Cleveland-Cliffs Buyer’s Climbing Stake

May 30, 2008

May 29 (Barron’s) – Shares of Cleveland-Cliffs (ticker: CLF) have almost tripled in the past 12 months on the demand for steel and its rising price. But one institutional investor thinks the run has just begun, digging into its pockets to acquire an additional $100 million in the mining company’s stock.

On May 22 and 23, Harbinger Capital purchased 1.1 million shares for $102 million, an average of $92.75 a share. Harbinger, a subsidiary of Birmingham, Ala.-based Harbert Management, now owns 13.9 million shares of Cleveland-Cliffs, a 15.3% stake.

Since the beginning of 2008, Harbinger has bought nearly four million shares, investing more than $275 million in Cleveland-Cliffs, the largest producer of iron-ore pellets in North America.

A spokesman for Cleveland-based Cleveland-Cliffs said that as it is a public company “any person or institution can purchase our common shares on the open market, and we would view Harbinger no differently than our other shareholders. We consider [share purchases] by any individual or firm as an endorsement on our prospects to generate value in the future.”

Harbinger did not return phone calls seeking comment.

While the Dow Jones U.S. Steel Index gained 31.3% in the last 12 months, Cleveland-Cliffs racked up gains of 173.9%.

“With Harbinger putting this much money into the stock at this point, as they continue to pour more money in as shares have gone higher, they obviously feel there’s still some room to run,” says Ben Silverman, director of research at InsiderScore.com. “Harbinger is an event-driven hedge fund, so they might also feel there’s going to be some event down the road, such as the company being acquired, but it’s a pretty big position for them not to be in it for the long term.”

Cleveland-Cliffs’ stock has recently almost quadrupled an Aug. 16 52-week intraday low of $28.20. Shares reached an intraday high of $107.15 on Wednesday.

On Thursday shares lost $5.91 to $101.09.

“At the price Harbinger made the buys, they’re still up 10%, even with today’s drop,” says Silverman. “And Cleveland-Cliffs’ guidance for pricing for iron ore and metallurgical coal, which goes into making steel, has been raised in terms of the average selling price they expect.”

Still, Cleveland-Cliffs’ first-quarter results were less than stellar, with profit dropping to $16.7 million, or 32 cents a share, from $32.5 million, or 62 cents a share, a year earlier, dragged down by unsettled benchmark prices and higher tax rates. On average, analysts were expecting earnings of $1 a share.

Despite the results, analysts remain bullish on Cleveland-Cliffs, and those surveyed by Thomson Reuters rated the company at Buy or the equivalent, with a 12-month target price of $82.88.

In a research note following the earnings report, Deutsche Bank Securities analyst Jorge Beristain wrote that 2008 guidance “remains on track” and upbeat. Beristain maintained his Buy rating on Cleveland-Cliffs and raised his target price to $115 from $85.

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