Cliffs Natural Resources Booted From S&P 500, To Be Replaced By Essex Property Trust – by Maggie McGrath (Forbes Magazine – March 26, 2014)

Cliffs Natural Resources CLF +1.25% has had a rough go of it recently: after posting a 32.5% loss in 2013, the struggling iron ore producer has continued to take a beating in 2014 trading. And now, its near-24% year-to-date decline has not only secured its title as one of the worst performing S&P 500 stocks over the past 12 months, but it has also gotten Cliffs booted out of the S&P 500 and into the S&P midcap 400.

The S&P Dow Jones Indices announced Wednesday evening that effective April 1, Cliffs will no longer be a member of the S&P 500. In its place will be Essex Property Trust, a REIT that is currently a member of the S&P midcap 400. In addition to moving up to the S&P 500, Essex will also acquire BRE Properties in a deal that is expected to be completed after the markets close on April 1.

As BRE currently resides on the S&P 400, its departure leaves room on the midcap index for the Fei FEIC +3.63% Company, an Oregon-based supplier of scientific instruments that is currently listed on the S&P Smallcap 600.

“Cliffs Natural Resources and FEI have market capitalizations that are more representative of the mid-cap market space,” the S&P Dow Jones Indices said, explaining the switch.

Cliffs has a $2.95 billion market cap, while FEI is a $4.2 billion company. The S&P 500 has a minimum market cap of $3.35 billion, though the average is closer to $35 billion and the median is $16.5 billion. Cliffs’ replacement on the S&P 500, Essex, has a $6.4 billion market cap.

This is the latest in a batch of bad luck for Cliffs, which in January saw itself the target of an activist investor, hedge fund Casablanca Capital. As FORBES’ Steve Schaefer reported at the time, Casablanca revealed a 5.2% stake in the iron ore producer and argued that Cliffs should spin off its international operations and convert its domestic assets into a master limited partnership structure. Casablanca accused Cliffs of “drowning” in an undeveloped project in Eastern Canada that has cost the company $6.4 billion since 2011 and, in Casablanca’s view, held back Cliffs’ lower-risk U.S. iron ore business.

Two and a half weeks after Casablanca’s letter, Cliffs noted in a letter to shareholders that its senior management met with Casablanca and “participated in discussion” regarding its proposal and analysis of Cliffs. “We are disappointed that Casablanca seems intent on waging a public campaign rather than continuing its private engagement with our chairman and management to address our doubts and concerns relating to Casablanca’s proposal,” wrote chairman James Kirsch and president and CEO Gary Halverson.

Cliffs shares have fallen 15% since that letter to shareholders, and upon news of its ouster from the S&P 500, the stock added to its 2% loss from Wednesday’s regular trading session, initially falling 1.3% in after-hours trading. The stock is currently down 0.83% in the after-hours session.

Essex, meanwhile, bounced up 2.2% in Wednesday after-market trading, nearly reversing its 2.4% decline from regular trading. Year-to-date, the REIT is up 15.8%. The FEI Company, which is also joining an index of bigger fish, also saw its shares increase 2% in the after-hours session; year-to-date it too is up a little more than 15%.

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