Cliffs Acquires Thompson Iron - Analyst Blog

North America's largest iron-ore producer, Cliffs Natural Resources Inc. (CLF) agreed to buy Canada's Consolidated Thompson Iron Mines Ltd. for about C$4.9 billion ($4.95 billion) or C$17.25 per share, to expand iron ore sales to Asia.

Cliffs also signed a support agreement with Consolidated Thompson's largest shareholder, Wuhan Iron and Steel of China, which owns a 19% stake in the latter. The acquisition will provide Cliffs with significant exposure to growing Asian markets.

After the acquisition, Cliffs will manage and operate Consolidated Thompson's the Bloom Lake open-pit iron ore mine and two adjacent properties in Quebec. This will result in cost savings of around $75 million in terms of transportation and port costs.

Earlier in fiscal 2008, Cliffs dropped a planned $10 billion acquisition of metallurgical coal producer Alpha Natural Resources Inc. amid opposition by Philip Falcone's Harbinger Capital Partners, which owned 15% of Cliffs.

Consolidated Thompson is not the only Canadian iron-ore miner that's being bid for, but the steel giant, Arcelor Mittal (MT) and Nunavut Iron Ore Acquisition Inc., are also vying for control of Baffinland Iron Mines Corp. The companies plan to develop an iron ore mine in the Canadian Arctic.

Iron ore prices have accelerated considerably in the past two years, due to a surge in demand from India and China. Cliffs is paying a 31% premium on top of Consolidated Thompson's average share price over the past 20 days. The purchase price includes net debt.

Cliffs is increasing its international iron ore exposure. The earlier Wabush mine acquisition is consistent with this approach, as production from this mine will be sold primarily in Europe.

Also, Cliffs' recovering coal business and longer-term diversification into the chromium business are huge positives for the stock. However, we are apprehensive that industry over capacity may pull down global iron ore and coal prices.  urrently, Cliffs has a Zacks #3 Rank (Hold) for the short term and a Neutral recommendation for the long term.

Cliffs is the largest producer of iron ore pellets in North America with a 45% share, besides being a major supplier of metallurgical coal in North America with a 30% share. The company operates six iron ore mines in Michigan, Minnesota and Eastern Canada as well as three coking coal mines in West Virginia and Alabama.

The three reportable segments of Cliffs are North American Iron Ore, North American Coal and Asia-Pacific Iron Ore. Cliffs competes with the likes of CONSOL Energy Inc. (CNX), Massey Energy Co. (MEE) and Peabody Energy Corp. (BTU).

 
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