Cliffs reports disappointing Q2 ahead of proxy vote

Whether or not a dissident shareholder succeeds in replacing Cliffs’ (NYSE: CLF) CEO at its annual general meeting next week, big changes are likely in store for the iron ore and metallurgical coal miner.

The company, under pressure for the last couple of years from sliding commodities prices, has slashed its capital spending in half and tried to contain costs at its operations.

But in January, activist hedge fund Casablanca capital revealed it had acquired a 5.2% stake in Cliffs and in a letter to the company charged that its management and board have been “slow to respond to the end of the commodities supercycle and the increasing need for fiscal discipline.”

Casablanca urged the company to spin off its assets in Canada and Asia, sell non-core assets and infrastructure, further cut costs, convert the corporate structure of its U.S. assets to a master limited partnership, and double its annual dividend.

In February, Casablanca went further, announcing it would seek to replace a majority of Cliffs board members with its own nominees at the company’s upcoming meeting, as well as current CEO Gary Halverson with its own nominee, Lourenco Goncalves.

Since then, Casablanca has named six nominees it would like to see on Cliffs’ 11-member board.

Cliffs has already made concessions to Casablanca, making room for two Casablanca nominees on the company’s board initially, and then more recently, four.

Cowen & Co. mining analyst Anthony Rizutto points out that the shareholder vote won’t end the battle, as Casablanca’s four nominees are likely to become Cliffs directors next week.

“Even without obtaining full control, we expect Casablanca nominees to begin to aggressively push their agenda,” said Rizutto in a note to clients.

The analyst has a market perform rating on Cliffs and a price target of US$16. The company recently traded at US$15.77.

Cliffs has made moves to cut costs in a difficult price environment. The company idled its high-cost Wabush iron ore mine in Labrador and suspended an expansion of its Bloom Lake iron ore mine in Quebec earlier in the year. It has also issued notice that unless market conditions for metallurgical coal improve, it will idle its Pinnacle mine in West Virginia for more than six months starting in late August.

Overall capital spending in 2014 is expected to be less than 50% the amount spent in 2013 — US$375-425 million vs. US$862 million.

But even with its cost-containment efforts, Cliffs reported a bigger than expected loss in its second-quarter results released this week, driven by a 24% decrease in sales from its U.S. iron ore operations and lower prices for iron ore and metallurgical coal.

The company reported a net loss of US$2 million, or US1¢ per share, on revenues of US$1 billion. That compares with net earnings of US$133.1 million, or US82¢ per share, on revenues of $1.4 billion in the same quarter of 2013.

Stripping out one-time items such as Wabush idling costs, proxy-related costs and a tax benefit of US37¢ per share, Rizutto calculates an adjusted loss of US21¢ per share. The consensus estimate had called for a loss of US8¢ per share.

“We expect CLF to remain challenged at current commodity prices,” said Rizutto in a note. “Iron ore remains below US$100 per metric tonne and all of the iron ore majors continue to indicate expected year-over-year production increases in 2015. Met coal prices are also depressed, with the company reducing expected revenues per ton outlook to US$75-80 per metric tonne from US$80-85.”

Still,the miner has made good progress on reducing cash costs at its mines. Compared with the year-earlier quarter, Cliffs saw a 24% reduction in cash costs to US$87.48 per tonne at its Eastern Canadian iron ore operations, a 16% decrease to US$53.38 per tonne at its Asia Pacific iron ore operations, and a 14% decrease to US$76 per ton at its North American coal operations.

While proxy voting advisory services Glass Lewis and Institutional Shareholder Services (ISS) had recommended that shareholders support Casablanca’s changes to Cliffs board and management, Glass Lewis changed its recommendation in late July in response to Cliffs proposal to make room for four Casablanca directors. A third proxy firm, Egan Jones, also supports Cliffs’ slate of nominees so that Cliffs can maintain a majority while including Casablanca representation on the board.

Cliffs has charged that if Casablanca’s slate of directors is voted in, they will “enact what we believe is a value-destructive plan, including a ‘fire sale’ of Cliffs’ assets at the bottom of the cycle.”

Casablanca, meanwhile, has rejected Cliffs’ offer of four seats as a “desperate ploy” to maintain the status quo.

Cliffs shares have traded between US$13.60-28.98 in the past 52 weeks. The company has 153.2 million shares outstanding.