At Cliffs, Everybody Sacrifices in Prosperity (CLF, ANR, FCL)

In the wake of a poor first quarter report, iron ore producer Cliffs Natural Resources Inc. (NYSE:CLF), formerly known as Cleveland-Cliffs, has tightened its belt and the belts of all its shareholders. The company’s chairman, president, and CEO said that “we have asked all of our stakeholders to make sacrifices that will better position Cliffs to weather the direst of economic scenarios, while at the same time positioning the Company to take advantage of possible opportunities when the environment improves.”

The sacrifices referred to include cutting the company’s quarterly dividend by 55%, from $0.0875 to $0.04; cutting board member, executive, and management pay by up to 10%; and suspending contributions to all company 401(k) accounts. The company expects to save a total of $15 million from the reductions to pay and 401(k) contributions, and $22 million from the dividend cut.

Cliffs will also offer 12 million new shares of common stock in a secondary offering underwritten by JP Morgan Securities and Merrill Lynch. The proceeds will be used for “general corporate purposes,” which might include ” funding certain capital expenditures, repayment of indebtedness or strategic transactions.” The stock offering increases the number of outstanding shares by about 10%. The underwriters have an over-allotment option of 1.8 million additional shares.

Less than a year ago, Cliffs was booming on the huge run-up in prices for iron ore, primarily from China. The bottom has fallen out of the market, and the company’s coal production is not big enough to carry the weight of the dividends, high salaries, etc. The company tried to bulk up by offering to buy Alpha Natural Resources, Inc. (NYSE:ANR) last year, but that deal fell apart when analysts and shareholders balked at the huge drop in value as the global economy tanked. Now that Alpha has purchased Foundation Coal, Inc. (NYSE:FCL), its market cap is roughly equal to Cliffs’.

It almost goes without saying that Cliffs is taking a beating in the pre-market this morning. Shares are off around 10%, at $25.98. The company’s 52-week range is $11.80-$121.95.

Paul Ausick
May 13, 2009