Casablanca Capital LP, the beneficial owner of approximately 5.2% of Cliffs Natural Resources Inc. (NYSE:CLF) today filed a Schedule 13D with the U.S. Securities and Exchange Commission (SEC) disclosing its position as one of the company’s largest shareholders and outlining recommendations to dramatically increase shareholder value.
Casablanca urges Cliffs to spin off the company’s international assets, double the annual dividend paid to shareholders, convert its U.S. assets to an MLP and significantly cut costs. If Cliffs implements these recommendations, Casablanca believes the shares should be valued at $53.00, over 2.5x its current price.
The full text of a letter Casablanca sent to James F. Kirsch, the Executive Chairman of Cliffs, which was included in the 13D filing, is as follows:
January 27, 2014
James F. KirschExecutive ChairmanCliffs Natural Resources Inc.200 Public Square, Suite 3300Cleveland, OH 44114
Funds managed by Casablanca Capital LP own approximately 5.2% of the outstanding common stock of Cliffs Natural Resources Inc., making us one of your largest shareholders.
Over the past six weeks, we have met twice and had a number of constructive follow-up conversations with you and senior members of the executive team. During our discussions, we expressed our view that Cliffs is significantly undervalued and recommended steps management take to enhance shareholder value. You have indicated that you will seriously consider our proposals and share them with the Board.
First and foremost, we urge you to spin off Bloom Lake, together with Asia Pacific, to create “Cliffs International.”
Cliffs operates two distinct iron ore businesses with very different risk/reward profiles. The Cliffs International assets are directly exposed to the competitive “seaborne” iron ore market, and the large Bloom Lake project is still in the development stage. In contrast, the “Cliffs USA” iron ore assets benefit from unique supply and demand characteristics and barriers to entry in the Great Lakes, generate strong cash flow and enjoy long-term contracts, which provide volume and price visibility.
In addition, we urge the Board to take the following initiatives:
Casablanca believes that implementing these recommendations would create substantial shareholder value and result in an implied valuation range with a midpoint of $53.00 per Cliffs share—over 2.5x Cliffs’ most recent trading price.
- Double the dividend (which would be paid by Cliffs USA going forward)
- Convert the U.S. assets to a Master Limited Partnership (“MLP”)
- Significantly cut SG&A and exploration expense
- Optimize cash costs and operating profitability
- Divest infrastructure and other non-core assets
- Set clear objectives for return on capital
- Hire strategic and financial advisors to assist in evaluating and executing these measures
Cliffs has significantly underperformed both its peer group and the broader market in recent years.
For most of 2013, the company held the title of "biggest loser" in the S&P 500 (finishing the year in the number two spot), and remains one of the most shorted equities in the index.
Cliffs’ stock price has lost more than 80% in value since its five-year high of $101.43 in mid-2011. In the past five years, the company spent approximately $8 billion (more than its current enterprise value) on what we view as ill-conceived acquisitions and development projects—efforts that contributed less than 3% to segment EBITDA on an LTM basis.