Cliffs Natural Resources (CLF 4.07%) has written numerous open letters to shareholders and responses to activist shareholder Casablanca Capital in just a few months. In the latest act of this thriller, Casablanca Capital issued a 119-page presentation regarding changes it wants to implement at Cliffs. As usual, Cliffs' response followed.
While this correspondence is a rather fascinating read, it lacks one important thing -- a realistic plan to deal with Cliffs' problems. Both sides are good at highlighting each other's sins, but neither one makes a compelling case for a change.
Casablanca plan: sell, sell, sell
Casablanca's plan relies on selling almost everything, except Cliffs' U.S. iron ore business. Casablanca states that Cliffs' attempt to become a diversified miner with assets in different regions has failed and that there is no way that Cliffs could compete with the likes of major miners like BHP Billiton (BHP 2.47%) and Rio Tinto (RIO 3.41%).
Instead, it looks like Casablanca views major miners as possible buyers of Cliffs' assets. While Cliffs has stated that it is not wise to sell assets during the market downturn, Casablanca believes that a good buyer would pay a good price. In my view, this is a wrong premise.
If we look at big iron ore players, be it BHP Billiton, Rio Tinto, or Vale (VALE 4.52%), it becomes obvious that they regret the rapid expansion that brought iron ore prices to multi-year lows. For example, recent reports show that BHP Billiton could be eyeing more iron ore job cuts in order to lower costs. Vale, whose costs are higher than BHP Billiton's and Rio Tinto's because of transportation expenses, has its own projects underway and is unlikely to buy more projects. The likelihood that either of these major players would be ready to pay a decent price for iron ore assets is small.
The story with Cliffs' met coal assets is even more complicated. Met coal is probably the worst market to be in nowadays, so the price of these assets will be minuscule. Meanwhile, Cliffs is preparing to idle its West Virginia coal mine, joining a plethora of other miners in cutting production.
Casablanca's dream is to package Cliffs' Canadian and Australian assets and sell them in a bundle; but, once again, this looks good only on paper. The realization of such a plan looks unrealistic. Casablanca also speaks about so-called second-stage value creation opportunities. In fact, one of them is the sale of Cliffs, or what's left of Cliffs after all non-U.S. assets will be sold. All in all, this does not seem to be a value-creating plan.
Cliffs' plan: We are doing the right things
Unfortunately, Cliffs' own plan does not look better. In its numerous open letters and responses to Casablanca, the company has concentrated on bashing Casablanca's proposals, like the outrageous proposal to double the dividend, which Casablanca has already dropped. However, Cliffs' own actions have not been a real breakthrough. Otherwise, its stock would not be down 40% since the beginning of the year.
It remains unclear what Cliffs is going to do with its two most problematic points -- the Bloom Lake mine and the met coal business. It's impossible to assess the viability of Cliffs' plan without knowing what the company is going to do with these assets. Without a clear path for money-losing assets, Cliffs' plan is not a plan at all.
I've found another worrying thing in the latest Cliffs letter to shareholders. In this letter, the company states that the recent cyclical decline in pricing is not expected to continue for the longer term. In fact, multiple market observers have already cut their 2015 iron ore price estimates and predict no rebound in sight. If Cliffs' management is hoping for a magical rescue from the pricing side, the company's strategy is dubious.
Bottom line
Cliffs Natural Resources is facing significant headwinds from the iron ore and met coal sides as well as a proxy battle with Casablanca Capital. Unfortunately, neither Cliffs nor Casablanca demonstrated a clear and realistic turnaround plan. With that in mind, Cliffs' shares will remain under pressure unless the company shows a clear path out of the current state of things.
