NEW YORK (TheStreet) -- In early 2011, Cliffs Natural Resources (CLF) made an all-in bet on recovering iron ore prices through a $4.9 billion acquisition of Quebec-based miner Consolidated Thompson. Within 18 months, iron ore prices plummeted to lows not seen since the depths of the financial crisis, and in January 2014, fledgling activist hedge fund Casablanca Capital bought $200 million of Cliffs' stock and said it had a plan to turn the company around.
For six months, Cliffs and Casablanca have battled over their competing strategies in what looks to be one of the thorniest activist investments in recent memory. If the price of iron ore has dropped nearly 50% since Cliffs signed its Consolidated Thompson deal, the company's shares have fallen almost as much since Casablanca disclosed its 5.2% stake in late January 2014.
In mid-March, after lengthy discussions between Casablanca and Cliffs over strategy and board seats, it appeared a settlement to bring a slate of Casablanca-nominated directors onto Cliffs' board was near. By April, Cliffs abruptly ended those talks and by May, the company insinuated that a successful hostile campaign by Casablanca could force the company to repurchase outstanding loans, triggering a liquidity crisis.
With no settlement on the horizon, Cliffs and Casablanca sent their proposals to shareholders to vote on at the company's July 29 annual shareholder meeting. Casablanca wants six seats on a nine-member board at Cliffs with one nominee, Laurenco Goncalves, acting as the company's senior most executive officer. Casablanca has also promised to withdraw Cliffs from what it sees as a failed international expansion, helping the company re-focus on its profitable U.S. operations.
By contrast, Cliffs is asking shareholders to support its nine-member slate of board directors and a plan to cut the company's expense to preserve value for investors as it awaits a bottom in the iron ore market. Cliffs shares are off over 40% year-to-date and are within striking distance of 10-year lows.
Some signs indicate that as Casablanca has suffered large paper losses on its Cliffs investment -- the fund's only major current holding -- it may be gaining support for its activist effort.
Some key shareholders appear to be supportive of Casablanca's majority slate of directors. So much so, when Casablanca nominee Patrice Merrin was given a seat on Glencore Xstrata's board in late June, Cliffs shareholders reached out to Casablanca to ask for a replacement nominee, ensuring a full six-member slate, according to one source familiar with the situation.
Those calls are perhaps indicative of shareholders' appetite for change after years of apparent missteps. On July 1, Casablanca nominated James Sawyer, a longtime CFO at chemicals producer Praxair (PX), to replace Merrin on its six-director slate. Still, Casablanca's recommendations are controversial.
Can Cliffs Be Fixed?
When Casablanca first unveiled its investment, analysts were generally lukewarm on the feasibility of the firm's plans. One issue is that Cliffs' past mistakes are so great it may only have a limited ability to change. The Consolidated Thompson acquisition may be Cliffs' most crucial mistake.
Cliffs took on billions in debt to make the all-cash acquisition and it has plowed a further $1.5 billion in capital expenditure to develop an initial phase of the company's Bloom Lake mine in Quebec. For all that spending, Bloom Lake's first phase of mine development is running at a loss. Earlier in 2014, Cliffs decided to idle Bloom Lake's phase two expansion until a recovery in iron ore prices takes hold.
Ignace Proot, a mining analyst with Bernstein Research, believes Cliffs may have a hard time ultimately selling or shuttering Bloom Lake as a result of debt commitments attached to the mine. He also questions the mine's economics even with a moderate recovery in iron ore prices.
"Fundamentally, the problem with Cliffs is they overpaid for assets in Canada," Proot said in a July 14 telephone interview. "An activist shareholder cannot change the asset," Proot added.