Commentary: Ring of Fire Sale

For anybody wondering what’s going to happen to Cliffs Natural Resources’ (NYSE: CLF) chromite discovery in Ontario’s Ring of Fire region, all they have to do is read Casablanca Capital’s dissident letter to shareholders in the run-up to Cliffs’ July 29 annual general meeting (AGM).

Casablanca’s takeover strategy was to run an alternative slate of six directors on the “hedgefund platform” that Cliffs, under new management, would wield the broom over its multi-billion dollar expansion frenzy that it had just pulled off in iron and chromite.

Here is the excerpt imploring Cliffs shareholders to vote the Casablanca slate in, as the incumbent directors had to go: “The directors are focused on their own interests at the expense of shareholders, cannot be entrusted to lead Cliffs and do not deserve a single vote after having destroyed $9 billion of value.”

Shareholders overwhelmingly agreed at the AGM and thus the slicing-and-dicing commenced. Here’s a key excerpt from Market Realist analysts that spelled the end of Cliffs and Casablanca’s infatuation with the Ring of Fire:

“In our view, spinning off international assets might not be possible because most of the international assets are losing money. So ‘fire sale’ might be one option, but even for that it might be difficult to find a buyer at this stage of the market environment … Cliffs’ chromite project, which is located in the Ring of Fire area of Northern Ontario, was idled by management in fourth-quarter 2013 [because of] ongoing delays in the environmental assessment process, land rights and negotiations with the province of Ontario.”

Nothing has changed. In fact, legal access to the discovery via road or rail is still mired in intense litigation. The environmental review is in limbo. And impacted First Nations are less than impressed with the Ontario bureaucracy’s latest reincarnation of the ill-fated Ring of Fire Secretariat — now in the form of a nascent “Development Corp.”

The native reaction was immediate, as per Chief Cornelius Wabasse’s (Webequie First Nation) statement on Wawatay News:

“Minister of Northern Development and Mines Michael Gravelle called me before, giving me a heads up that they’ll be doing an announcement,” he said. “And I told him that I thought he said that we were supposed to be working together, to make that type of announcement.” Instead, Wabasse said that “Ontario is just moving forward without meaningful consultation and [without] working together side-by-side with First Nations.”

One wonders what appetite Cliffs has for weathering this storm up in Canada. “Fire sale” or not, it’s hard to believe that there will be many takers for what’s on offer.

The day after the AGM, five Ontario chiefs announced on CBC News that “all those seeking to access or use First Nations land and resources have, at a minimum, a duty to engage, inquire and consult with First Nations with the standards of free, prior and informed consent. We will take appropriate steps to enforce these assertions.”

The same scenario happened at Voisey’s Bay circa 1998, whereby Inco had faced agitated natives, a losing appellate-level court case, no on-site access, no infrastructure, no hydro power, disharmony amongst juniors and no political leadership, plus negative market and media commentary.

For Inco, Voisey’s Bay was a de facto “poison pill” warding off corporate predators. This may be the same situation that Cliffs’ new management now finds itself in — and that was  without a troubling tailings pond breach at Imperial Metals’ Mount Polley mine in B.C., which will add years to any mine development.

Welcome back to Ontario, Cliffs: land of politicos, secretariats, litigators, devcos, poison pills and bitter pills. Even at “fire sale” prices, any mining of this chromite discovery is a long way off.

— Based in Waterloo, Ont., Bill Gallagher LL.B. is an experienced strategist in the dynamic area of native, government and corporate relations, and an authority on the rise of native empowerment in the Canadian resources sector. He is author of Resource rulers: Fortune and folly on Canada’s road to resources. Visit www.billgallagher.ca for more information, book excerpts and a blog.