Who's Winning the Corporate Battle of the Year?

For a company about to undergo the most important decision of its life, Cliffs Natural Resources  (NYSE: CLF  )  is remarkably quiet. After falling significantly over the past year, the retreat has stopped. Cliffs Natural Resources' stock has been range-bound in the past month. 

Part of the lull may be due to a change in sentiment. Other steel related names such as Walter Energy are up comfortably in the past month as well. But part of the lull may just be the customary quiet before the big battle. Given the importance of the proxy contest on July 29, which side will win?

The market's opinion
Currently, the market is voting that management will win. Casablanca Capital bought its stake in Cliffs Natural Resources at around $25.1/share. If Casablanca Capital wins, the fund will likely pull all the levers available in an attempt to raise Cliffs Natural Resources to that price or higher so the fund can exit with a profit.

In addition to Casablanca Capital pulling levers, there will likely be a short squeeze as short investors leave to find better proxies for shorting iron ore. Since the market knows this and the price of Cliffs Natural Resources is still languishing, the market is voting that Casablanca Capital will lose. 

With that being said, the market can be notoriously fickle -- it could easily change its opinion in the coming days.  In critical times such as this, all it takes is for a few large shareholders to switch sides and the outcome will turn. 

Proxy advisory firm recommendations
Many proxy advisory firms are recommending shareholders vote for Casablanca Capital. 

Even though they recommend voting for only 4 out the 6 Casablanca Capital nominees, proxy advisory firms ISS and Glass Lewis are implicitly supporting Casablanca Capital because voting for Casablanca Capital's proxy will give the fund the ability to elect the majority of the board due to the effect of cumulative voting. 

In direct contrast to ISS and Glass Lewis, independent proxy firm Egan-Jones is so far the only proxy advisory firm to recommend shareholders vote for Cliffs Natural Resources' management. 

The bottom line
As for which side the average shareholder should vote for, it's really about their opinion on the Chinese economy. 

If shareholders believe that the Chinese economy will crash, voting for Casablanca Capital will be right choice. In the event that the Chinese economy crashes, Bloom Lake would be worthless and Cliff Natural Resources' currently profitable Asia Pacific operations would likely lose money. Under that scenario, Cliffs Natural Resources would have to make very painful decisions (such as issuing new shares) just to continue its operations. If Casablanca Capital were to win, Bloom Lake and the Asia Pacific operations would be another company's problem when China crashes. 

If shareholders believe that the Chinese economy will muddle through and not significantly improve in the next three or four years, voting for Casablanca Capital will also be the right choice. Iron ore giants Rio Tinto plc (NYSE: RIO  ) and BHP Billiton Limited (NYSE: BHP  ) have very low production costs relative to Cliffs Natural Resources and will not stop their production increases anytime soon. If the Chinese economy remains in its current state, those production increases will likely keep iron ore prices low and slowly bleed Cliffs Natural Resources' liquidity. 

If shareholders believe that the Chinese economy can achieve a soft landing and rebound quickly or that the Chinese government will launch a 2008-like stimulus plan, voting for management will be the right choice. In the event that the Chinese economy rebounds quickly, both Bloom Lake and Casablanca's Asia Pacific operations would be worth significantly more than what they are worth now. Cliffs Natural Resources would basically be a long-term call option with a strike price of around $100-110 on iron ore. If Casablanca Capital were to win, shareholders would miss that upside. 

Given the share price of Cliffs Natural Resources, the market is voting that management will win. But given ISS and Glass Lewis' recommendations, there is also a significant chance that Casablanca Capital could come out on top. Anything can happen as the proxy contest approaches. Whatever the outcome may be on July 29, it will have huge consequences. 

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