Is a Dividend Cut Around the Corner for Cliffs Natural Resources Inc.?

News about fresh lows for iron ore have become commonness. Following the news about another Chinese probe on using metals for financing, iron ore dipped once again, scoring a more than 30% decline year to date. While bigger miners like Vale (NYSE: VALE  ) , Rio Tinto (NYSE: RIO  ) , and BHP Billiton (NYSE: BHP  ) are still profitable at current levels, smaller players take a hit. Cliffs Natural Resources (NYSE: CLF  ) is a vivid example, with its shares losing almost 50% of their value since the beginning of this year. As the company's cash flows are pressured by the softness of iron ore and met coal market, another problem could be around the corner for Cliffs Natural Resources shareholders – the dividend cut.

Casablanca Capital drops "doubling the dividend" proposal
Downside in Cliffs Natural Resources shares has sent the company's dividend yield way above 4%. Back in winter, activist investor Casablanca Capital suggested that Cliffs Natural Resources should double its dividend. However, in current conditions, such a raise is impossible, and Casablanca itself seems to have dropped this proposal.

In its latest open letter to shareholders, Cliffs Natural Resources states that Casablanca is focused on pushing Lourenco Goncalves, former CEO of Metals USA, to become Cliffs' executive chairman. What's more, Cliffs Natural Resources states that Casablanca Capital changed its view on solving Cliffs' problems, and is suggesting a potential sale of the whole company. The focus of Casablanca's proposals seems to have shifted, making the whole story messier.

No relief on iron ore side
There are few optimists on the iron ore market nowadays. Lately, Morgan Stanley joined other banks to cut its iron ore price forecast for this year and predicting a further drop next year. In turn, Citigroup thinks that iron ore prices could find support near current levels, as low prices cause further production cuts. However, no one predicts a turnaround in iron ore's fate. In fact, stagnation at current price levels could be seen as a satisfactory scenario.

BHP Billiton, Rio Tinto, and Vale might regret what they have done by flooding the market with supply. While BHP Billiton and Rio Tinto' costs allow these miners some comfort, Vale could be feeling less easy if the iron ore decline extends. The reason for this is simple – Vale faces higher transportation costs to its main customer, China, than BHP Billiton and Rio Tinto.

Debt covenants
Cliffs Natural Resources has certain covenants on its $3.2 billion debt, including a 3.5 to 1.0 debt-to-EBITDA covenant. The company has already swung into negative operating cash flow territory in the first quarter of 2014. As iron ore prices extend their decline, the company's ability to stay within its covenants comes under question.

In this environment, a dividend cut seems plausible. The company has already attacked capital spending, cutting it by an additional $100 million at the end of May. Prior to this, Cliffs Natural Resources announced voluntary delisting from Euronext Paris, which has saved a few pennies for the miner. While the company is working toward reducing its costs, it's running out of available options. As Cliffs Natural Resources discarded Casablanca's proposals regarding divestments, the dividend cut is the next logical step in the company's crusade on costs.

Bottom line
Cliffs Natural Resources is in a difficult strategic situation. While Cliffs' earnings are pressured by low met coal and iron ore prices, the company faces a proxy war with activist shareholder Casablanca Capital. Cliffs Natural Resources will surely avoid cutting the dividend as long as possible, as this move will upset shareholders and put additional pressure on shares. However, as iron ore price softness persists, such a move looks increasingly plausible.

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  • Report this Comment On June 21, 2014, at 11:23 AM, Lordrobot wrote:

    Cliff's Naturals is a mess because Mgt doesn't know what they are doing. The CEO never ran a public company in his life. The Chairman of the Board never ran a profitable company. Several on the board are female appointee employees from CLF that have never run any companies.

    As for Iron ore, it is meaningless in CLF's case. CLF sells pellets to the hot rolled steel market. The only exposure CLF has to the spot market is its pacific rim operations which Casablanca wanted to spin off as an MPL. I think it should be spun to the shareholders and negotiated for sale.

    The great lakes business is profitable in spite of the logistic missteps of Mgt to fold due to ice on the lakes. Their foray into Canada has been an unmitigated disaster.

    Is the company worthwhile? Not with present mgt or the Chairman. The company should be sold off in chunks preserving the great lakes business which is long term contracts.

    The company has taken no innovative steps at all to even listen to Casablanca proposals. Instead it has adopted a silent treatment and pursued mere cost cutting instead of selling off noncore assets.

    The mgt has not purchased shares only shares given to them as options. They have watched the stock stoically drop 40% this year. I have news for you, the Iron ore spot market did not drop 40% this year. Cliff will sell all the pellets it can make this year. Your fantasy about ore prices dropping and triggering the covenants is false. Mgt used this notion to promote their proxy put to shareholders which is a breach of their fiduciary duty. Casablanca threatened suit until their Gold Proxy was included.

    Mgt went after a mine in Canada and invested billions and didn't have a road or rail to move the product from the mine. That is not poor business judgement that is gross negligence.

    I caution you with your article that you are wrongly attributing the lower prices of iron ore for CLF's problems. I read the Morgan Stanley report and it did not conform to the international metallurgic spot numbers at all. I suggest that J. P Morgan has substantially more clarity in this commodity than MS. Steel production in the US is up and its up in China. The largest ore miners will sell all the ore they can mine this year with margins exceeding 54%. Mining is a very lucrative business.

    If Casablanca can get control of the company, it will move fast in spinning off the pacific rim to shares and it will improve cash flow, sell off the Canadian assets and groom the pellet business for sale to someone like VALE that wants to get into the American ore and pellet market.

    CLF's underlying great lakes business is solid and if run efficiently could be very valuable. IT HAS NO EXPOSURE WHATSOEVER TO THE SPOT MARKET! In that regard your blog is very misleading.

    The respected analysts all agree that the spot market in ore is now stabilizing. Remember this, that the big three cost of mining iron ore has improved. RIO is close to $50 and VALE is rapidly moving down toward $40 with an eye to $20!. The spot market in ore has not been moving down faster than the reduced cost of production. This is what Morgan Stanley missed entirely even going so far as to call iron ore a glut; extremely misleading. J P Morgan had this one pegged.

    Casablanca will have to clean house at the shareholder meeting and in short order will have operations of noncore businesses sold off or spun to shares.

  • Report this Comment On June 21, 2014, at 2:39 PM, Aurum wrote:

    These articles are meaningless until the shareholder meeting. IF Casablanca takes over, I think shares at the current price are extremely undervalued. CLF can be turned around and made very profitable even in a depressed commodity cycle- but current management has no clue.

    IF Casablanca loses, however, I'm completely done with this company and its board.

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