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Summary

  • Casablanca Capital has succeeded in getting all six of its nominees elected to the Cliffs Natural Resources Board of Directors and now controls the majority of the Board's seats.
  • Casablanca Board nominee Lourenco Goncalves is almost certain to replace Gary Halverson as Cliffs CEO.
  • Casablanca will attempt to implement a multi-step plan that could include selling off international assets, closing the Bloom Lake facility and turning the company's North American assets into an MLP.

Casablanca Capital won a major battle with the existing management of Cliffs Natural Resources (NYSE:CLF) at the company's July 29th shareholder meeting by getting all six of its nominees elected to the Board of Directors. With the Cliffs' Board consisting of 11 directors in total, Casablanca now holds the majority of the seats in the company that it currently owns a 5.2% stake in.

With the change in control of the company, Cliffs is now likely to see significant changes in both management and strategic direction. Casablanca promised major changes to how the company is run and here is a sample of what could be in store for Cliffs in the near future.

Replacement of Gary Halverson as CEO

The change in control of the Board of Directors almost certainly signals an end to CEO Gary Halverson's time at the top. Halverson took over for former CEO Joe Carrabba in February and has made significant capital expenditure cuts in order to keep the company afloat amid plunging revenue due to falling iron ore prices. Carrabba for his part made billions in global asset purchases in an attempt to take advantage of demand in China, expand the Cliffs footprint and drive revenues higher. Several of the purchases have been idled or never properly utilized - a major point that Casablanca wishes to rectify.

One of the newly elected Board members Lourenco Goncalves is considered the likely choice to replace Halverson.

Closing the Bloom Lake facility

Cliffs announced the acquisition of Canada's Bloom Lake iron ore mine in January 2011 for $4.9 billion and the news has been bad ever since.

Cliffs is roughly a $2.8 billion dollar company so management paid almost double the current market cap of the entire company for the mine just three years ago. Cliffs had to take a write down on the facility in 2012, production costs at Bloom Lake continue to be higher than expected and with iron ore prices in the $90s the facility will likely be operating at a loss for the foreseeable future.

Cliffs was already exploring options as far as what to do with Bloom Lake such as look for a partner, scale back production or close altogether. Casablanca wants to halt and likely get rid of the facility in order to improve the company's free cash flow picture. This will likely be one of the first things on Casablanca's agenda.

Sale of other non-American and non-core assets

Casablanca wants to essentially strip things down to the studs and focus solely on core cash flow positive activities. That would mean selling off international assets in places like Canada and China and divesting itself of what it considers non-core assets.

Casablanca is also considering turning the company's North American assets into a master limited partnership and spinning off international assets into a company of its own.

Returning capital to shareholders

Cliffs has already cut capital expenditures and cut the dividend to help prevent the company from continuing to burn through cash. On the surface, these seem like logical moves. However, Casablanca wants to actually raise the dividend going forward.

Its argument is that the company can unlock shareholder value by breaking up Cliffs, raise cash through the sale of divestment of specific assets and take the cash generated by these events to eventually return capital to shareholders. For long suffering shareholders, this is probably music to the ears as Casablanca has proposed not just a dividend increase but a significant one at that. One concern is that Casablanca may want to get rid of assets when their price is at its lowest which could be sacrificing long-term opportunity for short-term gain.

Purchase outstanding notes

One of the items mentioned in Cliffs proxy statement is that "Cliffs is required to offer to repurchase its outstanding notes if it experiences a "change of control" and corresponding ratings downgrade below investment grade.

The change of control is happening so this could be worth keeping an eye on if the company is required to commit its cash to a note purchase.

Conclusion

The stock price popped on the news of the Board changes. The stock is now up almost 33% from its recent 52 week low so shareholders are encouraged by what lies ahead.

There is logic behind the path that existing Cliffs management wanted to take - cut capital expenditures, try to remain cash flow positive and attempt to ride out the current trough in iron ore prices. Casablanca obviously was ready to take a less passive approach by laying out a multi-pronged plan that includes several actionable steps that can be taken immediately.

With the new composition of the Board of Directors it's virtually guaranteed that we're going to see big changes ahead for Cliffs. For shareholders, this may be the first real sense of optimism they've experienced in a long time.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: Casablanca Takes Control Of The Board: What's Next For Cliffs Natural Resources