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Cliffs Investor Call for Change Spurs Record Bull Bets

Feb. 12 (Bloomberg) -- The cost of bullish options on Cliffs Natural Resources Inc. rose to an all-time high amid speculation that shareholder activism can revive the second-worst performer in the Standard & Poor’s 500 Index in 2013.

Calls betting on a 10 percent rally cost 0.36 point more than puts protecting against a 10 percent drop in Cliffs shares, according to three-month data compiled by Bloomberg. Bullish options traded at 1.06 point above bearish contracts on Feb. 10, the most expensive on record. The stock has rallied 11 percent since Jan. 28, paring a retreat for the year to 16 percent.

The stock tumbled 32 percent in 2013, prompting shareholder Casablanca Capital LP to urge the biggest U.S. iron-ore producer to spin off foreign assets and double its dividend. Cliffs, which may report its strongest quarterly earnings growth since 2011 tomorrow, is poised for a rebound if metal prices recover, according to Tom Winmill of Midas Funds.

“The Casablanca stake is going to be good for the shares,” Winmill, who helps manage about $250 million of assets including Cliffs stock in Walpole, New Hampshire, said in a telephone interview yesterday. “We’re bullish on iron. That’s one of the nicer spots in commodities to be in. Cliffs has stumbled a bit, but I think they have a nice niche geographically should iron come back.”

Iron Slump

Cliffs is among mining companies struggling to increase profit and realize expansion plans as iron-ore prices have declined 23 percent in the past 12 months. The company delayed a Quebec mine expansion and cut its dividend last year as its chief executive officer and president of global operations resigned.

Casablanca, the fourth-largest shareholder, wants the Cleveland-based company to convert its U.S. assets to a master-limited partnership and “significantly” cut costs, according to a letter to Cliffs Chairman James Kirsch filed with regulators on Jan. 28. The New York-based investment adviser has 7.91 million shares in the company, about a 5.2 percent stake.

Cliffs would rise to about $53 a share if the changes were carried out, Casablanca said in the letter. The stock rose 4.5 percent to $21.50 yesterday and trades for about 10 times profit for the next 12 months, almost 40 percent below the projected price-to-earnings ratio for S&P 500 raw materials companies, data compiled by Bloomberg show.

Price Forecasts

Iron ore prices will be little changed this year, averaging $120 a ton according to estimates compiled by Bloomberg. The metal may do better than expected going forward amid continued support, averaging $123 a ton in 2014, Lucas Pipes, a New York-based analyst at Brean Capital Llc, wrote in a Jan. 13 note.

Options 10 percent above the share price had an implied volatility, the key gauge of options prices, of 56.95 yesterday, versus 56.59 for those 10 percent below. Skew, the spread in implied volatility between puts and calls, has averaged 4.37 points over the past five years, compared with minus 0.36 point yesterday.

“It’s not necessarily surprising to see skew decline like that as that is often the case alongside a sell-off in the stock,” Chris Jacobson, a New York-based options strategist at Susquehanna Financial Group, said in an interview yesterday. “As a given stock trades lower, investors may start to hedge less aggressively, while others come in to buy calls to position for a bounce, resulting in a decrease in skew.”

Implied Moves

Patricia Persico, a spokeswoman for Cliffs, declined to comment on the options trading as well as Casablanca’s proposal.

The options market is implying a one-day move of 7.5 percent following the release of Cliffs’ fourth-quarter earnings report on Feb. 13, compared with an average gain or drop of 8.8 percent after the last eight reports, according to Bloomberg data.

Analysts forecast that profit excluding some items at Cliffs increased 30 percent in the last quarter of 2013, the best performance in a three-month period since 2011, according to the average estimate compiled by Bloomberg. Profit decreased 7 percent last year, improving from a 71 percent slump in 2012, analysts project.

Casablanca’s engagement and Cliffs’ decision on whether to shut down or expand its Bloom Lake mine have increased uncertainty for shareholders, according to Nathan Littlewood, an analyst at Credit Suisse Group AG.

‘Complicated Landscape’

“We see no clear-cut path through the increasingly complicated landscape of catalysts and milestones ahead,” Littlewood, who has the equivalent of a sell rating on the shares with a $10 target price, wrote in a Feb. 5 note. “The Casablanca and Bloom Lake situations have both positive and negative near-term implications,” he said.

“Without conviction on the outcomes of some of these catalysts, we’d prefer to be on the sidelines for the time being,” he wrote.

The Chicago Board Options Exchange Volatility Index, which measures the cost of S&P 500 equity derivatives, fell 1.4 percent to 14.30 today. The VStoxx Index, a measure of Euro Stoxx 50 Index options prices, added 1.4 percent to 17.93.

In November 2012, Cliffs announced it was delaying the expansion of its Bloom Lake iron-ore mine in Quebec, acquired when it bought Consolidated Thompson Iron Mines Ltd. in 2011.

Dividend Cut

Cliffs cut its dividend 76 percent to 15 cents in February 2013, after three quarters of paying out a dividend more than twice the prior year’s level. CEO Joseph Carrabba and executive Laurie Brlas left Cliffs in 2013.

The company said yesterday it will leave its dividend at 15 cents a share even after pressure from Casablanca to increase it. Cliffs also said it will cut capital expenditures in 2014 by more than half, planning to spend $375 million to $425 million, as the company reduces spending at a Canada mine expansion and idles another mine.

While implied volatility for bullish Cliffs options is higher than for bearish ones, traders continue to pay a premium for insurance against stock losses in competitors Vale SA and BHP Billiton Ltd.

Puts protecting against a 10 percent decline in the American Depositary Receipts of Rio de Janeiro-based Vale cost 1.5 points more than calls betting on a 10 percent advance as of yesterday, according to three-month data compiled by Bloomberg. The skew spread for Melbourne-based BHP was 3.41 points yesterday.

“There’s currently a lot of uncertainty surrounding the stock,” Derek Maupin, a research analyst at Hodges Capital Management Inc., said yesterday in a phone interview from Dallas. Hodges manages $1.7 billion, including Cliffs shares. “Everybody is expecting to hear something with earnings on Thursday and I think that will provide a little certainty to the situation, to see where management is going.”

To contact the reporters on this story: Callie Bost in New York at; Nikolaj Gammeltoft in New York at

To contact the editor responsible for this story: Lynn Thomasson at

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