UPDATE 4-Hedge fund plans proxy fight with Cliffs to install new CEO

Wed Feb 12, 2014 4:25pm EST

(Adds Cliffs' response, updates share price to close)

By Allison Martell

Feb 12 (Reuters) - The activist investor squaring off with Cliffs Natural Resources Inc named its preferred candidate for chief executive officer on Wednesday and said it plans to nominate enough new directors to form a majority of the iron ore miner's board.

Hedge fund Casablanca Capital, which owns about 5.2 percent of Cliffs, said it is backing Lourenco Goncalves, former CEO of Metals USA, to take the top job at hard-hit Cliffs.

Last month Casablanca publicly urged Cliffs to spin off its international operations and form a master limited partnership from its U.S. assets, but the fund declined to say what its next steps would be if Cliffs refused.

Cliffs defended its incoming chief executive Gary Halverson in a release on Wednesday afternoon, saying the former Barrick Gold Corp executive was chosen for "deep international and large scale mining industry leadership experience."

In an interview with Reuters, Goncalves said he would focus on supplying U.S. steelmakers rather than selling into the competitive global iron ore market. He was particularly critical of Cliffs' Bloom Lake Mine in Quebec, saying he would never have bought the mine.

Asked whether he would carry out Casablanca's proposals as chief executive, Goncalves said the fund's plan offers "good alternatives, but they are alternatives, they are possibilities."

Cliffs, a relatively high-cost producer, has been battered by weak iron ore prices. Operational issues and worse-than-expected costs have plagued Bloom Lake, once seen by analysts as a key growth project.

After months of uncertainty, the company said on Tuesday it has decided to indefinitely suspend a planned expansion at Bloom Lake, and idle Wabush, another Canadian mine, slashing capital spending and cutting some 500 jobs.

"If you are in a hole and you are digging the hole, the very first move you should make is, stop digging," said Goncalves. "Yesterday they stopped digging. It doesn't mean that they are getting out of the hole."

On Wednesday, Cliffs said its board has previously considered "key elements" of Casablanca's proposal and found that they would not offer value over the long term. It reiterated that it is considering strategic alternatives for Bloom Lake.

"The Company is 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," it said.

Cliffs shares closed higher on Wednesday, but little changed from where they were trading in the premarket before Casablanca's announcement.

The company is set to report its fourth-quarter results after the close on Thursday.

METALS VETERAN

The Cliffs campaign is Casablanca's first foray into mining. Founded in 2010 by former investment bankers Drapkin and Douglas Taylor, the fund is best known for pushing, along with activist investor Carl Icahn, for a board shakeup at electronic design automation company Mentor Graphics in 2011.

But Goncalves is a metals industry veteran - he led Metals USA for 10 years, until the steel service center operator sold to Reliance Steel and Aluminum Co last year.

He was also chief executive of steelmaker California Steel Industries, and from 1981 to 1998 worked for Brazilian steelmaker Cia Siderúrgica Nacional SA, which has its own iron ore operations.

Cliffs supplies steelmakers with iron ore, and has a smaller coal mining business.

The miner is in the midst of an unusual leadership transition. Its last chief executive, Joseph Carrabba, retired in November, and Halverson was named to succeed him.

But Halverson's current title is president and chief operating officer. While Cliffs executives report to Halverson, he is not yet chief executive.

Executive chairman James Kirsch has been helping with the transition as Halverson develops "a deep understanding of the business at an operating level" Cliffs said in October.

Cliffs shares closed up 2.3 percent at $21.99 on the New York Stock Exchange on Wednesday.

Cliffs said it is being advised by J.P. Morgan and Bank of America Merrill Lynch, as well as law firm Wachtell, Lipton, Rosen & Katz. (Additional reporting by Nicole Mordant in Vancouver; Editing by Meredith Mazzilli)