A management rejig
Casablanca’s bid has led Cliffs Natural Resources’ (CLF) management to go for a total rejig to deliver change and cost reductions. New management plans to change its strategic course and improve operating and financial discipline following the company’s $9 billion acquisition spree over the last decade.
According to the new management team, Cliffs’ focus will now be on free cash flow generation and lower net debt position.
Capital expenditure cuts
Capital expenditure for the first quarter of 2014 has fallen 55% year-over-year. Management has announced capex reductions to the tune of 65% in 2014 from 2013 levels. Of this reduction, 75% will aim at the Eastern Canadian iron ore and North American coal segments. This is mainly driven by volatility in seaborne iron ore and metallurgical coal pricing.
Reduced operating spending
Also, streamlining costs and business support functions has started to eliminate duplications. As a result, SG&A (sales, general, and administrative expenses) and exploration costs have decreased 29% year-over-year for the first quarter of 2014. Management has set a target of reducing SG&A and exploration costs by $90 million in 2014 from 2013.
However, as Casablanca has rightly observed, the capex requirements have been deferred rather than cut. Since Bloom Lake will require $800 million of sustaining capex for the next four years as per Cliff management’s own admission in an earnings call, there’s not much clarity around this move.
But all this is a short-term change driven by short-term objectives of maintaining the company’s credit profile. The new management team’s efficiency will only be apparent if it finds a less expensive solution to the Bloom Lake acquisition and reduces net debt levels on a sustained basis.
In a falling iron ore price scenario, all mining companies—including Rio Tinto (RIO), BHP Billiton (BHP), and Vale SA (VALE)—take cost-cutting measures. But capital expenditure is ongoing for more low-cost supply additions.