Cliffs Natural Resources' (NYSE:CLF) battle with Casablanca Capital continues. The troubled miner has offered a settlement to the activist investor one more time.

According to a Cliffs Natural Resources press release, the company has offered three seats on the Cliffs Board to Casablanca. What's more, the board would be cut to nine members from current eleven if Casablanca accepted the proposal. Casablanca's response was fast, and the activist investor rejected the offer. In my previous article on this story, I argued that both Casablanca's and Cliffs Natural Resources' plans were dubious. However, there seems to be another trap on the way for Cliffs Natural Resources, and that's indecision.

The shadow of downgrade falls on Cliffs Natural Resources
While Cliffs Natural Resources is trying to resolve its issue with Casablanca, Standard & Poor's stated that the company could face a downgrade if the iron ore price downside persists. Besides iron ore, which brings the biggest part of Cliffs' revenue, the company also produces met coal. S&P recently cut the rating of pure met coal play Walter Energy (NYSE: WLT) to CCC+ with a negative outlook. The rating powerhouse believes that Walter Energy's debt level is unsustainable because of low met coal prices and reduced production levels.

As Cliffs Natural Resources is pressured from both the iron ore and met coal fronts, a rating cut looks plausible. Currently, S&P rates Cliffs as BBB- with a negative outlook. A rating cut will push Cliffs into a speculative territory, according to S&P's ratings definitions.

At the same time, Cliffs will likely see no mercy from big iron ore producers that continue with their expansion plans without paying attention to low prices. Rio Tinto (NYSE:RIO) has recently obtained rights to develop blocks 3 and 4 of the gigantic Simandou iron ore deposit in Guinea. When Rio Tinto's southern Simandou reaches full production, it could export up to 95 million tons of iron ore annually.

While Rio Tinto will develop the southern part of the project, the developer of the northern side is yet to be determined. Glencore is said to be interested in blocks 1 and 2, as is BHP Billiton (NYSE:BHP).

Finishing with no plan at all will be a nightmare for Cliffs Natural Resources
Cliffs Natural Resources has made several concessions to Casablanca Capital since the beginning of the story back in winter, but the fund has rejected everything and continues to push for the full control of the board. The last move by Cliffs seems to target the large audience of investors instead of Casablanca, as Casablanca states that it learned about Cliffs' new proposals through the company's press release.

Cliffs' management is distracted by these ongoing negotiations. At this point, it is not clear why the management continues its little steps toward Casablanca's position. Casablanca reiterated many times that it wants a dominant position for its nominees on the Cliffs board, and will not accept anything less. Cliffs' management is not going to offer this to Casablanca. Why not let shareholders decide? The proxy battle adds costs, but Cliffs' financial situation is not that bad; the company can afford it.

The question that arises is whether the sides of the conflict know what to do aside from battling for board control. For example, what is Cliffs going to do with its Bloom Lake mine? Phase 1 of this project did not bring about the expected results. Proceeding with Phase 2 would be costly and is not on the table in current pricing environment. Idling the mine could be costly as well because of take or pay obligations, as indicated in the Cliffs' annual report.

Bottom line
The worst-case scenario for Cliffs Natural Resources is the lack of the plan. The company could be involved in continuing a lengthy battle with Casablanca while taking cosmetic measures instead of making big changes. Hopefully, this risk will not materialize and the company's strategy will be outlined after the Cliffs' annual shareholder meeting, which will be held on July 29.