Investor Wants Cliffs Natural Resources, Inc. Cleaved in Two

Activist shareholder says two halves of the resources company are better apart than together.

Jan 29, 2014 at 4:12PM

Although Cliffs Natural Resources (NYSE:CLF) is a leading iron ore miner, its U.S.-facing business is a different animal in many respects than its international operations, which makes the consolidated business really two different companies. Casablanca Capital, an activist investor that recently acquired a better than 5% stake in the miner, believes Cliffs can do better by recognizing those separate qualities by dividing itself into two distinct companies, Cliffs USA and Cliffs International, and use the more focused attention it will give to its business to double the dividend.

There's a lot to commend the plan the private equity firm developed, but lots of risk, too, and though both sides have said the conversations were constructive, Cliffs management was noncommittal in saying it will investigate the proposal.

The case for Casablanca's plan is based on the premise its international assets are directly exposed to the highly competitive seaborne iron ore market largely headed for the Asia-Pacific markets, while its U.S. assets present a low-risk profile tied to recovery in the automotive and construction industries.

Because Cliffs has to go up against global iron ore giants like BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO) that have financial resources beyond its own capacity, management's ability to jockey the two segments that have little synergy between them serves as a drain on performance. It would be better for both if the international assets were spun off into a separate company and add in the undeveloped Bloom Lake project in eastern Canada, which has been subject to delays, rising costs, and revised expectations.

The U.S. ore and metallurgical coal business, in contrast, would serve as the springboard for new growth. Freed from the vagaries of the seaborne trade, Cliffs could partake in the recovery of the U.S. economy that will spur greater demand for its output. To ensure maximum shareholder value was realized, the assets should be put into a master limited partnership that would pay out a dividend twice as large as it currently pays, which would command a premium in the marketplace once they were no longer saddled with the international albatross.

As I said, there is some sense to the plan, and focusing on core competencies has been the hallmark of both management and activist investors everywhere. Miners, in particular, have been shedding assets and whittling down operations to a smaller, more manageable size. Yet there are significant risks, too.

While the seaborne trade is highly competitive, spinning out those assets at the moment might very well create a weakened entity unable to effectively compete. Rio Tinto has been trying to unload its Canadian iron ore assets for some time now, and though there has been interest, potential buyers feel the asking price is too high for existing conditions. Moreover, China's economy is slowing precipitously and steel production is expected to grow this year at less than half the rate it did in 2013, or 3.1%.  That suggests Cliffs International wouldn't offer shareholders much value at all as it would likely trade at a severe discount to its intrinsic value. Moreover, Cliffs has viewed Bloom Lake as key to its future growth prospects and significant earnings potential.

As for the U.S. recovery, that's not engraved in stone, either. Auto sales, while better than they have been, are slowing and haven't exhibited the same robust expansion they did a year ago. Construction, although also better than it's been in a long while, has similarly tailed off. If China's economy does go flat -- or worse, contracts -- then a new global slowdown won't be far behind and a divided Cliffs could be at a disadvantage.

Certainly, the markets haven't been kind to Cliffs as it was one of the worst performers last year, second only to gold miner Newmont Mining. It's intriguing to think that cleaving the company in two could mysteriously unlock value, yet the hurdles facing it are no less high than they would be if things were kept as they are, and it would deny it the benefits that would accrue if the economic growth story doesn't pan out.

I'd like to think Cliffs Natural Resources would be worth $53 a share, double its current level, if it traded as a U.S.-focused resources company as Casablanca contends, but with a new CEO soon assuming the role (having come from Barrick Gold, he's getting a feel for the job by serving first as COO and president), it's a big change and not one he might willingly accept. And I'm not sold that in this case two is bigger (or better) than one.

A better dividend play
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Rich Duprey has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers