Showdown Over Cliffs Natural Resources Heading for a Cliff

The plan to shake Cliffs Natural Resources right down to its foundations became even more hostile as the activist shareholder looking to split the mining giant in two scoffed at its alternative plan for cutting capital expenditures and announced it was running a slate of candidates for the board of directors, including a new CEO.

Cliffs Northshore Mine. Copyright © 2011 Cliffs Natural Resources.

As one of the worst-performing stocks last year by losing 30% of its value when the S&P 500 was gaining 30%, Casablanca Capital says Cliffs needs to fundamentally change its structure by bundling its Bloom Lake project in eastern Canada with its international mining assets and spinning them off into a stand-alone company. At the same time, it needs to take the remaining U.S. assets and turn them into a master limited partnership that will throw off a lot of value to its shareholders.

The miner, though, essentially said "thanks but no thanks" and unveiled its own restructuring plan, which includes halting operations at its Wabush mine in Newfoundland and Labrador by the end of the first quarter because of "unsustainably high" costs, eliminate the 500 jobs associated with it and cut its capex budget in half (or more) to $375 million to $425 million.

The results of Rio Tinto released today suggests why management is unwilling to forgo the seaborne trade as Casablanca wants. Profits at the world's second-largest miner jumped 43% to $6 billion due in large part due to rising prices for iron ore, which jumped 15% in the last six months of 2013 as China began stockpiling the ore. It has pulled back some 10% this year, however.

I've already expressed some doubts about Casablanca's plan because as different as Cliffs segments are, they're also inextricably linked to China, whether directly through the seaborne trade or indirectly through its economic health that will impact our own domestic economy. It is the expected recovery of the U.S. auto and steel industries that informs Casablanca's moves. With two-thirds of its revenues coming from international operations, Cliffs may be left in a vulnerable position to have steelmaker ArcelorMittal , Cliffs' biggest partner, come in and snatch up what's left. Mittal accounted for 32% of its iron ore revenue in 2012 and 17% of total product revenue.

Casablanca, however, scoffed at Cliffs' plans, calling it a "knee jerk reaction" that does little to move the needle to change its prospects. As a result, it will be running a slate of candidates to be elected and will be seeking to have Lourenco Goncalves, the former CEO of Metals USA, take over the top spot at Cliffs, which has its own candidate waiting in the wings. Coming from Barrick Gold, Gary Halverson is currently working as COO and president to get a feel for the company.

Goncalves wants to focus on steel rather than on iron ore, which would seem to raise the possibility ArcelorMittal might quickly become interested in the miner if it was suddenly reduced to half its performance operations. Metals USA was taken private in 2005 during Goncalves tenure before going public again in 2010 and then being bought out by Reliance Steel & Aluminum last year.

While a breakup of Cliffs Natural Resources would undoubtedly shake things up, it can't be denied that after last year's performance, which was not wholly of its own making, something needs to change and perhaps it couldn't do much worse than what we've already seen. But then again, it might end up with Cliffs getting swallowed up by the resulting quake.

No split decision
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