Change in management
Cliffs Natural Resources (CLF) changed its management in July 2014. Management changed as a result of a proxy contest by Casablanca—an activist hedge fund. Casablanca appointed Lourenco Goncalves as the new chairman, president, and CEO.
The new management’s intention is to focus on U.S. iron ore operations. It plans to sell-off the rest of the non-core operations—including the non-U.S. iron ore and coal businesses. The new management has taken two important steps since it took control of the board:
- It authorized a $200 million share buyback and the renegotiation of the debt agreement
- It reversed the decision to close the Pinnacle coal mine
Divesting non-core assets
Management wants to divest the non-core operations. The non-core operations are high cost or even loss-making. This would stop the cash bleed and provide much needed funds to pay off the debt.
There are other factors that don’t fall into place—like buying back shares at this time. Usually, companies go for a buyback when they have excess cash and no option to invest it anywhere that will be profitable. Cliffs only had cash of $360 million in 2Q14. This is a much needed resource in a tight liquidity situation.
The new management’s short-term view is to increase the share price through buybacks. In our view, this isn’t in the best interest of the company. Instead, management should focus on a strategic option to stop cash outflow at Bloom Lake and reduce the company’s debt load. It might be able to do this by reducing the dividend distribution.
In a declining price scenario, iron ore players—including Rio Tinto (RIO), BHP Billiton (BHP), and Vale SA (VALE)—need more cash to maintain liquidity. As a result, they’re divesting non-core assets the way Cliffs in intending. Investors can also invest in the SPDR S&P Metals & Mining ETF (XME) to get diversified exposure to the metals and mining sector.
Click here to learn more about Cliffs’ 2Q14 earnings.