Cliffs Natural Resources (NYSE:CLF), the embattled iron ore and metallurgical coal producer, has been embroiled in an increasingly vicious proxy battle with Casablanca Capital, a hedge fund and major shareholder of the company. As this proxy battle comes to a head during the company's upcoming annual shareholder meeting on July 29, let's take a closer look at what exactly is at stake and why it could very well determine Cliffs' near-term fate.
The Cliffs-Casablanca saga
Before getting into what's at stake in the company's upcoming shareholder meeting, allow me to quickly recap Cliffs' history with Casablanca for readers who may be unaware. The Cliffs-Casablanca saga began in January of this year when the New York-based hedge fund, which owns 5.2% of the company's outstanding shares, commenced its campaign of instigating change at Cliffs.
Casablanca, which alleged that Cliffs' "incompetent and entrenched" board has destroyed shareholder value, wants the company to spin off or sell its "riskier" international operations in Asia, and return more cash to shareholders. It is also pushing to replace Cliffs' CEO Gary Halverson and some of its board members with candidates of its own choosing.
To help favorably resolve the ongoing proxy battle, Cliffs announced earlier this month that it will elect a new chairman following its upcoming shareholder meeting and will also relinquish three seats on its reduced nine-person board to Casablanca. The company had previously offered the hedge fund two seats on its board, an offer it rejected.
What's at stake
Casablanca is now hoping to gain majority control of Cliffs' board so it can follow through with its restructuring plans. But Cliffs obviously wants to retain board control and is prompting shareholders to cast their votes in favor of its own nominees. On Monday, the company issued an open letter to shareholders regarding its upcoming meeting.
In the letter, it outlined the two options available to shareholders: 1) voting using the white card, which means voting for a board comprised of seven Cliffs nominees and four Casablanca nominees, and 2) voting using the gold card, which means voting for Casablanca to gain a majority of the board by electing all six of its nominees.
If Cliffs retains control of the board, it likely means the company will not sell off its Asian operations as Casablanca has suggested it should, in the hopes that massive spending cuts will be enough to see it through a weak commodity price environment.
But if Casablanca gains control of the board, the hedge fund will push Cliffs to divest its Asian assets and sell off its high-cost Bloom Lake mine. Casablanca recently said that two leading independent proxy advisory firms have recommended shareholders vote for four of Casablanca's six board nominees.
Implications of a Casablanca victory
I think it's safe to say that a Casablanca "victory," whether it be the election of all six of Casablanca's nominees or just four of them, would likely provide a boost to Cliffs' share price since investors don't appear to believe that the company's cost-cutting efforts will be enough to get the company through a prolonged period of depressed iron ore prices.
By selling its Bloom Lake mine and Asian assets, Cliffs would be able to raise much-needed cash during a time when it is burning cash at a staggering rate, thereby ensuring it can stay afloat for longer. After all, cash is king in mining. A Casablanca victory could also boost Cliffs' share price by triggering a short squeeze, which would force short-sellers to exit their positions, driving the stock even higher.
While a Casablanca victory would likely improve Cliffs' near-term prospects, the company still faces an overwhelming longer-term headwind. Its main commodity, iron ore, which accounts for about 85% of revenues, is likely beginning a structural downturn due to a combination of slowing steel demand from China and increasing supply from mining giants like Vale, Rio Tinto, and BHP.
As these low-cost giants ramp up production, they could push high-cost producers like Cliffs out of the market. In short, investing in Cliffs right now is akin to betting on high iron ore prices over the next several years -- a highly unlikely proposition.