Shares in Cleveland-based Cliffs Natural Resources (NYSE: CLF) have been trading heavily since activist hedge-fund Casablanca Capital urged the company to spin off its international assets and implement other changes to boost shareholder value.
In a letter disclosed on Jan. 28, the New York-based firm revealed it is one of Cliffs’ largest shareholders with a 5.2% stake, and asked the troubled miner to spin off its Australian and Eastern Canadian iron-ore assets — including the development-stage Bloom Lake project in Quebec — to existing shareholders so that it could focus on its more profitable U.S. operations.
The division would allow investors to evaluate the company’s assets, Casablanca argues, explaining the miner’s U.S. business is low-risk and generates strong cash flow, while its foreign operations are “directly exposed to the competitive ‘seaborne’ iron-ore market” and development risks.
Bloom Lake — which Cliffs bought for US$4.9 billion in 2011, and is still developing for billions of dollars — has damaged the company’s valuation, Casablanca says. “In fact, our analysis indicates Cliffs trades with a negative [US]$2-billion value drag from Bloom Lake.”
Cliffs was the second biggest loser in the S&P 500 Index last year, and has consistently underperformed its peers in recent years, the hedge fund says.
“We believe that because of Bloom Lake, Cliffs is incorrectly treated as a proxy short for the global iron-ore price. We see no reason for Cliffs to sacrifice itself to the iron-ore bears when it has other alternatives available.”
With the proposed split, Casablanca says the cash flow from Cliffs’ mature Australian assets could help complete Bloom Lake.
But some analysts disagree with the benefits of the potential spinoff. BMO analyst Tony Robson says that while there are ways to improve Cliffs’ shareholder value, splitting the company into U.S. and international entities is not the way to go.
“Bloom Lake and Wabush [both in Quebec] could not survive as stand-alone entities, while the former Portman iron-ore mines in Australia are highly profitable and worth keeping. A better way to restructure Cliffs may be to combine the U.S. and Australian iron-ore operations, and sell or close all other assets, leaving the company as a specialist iron-ore miner with profitable operations.”
Bernstein Research analyst Ignace Proot also believes it’s not a good idea to spin out the combined Australian and Canadian assets. “If you think about the Australian operations and the Canadian operations, these are very different operations in very different shape,” he told Business News Network. “I don’t see why relatively healthy Australian operations should almost subsidize the Bloom Lake asset.”
Casablanca advises Cliffs to double its dividend and place its U.S. assets into a master limited partnership (MLP) — a corporate structure that pays no taxes and passes most of its profits directly to shareholders.
But BMO’s Robson says that “MLP structures for volatile coal and iron-ore operations may not be practical.”
The activist fund also suggests Cliffs divest its infrastructure and non-core assets — including the halted chromite development project in northern Ontario — as well as reduce its selling, general and administrative costs, and exploration budget.
If Cliffs implements the suggestions, its shares could trade above US$50, Casablanca says.
In a short release, Cliffs said it welcomed further discussions with Casablanca and had made changes to its board and management last year to increase shareholder value, commenting that it is always looking for ways to add value to its shares.
Cliffs closed Jan. 29 relatively flat at US$20.07, despite 13.2 million shares changing hands.
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