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Cliffs fights for its life against hedge fund

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news Duluth, 55802

Duluth Minnesota 424 W. First St. 55802

The view from Cliffs Natural Resources’ Minnesota operations looks pretty good.

One of the state’s largest players in the taconite iron ore business, the company’s Northshore Mining, United Taconite and Hibbing Taconite plants are running near capacity with solid domestic markets and long-term contracts with U.S. steelmakers.

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The company has more than 1,850 employees on the Iron Range with a payroll of $251 million.

There even was good news from Michigan’s Upper Peninsula this year when Cliffs announced its Empire taconite operations wouldn’t close after all, with a new contract for its ore keeping it running into 2017.

Even after weathering a cold spring and slow start to the shipping season, the company expects to produce about 22 million tons of taconite in the U.S. this year, up from 21 million tons last year. Northshore Mining is back to near full capacity after a temporary slowdown in 2013.

But on a global scale the view is less rosy. The Cleveland-based mining company is fighting for its life, with the decisive battle set for Tuesday.

That’s when Cliffs will hold its annual shareholder meeting and election of corporate officers, and it’s when New York-based hedge fund Casablanca Capital will make its play to take over Cliffs.

Casablanca in January announced that it wanted to take control of Cliffs, saying the company was overextended overseas and was spending too much money on new projects. Casablanca, which owns about 5.2 percent of Cliffs stock, claims that Cliffs’ “incompetent and entrenched” board has “destroyed shareholder value,” and Casablanca wants Cliffs to sell some of its riskier overseas operations and send more cash to shareholders.

Casablanca also has proposed replacing Cliffs’ top management with a slate of its own, hand-picked leaders, and has engaged in a proxy war to get shareholders to vote for its team.

It will be up to shareholders on Tuesday to decide the fate of a company, formerly Cleveland-Cliffs, that traces its roots back to 1847 and which has been a part of Minnesota iron mining for decades.

Tough times

Clearly, Cliffs has struggled through tough times recently. Its stock value has plummeted from about $89 per share three years ago to about $16 as of Friday’s close of trading. That’s in large part because global iron ore prices have been halved during that period, from nearly $200 per ton to less than $90 now.

Without its own steel mills to feed, Cliffs has to sell everything it mines. And while the company can produce taconite iron ore in Minnesota for about $67 per ton, the current global price is about the same as what it costs Cliffs to produce ore at its Canadian operations, leaving little or no room for profit.

But Cliffs’ current managers have battled back, and they’re asking shareholders to back their management team over Casablanca’s takeover. Pushed by Casablanca’s actions, Cliffs this year also has taken major steps to cut costs. In February the company moved to close its Wabush iron ore mine in Newfoundland and Labrador and suspend efforts to build a second phase at its Bloom Lake iron ore mine in Quebec. The company also shelved plans to open a chromite mining operation in Canada.

Still, Cliffs’ current team is heading into Tuesday’s meeting bearing some bad news. Last week, the company announced it lost $2 million, or 1 cent per share, in the three months ending in June, down from a profit of $133 million, or 82 cents a share, in the second quarter of 2013. The company’s lower revenue primarily were driven by significantly decreased market pricing for iron ore and metallurgical coal, as well as a 24 percent decrease in sales volume from U.S. iron ore operations thanks in large part to the extremely cold winter and ice that impeded Great Lakes shipments well into April.

Letter to shareholders

Cliffs recently said two independent firms — ISS and Glass Lewis — have recommended that shareholders not vote for a majority Casablanca slate. But in an effort to satisfy Casablanca, Cliffs announced earlier this month that it will elect a new chairman after Tuesday’s meeting and give up to four seats on a nine-person board to Casablanca. Cliffs earlier had offered two seats, which Casablanca rejected.

Last week, Cliffs sent all its shareholders a letter explaining their two options: Vote using the white card, which means voting for a board comprised of seven Cliffs nominees and four Casablanca nominees, or use the gold card, meaning Casablanca gets six board members and control of the company.

If Casablanca wins, Cliffs officials claimed in the letter, Casablanca could tear the existing mining company apart.

“At our upcoming annual meeting, Cliffs shareholders have an important and strategic choice to make regarding the future of the Company,” Cliffs said in the letter.

“If shareholders vote using the gold card, it is almost certain that Casablanca will be able to use Cliffs’ cumulative voting provision to elect all six of their nominees, providing Casablanca with a majority of the board and enabling them to enact their potentially value-destructive plan to conduct a fire sale of Cliffs assets at the bottom of the commodity cycle. … By voting on the white card, Cliffs shareholders can elect a board that includes shareholder representation by Casablanca as recommended by ISS and Glass Lewis, but that also retains a majority of the directors Cliffs believes have the necessary industry and commodity cycle experience to enable (Cliffs) to succeed in the current iron ore and metallurgical coal pricing environment and emerge from the downturn as a stronger company.”

Outlook for Cliffs

It remains unclear what a Casablanca takeover would mean for Cliffs’ U.S. operations. In addition to owning and operating Northshore Mining in Silver Bay and Babbitt and United Taconite in Eveleth and Forbes, Cliffs also is a co-owner and operator of Hibbing Taconite and owns the Empire/Tilden operations in Michigan’s Upper Peninsula. The company also owns metallurgical coal mines in the U.S. and other iron ore mines in Canada and Australia.

“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,” said Arjun Sreekumar, an industry analyst writing for The Motley Fool. “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.

“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,” Sreekumar noted, adding that, either way, the current global market for iron ore looks crowded with capacity and primed for lower profits.

As new iron ore mines expand worldwide “they could push high-cost producers like Cliffs out of the market,” he said. “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.”

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