Cliffs’ boardroom shake-up presents buying opportunities for Canadian miners – by Peter Koven (National Post -August 5, 2014)

The National Post is Canada’s second largest national paper.

A boardroom shake-up at Cliffs Natural Resources Inc. has raised the likelihood that its international assets will hit the market, creating some intriguing buying opportunities for Canadian miners in their own backyard.

These assets include a large but troubled iron ore mine in Quebec, and a huge chromite deposit in Northern Ontario’s “Ring of Fire” that one company has already expressed interest in buying.

Cleveland-based Cliffs has been engaged in a vicious proxy war with hedge fund Casablanca Capital LP for the past six months. That battle ended in an apparently decisive victory for Casablanca last week, as the New York-based activist fund said it claimed six of the 11 seats on Cliffs’ board. Cliffs has not yet confirmed the final numbers.

Casablanca has been very open about its plans for Cliffs: It wants the company to focus on its core U.S. iron ore operations and look at divesting everything else, including assets in Canada and Australia.

The fund had plenty of shareholder support for this strategy, because Cliffs’ recent international forays have simply not worked out. In Canada, the company spent a staggering $4.9-billion in cash to buy the Bloom Lake iron ore mine in the 2011 takeover of Consolidated Thompson Iron Mines Ltd. The mine has not lived up to expectations and has strained the company’s balance sheet. Cliffs also spent about $500-million in the Ring of Fire before suspending the project last year due to a lack of key agreements around infrastructure and other issues.

If Cliffs does put Bloom Lake up for sale, experts could think of only one logical buyer: Teck Resources Ltd. Vancouver-based Teck has been eager to get into iron ore for many years, but has not found a good entry point. When Rio Tinto Ltd. put its Canadian iron ore properties on the block last year, Teck passed because it felt the price was far too high.

Bloom Lake would be a bargain by comparison, especially because iron ore prices have sunk this year. But it is a troubled asset that has lost money and needs to be turned around. A take-or-pay rail contract tied to the mine is also a deterrent for any potential buyer.

“Bloom Lake is a problem. You lose a little money by running it, or a lot all at once by shutting it down [due to penalties in the rail contract],” said Rick de los Reyes, a portfolio manager at T. Rowe Price.

In order to make Bloom Lake attractive, a buyer would likely have to double production to 14 million tonnes a year at a cost of more than US$1-billion. Cliffs planned to make that expansion, but backed away because of its poor balance sheet and weak iron ore prices.

Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier, said Teck may not be interested in a turnaround situation like Bloom Lake. But he thinks the company might step up and buy if the price is right.

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