Will Cliffs go US Steel Corporation’s way on credit protection?



Creditor protection

During the company 3Q 2014 earnings call, Cliffs Natural Resources Inc.’s (CLF) CEO said there’s “no risk of contamination to the parent company in the event that we need to do something specific about Canada. Everything would be within the parent company that holds the Bloom Lake assets.” Cliffs’ current estimate of the closure costs and liabilities is in the range of $650 to $700 million.

But after meeting with Cliffs management, Credit Suisse reported that these closure cost estimates are based on a worst-case scenario. According to Cliffs management, Credit Suisse said, the costs could be substantially lower. Liabilities related to the rail take-or-pay agreement account for nearly two-thirds of the estimated closure costs. Early cancellation of the rail contract would trigger this liability.

Cliffs CEO Lourenco Goncalves told Reuters that a credit protection filing in Canada is “absolutely” on the table. Analysts contend that a credit filing is one of the options and that Cliffs’ closure costs and liabilities would be significantly smaller if it made that move.

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United States Steel’s ringfencing case

The insulation Cliffs is planning is similar to what United States Steel Corporation (X) put in place when it filed for protection over its money-losing Canadian operations two months ago. The CCAA (or Companies’ Creditor Arrangement Act) is a Canadian law that allows a company facing insolvency to avoid complete bankruptcy or foreclosure, and instead work out a restructuring plan. This law will permit United States Steel to deconsolidate its Canadian subsidiary from its financial statements. The company will then be free from liabilities on its Canadian subsidiary’s books.

Cliffs has suffered losses and cost escalations at its Bloom Lake mine since acquiring it in 2011. Now, the company’s considering doing what United States Steel did to shield the parent from the subsidiary’s liabilities. Such an action is a reflection of current restructuring and consolidation efforts in the metals and mining space. Recently, ArcelorMittal SA (MT) sold its Gallatin operations to Nucor Corporation (NUE). And, AK Steel Holding Corporation (AKS) acquired Dearborn operations from Severstal.

The SPDR S&P Metals and Mining ETF (XME) provides diversified exposure to the metals and mining sector.


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