A month after activist hedge fund Casablanca Capital succeeded in gaining control of the board at Cliffs Natural Resources (NYSE: CLF), the troubled iron ore and metallurgical coal miner says it plans to buy back US$200 million worth of its own ordinary shares before the end of December 2015.
The board has authorized the management team to renegotiate consents and amendments to its existing debt that would preclude the company from executing the buyback program. At the end of the second quarter, Cliffs held about US$3.45 billon in debt and US$360 million in cash.
Lourenco Goncalves, the company’s new president and chief executive, said in prepared remarks that he was pleased that the new board “has agreed with our conviction that, at this point, the best use of our capital is to invest in our business, our people and our assets by buying back Cliffs’ common stock,” and noted that the company has successfully started to implement its new strategy “centered on the U.S iron ore business.”
News of the buyback generated mixed reviews, with some analysts applauding and others criticizing the move.
Analysts at London-based Investec Securities commented that it was “encouraging to see another company that is now focused on delivery of returns to shareholders, albeit one that took some behind-the-scenes boardroom activity.”
But others like Tony Robson of BMO Capital Markets viewed the plan negatively. “The cash outflow (assuming the banks grant permission) further limits the company’s ability to make any meaningful reduction to its sizable debt position,” he said in a research note.
“The decision to undertake a buyback appears to be a near-sighted move, possibly led by pressure from activist investor Casablanca Capital to improve the share price and give some returns to its investment (estimated entry price about US$25 per share).”
Robson added that the company’s “weakened management team, poor balance sheet, and high cost assets with minimum growth optionality make Cliffs difficult to recommend to investors.”
The company posted a second-quarter net loss of US$2 million on revenues of US$1 billion. That compares with earnings of US$133.1 million, or US82¢ per share, on revenues of US$1.4 billion in the same quarter of 2013.
In mid-August The Northern Miner reported that the troubled miner will have to make close to US$28 million in severance payments to executives and other key staff that it ousted following the proxy battle. Former president and chief executive Gary Halverson, who joined the company in November 2013, is entitled to US$11 million in severance under change of control provisions in the company’s previously adopted incentive equity plan.
Over the last year the company has traded between a high of US$28.98 per share in November 2013 and a low of US$13.60 in June 2014. At press time in New York Cliffs’ shares were trading at US$15.81.
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