By Ron Brochu
Cliffs Natural Resources Inc. (NYSE: CLF) announced a major management shake-up last week with the immediate appointment of Lourenco Goncalves to chairman, president and chief executive officer.
The move was expected at Cliffs, which manages or has an ownership stake in five regional iron ore mines and processing plants. Before gaining control of Cliffs’ board last month, activist investor Casablanca Capital LLC had urged the company to name Goncalves its CEO. On July 29, when Cliffs held its annual meeting of stockholders, Casablanca announced its six board nominees had been selected, which gave the New York-based hedge fund majority control of the mining and minerals processing company.
Goncalves was among the new board members. In a prepared statement on July 29, he wrote “The conclusion of this proxy contest marks not an end but a beginning. We look forward to working collaboratively with the continuing members of Cliffs’ Board and the company’s hardworking, dedicated and talented employees to set Cliffs on a course to improve performance and restore shareholder value.”
Today, he expanded on that initial statement.
“I am honored by the opportunity to lead Cliffs into its next chapter, with a keen focus on improving performance and restoring shareholder value,” Goncalves said in an Aug. 7 news release. “Cliffs has a unique position of strength in iron ore in the Great Lakes region, many valuable assets in other sectors elsewhere in the U.S. and around the world and talented employees at all levels of the company. I look forward to working closely with all of my fellow directors to refocus Cliffs on a new strategic path that builds on those strengths, and I am grateful to my fellow shareholders for the vote of confidence they have placed in us. While there is much to be done and many challenges ahead of us, there is also much promise. I can assure all of our stakeholders we are hitting the ground running.”
He replaces Jim Kirsch, who served as chairman since July 2013, and Gary Halverson who served as CEO since February 2014. During the proxy fight, Casablanca suggested other executives were more qualified to lead the company.
“I look forward to working with the new board and management team. The company wishes to thank Gary Halverson for his contributions to Cliffs as CEO,” said Richard K. Riederer, who has been a Cliffs director since 2002 and was re-elected at this year’s annual meeting. “We also extend our thanks to Jim Kirsch for his service as chairman of our board and wish him well in his future endeavors.”
Goncalves’ has more than 30 years of experience in the metals and mining industries, as well as lengthy board experience in the United States and abroad. He served as chairman, president and CEO of Metals USA Holdings Corp., a leading American manufacturer and processor of steel and other metals, from May 2006 through April 2013, and was president, CEO and a director of the company since February 2003. Goncalves also served as a board member of Ascometal SAS, a manufacturer of special steel headquartered in Paris, France, from October 2011 to April 2014. Prior to Metals USA, he served as president and CEO of California Steel Industries, Inc. from March 1998 to February 2003. From 1981 to 1998 he was employed by Companhia Siderúrgica Nacional, a leading steel and mining company in Brazil, where he held several positions in operations and sales.
Goncalves earned a Masters of Science degree in Metallurgical Engineering from the Federal University of Minas Gerais in Belo Horizonte, Brazil and a Bachelor’s degree in Metallurgical Engineering from the Military Institute of Engineering in Rio de Janeiro, Brazil.
Casablanca’s victory followed a bitter seven-month public battle in which Casablanca aggressively argued the iron ore miner and processor has deprived shareholders of value through imprudent acquisitions made by inexperienced board members and executives.
“Cliffs has significantly underperformed both its peer group and the broader market in recent years,” Casablanca said in a Jan. 28 letter. “For most of 2013, the company held the title of ‘biggest loser’ in the S&P 500 (finishing the year in the number two spot), and remains one of the most shorted equities in the index.”
Signed by Casablanca’s principals – Donald Drapkin, Douglas Taylor and Gregory Donat – that letter was the first of many released by the firm, which had become one of Cliffs’ largest shareholders by purchasing a 5.2 percent position.
It’s expected that Casablanca’s board members will pursue other significant changes at Cliffs.
In a March 6 letter to Cliffs’ board members, Casablanca proposed a change of structure for the corporation.
“Cliffs should consider second-stage value-creating steps for its U.S. business, including a master limited partnership (“MLP”), an eventual sale of the Company or other initiatives,” the hedge fund wrote.
The MLP structure generally is restricted to firms that engage in the extraction or distribution of natural resources, such as Enbridge Energy Partners. Units of an MLP are publicly traded just like shares of a public stock company, allowing investors to maintain liquidity, but distributions are treated differently. The general partner is required to pay a quarterly dividend to investors, who are called “limited partners.” Meanwhile, the general partner is paid a management fee based on the dividend, which encourages the general partner to take steps that enhance profitability.
Taxes also are handled differently. Partnerships are exempt from corporate taxes. Instead, taxes are paid by the partners based on their dividends received.
Despite criticism of Cliffs’ financial performance, Casablanca believes the company owns strong, profitable assets and weak non-performing ones. Fortunately for Northeastern Minnesota, the activist investor believes the domestic holdings are worth retaining.
“The assets that would remain with ‘Cliffs USA’ enjoy critical mass and high-quality cash flows — the U.S. Iron Ore assets produced over $1 billion of segment-level EBITDA in the last 12 months,” Casablanca said in a Jan. 28 statement.
Conversely, it has been highly critical of the Bloom Lake iron ore mine acquisition in Eastern Canada, acquired in 2011 at a cost of $4.9 billion.
“We therefore propose spinning off Bloom Lake, together with the mature Asia Pacific assets and the rest of the Eastern Canadian assets, to create a new, separately traded ‘Cliffs International’ that targets growth-oriented natural resources investors,” Casablanca said. “Cliffs International may become an acquisition candidate or joint venture partner for any of several large-cap multinational players, who likely have little strategic interest in Cliffs’ U.S. business, but would place a premium on a pure-play seaborne iron ore company.”
Cliffs existing management has suggested the company search for a joint venture partner to assist with the Bloom Lake development, but Casablanca does not believe it would be possible to find a cash-paying partner in a reasonable time frame.