Hedge fund Casablanca Capital took over mining company Cliffs Natural eight months ago. So far, it’s not going so well.
These days, activist investors paint themselves as Wall Street’s turnaround specialists. Activists’ track record at getting companies to boost their share buyback programs, hand over board seats, or put themselves up for sale has been impressive. But when it comes to actually turning around a troubled company, or steering a company away from trouble, the jury on activism is still out.
Last July, activist hedge fund Casablanca Capital won control of the board of mining company Cliffs Natural Resources CLF -3.63% after a six-month proxy fight. Days later, the hedge fund installed a new CEO and said that it had a new strategy to increase shareholder value. Eight-and-a-half months later, Cliffs’ stock has plunged 69%. So much for increasing shareholder value.
To be sure, Casablanca’s biggest problem has been commodities prices, which are out of the hedge fund’s control. Cliffs is the largest U.S. miner of iron. And iron prices in 2014 fell nearly 50% in 2014. That drop has taken Cliffs’ cashflow with it.
But Cliffs was also over leveraged. And it may have tried to do too much too soon. The hedge fund may have also underestimated how hard it would be to compete against its larger and more diversified competitors, such as Rio Tinta Group and BHP Billiton.
Cliff’s new CEO, Lourenco Goncalves, has put in place a plan to sell off assets to generate cash or close mines that have been losing money. Cliffs has been looking to sell most of its coal assets. But such sales have gone slowly, and many of the deals haven’t generated a lot of cash. In March, for instance, Cliffs reached a deal to sell its chromite mines in Northern Ontario’s so-called Ring of Fire region for $20 million, or about 4% of the $550 million Cliffs has spent to acquire the mines.
Closing plants have proven expensive, too, and such efforts have put a short-term strain on the company. In November, Cliffs decided to close a money-losing Canadian iron ore mine in Bloom Lake. The company said closing the mine would cost $650 million to $700 million, but a bankruptcy proceeding for the assets may reduce the cost.
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