Casablanca Capital Is Just Another Problem for Cliffs Natural Resources

At a time when iron ore producers are pressured by low prices, Cliffs Natural Resources (NYSE: CLF  ) has another problem to deal with. Activist shareholder Casablanca Capital continues to seek control of Cliffs' board of directors. Tension between Cliffs and Casablanca started back at the beginning of the year, when Casablanca issued its proposals to enhance value for Cliffs' shareholders. Now, the battle continues, and it is far from being over.

Seeking to replace the CEO
In the latest round of this drama, Casablanca accused Cliffs of making threats to shareholders. Casablanca accused Cliffs that it was putting pressure on shareholders when stating that proposed changes to the company's board could trigger a repurchase in Cliffs' notes. Surely, Cliffs could not allow a rapid repurchase of its debt right now. That's why Casablanca stated Cliffs was trying to force shareholders to vote for the incumbent board or to be prepared for tough consequences.

In turn, Cliffs stated it was not threatening its shareholders. From the company's point of view, Casablanca's actions put shareholder value at risk. Back in March, Cliffs tried to settle the problem with Casablanca. The company offered Casablanca the opportunity to appoint two new independent directors to Cliffs' board and a third mutually agreed-upon director. Casablanca rejected the settlement offer and continued to seek the replacement of Cliffs' CEO.

Most Casablanca proposals don't seem viable
While Casablanca continues to seek control of Cliffs' board, let's take a look at what the fund proposed back at the beginning of the year. First, Casablanca proposed to separate Cliffs' operations into two parts -- "Cliffs USA" and "Cliffs International." However, the existence of "Cliffs International" would have been problematic, as Cliffs' Canadian iron ore segment continues to suffer from high costs.

Among other proposals, the most astonishing one was doubling the dividend. This one seemed to have come from the realm of fantasies back when it was issued. At present times, it looks even more ridiculous. Iron ore prices have just hit fresh lows on news that the Chinese central planning agency stated that the country's high steel demand period had passed.

In addition, supply from the big three iron ore producers -- Rio Tinto (NYSE: RIO  ) , BHP Billiton (NYSE: BHP  ) , and Vale (NYSE: VALE  )  -- continues to flood the market. In fact, the supply is growing not only in the near term, but in the long term as well. For example, Rio Tinto has just signed a massive deal to develop the southern part of the Guinean Simandou project. Rio Tinto stated that this mine is able to produce as much as 100 million tons of ore per year at full production, which makes the mine bigger than Cliffs' whole iron ore business.

In such conditions, doubling Cliffs' dividend is plain impossible. Such a move will put the company's financial stability at risk. Yet, it is not clear whether Casablanca is focused on its earlier-stated proposals now. In its latest letter to Cliffs' shareholders, Casablanca highlights its desire to replace current CEO Gary Halverson with Lourenco Goncalves. In this letter, nothing is stated about which previous proposals Casablanca still views as viable.

Apart from separation of the company and a dividend increase, these proposals included converting the company's U.S. assets into an MLP, reducing costs, and divesting infrastructure. Notably, the cost part of Casablanca's wishes seems to be fulfilled, as Cliffs has recently announced a reduction of its full-year capital spending by an additional $100 million.

Bottom line
It seems that a proxy fight with Casablanca Capital is around the corner for Cliffs. This is not good news for the company, whose shares trade at a pricey 44 forward P/E despite a 40% loss of value this year.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2014, at 10:36 AM, Aurum wrote:

    It would be nice if financial writers would stop regurgitating all the other SA and FOOL articles saying exactly the same thing about iron ore prices and do some DD of their own about Casablanca's involvement.

    What would you prefer to happen? Do you honestly think that CLF would be trading higher right now if Casablanca was out of the picture?

    Casa is the only hope for CLF now, and their proposals are valid. Separating international operations is a smart thing to do, because while the international operations will undoubtedly trade at a huge discount this frees up the U.S. operations (still very profitable even with the most pessimistic of Analyst's forecasts for iron ore prices) to trade where they should.

    Doubling the dividend is possible for the U.S. operations on their own, especially if all extraneous operations are sold (even at ridiculous prices.)

  • Report this Comment On June 04, 2014, at 1:22 PM, Lordrobot wrote:

    Guinean Simandou has NO ROAD and NO RAIL to ship any ore production.

    As for Iron ore glut, that is false. China requires all Ore production. VALE sells all it can make and it has 76% of the global market share. Its margins are 54% at $100 ore. 80% of the cost of ore is shipping. VALE has the massive VALEMAX ships.

    As for CLF, it has very little exposure to the spot market. CLF's problem is the Board and Management are ineffective. The proxy put is a defacto legal argument which suggests the board of CLF has breached its fiduciary duty to include CASA names on the elective roster.

    CLF is a disjointed business. Its great lakes business is doing well. The pacific rim is foundering and their foray into Canada has been an unmitigated disaster. CASA has the ability to put deals together but CLF mgt is delivering a poison pill to CASA and shares.

    Your article is very thin and not factual.

  • Report this Comment On June 04, 2014, at 4:05 PM, plange01 wrote:

    all of these TRASH FUNDS need to be shut down!!

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