Dallas, Texas 01/30/2014 (FINANCIALSTRENDS) – The shares of Cliffs Natural Resources Inc (NYSE:CLF) shoot up by almost 14% after an activist hedge fund, Casablanca Capital announced to have bought a 5.2% stake in the company.
What’s Next?
After the stake building, Casablanca is pressurizing Cliff to take measures to step up its value. The proposed measures include the urgency to carry out cost reduction measures as well as the demand of separating Cliff’s international operations from that of domestic operations, mainly with a view that the stability in the U.S. operations can boost its credit rating and dividends.
A spun off is always an attractive strategy on the syllabus of the hedge funds as the U.S. operations are shielded to quite an extent from the global price volatility as it feeds the demand of domestic mills. And, therefore, in the backdrop of global iron-ore vulnerability and sluggish Chinese economy growth makes the split of sound alluring. The hedge fund also estimates that the split could take the stock price to a level as high as $53. Casablanca is also looking at the possibility of creating a tax-advantage MLP, post split. However, analyst Lucas Pipes at Brean Capital notable mentions that the business can generate cash for the first few years to pay to the MLP investor demand, but soon the pressure on iron-ore prices will affect these cash generations.
Moody’s Do Not Support The Idea
Contrary to Casablanca’s thoughts, Moody’s analysts are of view that any split of the operations is unlikely to get any investment grade quality. Above all, the U.S. operations individually too do not look well. The analysts suggested that instead of evaluating any spun off, the company should remain cautious in its capital structure and should continue to take steps towards cost cutting and balancing its neutral cash flow position, while foraying into limited but necessary capital investments.
