Cliffs Natural Resources: What If Casablanca Capital Wins?

In a few weeks, during Cliffs Natural Resources'  annual shareholders meeting, activist hedge fund Casablanca Capital will fight against management for control of the board of directors.

Casablanca Capital is fighting because it feels that Cliffs Natural Resources needs some changes. The company's stock has fallen on hard times over the past year as iron ore prices have crashed from $150/ton to below $100/ton as the Chinese economy slows down and low-cost producers such as BHP Billiton Ltd. and Rio Tinto  increase production. Because of the falling iron ore prices, Cliffs Natural Resources is bleeding cash -- Wells Fargo estimates that the company is burning cash at a $220 million a year pace -- and shareholders have seen their stock fall 40% year to date.  

Casablanca Capital's idea of change would be for the company to split itself into two parts: a stable U.S. iron ore division, and a division with everything else. Casablanca Capital believes Cliffs Natural Resources' U.S. division represents a stable oasis in a world of falling iron ore prices. Because of shipping logistics and a strong U.S. economy, Cliffs Natural Resources' U.S. division will likely remain stable and profitable even if iron ore prices fall elsewhere. Casablanca Capital's plan is to turn the U.S. division, which contributed 62% of the company's EBITDA in 2013, into an MLP to avoid paying tax and double the dividend. It would then spin off or sell non-core assets such as the company's Bloom Lake mine, Asian assets, etc.  

So far, it is uncertain whether Casablanca Capital will win control of the board. While Cliffs Natural Resources management has agreed to having at least two of Casablanca Capital's six nominees on the next board, the market is voting that Cliffs Natural Resources management will retain a great deal of influence. This is because if the market believed Casablanca Capital would win, Cliffs Natural Resources' stock price would be higher by now. 

So how much higher would the stock be if Casablanca Capital were to win?

Well, Casablanca Capital did buy its 5.2% stake when prices were in the mid twenties. (According to a 13-D filing, Casablanca Capital bought 7.5 million shares around $25.1.)

Casablanca Capital also stated in an SEC filing that it believes the U.S. division could be worth $23/share assuming a doubling of the dividend and a dividend yield of 5%. Given that Cliffs Natural Resources paid a proverbial arm and leg for Bloom Lake, Casablanca Capital believes Cliffs Natural Resources' international assets could be worth as much as $15/share. 

Given the falling iron ore prices, it is uncertain whether the company's international division would be worth as much as Casablanca Capital originally predicted. It is fair to say, however, that if the company does double its dividend and spin off its international division, shares will likely rally as income investors take another look at Cliffs Natural Resources and some short investors exit.

Whether that rally can be sustained, and whether Casablanca Capital's plan is better than management's plan of riding out the cycle is something that Cliffs Natural Resources shareholders will have to decide in the annual shareholders meeting. 

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The article Cliffs Natural Resources: What If Casablanca Capital Wins? originally appeared on

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