Much at stake in Cliffs proxy battle

ISHPEMING – An activist hedge fund that became one of Cliffs Natural Resources’ biggest shareholders in January is in the midst of a battle to unseat Cliffs board members and take control of the company.

Casablanca Capital, a New York City-based hedge fund run by co-general managers Donald Drapkin and Douglas Taylor, hopes that by taking control of Cliffs’ Board of Directors with a proxy vote at its annual meeting of the shareholders Tuesday it can make some drastic changes to the way the mining company operates, with the end goal being to roughly triple its current stock price, according to a letter Casablanca sent to Cliffs board in January.

Beginning in mid-November last year and continuing through the end of January, Casablanca spent more than $200 million to purchase more than 7.9 million shares of Cliffs stock at roughly $25 per share, according to documents filed by Casablanca with the U.S. Securities and Exchange Commission. Cliffs stock opened at $15.15 this morning. The purchases made Casablanca, with a 5.2 percent stake, one of the company’s largest shareholders.

In the January letter, Casablanca expressed its “disappointment in (Cliffs) historical financial underperformance” and included a number of recommendations that it believed would “materially increase (Cliffs’) valuation.”

Specifically, Casablanca wants Cliffs to “spin off” – or create separate, independent entities of – all of its assets aside from its domestic iron ore and coal operations. These spin-offs would include Cliffs’ Bloom Lake Mine near Fremont, Quebec – which Cliffs paid nearly $5 billion for in 2011 and the expansion of which has faced a number of delays – and Cliffs’ Asia Pacific division, which Casablanca says is particularly susceptible to the volatility of Chinese steel prices.

By contrast, the letter states: “The ‘Cliffs USA’ iron ore assets benefit from unique supply and demand characteristics and barriers to entry in the Great Lakes, generate strong cash flow and enjoy long-term contracts, which provide volume and price visibility.”

Cliffs said it expects Chinese demand for iron ore to stay stable.

“Demand for steelmaking raw materials in China is anticipated to remain high, as Chinese officials remain committed to achieving their targeted real GDP growth rate of approximately 7.5 percent,” Cliffs said in a press release Wednesday. “However, increased seaborne supply could continue to put downward pressure on pricing for steelmaking raw materials.”

Casablanca also suggests that Cliffs double its dividends to shareholders; slash its selling, general and administrative expenses; divest its infrastructure and other non-core assets; and convert its U.S. operations to a master limited partnership, which would allow the company to avoid having its profits taxed at the state and federal level, with owners of shares only paying tax on dividends.

Casablanca said that adopting these measures will create a midpoint price of $53 per share.

Casablanca has nominated six candidates in opposition to Cliffs’ candidates for the 11 available board seats in Tuesday’s election. Cliffs originally nominated nine candidates for the available seats, but has since reduced that number to seven, a compromise in line with recommendations from proxy firms Institutional Shareholder Services and Glass Lewis & Co. Electing Cliffs’ seven nominees will still give Casablanca four seats and a strong say in company decisions, Cliffs said in a July 21 letter to shareholders.

In a number of press releases and open letters to shareholders over the past two months, Cliffs said it anticipates that Casablanca will use cumulative voting to try and elect as many of its nominees as possible.

Cumulative voting means that because there are 11 available seats, shareholders will have 11 votes to cast for each share owned, allowing shareholders to vote as many as 11 times for a single candidate.

In the Monday letter, the board urged shareholders to vote for all seven of the board’s nominees. It said that electing four of Casablanca’s candidates will give the hedge fund a voice in the company without giving it control.

“Surrendering a majority of the board will enable Casablanca to enact what we believe is a value-destructive plan, including a ‘fire sale’ of Cliffs’ assets at the bottom of the commodity cycle,” the letter states. “We believe that Casablanca’s intention is to replace our new CEO, Gary Halverson, with Lourenco Goncalves to carry out its ill-advised plan.

“In Mr. Halverson, Cliffs has a steady and experienced hand at the helm to navigate this volatile industry environment. In contrast, Mr. Goncalves has no meaningful experience managing large-scale, long-lived mining assets in complex ore bodies or operating global assets in multiple geographies. The choice is with you, our shareholders – where it belongs.”

In Wednesday’s release, Cliffs said it had continued to reduce capital spending. It also reported having spent $4 million related to the upcoming proxy contest.

Zach Jay can be reached at 906-486-4401.