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Miner problem

28 Jan 2014 By Kevin Allison

A hedge fund’s call to break up struggling iron ore producer Cliffs suggests U.S. mining may be a fertile sector for activist investors. After all, shareholder pushiness in oil exploration and chemical production has shown the way. But long paybacks and gyrating commodity prices make even good strategic ideas tough to turn into timely profit.

Cliffs shares leapt as much as 13 percent after it revealed that Casablanca Capital, run by former Lazard bigwig Donald Drapkin, had taken a 5.2 percent stake in the company and started pushing for big changes. Casablanca thinks spinning off international operations, slashing spending, doubling dividends and putting Cliffs’ U.S. assets into a tax-advantaged master limited partnership could more than double its market value.

The logic is tempting. Cliffs was the second-worst performer on the S&P 500 Index last year and trades at a big discount to peers. Its international business has been hit by weakness in the seaborne iron ore price. The company has been investing heavily in a Canadian project that needs expensive iron ore to work. Its U.S. business, meanwhile, has a captive regional customer base that makes it less susceptible to global price swings. New management, put in place in October, is probably open to ideas.

Still, Casablanca is playing a risky game. Activists in the oil and gas sector, for instance, have brought asset sales, overhauls of executives and boards, improved governance and other changes at a raft of companies including Chesapeake Energy. But mining involves especially long lead times and huge upfront investment. It’s not easy to wind down spending quickly. Fluctuating prices for products like Cliffs’ iron ore mean even well thought-out plans can quickly be overtaken by events.

That’s what happened to the last activist who rattled the cage at Cliffs. In 2008, Philip Falcone’s Harbinger Capital, then a big Cliffs shareholder, blocked a $10 billion takeover of a U.S. coal producer. Strategically Falcone was probably right, but he was then left holding the bag as commodity prices collapsed during the financial crisis. Barely two months after his intervention, Cliffs’ shares had fallen 80 percent. Drapkin, who admits he is not a mining expert, had best step carefully.


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