Cliffs Natural Resources Delisting Puts Pressure on Shares

Cliffs Natural Resources move to delist its shares from Euronext Paris makes perfect sense, but it will add to short-term pressure on company's shares.

Vladimir Zernov
Vladimir Zernov
Apr 2, 2014 at 12:56PM
Energy, Materials, and Utilities

Editor's note: A previous version of this article incorrectly stated Cliffs Natural Resources cancelled its annual meeting of shareholders. Cliff Natural Resources only postponed the meeting to a future date, still being determined. The Fool regrets the error. 

Cliffs Natural Resources (NYSE:CLF) recently announced that it is going to voluntarily delist from Euronext Paris. The delisting is expected on May 7. Thus, NYSE will remain the sole exchange where Cliffs Natural Resources' shares are traded. The company stated that it was making this move after a review of the trading volume, costs, and administrative requirements related to its listing on Euronext Paris. As iron ore and met coal prices remain under pressure, the company cannot afford the luxury of being listed on two stock exchanges.

Delisting from Euronext Paris could put near-term pressure on shares
Owners of Cliffs Natural Resources' stock on Euronext Paris could tender their shares to a special sales facility from April 3 to April 16. The shares from the facility will be sold on the NYSE from April 25. Chances are that many shareholders will decide to sell their stock to avoid complexities of owning shares on the exchange that could be new to them. As a result, the sales from the sales facility will pressure Cliffs Natural Resources' share price starting from the end of April.

The company's move to delist from Euronext Paris came at a time when the company is involved in a battle with activist investor Casablanca Capital. Earlier this year, Casablanca Capital proposed several changes, including separation of Cliffs' U.S. business from other segments of the company, doubling of the dividend, transforming the company's U.S. assets into a master limited partnership, and divesting non-core assets. What's more, Casablanca Capital is seeking full control of the company's board.

As a result of this move, Cliffs Natural Resources postponed the record date for its annual meeting of shareholders, which was originally scheduled to take place on May 13. The new record date for Cliff's annual meeting of shareholders will be released in a future press release. This battle is weighing on the company's shares, as management is distracted from running the company and has to defend its positions. In my view, Casablanca's proposals are overly aggressive and, in the case of doubling the dividend, unrealistic. This is why I expect a prolonged fight, which is not good for Cliffs Natural Resources.

Cost-cutting should be a priority
Lower iron ore and met coal prices do not make things easier for the company. Growing production from the likes of BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO) is flooding the iron ore market. While both BHP Billiton and Rio Tinto could afford to increase volume and sacrifice price, Cliffs Natural Resources is in a tougher situation.

Production from the company's Canadian mines is too expensive and uneconomical at current price levels. The company previously announced its plans to idle its Wabush mine by the end of the first quarter of this year. Earlier in 2013, Cliffs Natural Resources idled production at its Pointe Noire iron ore pellet plant. Iron ore prices are likely to remain under pressure, so the company will have to make tough decisions about the future of its remaining Canadian operations. If Cliffs Natural Resources' cost-cutting efforts don't succeed, the company will be forced to sell or idle the rest of its Canadian mines.

Bottom line
Cliffs Natural Resources' decision to delist from Paris Euronext makes perfect sense, although it may put additional pressure on its shares in the short term. The company must lower its costs as much as possible to provide more value to shareholders. The prolonged fight with Casablanca Capital is another negative for the company, although it's too early to say whether activist proposals will lead to any changes in Cliffs' strategy.