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Bloom Lake Liabilities – Is There Really No Recourse for Cliffs?

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Bloom Lake mine

Bloom Lake (or BL) has been a very troubled part of Cliffs Natural Resources (CLF) since the company acquired it in the $4.9 billion Consolidated Thompson acquisition in 2011. You can read more about the Bloom Lake acquisition in the Market Realist article Why Cliffs’ Bloom Lake acquisition hurts its earnings and shares.

BL exceeded capital expenditure (or capex) and operating costs expectations. As a result, it became a drag on the already depressed earnings. On January 27, 2015, Cliffs announced the restructuring of BL.

This restructuring reflects the current restructuring and consolidation efforts in the metals and mining space. Recently, ArcelorMittal (MT) sold its Gallatin operations to Nucor Corporation (NUE), and AK Steel (AKS) acquired its Dearborn operations from Severstal.

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Without ‘any’ recourse?

During Cliffs Natural Resources’ 3Q14 earnings call, the company’s chief executive officer 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.” This meant that Bloom Lake liabilities will not have any recourse to Cliffs.

Analysts took some respite in the fact that the estimated closure costs of $650–$700 million will not have any recourse to Cliffs. However, according to Reuters, on March 16, Canada’s Nova Scotia Bank sued Cliffs Natural Resources (CLF) for $52.6 million. Cliffs was a guarantor on the loan given to Bloom Lake operations in Quebec for equipment. According to the news report, filing for creditor protection constitutes a default under the agreement, so Cliffs need to immediately pay the required amount.

Cliffs’ stock slipped 7.5% after this news broke. You can follow this news on Reuters.

The $52.6 million is not a game changer for Cliffs, but it could put management credibility in doubt.

Cliffs, Nucor, and AK Steel form 9.7% of the SPDR S&P Metals and Mining ETF (XME).

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