Cleveland-Cliffs Inc. - Company Profile, Information, Business Description, History, Background Information on Cleveland-Cliffs Inc.

1100 Superior Avenue
Cleveland, Ohio 44114-2589

History of Cleveland-Cliffs Inc.

With seven iron ore mines in the United States, Canada, and Australia, Cleveland-Cliffs Inc. is the Western world's leading producer of iron ore pellets. As North America's only full-service iron ore firm, the company manages 47 percent of the continent's total capacity for production of iron ore pellets. Cleveland-Cliffs has been faced with competition from imports, takeover attempts, shareholder revolts, an ill-advised diversification, and the vagaries of the cyclical steel industry over the years, but as it entered the mid-1990s, the company had established a position of strength at the top of its field. Some industry observers hold that Cleveland-Cliffs reached the pinnacle of its industry by holding to one essential objective first promulgated by William G. Mather in the 1930s and summed up in 1974 by then-CEO H. Stuart Harrison: "No matter what may happen, don't part with domestic iron ore reserves."

Cleveland-Cliffs' predecessor, the Cleveland Iron Mining Company, was established in 1846 by a group of investors led by Samuel L. Mather. Mather, an attorney, had moved to Cleveland, Ohio, in 1843, just two years after iron ore was discovered in the Marquette Range of Michigan's Upper Peninsula. Although Mather was confident that, given time, the venture would prove profitable, it was for many years a losing proposition. Transportation costs were prohibitive until 1855, when the Sault Ste. Marie shipping canal was completed. A 1974 company history noted that "it cost $200 a ton to smelt the ore and ship it down to Pittsburgh where [it] was selling at $80 per ton." Cleveland Iron Mining was only able to survive these difficult formative years through a "unique financial device" concocted by then-treasurer Mather and company President W.J. Gordon. They printed up scrip known as "Iron Money" in one-, two-, three-, and five-dollar denominations and met their financial commitments with these "IOUs" until the company's cash flow stabilized.

As the years went by and surface mines in the region were depleted, firms like Cleveland Iron Mining were forced to seek underground sources. Up to this time, mining was a fairly simple, but extremely labor-intensive, process. Below-ground mining necessitated the development of such specialized devices as power drills, hoisting and conveying machinery, pumps, and ventilation equipment. Cleveland Iron Mining in 1877 became one of the first firms to use these types of equipment to locate ore bodies. The company also pioneered the used of electricity at its mines, often establishing its own on-site hydroelectric and coal-fired generators. These one-time necessities grew into a profitable sideline in the early twentieth century.

During the late nineteenth century, Cleveland Iron Mining diversified into timber harvesting as a predictable adjunct to its mining efforts, for timber was used to support mine shafts and as fuel for blast furnaces. At its zenith, the mining company's lumber output topped 80 million feet of timber, and its timberland holdings peaked at 750,000 acres. As this property was cleared, it was often sold. After the turn of the century, the company formed a joint venture in paper production with the Munising Paper Company. It also acquired an interest in the Munising Woodenware Company, a manufacturer of wooden bowls, clothespins, and rolling pins. The company divested itself of these timber sidelines in the 1930s.

The discovery of high-grade iron ore deposits at open-pit sites in Minnesota's Mesabi Range in the 1890s--and the new competitive front it opened&mdashcelerated changes already underway in the Michigan-based segment of the iron mining industry. Between 1893 and 1905, many steel companies consolidated vertically through the acquisition of iron ore properties in the Lake Superior district. In order to protect their interests, several large mining companies merged and/or acquired their smaller competitors. This early shakeout formed the enduring structure of the industry.

A major transition at Cleveland Iron Mining reflected this change. In 1891 the company merged with the Iron Cliffs Mining Company to form the Cleveland-Cliffs Iron Company. Organized in 1864 by Samuel Tilden, the Iron Cliffs Company held broad mining interests, but suffered from an aging and disinterested management.

The merger was spurred by Jeptha H. Wade, Sr., former cofounder and president of Western Union Telegraph Company, who purchased a controlling interest in Iron Cliffs in the late 1880s. He entered negotiations with Samuel Mather to unify the two mining companies, but before the merger could be concluded, both Wade and Mather died. Their sons, Jeptha Wade, Jr., and William G. Mather, consummated the deal, which gave the new business entity the fiscal wherewithal to be an effective competitor. Using their unified resources, Cleveland-Cliffs joined the Pittsburgh & Lake Angeline Iron Company to build a railroad from the mines to docks at Presque Isle in the late 1890s. (By the mid-1970s, the railroad transported over seven million tons of ore and one million tons of general freight each year.)

William Mather was elected president of Cleveland-Cliffs. Mather, who had started his career with Cleveland Iron Mining as a clerk in 1878, served as president for 42 years. Perhaps inspired by social reforms of the turn-of-the-century Progressive Era, the second-generation leader established a department that provided disability and death benefits to miners and their families, as well as educational assistance, a pension fund, and a worker safety program.

The ever-growing capital requirements of mining made it an increasingly venturesome proposition in the early twentieth century. In order to distribute the risk, Cleveland-Cliffs formed partnerships with steel companies to own and operate mines. The company established its first joint venture of this type in 1903 when it leased the Negaunee Mine to a company it co-owned with Bethlehem Steel Corporation. Cleveland-Cliffs' customer relationships were often strengthened through the exchange of ore for stock and equity positions in steel companies.

This policy developed into a more coherent program in 1929, when Cleveland financier Cyrus Eaton hatched a plan to form a top-ranking steel company through the union of several mid-sized competitors. In exchange for financing part of the venture, Cleveland-Cliffs would become its preferred supplier. The scheme called for Cleveland-Cliffs to establish a new entity, Cliffs Corporation, that would be jointly owned by Eaton and a group of steel magnates. For his part, Eaton traded a $40-million portfolio of dividend-paying steel stocks in Republic Steel Corporation, Inland Steel Co., and Youngstown Sheet and Tube. Meanwhile, Cleveland-Cliffs acquired a controlling interest in Corrigan-McKinney Steel Company, a Cleveland steelmaker, for $23 million in borrowed funds. The industrialists intended to merge these four steel companies into a new business called Midwest Steel Corporation. The onset of the Great Depression, however, squelched the plan. Cleveland-Cliffs was left with a heavy debt load in the midst of the world's deepest economic downturn. The company recorded a loss in 1932.

A company history published in 1974 called this low point "William G. Mather's finest hour." It was at this desperate time that he established Cleveland-Cliffs' policy of sacrificing all but domestic iron ore reserves to keep the mining concern alive. Despite his efforts, Cleveland-Cliff's financial condition continued to deteriorate. In 1933 local banker Edward B. Greene, an in-law of the Wade family, replaced Mather as president, who assumed the position of chairman. Greene reduced Cleveland-Cliff's debt through sale of some timberlands and steel stocks, and the 1935 divestment of Corrigan-McKinney to Republic Steel. The financial reorganization brought about the 1947 reunion of Cleveland-Cliffs and the practically purposeless Cliffs Corporation. Mather retired in 1952 and was replaced by Greene. The position of president was briefly filled by Alexander C. Brown.

In the meantime, three forces converged on the iron industry and Cleveland-Cliffs to bring about fundamental changes in the business. World War II's military requirements had driven seemingly insatiable demand for high-quality iron ore. Given the high costs (and unpredictable payoff) of domestic underground exploration, iron and steel producers looked for alternative sources of high-grade ore through overseas exploration. Cleveland-Cliffs thus pursued options in eastern Canada, Venezuela, Colombia, Chile, and Peru, although it later scaled back its international operations to Canada and Australia.

At the same time, the U.S. steel market was inundated with high-grade, yet cheap, foreign ore. From 1953 to 1963, imports increased from eight percent of domestic consumption to 36 percent. The combination of high costs, competition, and exhaustion of higher-grade domestic ore sources forced hundreds of American mines out of business in the postwar era.

Walter A. Sterling, who was elected president of Cleveland-Cliffs in 1953 and chief executive officer in 1955, instigated the company's transition to an emphasis on upgrading abundant low-quality ores into material useful to the steel industry. Over the course of the decade, Cleveland-Cliffs adopted the pelletizing process that later became the standard for the American steel industry. First developed in Europe in the early twentieth century, pelletization is a method of iron processing that upgrades low-quality iron ores through concentration (grinding and separating the unwanted materials from the desirable ore) and pelletization (moistening, forming, and firing the ore into spheres suitable for use in a blast furnace). By the time Sterling retired in 1961, Cleveland-Cliffs was poised for a decade of growth. Sterling was succeeded as president and chief executive officer by H. Stuart Harrison, a Cleveland-Cliffs veteran of 24 years.

Cleveland-Cliffs was not exempt from merger overtures during this era of heavy industry activity. By the late 1960s, Detroit Steel had accumulated nearly one-third of Cleveland-Cliffs' stock. Although heirs of the Mather, Wade, and Greene families owned a similar-sized stake in the company, many feared that a firm interested in acquiring Cleveland-Cliffs could launch a strong offensive through Detroit Steel. That apprehension came to fruition in 1970, when Cyclops Corporation, a steel company, bought 19 percent of Detroit Steel. In order to diffuse the situation, Cleveland-Cliffs essentially repurchased its own stock from Detroit Steel by acquiring the remaining shares of the latter company for $50 million, recovering its own 1.1 million shares, and turning over its majority interest in Detroit Steel to Cyclops.

Having repulsed this threat to its independence, Cleveland-Cliffs undertook a diversification program in the early 1970s in hopes of reducing its reliance on the cyclical steel industry. The strategy included re-entry into the timber market, as well as investment in shale oil, uranium, and copper mining. This tactic soon proved disastrous. In 1982, Cleveland-Cliffs experienced its first loss since the Great Depression. Cliffs executives blamed a 51 percent reduction in North American iron ore production and a 44 percent decline in iron ore shipments. Indeed, the U.S. iron mining industry took a beating throughout the 1980s, as increasing imports and two severe recessions forced the closure of one third of America's iron ore mines. But notwithstanding these inherent problems, analysts--and significantly, some Cleveland-Cliffs shareholders--blamed the company's difficulties on its oil and gas operations, which experienced an 85 percent plummet in earnings in 1982. In recognition of this dreadful performance, Fortune indicated in 1991 that some Wall Street pundits dubbed the company's acquisition plan "de-worse-ification."

A second loss in 1986 brought the company perilously close to bankruptcy. By the end of 1987, Cleveland-Cliffs had $126 million in past due loans. As the company's stock declined, management instituted several anti-takeover measures, including a "poison pill" plan and "golden parachutes" that secured their own financial futures. The crisis--and the board's reaction to it&mdash′ecipitated a battle with shareholders over the best way to restructure the company's debt. CEO M. Thomas Moore wanted to pay off the liability with the proceeds of a new stock issue, but dissident shareholders led by David Bolger, who held 6.8 percent of the company's stock, favored a more creative plan. According to a January 1988 Forbes article, Bolger proposed to "raise $144 million in new bank debt, toss in $221 million cash from the company treasury and the sale of a Michigan power plant, call in $53 million in preferred [stock] and make a hefty $168 million cash distribution to shareholders."

Moore tried his plan and floated four million shares in the fall of 1987. The company, however, was only able to earn $62.4 million on the $68 million offering. Within days of the scheme's failure, Bolger called for a special vote on the composition of Cleveland-Cliffs' upper echelon. The majority of shareholders elected to retain Moore and the board of directors, but only after the corporate leaders announced that they had adopted a plan to either recapitalize or sell the company.

The reorganization that ensued involved divesting the firm's peripheral holdings, closing two mines, paying down debt with the proceeds, and renegotiating contracts with customers, unions, and utilities. The restructuring culminated with a $175.9 million repurchase of over one-third of the company's stock.

Cleveland-Cliffs acquired a major rival, Pickands Mather, just in time for a late 1980s steel industry revival. Voluntary restraint agreements with importers also helped, giving U.S. iron miners time to retool. By the end of the decade, Cleveland-Cliffs was again garnering commendations. A 1990 article in the Engineering & Mining Journal asserted that "perhaps no mining company has been as successful as Cleveland-Cliffs." Indeed, from 1986 to 1992, the firm's stock rose 500 percent. In 1991 the company gave shareholders a special $4 cash dividend.

Although Cleveland-Cliffs had recovered from its stumbling performance in the mid-1980s, in 1991 management again faced a shareholder revolt. This battle was initiated by Julian H. Robertson of Tiger Management Associates, which held ten percent of Cleveland-Cliffs' stock. Robertson, who was characterized in a 1991 Fortune article as "one of Wall Street's hottest money managers," worried that Cleveland-Cliffs would use the over $115 million in cash and marketable securities it had built up to launch another "de-worse-ification." Robertson fomented a proxy vote and won the right to seat five directors (a minority) on an expanded board.

Even these new leaders, however, were powerless to prevent the problems that plagued Cleveland-Cliffs in the early 1990s. In 1992 two of Cliffs' major customers--Sharon Steel, which contributed 11 percent of annual operating revenues, and McLouth Steel Products, which chipped in an estimated 25 percent&mdash-countered significant financial difficulties. Sharon Steel sought Chapter 11 bankruptcy protection that year, and McLouth stopped payments on its shipments. Cliffs was cited as the largest creditor of each of these two businesses. Fearful that it might never recover revenues lost to these two causes, Cleveland-Cliffs set aside $17.5 million in a contingency fund. This precaution contributed to the company's net loss of $7.9 million in 1992. A year later, in August 1993, labor problems bruised third quarter earnings. Finally, Cleveland-Cliffs faced threats from ever-present imports and new competition from "mini-mills," which utilized electric arc furnaces to turn scrap metal into usable steel. By 1993, this new technology had captured 43 percent of total steelmaking.

Nonetheless, several industry observers expressed confidence that Cleveland-Cliffs' strengths would enable it to meet the challenges of the 1990s. They cited the company's position of dominance in the iron ore mining industry, its strong balance sheet, and its research into alternative production methods (including iron carbide and scrap metal substitutes) as evidence of its vigor. Industry factors, including the close accord of supply and demand, also boded well for the mining concern.

In the fall of 1994, Cliffs bolstered its top-ranking position with the acquisition of Cypress Amax Minerals Co.'s iron ore mine and power plant in Minnesota for $66 million. The addition increased Cleveland-Cliffs annual production capacity by 69 percent, from 5.8 million tons to 9.8 million tons of standard pellets. The company netted $42.8 million on sales of $344.8 million that year, their highest levels for both figures since 1990.

Principal Subsidiaries: The Cleveland-Cliffs Iron Company; Cliffs Mining Company; Cliffs Mining Services Company; Cliffs Reduced Iron Corporation; Northshore Mining Company; Pickands Mather & Co. International.

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Further Reference

Bradley, Hassell, "Cleveland-Cliffs' Moore Challenges Status Quo," American Metal Market, September 24, 1990, p. 24A.Caney, Derek J., "Cliffs Completes Buy of Northshore Assets," American Metal Market, October 7, 1994, p. 3."Cleveland-Cliffs: 1st Loss in 50 Years, $30.2M Deficit," American Metal Market, February 4, 1993, p. 3.Furukawa, Tsukasa, "Mitsubishi, Cliffs Eye Plant for Iron Carbide," American Metal Market, June 4, 1993, p. 5.Harrison, H. Stuart, The Cleveland-Cliffs Iron Company, New York: Newcomen Society, 1974.Hohl, Paul, "Cliffs Bolger Claims Victory After Vote," American Metal Market, December 17, 1987, p. 2.------, "Cliffs Plans Stock Buy-back to Further its Restructuring," American Metal Market, March 18, 1988, p. 3.Lappen, Alyssa A., "Dilution Control," Forbes, January 11, 1988, p. 10.McGough, Robert, "High Iron," Financial World, April 14, 1992, p. 26.Norton, Rob, "Who Owns This Company, Anyhow?" Fortune, July 29, 1991, p. 131.Reingold, Jennifer, "Cleveland-Cliffs: A Bet on Upgrading Minimills," Financial World, March 29, 1994, p. 22.Zaburunov, Steven A., "Cost Reduction at Cleveland-Cliffs," EMJ--Engineering & Mining Journal, September 1990, p. 29.

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