Commodity Collapse Undermines an Activist’s Victory at Cliffs – by John W. Miller and David Benoit (Wall Street Journal – November 4, 2015)

Iron ore’s price slump has upended Casablanca’s efforts to boost miner’s returns

CLEVELAND—Activist investors are learning that even the best-laid plans can crumble under the weight of the commodity-price swoon.

Consider the case of Cliffs Natural Resources Inc., an iron-ore-mining company.

Last year, Casablanca Capital LP, a New York-based activist firm, amassed a 5.2% stake and carried out one of the biggest boardroom coups activism has seen. It put in place a handpicked CEO, Lourenco Goncalves, who aggressively cut costs, and shut down or sold Cliffs’s worst-performing mines.

Cleveland-based Cliffs announced its second-straight profitable quarter last week, saying that it made $6 million in the third quarter, after losing $6.9 billion, mostly because of a write-down, a year ago.

Yet Casablanca’s investment has been a disaster. The firm bought in at $25 a share, saying the stock could go as high as $53. It’s currently trading around $3 a share.

The reason: The collapse of the market for key industrial commodities, such as iron ore, the main ingredient in steelmaking. Global iron-ore prices have fallen 54% since Casablanca invested in Cliffs in January 2014.

Cliffs and Casablanca aren’t the only ones struggling because of low commodity prices. Oversupply in everything from oil and copper to zinc and nickel has upended efforts by activist investors in commodities, illustrating that activist plans to boost returns through measures such as stock buybacks and asset sales can falter if basic assumptions underpinning a business model collapse.

Most CEOs “have a lot of comfort in the [commodities] cycle because they’ve been there before,” said J.P. Morgan banker David Hunker, who focuses on activism. “The big public losses have probably put the activists on notice that there’s a potential to lose their shirt.” Mr. Hunker was an adviser to Cliffs in its battle with Casablanca.

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