November 28, 2014

Asset sales could follow Casablanca’s Cliffs takeover

Casablanca Capital, an activist investment firm, announced in late July that six of its nominees have been elected to the board of Cliffs Natural Resources, giving it effective control of the company. The new board lost no time in putting its stamp on operations. In early August the slate voted in Lourenco Goncalves, as chairman.

Goncalves, who will be taking over from Jim Kirsch, vowed to “set Cliffs on a course to improve performance and restore shareholder value.”

Initial moves appear focused on financial engineering more than mining. In late August, Cliffs announced a $200 million share repurchase plan that will boost earnings per share and return cash to investors, rather than reinvesting in operations.

In a statement announcing the buyback, Goncalves said that Cliff’s new strategy will center on its core US iron ore business.

Asset sales have also been mentioned by analysts as possible future moves, which raise the question as to whether the company’s Eastern Canadian iron ore assets and Great Lakes production facility could be on the chopping block.

According to one analyst, who asked not to be identified, the effects of the change of control at Cliffs and any potential restructuring will likely be company-specific. Mining firms generally accept that profits fluctuate with mineral prices and don’t usually restructure for that reason alone, the analyst said.

However sector managers will be closely watching the results of the takeover because if all goes well, others could be tempted to go down that path too.

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