Cliffs Capitulates to Casablanca Capital

Iron ore miner sees writing on wall in its battle against the activist shareholder

Jun 16, 2014 at 12:13PM

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Open-pit mining operation at Bloom Lake, Quebec. Source: Cliffs Natural Resources

In the increasingly heated proxy battle between iron ore miner Cliffs Natural Resources (NYSE:CLF) and activist shareholder Casablanca Capital, which owns 5% of the miner's outstanding stock, one thing has become clear: change is coming. Cliffs has acknowledged that after speaking with other significant shareholders, at least two of the hedge fund's six nominees for the board of directors will be elected at the annual shareholder meeting scheduled for the end of July.

Cliffs, like much of the rest of the industry, has been done in by the collapse of iron ore pricing, down 30% for the year with Morgan Stanley forecasting that it has further to fall -- and not just this year, but next year, too. It anticipates prices will average $105 a ton in 2014, an 11% decline from the $118  per ton estimate it delivered just last month, and the back half of the year could see prices fall as low as $80 per ton. Next year Morgan Stanley believes iron ore pricing may average $90 per ton, which suggests even lower lows could be tested.

The basis for its estimates is the supply glut ravaging the global seaborne trade, of which China consumes roughly two-thirds of the 1.2 billion-ton supply. With supply continuing to expand, the higher cost ore in China will be displaced by newer, lower cost shipments. BHP Billiton (NYSE:BHP), the world's largest producer, admits its previous expansionary iron ore policy was a mistake. Still, analysts see the surplus growing to at least 72 million tons this year and surging to as much as 177 million tons in 2015.

The damage to the trade, therefore, is not wholly of Cliffs' making, but because it has both U.S.-focused and global operations, Casablanca wants the miner to split itself in two, keeping the domestic business and spinning off the other into a new company, Cliffs International. It says there's little synergy between the two, and the lack of cohesion detracts from the whole. By dividing itself, it will also be able to double its dividend.

Cliffs rejects the notion. Though there is some sense to the activist shareholder's plan, sending off the new entity into a world where even BHP and No. 2 producer Rio Tinto (NYSE:RIO) are experiencing challenges in the global market may cause the company to wither and die. The weakened state of the market has prevented Rio from selling off its stake in the Iron Ore Co. of Canada, the largest producer in North America. Earlier this year interest in buying it out withered due to market conditions.

But Casablanca has other criticisms of Cliffs' management, and believes CEO Gary Halverson is not up to the task of leading the multibillion miner as he's had no prior executive leadership experience, and was only appointed to the position from the interim post he held after the hedge fund broached the subject. Coupled with other actions hostile to shareholder interests -- it dragged its feet on calling an annual meeting, for example, and only when Casablanca threatened a consent solicitation to force the board's hand did it relent -- it's seeking majority control of the board with a slate of six candidates.

That's what led the miner to speak with its shareholders, coming away with a belief that electing a slate of its nine director nominees would be in the best interests of all investors, though it means two of Casablanca's will be seated. It should be pointed out that during negotiations with Cliffs' board the hedge fund had first agreed to accepting four positions on the board, with its nominee Lourenco Goncalves serving as executive chairman, and then just three, with Goncalves at the top and Halverson reporting to him. Cliffs rejected each of these entreaties.

It seems the miner sees the writing on the wall, and understands that the makeup of its board will be changing. Perhaps it hopes to stave off the worst of it. With Casablanca Capital still marching forward with its plan, the board of Cliffs Natural Resources could look very different heading into the fall.

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