Fight to oust Cliffs board just got real ugly

Cliffs Natural Resources (NYSE:CLF), the US' biggest iron ore producer, announced this week that it is reducing capital spending by an additional $100 million on top of the $460 million in cuts already announced.

This led to speculation that Cleveland-based firm could breach certain debt covenants should the weakness in the price of the steelmaking raw material persist.

Cliffs stock was up on Thursday, but investors in the company are nursing a 37% slide in the market value of the company and an exit from the S&P500 index as it tries to cope with a downturn in the market by idling mines in Canada and the US and laying off workers.

Activist investment firm Casablanca Capital launched a bid in January to oust the current Cliffs board and on Wednesday issued another statement calling for drastic changes at the company.

Casablanca, a top shareholder with more than 5% of equity in the miner, called the value destruction at the company "alarming" adding that despite the losses "a majority of the current Cliffs directors, including its chairman, James Kirsch, remain in their seats."

"Rather than recognizing and addressing the need for fundamental change, the Board, which in the aggregate holds less than 1% of Cliffs’ shares, is digging in to protect its own interests at the expense of shareholders."

New York-based Casablanca said a proxy statement for the upcoming AGM "quietly filed late last Friday afternoon into a holiday weekend" an "affront" to shareholders:

"Cliffs stated that the election of a majority slate of new directors proposed by Casablanca could trigger a change of control under the indenture governing Cliffs’ senior notes, potentially compelling it to repurchase the notes.

This mandatory repurchase — or “Proxy Put” — would have a serious negative impact on Cliffs. We consider this an explicit threat to shareholders: vote for the incumbent Board or destroy the Company."

Calling it a breach of the directors' fiduciary duties and citing previous court cases backing its assertion, Casablanca goes on to say it "intends to protect shareholder interests by all available means, including litigation."

When Casablanca first launched its appeal for change, Cliffs elevated Gary Halverson, chief operating officer who joined Cliffs only in November last year, to the top position. Halverson previously headed Barrick Gold Corp's US operations.

Casablanca is backing Lourenco Goncalves, former CEO of Metals USA, to lead Cliffs and doesn't have kind words for Halverson or Kirsch:

"The record of shareholder value destruction on Mr. Kirsch's watch is not limited to his time at Cliffs. Shareholders of Ferro Corp suffered a loss of 86% of its value during his tenure as Chief Executive Officer from 2005 to 2012 (Ferro’s share price recovered most of its losses soon after Mr. Kirsch’s departure).

"While Mr. Halverson is relatively new to Cliffs and cannot be blamed for all of its past missteps, he also cannot, in our view, be counted on to drive the dramatic change that is desperately needed.
By Cliffs’ own admission, Mr. Halverson has been in effect a CEO-in-training, with no prior experience running a public company, let alone a multi-billion dollar enterprise in critical need of a strategic turnaround. Mr. Halverson now seems to be operating in lockstep with the rest of the Board."

Casablanca is backing Lourenco Goncalves, former CEO of Metals USA, to lead the company. Goncalves has personally invested some $1.5 million in Cliffs shares, while "not surprisingly, Mr. Kirsch has never invested even one dollar of his own money in Cliffs."

Apart from iron ore mines in Michigan and Minnesota and eastern Canada, Cliffs also owns an iron ore complex in Western Australia and operates five coking coal mines in the US.

Cliffs responds

After the market close on Thursday, Cliffs released a response to the Casablanca letter to shareholders saying  despite Casablanca’s relatively small holding in Cliffs’, Casablanca "are continuing their effort to seek full control of the Board without providing a credible and clear path to increase long-term shareholder value or paying a control premium":

"With regard to Casablanca’s “Proxy Put” accusation, in no way is Cliffs threatening its shareholders. On the contrary, it is Casablanca’s actions that have put shareholders’ interests at risk. The change of control provision within the senior note indenture that is in question has been publicly disclosed since Cliffs first issued public debt in March of 2010 and is standard for most companies with publicly issued debt. "

Cliffs also said it has made several offers to Casablanca in an effort to reach a settlement in good faith, but that Casablanca "seems intent on pursuing a costly and time consuming proxy contest":

"Cliffs will continue to pursue a resolution, avoiding a costly and distracting proxy contest, to the benefit of all shareholders and stands ready to engage with Casablanca."