The Cliffs Saga Continues

The saga of Cliffs Natural Resources (NYSE: CLF  ) continued to drag on last week with the company filing a notice that it was planning to close its Pinnacle coal mine.

This opens yet another chapter in the Cliffs' long drawn out demise and battle with activist head fund, Casablanca Capital.

Under pressure
If you're new to the Cliffs-Casablanca saga, let me quickly catch you up. Casablanca has acquired a 5% shareholding in Cliffs' with which it's trying to instigate change.

The fund is calling for Cliffs to replace its management team with Casablanca nominated replacements, spin off or sell its Asian operations, and return more capital to shareholders. I've covered the key points of the argument before, and an article with more detail can be found here if you want a more detailed catch-up.

Cliffs and Casablanca have been sparring for the past few months, and unfortunately, during the same period, the price of iron ore has collapsed, leaving Cliffs between a rock and a hard place.

Now, Cliffs has issued a release stating that in order to settle the costly and distracting proxy contest, the company is reaching out to Casablanca Capital to make a reasonable settlement offer. Cliffs' management is offering three seats on its nine seat board of directors to Casablanca candidates. This will also give the new Casablanca-nominated candidates a chance to vote for a new director.  

Running out of cash
There were some concerns on Wall Street earlier this month that Cliffs was sliding toward bankruptcy, as the company came close to breaching its debt covenants.

However, within the past few days it has been revealed that Cliffs' banking partners have agreed to extend the company's $1.75 billion unsecured revolving credit facility. According to a press release on the matter, Cliffs received "Unanimous Support from Lenders."

Lenders also agreed to amend the existing leverage covenant ratio, in order to give the company a more consistent source of liquidity. So, for the time being Cliffs has postponed the wrath of its banking partners.

Divesting assets
Just before the announcement that the company had been able to renew its credit facility, Cliffs revealed that it was planning to temporarily idle its Pinnacle metallurgical coal mine in West Virginia, unless market conditions improve.

It is estimated that 397 employees could be affected by this move but, unfortunately, the move is a necessary one for Cliffs.

The price of coal has collapsed over the past few years, leaving many coal companies with unprofitable mines. Cliffs owns three main North American coal production facilities; the Pinnacle mine is the largest of the six mines the company has, producing 2.8 million tons of high-quality, low-volatility metallurgical coal during 2013, just under 40% of expected 2014 production.

Cliffs does not give per-mine cost figures. However, the company reported that each ton of coal it produced during the first quarter cost $100 to mine. The same ton of coal only sold for $89. Including depreciation the company reported a loss per ton in excess of $30.

The closure of this mine should reduce losses significantly, although according to some analysts the Pinnacle mine was one of Cliffs' lower cost mines.

Not the only one
Cliffs is not the only coal company mothballing production. Alpha Natural Resources (NYSE: ANR  ) announced that it was laying off 120 people as it closed a mine in southwest Virginia amid declining production and demand. The mine will be closed over the next two months.

Unlike Cliffs' closure however, Alpha's mine was coming to the end of its life. According to Alpha spokesman, Steve Hawkins:

With production down, it's more difficult to get what's left and the cost of running the mine versus the market price of the product left it running in the red...The peak production of the mine was in 2007, when it produced 570,000 tons of coal. Last year, it produced about 300,000.

Production is expected to fall further this year.

Worrying environment
Still, despite the Pinnacle closure, Cliffs is not out of the woods. Wall Street is seriously concerned about Cliffs' high costs and the falling price of iron ore.

Rising global output of ore is expected to exceed demand by 200% over the next few years, putting high-cost producers like Cliffs in a sticky position. A weak iron ore pricing environment will also mean that Cliffs will find it harder to offload its high-cost Canadian assets.

Foolish summary
So, the Cliffs saga continues, and it would appear as if the company is beginning to panic. Indeed, management should have closed high-cost, unprofitable mines years ago, and closing the largest mine with the lowest costs seems like a silly mistake. Still, Cliffs' successful refinancing does bring some good news for shareholders. 

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