UPDATE 3-Hedge fund urges breakup of iron ore producer Cliffs

Tue Jan 28, 2014 2:43pm EST

By Nicole Mordant and Sayantani Ghosh

Jan 28 (Reuters) - A New York-based hedge fund is pushing Cliffs Natural Resources Inc to spin off its "riskier" international operations after the U.S.-based producer of iron ore was the second-worst performing stock in the S&P 500 Index last year.

In a letter to Cliffs' executive chairman, James Kirsch, Casablanca Capital LP said it had amassed a 5.2 percent stake in the Cleveland-based company, making it one of its biggest shareholders.

The letter, dated Oct. 27, was released in a filing with the Securities and Exchange Commission on Tuesday.

Cliffs' shares rose as much as 13 percent after the news. They were last trading at $19.88, up 2.5 percent.

Casablanca, which has met with the company twice over the past six weeks, also said that Cliffs should significantly cut costs, double its dividend and convert its U.S. assets to a master limited partnership (MLP).

An MLP is an investment vehicle that can pass profit to investors in regular payouts before it is taxed. It is popular in industries with steady earnings such as the oil pipeline sector.

Casablanca, which was started in 2010 by former M&A bankers Donald Drapkin and Douglas Taylor, said that Kirsh had indicated that he would "seriously consider" the hedge fund's proposals and would share them with the company's board.

"There is a certain sense of urgency and of pace that needs to arguably be picked up," Taylor said in an interview. He declined to comment on a deadline for Cliffs to respond by or say what the fund's next step might be if its demands were not met.

Cliffs said on Tuesday it would continue talks with Casablanca and that it had engaged J.P. Morgan as financial adviser and Wachtell, Lipton, Rosen & Katz as legal counsel.

Casablanca's move marks the hedge fund's first foray into the mining industry. The fund is best known for pushing for a board shakeup, along with activist investor Carl Icahn, at Oregon-based electronic design automation company Mentor Graphics in 2011.

"DROWNING IN BLOOM LAKE"

In its letter, Casablanca urged Cliffs to spin off its Bloom Lake mine together with the rest of its Eastern Canadian assets and its Asia Pacific business to create Cliffs International.

It said such a move would stop Cliffs' relatively riskier international assets from weighing on its strong cash-generating U.S. iron ore business.

Cliffs international assets are directly exposed to the competitive sea-borne iron ore market whereas its U.S. business enjoys long-term contracts, Casablanca said.

"(Cliffs') U.S. iron ore assets are ideally positioned to participate in the recovery of the U.S. automotive and construction sectors," Casablanca said.

Cliffs has been plagued by operational issues at its Bloom Lake Mine in Canada's iron-rich Labrador Trough region in Quebec and took a $1 billion writedown on the operation in early 2013. In November, it said it would indefinitely suspend its $3.3 billion Black Thor chromite project in Northern Ontario.

The company is without a chief executive after its former CEO retired in November. Cliffs has anointed former Barrick Gold Corp executive Gary Halverson as its next CEO but he has not yet taken up the position, instead joining the company first as chief operating officer and president while he builds a deeper understanding of the business.

Casablanca said it believed Cliffs' shares could be worth $53 a piece, if its recommendations were implemented.

Cliffs shares have nearly halved in value in the past year, partly on the back of weak iron ore prices globally. By contrast, the S&P 500 index has risen 19 percent.

Cliffs annual dividend totaled 60 cents per share in 2013, about 75 percent lower than what it paid though 2012, according to Thomson Reuters data.

Other large Cliffs shareholders include Capital World Investors, with a 10.5 percent stake, and BlackRock Institutional Trust Co, with 7.5 percent, as of Sept. 30, 2013, according to the latest Thomson Reuters data.

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