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Business North - The Daily Briefing - Business Newspaper Online
Cliffs' management, cost-cutting plan under fire by largest shareholder; company defends board, managers
PHOTO: Gary Halverson
A New York-based hedge fund has escalated its effort to make drastic changes at Cliffs Natural Resources, whose stock price has declined in tandem with the worldwide price for taconite pellets in the midst of stagnant steel demand.
Cliffs said Tuesday it will sharply reduce full-year 2014 capital expenditures compared with 2013. The merchant supplier of taconite pellets, which owns or manages five regional mines, also said it will idle production at its Wabush Mine in eastern Canada by the end of the first quarter.
Those initiatives were not enough to please the hedge fund, Casablanca Capital LP, which in recent months has acquired 5.2 percent of Cliffs' stock.
In January, Casablanca asked Cliffs to split off the corporation's international assets and double its dividend. Wednesday morning, Casablanca's input turned hostile. The hedge fund announced it is backing Lourenco Goncalves, former CEO of Metals USA, to become CEO. Casablanca has also delivered a letter to the company declaring its intention to nominate a majority of directors for election to Cliffs' Board of Directors at the company's 2014 annual meeting.
"The steps Cliffs announced yesterday (Feb. 11) are, in our view, a knee-jerk response to our call for change. We believe they are inadequate to address Cliffs' issues, including the need for dramatic cost savings, and do not demonstrate the strong leadership needed to create substantial value for shareholders," said Donald Drapkin, chairman of Casablanca. "In spite of its public statements, Cliffs hasn't engaged us in any meaningful dialogue on the issues we've raised or provided a timetable for doing so."
In response, Cliffs released a statement saying its board "is comprised of independent and highly experienced individuals that bring a wide range of relevant expertise to Cliffs from leading mining, steel, basic materials, engineering and natural resources businesses." The company added that it stands behind the selection of Gary Halverson, president and COO, as incoming CEO.
Cliffs on Tuesday said its 2014 capital expenditures will be in a range of $375 - $425 million, down more than 50 percent from the full-year 2013 capital spending of $862 million. The spending decrease, Cliffs said in a news release, will mostly occur at its Bloom Lake Mine in Québec.
“Sharper capital allocation must drive our decisions. Today’s announcement to reduce overall capital spending is an important first step,” said Halverson, who became Cliffs' president in November as part of a broad management and board of directors shakeup. “Bloom Lake's ore body is well suited for a global market that increasingly values quality and diversification of supply, but it also requires time and capital to be properly developed, built out and operated to realize its full potential. Given the wide range of outlooks for iron ore prices, we reduced our 2014 capital expenditures at Bloom Lake Mine as we evaluate the best alternatives for this asset as part of our overall focus on enhancing value for shareholders.”
In a news release, Drapkin said shareholders have already lost too much value.
"The sad truth is that shares of Cliffs have lost more than 80 percent of their value since mid-2011. The company's actions to date have confirmed our lack of faith in the ability of the current board and management team to reverse the deterioration in Cliffs' financial performance. We are therefore calling for the business to be refocused under a dynamic and experienced CEO, Lourenco Goncalves, supported by a significantly reconstituted Board of Directors. We are confident Mr. Goncalves will bring the strategic and operational skills needed to effect urgent change and restore the fundamental value we see in Cliffs. We will shortly announce a slate of highly qualified Board nominees to oversee this effort."
At a 2013 briefing in Virginia, Cliffs acknowledge its costs are too high at the Wabush mine. Tuesday, the company specified its cash costs amount to $143 per ton. The spot price recently was about $125 per ton. Halverson said it’s not economically viable to continue running the operation. About 500 employees will lose jobs as a result of the shutdown.
“Over the past three years, we have seen pricing drop and Wabush Mine’s costs escalate all while we have made significant capital investments into the operation. This is a regrettable but necessary decision. We simply cannot continue operating a high-cost mine while pricing and freight markets are so volatile. We do value the hard work of all our employees and are committed to easing the transition for the people and communities, including providing severance and other support services as a result of this decision,” Halverson said.
Cliffs anticipates incurring idle costs related to Wabush Mine of approximately $100 million in 2014. Also, due to the idling of Wabush Mine, Cliffs’ will record impairment and write-off charges of approximately $183 million.
The company hopes to allocate savings toward reducing debt.
“We will adhere to a return-driven approach to allocating capital. This will establish a prudent balance among key priorities relating to liquidity management, business investment, and capital allocation initiatives that provide for a more direct return to enhance long-term shareholder value,” Halvorson said.
Gonclaves, who recently putchased $1 million in Cliffs' stock, said the company is being managed poorly.
"Cliffs is undervalued by the market, not because of any inherent shortcoming in the assets, but rather because of how the assets have been structured and managed," he said in a prepared statement. "The personal investment I have made in Cliffs underscores my belief in the opportunity as well as my support for the cost-cutting and other recommendations Casablanca has made. I look forward to working with Casablanca and our fellow investors to catalyze positive change and generate significant shareholder value."
Cliffs will report its fourth quarter and year-end financial results after the market closes on Thursday. The company will host a quarterly conference call at 9 a.m. on Friday. It can be heard at www.cliffsnaturalresources.com.
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