Activist hedge fund-controlled iron ore and coal producer Cliffs Natural Resources Inc. (CLF) said Wednesday that it's looking at exit options for its Eastern Canadian iron ore operations, including possibly closing its Bloom Lake mine.
Lourenco Goncalves, which Donald Drapkin's Casablanca Capital LP hedge fund installed as president and CEO after taking control of its board in July, said in a statement that despite potential equity partner interest in Bloom Lake and its "high quality" ore, the potential investment isn't achievable within an acceptable time frame.
"With expansion no longer viable, we have shifted our focus to executing an exit option for Eastern Canadian operations that minimizes the cash outflows and associated liabilities," he said.
Cleveland-based Cliffs previously said that phase two development of Bloom Lake — which would cost $1.2 billion — was necessary to make it viable. If the company closes the mine, it estimates the costs at $650 million to $700 million over the next five years.
A spokeswoman didn't respond to a request for more information about a potential sale/closure of Bloom Lake.
Cliffs' stock fell almost 15% on the news, to $8.72 per share, in mid-morning trading.
Evan Mann, an analyst at bond research firm Gimme Credit LLC, wrote in a note that Cliffs' cost estimates for closing the mine appear to be on the high side. "The closing of the money-losing Bloom Lake mine should be a positive development by eliminating its drag on Ebitda and cash flow from operations. However, the $650 million to $700 million cost of closing this mine is troublesome for a company that produced a $237 million free cash flow shortfall (cash flow from operations less capital spending) after dividends for the first nine months of 2014," he said. "We look for credit ratios to continue deteriorating for at least the next few quarters on the weakness of iron ore and metallurgical coal pricing."
Cliffs also said that its unit, Cliffs Quebec Iron Mining Ltd., along with Bloom Lake General Partner Ltd. and Bloom Lake Iron Ore LP, recently lost an arbitration claim they filed against a former Bloom Lake customer relating to the termination of an iron ore sales agreement in August 2011.
The arbitrators decided in favor of the former customer, which Cliffs didn't name, and awarded it damages of $71 million plus attorneys' fees and accrued interest from the offtake agreement's termination date. Cliffs said Cliffs Quebec Iron Mining Ltd. is reviewing the award to determine "appropriate next steps."
Cliffs didn't mention anything about a potential sale of its Asia Pacific assets, which Casablanca Capital had previously lobbied for, or about finding alternatives for Bloom Lake and changing management.
On the company's earnings call last month, Goncalves acknowledged that the Asia Pacific business is noncore and that the company would like to sell it — but only at the right price.
Casablanca Capital, which had amassed a 5.2% stake in Cliffs, succeeded in placing six nominees onto the company's 11-member board at its shareholder meeting in July. The company chose Goncalves as its new CEO in August, replacing Gary Halverson, who was at the helm for less than a year.
Last month, Cliffs Natural shareholders breathed a sigh of relief when the company reported debt covenant amendments that prevented a potential covenant breach and preserved adequate liquidity.
"We don't need to sell assets and we have more than enough liquidity to run our business and pay down our debt," Goncalves said on the company's last earnings call. "There's no timebomb ticking within Cliffs."
On Oct. 17, Cliffs said it would book a $6 billion noncash impairment because of adverse market conditions for seaborne iron ore and metallurgical coal, warning that the impairment would result in it breaching a debt-to-capitalization limit of 45% that is stipulated by its revolving credit facility. At that time, the company didn't have any drawings on the $1.25 billion facility.
In a video interview with The Deal's Paula Schaap earlier this month, Casablanca Capital's Drapkin said Cliffs' shareholders agreed with its complaints that the company went from a $100 stock to a $15 stock, that management wasted more than $7 billion but didn't cut expenses to stanch the bleeding and that board members hadn't bought any shares in the company with their own money.
"We've been helping work with the company to get it into shape," Drapkin said. "Of course, it's a mining company, and the price of iron ore is, unfortunately, beyond our control, but the company is a much better company [since] our guy got in as CEO and it will be better yet every quarter. If the price of iron ore comes back, as it inevitably will sometime, the company will go back to being a very profitable, high-priced stock."
Cliffs Natural is a big iron ore producer in the Great Lakes region and also a producer of metallurgical coal in the U.S. It also owns an iron mining complex in Western Australia. — Paula Schaap, Lisa Allen and Paul Whitfield contributed to this report.