safety and Health Administration (“MSHA”) for total reportable incidents. According to MSHA, the industry frequency rate for total reportable incidents for U.S. mines, mills and shops (excluding coal) was 3.96 per 200,000 employee hours worked in 2005. Our frequency rate for lost-time incidents in 2005 was the best in company history at 1.3 per 200,000 employee hours worked. Unfortunately, during the year a tragic accident occurred at one of the Michigan mining operations when an employee was fatally injured while working at the production plant.

      At the Koolyanobbing operation, the Lost Time Injury Frequency Rate (“LTIFR”) for the year was 4.0, which is slightly below the Australian metalliferous open pit mining industry average of 4.1. During 2005, four Lost Time Injuries (“LTI’s”) were recorded at the Koolyanobbing operation, regrettably including one fatality. At Cockatoo Island, two LTI’s were incurred, resulting in a LTIFR of 7.29 for the year. Portman’s safety statistics include employees and contractors.

      Our operating objectives are to maximize safe production, efficiency and productivity at our mines. All of the mines and processing facilities have been in existence for several decades and are energy and labor intensive operations. Energy comprises approximately 27 percent of our mine production costs. We continue to strive for employment productivity improvements to offset rising energy and employee medical and legacy costs. Employees at the Empire Iron Mining Partnership (“Empire”) and Tilden Mining Company L.C. (“Tilden”) in Michigan and Hibbing Taconite and United Taconite mines in Minnesota, represented by the United Steelworkers of America (“USWA”), ratified four-year labor agreements that are comparable to other USWA contracts in the industry. The agreements provide for wage increases and additional funding into employee pension plans and VEBAs in exchange for employees and future retirees sharing in healthcare insurance costs and certain other provisions that will continue to improve productivity. (See “Labor Contracts.”)

Two-for-One Stock Split

      On November 9, 2004, the Board of Directors of the Company approved a two-for-one stock split of its Common Shares with a corresponding decrease in par value from $1.00 to $.50. The record date for the stock split was December 15, 2004 with a distribution date of December 31, 2004. Accordingly, all Common Shares, per-share amounts, stock compensation plans and preferred stock conversion rates have been adjusted retroactively to reflect the stock split. Additionally, all diluted per-share amounts reflect the “as-if-converted” effect of the Company’s convertible preferred stock as required by Emerging Issues Task Force Consensus 04-8, “The Effect of Contingently Convertible Instruments on Dilute Earnings per Share.”

Key Operating and Financial Indicators

      Following is a summary of the Company’s key operating and financial indicators for the years 2005, 2004 and 2003:

      North American iron ore pellet sales decreased .3 million tons from the previous record of 22.6 million tons sold in 2004. The sales decrease primarily reflected a slowdown in the North American steel industry in mid-2005 brought on by production reductions at North American steel companies undertaken to mitigate lower global steel pricing. Iron ore pellet production for our account increased .4 million tons largely due to the full-year production at United Taconite, which was acquired in December 2003, and higher production at all mines except Empire and Northshore.

      Our increase in 2005 North American sales margin from 2004 was principally due to an increase in sales prices partially offset by higher production costs and lower volume. The increase in sales prices reflected the effect on term sales contract escalators of higher steel prices, an increase in international pellet prices, and higher Producers Price Indices (“PPI”). Production costs were adversely affected by higher energy and supply pricing, increased maintenance costs and higher royalty rates due to increased pellet sales pricing. On a year-over-year basis, these factors were partly offset by the fixed-cost effect of a 14-week labor stoppage at Wabush Mines (“Wabush”) in the third quarter of 2004, the impact of a weaker U.S. dollar on our share of Wabush production costs, and costs incurred related to 2004 U.S. labor negotiations.

      Portman’s sales of lump ore and fines were 4.9 million tonnes since the acquisition. Iron ore production was 4.7 million tonnes, excluding .5 million tonnes at Cockatoo Island, since the acquisition.

      Our business is affected by a number of factors, which are described in detail under Item 1A. Risk Factors. As we have increased our role as a merchant of iron ore to steel company customers, we have become more dependent on the revenues from our term supply agreements. Because our agreements are largely requirements contracts, those revenues are heavily dependent on customer consumption of iron ore. Customer requirements may be affected by increased use of iron ore substitutes, including imported semi-finished steel, customer rationalization or financial failure, and decreased North American steel production resulting from increased imports or lower steel consumption.

      Further, our North American sales are concentrated with relatively few customers. Unmitigated loss of sales would have a significantly greater impact on operating results and cash flow than revenue, due to the high level of fixed costs in the iron ore mining business and the high cost to idle or close mines. In the event of a venture participant’s failure to perform, remaining solvent venturers, including us, may be required to assume additional fixed costs and record additional material obligations. The premature closure of a mine due to the loss of a significant customer or the failure of a joint venture participant would accelerate substantial employment and mine shutdown costs.

Results of Operations

      Following is a summary of results for 2005, 2004 and 2003:

2005 Versus 2004

      The decrease in net income primarily reflected last year’s after-tax gain of $99.3 million ($152.7 million pre-tax) on the sale of all directly-held ISG stock and the fourth-quarter 2004 reversal of $113.8 million of deferred tax asset valuation allowance, largely offset by higher North American sales margins and the inclusion of earnings from Portman since March 31, 2005, when we acquired a controlling interest.

      The $47.0 million decrease in income from continuing operations reflected higher income taxes of $119.8 and $10.1 million of income attributable to the minority interest owners of Portman, partially offset by higher income before income taxes and minority interest of $82.9 million. The pre-tax earnings increase from 2004 principally reflected higher North American sales margins of $209.1 million and the inclusion of Portman’s sales margin of $30.4 million since the March 31, 2005 acquisition partially offset by last year’s gain on the sale of ISG common stock of $152.7 million. Following is a summary of the sales margin:

North American Iron Ore

      Sales revenue (excluding freight and venture partners’ cost reimbursements) increased $312.7 million or 31 percent. The increase in sales revenue was due to higher sales prices, $328.0 million, partially offset by a sales volume decrease of $15.3 million. The 33 percent increase in sales prices primarily reflected the effect on Cliffs’ term sales contract price adjustment factors of an approximate 86 percent increase in international pellet pricing, higher steel pricing, higher PPI and other contractual increases, including base price increases and lag-year adjustments. Included in 2005 revenues was approximately .9 million tons of 2005 sales at 2004 contract prices and $2.4 million of price adjustments on 2004 sales.

      Cost of goods sold and operating expenses (excluding freight and venture partners’ costs) increased $103.6 million from 2004. The increase primarily reflected higher unit production costs of $116.6 million. Lower sales volume reduced costs $13.0 million. The increases in unit production costs included higher energy pricing, $50.4 million; increased maintenance costs, $18.7 million; higher supply prices, $16.6 million; and higher royalty rates, $13.2 million, due to increased pellet sales pricing. Production costs in 2004 were impacted by the labor stoppage at Wabush in the third quarter of 2004 of $5.2 million, a $3.4 million exchange rate effect due to the impact of a weaker U.S. dollar on our share of Wabush production costs, and $3.0 million related to 2004 U.S. labor negotiations.

      The sales margin improvement of $209.1 million in 2005 was principally due to an increase in sales price, partially offset by lower volume and higher production costs.

Australian Iron Ore

      Sales revenue of $204.5 million on 4.9 million tonnes of Portman’s sales reflects results since the March 31, 2005, acquisition. Sales revenues for the nine-month period represent a record for Portman. At

acquisition, Portman had currency derivatives used to hedge its currency exposure for a portion of its sales receipts denominated in U.S. dollars. Although Portman carried a hedge reserve, the reserve was not recognized in the allocation of purchase price. Pre-acquisition contracts, with a fair value of $13.0 million, therefore, are expensed upon delivery. Through December 31, 2005, $9.8 million of hedge contracts were settled and recognized as a reduction of revenues.

      Cost of goods sold and operating expenses of $174.1 million for the nine-month period reflected the recognition of $38.6 million of basis adjustments to inventory and mineral rights due to the preliminary allocation of the $433.1 million purchase price. We continue to refine our purchase accounting developed with the assistance of an outside consultant. The current allocation of the 80.4 percent interest in Portman allocated $23.1 million to product and work in process inventories, of which approximately $19.9 million has been included in cost of goods sold through December 31, 2005. Most of the $3.2 million remaining inventory step-up is expected to be expensed prior to the end of 2006. The $18.7 million balance of the basis adjustments principally reflected increased depletion of mineral rights.

      The sales margin of $30.4 million on 4.9 million tonnes of Portman’s sales reflects results since the March 31, 2005 acquisition.

Other Operating Income

      The pre-tax earnings changes for 2005 versus the comparable 2004 period also included:

      We entered 2005 with a valuation allowance to reduce a deferred tax asset related to $25.4 million of net operating losses attributable to pre-consolidation separate return years of one of our subsidiaries. In the fourth quarter of 2005, we determined, based on the existence of sufficient evidence, that we no longer required this valuation allowance. During 2005, an $8.9 million adjustment to reverse this valuation allowance was recognized. However, through our acquisition of Portman, we acquired a deferred tax asset of $11.1 million related to capital loss carryforwards with a corresponding $11.1 million deferred tax asset valuation allowance due to uncertainty about utilization of these carryforwards.

      In the fourth quarter of 2004, we determined, based on the existence of sufficient evidence, that we no longer required a valuation allowance other than $8.9 million related to net operating loss carryforwards described above. During 2004, a $113.8 million adjustment to reduce the valuation allowance was recognized.

      Excluding the $8.9 million and $113.8 million valuation reversals in 2005 and 2004, respectively, income tax expense of $93.7 million in 2005 was $14.9 million higher than the comparable amount last year. The increase was due to higher pre-tax income in 2005, partially offset by a lower effective tax rate.

      Our arrangements with C.V.G. Ferrominera Orinoco C.A. of Venezuela (“Ferrominera”), a government-owned company responsible for the development of Venezuela’s iron ore industry, to provide technical assistance in support of improving operations of a 3.3 million tonne per year pelletizing facility were terminated in the third quarter of 2005. We recorded after-tax expense of $1.7 million related to this contract in 2005.

      On July 23, 2004, Cliffs and Associates Limited (“CAL”), an affiliate of the Company jointly owned by a subsidiary of the Company (82.3945 percent) and Outokumpu Technology GmbH (17.6055 percent), a German company (formerly known as Lurgi Metallurgie GmbH), completed the sale of CAL’s Hot Briquette Iron (“HBI”) facility located in Trinidad and Tobago to ISG. Terms of the sale included a purchase price of $8.0 million plus assumption of liabilities. CAL may receive up to $10 million in future payments contingent on HBI production and shipments. In 2005, we received payments totaling $.6 million and at December 31, 2005, we have a receivable balance of $.5 million. Mittal Steel USA closed this facility at the end of 2005 and it is unlikely we will receive further payments related to this transaction. We recorded after-tax income of approximately $.9 million in 2005.

2004 Versus 2003

      The increase in net income reflected higher North American sales margins and a $152.7 million pre-tax gain on the sale of directly-held ISG common stock. The increase in net income also included a $3.4 million increase in after-tax income related to discontinued operations and a $2.2 million after-tax extraordinary gain related to the United Taconite acquisition of the Eveleth mine assets in December 2003.

      The $355.1 million increase in income from continuing operations reflected improved pre-tax results of $320.4 million and an increase in the income tax credit of $34.7 million. The increased tax credit in 2004 reflected a $113.8 million reversal of deferred tax valuation allowance partly offset by the current year’s tax provision. Included in the pre-tax increase of $320.4 million was $152.7 million relating to a gain on sale of directly-held ISG common stock and higher sales margins of $159.4 million. Following is a summary of the sales margin:

      Sales revenue (excluding freight and venture partners’ cost reimbursements) increased $308.2 million or 45 percent. The increase in sales revenue was due to higher sales prices and the 3.4 million ton, or 18 percent, increase in pellet sales volume in 2004. The 22.6 million tons sold in 2004 was a record, surpassing the previous record of 19.2 million tons sold in 2003. The increase in sales price realization resulted from term sales contract escalators, primarily higher steel prices and an approximate 20 percent increase in international pellet prices.

      Cost of goods sold and operating expenses increased $148.8 million, or 21 percent, from 2003, principally due to higher sales and production volume of $122.8 million, increased energy and supply pricing of $19.9 million, the fixed-cost effect of a 14-week labor stoppage at Wabush in third-quarter 2004 of $5.2 million, a $3.4 million exchange rate effect due to the impact of a weaker U.S. dollar on our share of Wabush production costs, and $3.0 million related to 2004 U.S. labor negotiations. Operating costs in 2003 included an $11.1 million fixed-cost impact caused by a five-week production curtailment at the Empire and Tilden mines relating to the loss of electric power due to flooding in the Upper Peninsula of Michigan.

      The sales margin improvement of $159.4 million in 2004 was principally due to an increase in sales prices and volume, and was partially offset by higher production costs.

      The pre-tax earnings changes for 2004 versus the comparable 2003 period also included:

      Through the third quarter of 2004, we maintained a valuation allowance to reduce our deferred tax asset in recognition of uncertainty regarding utilization. In the fourth quarter of 2004, we determined, based on the existence of sufficient evidence, that we no longer required a valuation allowance other than $8.9 million related to net operating loss carryforwards of $25.4 million that will begin to expire in 2021, which are attributable to pre-consolidation separate return years of one of our subsidiaries. As a result, a $113.8 million adjustment to reduce the valuation allowance was recognized. Excluding the $113.8 million valuation reversal, income tax expense in 2004 of $78.9 million was $79.2 higher than 2003 principally reflecting higher pre-tax income.

      We recorded after-tax income of $3.1 million related to CAL in 2004. The gain is classified under “Discontinued Operations” in the Statement of Consolidated Operations.

      Income in 2004 from Ferrominera, whose operations were terminated in the third quarter of 2005, was $.3 million.

Cash Flow and Liquidity

      At December 31, 2005, we had cash and cash equivalents of $192.8 million, including $54.7 million at Portman. Following is a summary of 2005 cash flow activity:

      Following is a summary of key liquidity measures: