There's Still Life In This Rust Belt RelicZachary Schiller
The boardroom of iron-ore giant Cleveland-Cliffs Inc. doesn't look much like a philosophical battleground. But there, on July 9, a strange event is set to take place. Seven incumbent directors are due to sit down for the first time with five new colleagues--all of them dissidents elected in May over management's strenuous objections. The newcomers say they have no special agenda. But if they should swing the $310 million company around to their sponsor's way of seeing the world, Cliffs could become a prime example of the dark side of investor involvement.
The question confronting Cliffs is basic to a host of the nation's old-line industries: Should it invest in a future that may be essential to the common weal, even if it means a delayed or possibly even reduced return for shareholders? No question, the iron-ore business seems a natural candidate for what investment theorists call gradual liquidation, in which profits are paid back to investors rather than reinvested. It's old, it's dirty, and its customers--steel companies--have seen their best days. Yet Cliffs is convinced that its business could catch a second wind from well-placed investments. "In any mature industry, if you have a significant franchise, there's room to make money if you're good at it," says Chairman M. Thomas Moore.
BANG-UP JOB. The schism at Cliffs began as an argument over whether the company should funnel its cash hoard to shareholders or reinvest it in the business. Although impressed with Moore's record as an operator, 10% shareholder Tiger Management Corp. lacked confidence that the Cliffs board would invest wisely. So Tiger, run by renowned money manager Julian H. Robertson Jr., argued that management should begin a big share buyout.
Moore said no. He did agree in March to select a third of the board from nominees picked by Tiger but backed away. Robertson then fielded a slate of outsiders to run for the board on no particular platform. "Our only agenda was to put independent, highly qualified people on a board that was not independent," says John A. Griffin, a Tiger managing director. That, Moore protests, was so much "veneer" for Tiger's real agenda: turning away from a long-term focus on the iron-ore business to pay out cash to investors. In any event, Robertson's slate attracted 42% of shareholders' votes, enough under the rules to win five seats on the board.
Curiously, even Tiger concedes that Moore and his team have done a bang-up job of rewarding investors since taking the helm in 1987. Back then, Cliffs was sinking into financial distress as its steel-company partners went bankrupt. But improved operations and healthier demand restored Cliffs to prosperity. Today, it accounts for more than 40% of North American iron-ore output and, though singed by the recession, is expected to earn about $35 million this year. Moreover, spin-offs and a special dividend have paid out the equivalent of $8.35 a share since 1988, while the quarterly dividend has been reinstated--now paying 27~ a share. Debt, at $121 million, is a mere 32% of capital, and the company has nearly $100 million in cash.
So what to do with all this new wealth? Moore looks at the sagging North American steel industry and takes comfort in his cash trove. He also figures steel's woes could provide the opportunity to pick up ore properties on the cheap. He sees a chance to grow abroad, too, where steel demand is expected to pick up, albeit slowly. Considerable industry investment is going into iron ore in Australia and South America.
'OPPORTUNITIES.' Further down the road, new technologies could allow Cliffs to supply iron in new forms to U. S. minimills, which have been growing at the expense of integrated mills. Cliffs and North Star Steel Co. are experimenting with substituting Cliffs' iron carbide for some of the scrap North Star uses. "There's a whole bunch of profitable opportunities around," says Firoze E. Katrak, vice-president for market assessment at consultant Charles River Associates Inc.
Not surprisingly, Tiger's view is as different as Wall Street is from Lake Erie. "Why would you ever want to invest in mining in Venezuela when you can buy in your own stock at six times earnings?" asks Griffin. Moreover, Tiger doesn't trust Cliffs' incumbent directors, whom it characterizes as a clubby band too close to management. Griffin argues that shareholders have done well largely because a 1987 proxy fight squelched an ill-considered diversification that Cliffs' directors approved.
However, there's little to suggest that Moore is a free spender. He has focused on iron ore, and his track record suggests he may well be able to find profitable opportunities in it. The new directors, who say they have open minds about Cliffs' strategy, would probably serve shareholders best by giving Moore the chance.