Sunday, March 15, 2015

Activists in Commodities Should Beware of Cliffs

Clever activists in commodities NOT. Aivars Lode

Even a rational plan to shake up a miner or a big oil company can run into the reality of slumping commodity prices

By Liam Denning 

Activists have gotten bolder in terms of targets, with even a giant like Apple fair game these days.
But taking on China? That is what Casablanca Capital did, albeit indirectly. In January 2014, the fund said that it had taken a 5.2% stake in iron-ore miner Cliffs Natural Resources. At the time, Cliffs shares traded at about $19, and Casablanca had paid about $25 a share for its stake. But it said that, under its plan, they could be valued at $53.
On Friday, the stock closed at less than $5. Casablanca actually won its proxy fight last year and installed a host of directors and a new chief executive, Lourenco Goncalves. Yet its plan to split Cliffs looks beside the point given a roughly 50% decline in iron-ore prices the past year.
That is largely because of chief buyer China’s slowing growth. Rather than relying solely on self-help, Mr. Goncalves urged big, rival miners last week to curb output to help rebalance the iron-ore market, which would help Cliffs sell international assets. His call likely won’t be heeded.
Even the U.S. business, around which Casablanca wants Cliffs to focus, faces issues as steel plants contend with weak demand and surging imports from, you guessed it, China. Moreover, Cliffs said last week that many bondholders are holding out against a proposed debt exchange.
Casablanca’s case is a harsh one, but it isn’t completely alone. A year before its own campaign, Elliott Management began pressing for change at Hess. Elliott got much of what it wanted; the stock rose as high as $104 from less than $50. Hess is undoubtedly a stronger company now, yet the stock is back below $70. The reason? Oil also has slumped. When it comes to going after commodities producers, even when you win the argument, the world won’t always listen.

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