Cliffs Natural Resources Inc. Earnings: Could a Spinoff Spur New Growth?

Cliffs Natural Resources (CLF -6.42%) will release its quarterly report on Thursday, and even though investors are expecting to see improved earnings for the quarter compared to last year, many fear the respite from falling net income in past quarters could prove short-lived. Yet, even as international mining competitors Vale (VALE -2.56%) and BHP Billiton (BHP -2.90%) have seen their shares struggle amid the same poor conditions in the iron ore market, Cliffs has attracted an activist investor with dramatic plans to change the company's structure. Now, a proxy fight to put in a new CEO could make things turn ugly for Cliffs -- although it's unclear whether it would be good or bad for shareholders.

Cliffs produces mostly iron ore, with the steel industry as its primary market. Like Vale and BHP Billiton, Cliffs thrived during high periods of steel production, especially when emerging markets were grabbing up raw materials at a frantic pace to support their own infrastructure and construction efforts. But as economic growth has cooled off worldwide, iron ore prices plunged, and that forced Cliffs to slash its dividend last year and take drastic measures to conserve cash. Yet, there's disagreement about the path forward, as hedge fund Casablanca Capital thinks that breaking up the company, to separate international from domestic assets, could produce gains for investors. Let's take an early look at what's been happening with Cliffs Natural Resources during the past quarter, and what we're likely to see in its report.

Cliffs Northshore Mine. Source: Cliffs Natural Resources.

Stats on Cliffs Natural Resources

Source: Yahoo! Finance.

What's next for Cliffs earnings?
Analysts have been generally positive in recent months about Cliffs Natural Resources and its earnings, raising their fourth-quarter estimates by $0.04 per share, and nudging up their full-year 2014 projections by about 1.5%, as well. The stock has kept declining, though, falling 20% since early November.

By all accounts, Cliffs seemed to have some positive momentum coming into the current quarter, as its third-quarter results showed impressive growth. Net income jumped 23% for the quarter, as rising iron-ore prices, combined with improving cost, figures to produce wider margins. Cost cuts were even more dramatic on the metallurgical coal side of the business, as cash costs per ton dropped by a third, but met coal is only a small part of Cliffs' overall business. That was consistent with growth figures that BHP Billiton and Vale posted, reflecting some recovery in the industry overall.

Yet, Cliffs continues to face big struggles. In November, it announced it would stop its Ring of Fire chromite project after disputes among rival resource companies prevented Cliffs from getting approval to build a road for access to take ore out of the mine. Even had Cliffs gained access, however, prices for the metal weren't projected to be as high as the company had hoped in order to generate an attractive internal rate of return in the mid-teens. The move puts even more pressure on Cliffs to make its Bloom Lake mine, which has been plagued by delays and rising costs, pay off.

But the big news for Cliffs has come in just the past couple of weeks, as Casablanca Capital disclosed that it had taken a 5% stake in the company, and was seeking to have Cliffs break itself into two parts. One division would focus on its U.S. operations, while its international assets would go into the other. Casablanca thinks that would allow Cliffs to double its dividend, while also potentially unlocking value in the U.S. side of the business, given that it has local customers that shelter it somewhat from variations in global demand.

Just today, Casablanca said it would recommend former Metals USA CEO Lourenco Goncalves to take over as Cliffs CEO, notifying Cliffs that it would nominate directors to initiate a proxy fight for control of the board. Casablanca cited Cliffs' announcement yesterday that it would curtail capital spending, cut back on its planned Bloom Lake expansion, and shut its Wabush mine in Canada, cutting 500 jobs. Casablanca called those moves "inadequate to address Cliffs' issues." The stock moved up on the news, showing that shareholders might well be impatient with Cliffs' slow progress.

In the Cliffs earnings report, watch to see what position current management takes with respect to Casablanca's challenge. As things appear to be getting hostile, what Cliffs reports tomorrow could be less important than the strategic moves it makes to address Casablanca's concerns and stave off an unwanted takeover.