Cliffs' Board Still Likely To Be Ousted Next Week, And Q2 Results Don't Help

Jul.24.14 | About: Cliffs Natural (CLF)


Cliffs is in the middle of a proxy contest for its board that it should lose, because the board has done a poor job and requires change.

Cliffs reported a Q2 loss of $2 million, and it spent $4 million on proxy costs, without which it would have had a $2 million profit.

The annual meeting is next week and Casablanca Capital appears likely to take control of the board.

On Wednesday, July 23, after the markets closed, Cliffs Natural Resources (NYSE:CLF) (CLV) reported results for the second-quarter. Consolidated revenues came in at $1.1 billion, or a decrease of $388 million, or 26%, compared to Q2 of 2013. The reduced revenues were primarily due to lower iron ore and metallurgical coal prices. The company also reported a 24% decrease in sales volume from the company's core domestic iron ore operations.

Cliffs recorded a Q2 net loss of $2 million, or $0.01 per share, compared to a net income of $133 million, or $0.82 per share, in the second quarter of 2013. This could have been a profitable quarter, but for expenses incurred in the quarter that included a $14 million penalty due to the company's failure to ship its minimum tonnage obligation from Bloom Lake, as well as $4 million in proxy-contest-related expenses.

That is right, CLF shareholders, if it weren't for the spending of four million dollars in order to protect the majority of the company's board from losing their seats on account of their failure to act as good stewards of shareholder capital, the company would have had a profit of two million dollars, or one cent per share. Despite this newest waste of money, the board appears likely to be ousted by nominees proposed by activist shareholder, Casablanca Capital.

Worse yet, the company has clearly continued to spend company money into Q3 on the proxy effort to keep its board, despite the apparent ineptitude of its senior members and growing likelihood that shareholders shall vote them out. Within July the company has contacted its shareholders so frequently that it borders on being both annoying and harassing, and I shudder at the thought of how much money is being wasted, not to mention paper.

For example, on July 7, Cliffs issued a letter to shareholders pleading for shareholder support in the upcoming vote, only to mail yet another highly similar letter on July 14. Just two days after the second letter to shareholders within July, two independent proxy voting and corporate governance advisory firms, Institutional Shareholder Services and Glass Lewis, both recommended that Cliffs' shareholders vote for Casablanca's proposed board members, due to the need for change, and for Cliffs' directors to be held accountable for their squandering of shareholder capital.

Also on July 18, Cliffs announced that it revised its proxy option to be more consistent with the advisory firms' recommendations. Cliffs reduced its slate of directors up for re-election from nine to seven candidates. Then, on July 21, Cliffs mailed yet another letter to shareholders, spending even more capital on its latest reiteration of the plea to not fire what can only be seen as a terribly wasteful board.

Just to be clear, none of these letters were sent in Q2, so the costs related to the mailing of them and the revised proxy cards is an expense Cliffs shall incur in Q3, and is not included in the four million the company spent on the proxy contest in Q2. Even before Casablanca arrived, Cliffs' board engaged in entrenchment tactics, including proposals to remove shareholders' rights to approve bylaw amendments and eliminate cumulative voting, both of which failed to gain shareholder approval in 2013. Now, the question is whether the board's current plan to stay employed will also fail.

Cliffs' annual meeting is next week, on July 29. It appears of increasing likelihood that Casablanca Capital will win its fight for control of the board, but even if it is unsuccessful in its attempt to wrestle the company from the clutches of the current board, recent concessions indicate Casablanca will have at least a decent foothold. On the other side of the vote, there should be significantly less uncertainty overshadowing shares, which should bode well for share valuation. Moreover, the unacceptable hemorrhaging of cash and letters to shareholders related to board security will finally stop.

Disclosure: The author is long CLF, CLV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.