Activist investors have a lot of ideas. But unfortunately, executing them can be much more difficult than pontificating. Casablanca Capital is experiencing this first hand, as shares in its primary holding, Cliffs Natural Resources (CLF), have lost significantly more than half their value since the activist investor took the mining outfit in hand in June 2014.
Put simply, the relationship between Casablanca Capital and Cliffs Natural Resources has not marked the beginning of a beautiful friendship.
Last year, Casablanca Capital had a tremendous victory over CLF, a Cleveland-based mining company that specializes in iron ore and coal. The New York-based hedge fund succeeded in naming six board members and installing Lourenco Goncalves as CEO.
In the lead-up to Casablanca's win, Donald Drapkin, CEO of Casablanca Capital, said -- in an interview with Jim Cramer and David Faber on "Squawk on the Street" in February 2014 -- that "this company has been asleep at the switch for the last three years."
So far, Casablanca's victory appears to be a pyrrhic one. Since Casablanca's coup, Cliffs Natural Resources stock has fallen 85% -- to $2.24. It gets even worse for Casablanca: As of its latest 13F filing, the company lists only CLF as a holding. For comparison, in its filing from August 2014, the company listed nearly 40 holdings from a diverse set of names that included General Motors (GM), Dollar General (DG), Time Warner Cable (TWC) and Valeant Pharmaceuticals (VRX).
The only potential bright spots for Cliffs Natural Resources -- and consequently Casablanca -- come from the misfortunes of its competitors. On Tuesday, Brazilian-based Vale (VALE) announced that it was cutting its iron-ore output due, in part, to a dam collapse at its Samarco venture, which Vale co-owns with Australian-based BHP (BHP). Cliffs Natural Resources could potentially cover the gap in production, but even more important, the production cuts could remove pricing pressure.
"You don't go in because you want to lose money, you go in because you want to make money for shareholders," Drapkin said in an interview with broadcast news program, "Wall Street Week," in September.
Of course, one reason for Cliffs Natural Resources' decline is the fall in commodity prices -- specifically iron ore. Since Casablanca initiated Cliffs Natural Resources' management change last June, the price of iron ore has fallen over 50% -- to just below $40 per metric ton from $96.50, as of Monday's pricing. The decline is part of a much longer pattern of declining iron ore prices, and other companies in the space have also felt the pinch.
"You have to ride out the commodities cycle, and I wish I knew how long this one was going to last," Drapkin said during the same interview, after noting that other mining companies -- such as BHP and Vale -- can continue production down to $45. Shares of BHP and Vale are down 43% and 60%, respectively, so far this year.
Even so, Cliffs Natural Resources faces fundamental issues. Like many companies in the commodities space, liquidity is an issue as the price of commodities falls. Also, the company has had difficulty divesting itself from nonperforming assets. Specifically the company said that several other coal companies have declared bankruptcy, which has created a dearth of buyers for its planned sales of the Pinnacle and Oak Grove mines.
"From our side, we have no intention to be at the mercy of the buyers' timelines. We control the process and not them. While the effort to sell these assets continues, we must do more to shore up profitability as we operate these mines during the sale process," Goncalves said, during the third-quarter conference call. In the meantime, Cliffs Natural Resources has cut the workforce from the mines by half.
How much Cliffs Natural Resources can recover after lowering debt and other cost-cutting measures remains to be seen. Still, it hasn't weakened Drapkin's conviction in the role of the activist investor.
"It doesn't mean that every activist is a good guy. It doesn't mean that every activist knows what he's talking about, or has done his homework, or is a better manager than the guy who is there," Drapkin said on "Wall Street Week," while speaking more broadly about the role of activist investors. "There are good deals and there are bad deals."
So far, this has proven to be a bad deal for Casablanca.