Major iron ore and coal producer Cliffs Natural Resources (NYSE:CLF) and Casablanca Capital, which owns about 5.2 percent of Cliffs, have different ideas about how Cliffs should operate moving forward.
Put simply, so-called activist investor Casablanca wants Ohio-based Cliffs to spin off its international assets, while Cliffs believes the path to success lies in more stringent cost-cutting measures. In an effort to discern whose idea is better, Iron Investing News takes a look at what Cliffs and Casablanca have said to each other in the last few weeks and what market watchers think is the superior proposition. To split or not to split? As mentioned, the central tenet of Casablanca's plan for Cliffs, put forward in a letter sent to Cliffs at the end of last month, is that the company's international assets — namely the Bloom Lake mine, located in Quebec, and the company's Asia Pacific-based assets — should be spun off. Casablanca's reasoning is that Cliffs' international and domestic iron ore businesses have "very different risk/reward profiles." Specifically, the company's Asia Pacific assets are "directly exposed to the competitive 'seaborne' iron ore market, and the large Bloom Lake project is still in the development stage," while the company's US 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." Cliffs, however, doesn't see such a split as necessary. Last Tuesday, the company said that in 2014 it will spend significantly less than it did in 2013 — specifically, $375 to $425 million compared to $862 million last year.