Cliffs' Latest Attempt to Sway Shareholders Looks Foolish

The fight between Cliffs Natural Resources (NYSE: CLF  ) and Casablanca Capital continued this week with the two companies firing yet more accusations at each other over the past week. If you've been following the Cliffs/Casablanca saga as I have this will come as no surprise.

The two parties are deeply entrenched, and neither side is planning to give up any ground so accusations continue to be flung around. I've summarized the Cliffs saga here, for those readers who are not up to date.

Unfortunately, for Cliffs the most recent developments in this proxy battle have made the company look foolish.

Latest developments
Two new developments have occurred during the past week. Firstly, at the beginning of the week Cliffs sent a letter to shareholders, ahead of its annual meeting scheduled to be held on July 29, 2014.

The meeting is set to be a showdown between Cliffs and Casablanca as shareholders will be able to vote in their choice of candidates. Shareholders will be able to choose a new host of directors as proposed by Casablanca, or reelect the current board.

Cliffs has written to investors asking them to reelect the current board. Cliffs claims that none of Casablanca's nominees have any recent mining experience. That said, some of the nominees do have mining experience. Cliffs claims that Casablanca's candidate for executive chairman of the board, Mr. Goncalves, "[has a ] lack of meaningful experience in managing large-scale, long-lived mining assets in complex ore bodies or operating global assets in multiple geographies...[it's] not in the best interests of Cliffs` shareholders to appoint him as executive chairman."

However, as I have previously covered, Casablanca's nominees have a record of creating shareholder value, something Cliffs' management has failed to accomplish.

Executive compensation
With the past few days Casablanca has issued a rebuttal to the above claims. Casablanca used this criticism by Cliffs to draw attention to the company's escalating management compensation, while shareholder returns have plummeted.

Further, Casablanca notes that Cliffs' executive compensation scheme is opaque by nature, and that bonus compensation metrics have changed from year to year in an apparent effort by the Cliffs board to justify bonuses despite severe underperformance.

Additionally, Casablanca picks up on another interesting point. The activist fund notes that at present, Cliffs' current board only owns 0.3% of Cliffs' free float. Moreover, not a single member of Cliffs' current board has ever paid for shares in Cliffs; all the existing holdings have been issued via executive compensation schemes.

In comparison, Casablanca owns 5.2% of Cliffs, while Lourenco Goncalves has made a personal investment of $1.5 million in Cliffs' shares. With this being the case, Casablanca and Lourenco Goncalves stand to lose more than the current board of directors. This certainly raises the stakes.

Looking foolish
But with Casablanca and its nominees having so much at stake they have more to lose than Cliffs' current management. So, by claiming that Casablanca does not have shareholder interests in mind, Cliffs has made itself look slightly silly. Casablanca is a shareholder, while the current managers are only shareholders by virtue of misaligned opaque compensation schemes.

It certainly looks as if the battle for Cliffs is heating up.

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