If you don't already know, activist investment fund Casablanca Capital is pressing for a break-up of Cliffs Natural Resources (NYSE:CLF) after acquiring around 5% of Cliffs' shares and becoming a majority shareholder.
In short, Casablanca is demanding that Cliffs 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 the article can be found here if you want a quick catch-up.
For the most part, Casablanca's demands are well thought out. However, Cliffs is refusing to cooperate with the fund.
Casablanca issued a new press release to Cliffs' management and shareholders at the end of May. This release provided an update on what both Cliffs was doing wrong and what Casablanca wanted to happen.
A key point of Casablanca's press release is the fact that since mid-2011, shareholders have seen the value of their holdings decline by 84%.
During this period, Cliffs has spent over $7 billion (more than its current enterprise value) on ill-conceived acquisitions and development projects; none of these have yielded results. Cliffs' stock was the S&P 500's worst performer during 2013.
Casablanca states that Cliffs' management is trying to threaten shareholders into voting against the activist fund. These accusations are based on the fact that Cliffs' management is telling investors that the company would be forced to pay off its debt almost immediately if Casablanca's appointed nominees take over management. Casablanca points out that this could be easily avoided.
The fund also points out that Cliffs' management does not know the business well enough to be in place. Cliffs is accused of "rushing" the appointment of Mr. Halverson, now CEO of Cliffs.
Still, Casablanca has celebrated the company's new-found financial discipline. Cliffs has slashed capital spending since Casablanca started its attack.
It didn't take Cliffs long to issue a rebuff against Casablanca's press release -- only a few hours in fact.
Management wholly refuted Casablanca's accusations that they were "threating" shareholders. Instead, the company took the line that it was working in shareholders' best interests and was quick to point out the cost-saving efforts that it has recently begun.
Cliffs' response also accuses Casablanca of damaging shareholder interests by pursuing a costly proxy war against the company:
Despite Casablanca's ownership of only approximately 5% of Cliffs' outstanding shares, we believe that they are continuing their effort to seek full control of the Board without providing a credible and clear path to increase long-term shareholder value or paying a control premium...
It seems that for the time being, Casablanca and Cliffs will continue to fight it out. The question is, with iron ore prices falling, how much longer can Cliffs survive?
The price of iron ore has slumped this year to lows not seen since 2012. This has hit producers hard, and Goldman Sachs believes that the price of the commodity could fall as low as $80 per ton. That level would push many high-cost producers out of business.
Cliffs is a relatively high-cost producer. The company has reported a cash cost per ton of production of around $85 to $90 at its Canadian mines, $65 to $70 per ton at its U.S. mines, and $60 to $65 per ton in Australia.
However, compare these costs to industry leader Vale (NYSE:VALE), which reported a 20% fall in profit during the first quarter. Vale is able to produce one ton of iron ore for as little as $22, while other high-cost miners have per-ton costs of $100. This is close to the costs that Cliffs is reporting.
Surprisingly, Vale reported iron ore selling prices of only $90.50 a ton for the quarter. This is low, but it is also indicative of the prices that can be seen on the sport market at present. With this in mind, Cliffs could be set for further losses during the second quarter.
The Cliffs-Casablanca saga continues, and both parties remain locked in debate. However, it would appear that Cliffs is running out of time as the price of iron ore continues to collapse. The company has already reported a loss for the first quarter of this year, and it would appear that things are only going to get worse from here on out.