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TABLE OF CONTENTS Aug 4 - 10, 2014 Volume 100 Number 25 - 0 comments

Editorial: Cliffs and Casablanca - the start of a beautiful friendship?

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It’s the biggest shareholder revolt of the current downturn in mining, but as we go to press it looks like Casablanca Capital has succeeded fulsomely in its long-shot bid to swamp the 11-member board of Cliffs Natural Resources with six of its own nominees.

Cleveland-based Cliffs is a major producer of iron ore and metallurgical coal worldwide, but its share price has suffered in the past three years owing to a combination of  low iron ore and coal prices, and overexpansions into such ill-fated projects as its chromite project in Ontario’s Ring of Fire region. Earlier this year, Cliffs idled its high-cost Wabush iron ore mine in Labrador and suspended an expansion of its Bloom Lake iron ore mine in Quebec, and is now set to idle its Pinnacle coal mine in West Virginia for more than six months starting in late August.

In the lead-up to the vote, Cliffs woes showed in its second-quarter net loss of US$2 million on revenues of US$1 billion. That compares with net earnings of US$133.1 million, or US82¢ per share, on revenues of $1.4 billion in the same quarter of 2013.

Based in New York and founded in 2010 by Donald G. Drapkin and Douglas Taylor, Casablanca Capital describes itself as an “event-driven and activist investment manager.”

It was only this January that Casablanca revealed it had acquired a 5.2% stake in Cliffs, and in an open letter charged that Cliffs’ management and board were “slow to respond to the end of the commodities supercycle and the increasing need for fiscal discipline.” And Casablanca had specific remedies in mind for Cliffs: spin off its assets in Canada and Asia, sell non-core assets and infrastructure, further cut costs, convert the corporate structure of its U.S. assets to a master limited partnership and double its annual dividend.

Cliffs initially rebuffed Casablanca, arguing that it had ended 2013 with a new management team led by ex-Barrick Gold exec Gary Halverson, and had already embarked on company-wide cost-cutting and efficiency drives. More recently Cliffs had offered Casablanca first two, and then four seats on the board, but still charged that if Casablanca’s full slate of directors were voted in, they would “enact what we believe is a value-destructive plan, including a ‘fire sale’ of Cliffs’ assets at the bottom of the cycle.”

Obviously, Casablanca’s argument was more compelling: on July 29, Casablanca announced that all six of its nominees were elected to the Cliffs board “according to preliminary estimates by its proxy solicitor of the voting results at today’s annual meeting of shareholders.” The Casablanca slate comprises Lourenco Goncalves, Robert P. Fisher, Jr., Joseph Rutkowski, James Sawyer, Gabriel Stoliar and Douglas Taylor.

As news of Casablanca’s victory spread on July 29, Cliffs’ shares soared from US$16.35 to US$18 before settling down to US$17.25. It’s still a far cry from the peak of US$99 seen in mid-2011.

Casablanca chairman Drapkin said in a release that “we are grateful to our fellow Cliffs shareholders for their careful consideration of the issues and gratified that they have sent a resounding message of support for our efforts to drive meaningful change at Cliffs, bring true accountability to the company’s leadership and restore shareholder value.”

Goncalves sought to reassure Cliffs employees, saying that on behalf of all the newly elected Casablanca nominees, “We look forward to working collaboratively with the continuing members of Cliffs’ board and the company’s hardworking, dedicated and talented employees to set Cliffs on a course to improve performance and restore shareholder value. Cliffs has tremendous inherent value, and we are confident there is much we can and will do to refocus Cliffs and steer it in a new strategic direction.”

Casablanca adds that “subject to certification of the final results by the independent inspector of elections, the newly elected directors begin their terms immediately and will serve through the company’s 2015 annual meeting of shareholders.

Cliffs seemed to be in shock after the vote, stating simply: “We look forward to receiving the final results of today’s vote . . . the company will await the preliminary report of the inspector of election, IVS Associates, Inc., before releasing any further statements about the vote. The inspector has indicated that it expects to issue a preliminary tabulation of the vote results within approximately three business days, which Cliffs will publicly announce.”

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