Shareholders of Cleveland-Cliffs Still Standing in the Shadows

Last Friday, shares in Cleveland-Cliffs (CLF-$77.81) climbed $4.29, or 5.6% in price, following a report in the trade magazine, American Metal Market, that the world’s largest steelmaker, Arcelor Mittal (MT-$66.01), would make an offer of over $100 a share.

Another weekend came and went, however, and no steelmaker stepped forward with an offer for this U.S. producer of iron ore pellets.

Cleveland-Cliffs was a $53 stock before the first round of buyout rumors hit the stock back in March. Speculation about the Company’s future peaked on Monday, June 1, at an intra-day high of $92.06 per share, when traders looking for another round of consolidation in the steel industry, believed that either Brazilian iron ore miner Companhia Vale do Rio Doce (RIO-$46.50) or Australian miner Rio Tinto Plc. (RTP-$311.76) were negotiating a takeout of Cleveland-Cliffs.

Two weeks later, shareholders find themselves in the valley of the shadow of its peak price.

After reading the Company’s annual proxy, the 10Q Detective believes that shareholders “should feel no evil,” for management would quickly acquiesce if a buyout offer materialized.

“Over every mountain there is a path, although it may not be seen from the valley.” Theodore Roethke (American poet, 1908 –1963)

Looking at nonqualified deferred compensation and equity (restricted share grants, performance shares and beneficially-owned common stock) Chairman and CEO Joseph Carrabba, Former Vice-Chairman of the Board David Gunning, Executive VP William Calfee, and Pesident-US Ore Operations Don Gallagher stand to receive $10.79 million, $8.58 million, $10.32 million, and $12.12 million, respectively, with a ‘change in control without termination.’

If the foregoing executive officers were ‘terminated without cause following a change in control,’ each would receive $21.14 million, $14.31 million, $16.33 million, and $18.65 million, respectively. It would behoove each of the named officers to ‘leave for health reasons,’ for if they were to leave the Company following its acquisition, the higher payments would include tax gross-ups, too.

The aforementioned severance amounts belie the actual amounts each named executive officer would receive, for the stated amounts are based on the closing price of Cleveland-Cliffs on June 7, 2007, which was $82.60 per share.

Former Chairman and CEO John S. Brinzo would benefit handsomely, too, should the Company yield to one of the named predators. Messer. Brinzo, who retired on September 1, 2006, would receive about $10.87 million (at a price of $100 per share).

CEO Joseph Carrabba, who is only 54 years old, could easily find work at another Company. The one potential hit he would have to absorb is country club membership fees. In 2006, the Company paid $67,539 in club dues for him.

Traders should note, however, that the options market is not expecting much in terms of a premium bid for Cleveland-Cliffs in the coming weeks. For example, the bid-ask spread for the July 80 call options (which expire July 21, 2007) is $3.00 per contract - $3.20 per contract [all time premium], with open interest of 4,312 contracts.

Editor David J. Phillips does not hold a financial interest in any of the stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.