The Rising Influence of Rising Affluence

[DewDiligence]

CLF Acquires Consolidated Thompson for $5B in Cash

[This is a transformative deal for CLF insofar as the cash price of the acquisition amounts to almost half of CLF’s own market capitalization. The rationale for the deal is to augment CLF’s Wabash mine in Quebec (acquired by CLF in Oct 2009: #msg-42447258), which ships product to China and other buyers in Asia, thereby earning the global price for seaborne iron ore rather than the (lower) North American price CLF realizes from its mines in the Great Lakes region. I.e., the deal is a direct play on The Global Demographic Tailwind.

Thompson’s mines, which have been operating commercially for less than a year, are near enough to CLF’s existing operations in Quebec that they can share the rail transport and port facilities, reducing operating costs and allowing the output of the Thompson mines to be doubled from 8M to 16M annual tones within the next few years. Moreover, Thomson’s ore averages 66% Fe content by weight, making it the highest quality ore in North America (and comparable to the output from VALE’s Carajas mine in Brazil) and thereby subject to a premium price relative to the global seaborne benchmark , which is based on 62% Fe content.

Wuhan Iron and Steel Co (WISCO), China’s third-largest steel company, owns 25% of the Thomson mines and will retain this ownership following CLF’s takeover of Thompson. WISCO is also an equity holder in Thompson’s Canadian-listed shares and has agreed to sell all of its stake to CLF, which makes the takeover close to being a fait accompli.

Despite the substantial risk of a deal that shells out cash worth almost half as much as CLF’s own market cap, today’s price action shows that market likes the strategic rationale for the deal and the fact that the deal will be immediately accretive to EPS. CLF is up 3% today to a new 2-year high, and the shares are up more than 700% (!) from their Mar 2009 low. Still, I wonder if CLF, which has been buying up everything it can get its hands on during the past 18 months, might be biting off more than it can chew.]

http://finance.yahoo.com/news/Cliffs-Natural-Resources-Inc-prnews-3476425548.html?x=0&.v=1

›Cliffs Natural Resources Inc. Announces Definitive Agreement to Acquire Consolidated Thompson Iron Mines Limited for C$4.9 Billion, or C$17.25 in Cash Per Share

• Acquisition to Diversify Cliffs' Customer Base with Expanded Seaborne Presence

• Positions Cliffs as a Top Ten Global Iron Ore Producer

• Consolidated Thompson's Largest Shareholder Agrees to Support the Acquisition

Tuesday January 11, 2011, 4:40 pm

CLEVELAND, Jan. 11, 2011 /PRNewswire/ -- Cliffs Natural Resources Inc. (NYSE:CLF) (Paris:CLF.pa), an international mining and natural resources company, today announced that it has entered into a definitive arrangement agreement with Consolidated Thompson Iron Mines Limited (TSX:CLM.to - News) to acquire all of Consolidated Thompson's common shares in an all-cash transaction valued at approximately $4.9 billion Canadian dollars (including net debt), or C$17.25 per share, which represents an implied premium of 30% to Consolidated Thompson's closing share price as of Jan. 10, 2011. Cliffs has committed financing and available liquidity sufficient to fund the purchase price. Cliffs expects to arrange for permanent financing by accessing the capital markets, which may include long-term debt and equity.

The transaction is expected to be modestly accretive to Cliffs' earnings-per-share and cash flow in 2011 and 2012. The transaction is expected to close early second quarter 2011, subject to the satisfaction or waiver of various customary closing conditions.

The transaction has been approved by Consolidated Thompson's Board of Directors. In addition, Consolidated Thompson's Board of Directors has recommended that its shareholders support the transaction, which would be completed by way of a statutory plan of arrangement that is subject to shareholder approval in a court-supervised process under Canadian law. In addition, Cliffs has entered into a support agreement with Consolidated Thompson's largest shareholder, Wuhan Iron and Steel (Group) Corporation of China, which owns nearly 19% of Consolidated Thompson's outstanding shares [i.e. WISCO has committed to tender its shares]. Consolidated Thompson's directors and certain senior officers have also entered into support agreements with Cliffs.

Strategic Rationale

The proposed acquisition of Consolidated Thompson reflects Cliffs' strategy to build scale by owning expandable and exportable steelmaking raw material assets serving international markets. Once the acquisition and planned expansion projects are complete, Cliffs expects nearly half of its iron ore production in North America will be exported. The transaction will provide Cliffs greater access to Asia and opportunities to build and grow strong business relationships with Consolidated Thompson's current customers.

All of Consolidated Thompson's current production capacity is contracted under long-term off-take arrangements at sales-per-ton rates that move with the global seaborne prices. This production capacity includes the existing strategic alliance with Wuhan Iron and Steel (Group) Corporation, China's third largest steel producer, and two large Asian commodity brokers. Consolidated Thompson has established strong relationships with its existing customers. Upon completion of the acquisition, Cliffs expects to maintain and enhance these strategic relationships. These new customers would also enable Cliffs to strategically diversify its customer base beyond its historical North American steelmaking customers. Upon completion of the acquisition and completion of the planned ramp-up in production, it is expected that over half of the combined revenue base will be generated from customers outside of North America.

Joseph A. Carrabba, Cliffs' chairman, president and chief executive officer, said, "The acquisition of Consolidated Thompson will combine a low-operating risk profile with access to high-growth global markets and broaden our exposure to seaborne iron ore prices. We have followed Consolidated Thompson closely since its founding in 2006, and have been very impressed with its significant progress and development to date. We are also enthusiastic about expanding our investment in Eastern Canada, where we have over 45 years of experience and where the regulatory environment, political system and environmental stewardship are consistent with our core values."

Consolidated Thompson's Strategic Assets

As an emerging world-class iron ore producer, Consolidated Thompson currently operates in the iron ore-rich area spanning northeastern Quebec, western Newfoundland and Labrador. Consolidated Thompson manages and operates Bloom Lake, an open-pit iron ore mine, and two adjacent development properties, Lamelee and Peppler Lake. The producing operations are currently ramping to an annualized production rate of 8 million metric tons of iron ore concentrate, with an expansion in progress that is expected to double the company's annualized production to 16 million metric tons.

Consolidated Thompson's assets are located in close proximity to a hydroelectric power grid, along with roads and a rail line that link the processing facility to deep-sea ports in Sept-Îles, Quebec. This infrastructure, coupled with Consolidated Thompson's newly commissioned concentrator facility, good quality ore body and absence of royalty payments, positions it among other low-cost iron ore producers around the world.

Consolidated Thompson controls approximately 580 million metric tons of proven and probable iron ore reserves at an average grade of 30%. In addition, Consolidated Thompson has over a billion metric tons of measured and indicated resources, with potential additional resources to be proven via a near-mine drilling program.

Synergies with Cliffs' Existing Eastern Canada Operations

Consolidated Thompson's operations are close to Cliffs' existing operations at Wabush Mines in Eastern Canada, a 5.6 million metric-ton rated capacity iron ore pellet operation with integrated rail and port infrastructure that currently supports Consolidated Thompson's operations. Cliffs' close proximity to Consolidated Thompson's operations is expected to provide the opportunity to achieve significant sustainable operating synergies by leveraging Cliffs' existing logistics and processing infrastructure. Cliffs has identified opportunities to lower Consolidated Thompson's freight and ship loading costs and maximize the combined company's consolidated reserve and resource base by optimizing product mix between pellet and concentrate products. Cliffs estimates that the proposed transaction could generate annual pre-tax operating synergies of approximately US$75 million.

Combined Company Profile

Cliffs' acquisition of Consolidated Thompson is expected to enhance Cliffs' profile as one of the largest mining and natural resources companies in North America, with significant exposure to Asia. Cliffs' legacy and technical expertise in open-pit mining, combined with Consolidated Thompson's high-growth development profile, creates the opportunity for additional scale and leverage. Upon consummation of the acquisition, Cliffs' global mine portfolio will include ten iron ore facilities, six coal mines and a pre-feasibility chrome-development project across North America, South America and Australia.

Cliffs believes that, with Consolidated Thompson's current operations and successful completion of its ongoing expansion projects, combined with Cliffs' global iron ore operations, the acquisition would position Cliffs to become a producer of up to 30 million metric tons of iron ore pellets, up to 16 million metric tons of iron ore concentrate and up to 11 million metric tons of lump and fines iron ore.

Upon completion of the acquisition, Consolidated Thompson will become an indirect wholly-owned subsidiary of Cliffs Natural Resources and be rebranded under the Cliffs name. It is anticipated that Consolidated Thompson will become part of Cliffs' North American Iron Ore business unit and will be led by Cliffs' executive leadership team.

Details Regarding Arrangement Agreement

Cliffs' agreement to acquire Consolidated Thompson contains customary closing conditions. These include:

• Approval by two-thirds of the votes cast by Consolidated Thompson's shareholders attending or represented at a future special meeting of shareholders;
• Obtaining all court, government and regulatory approvals, including Investment Canada, Canadian Competition Act, and others; and,
• No material adverse change in Consolidated Thompson's business, financial condition or results of operations.

Cliffs' Advisors

J.P. Morgan Securities LLC is acting as Cliffs' financial advisor and has committed bridge financing for the transaction. Jones Day and Blake, Cassels & Graydon LLP are acting as legal counsel.

Conference Call

Cliffs Natural Resources' executive management will host a conference call today, Jan. 11 at 5:30 p.m. ET to discuss the agreement. Interested participants may listen to the call by dialing [phone] (for callers within the U.S.) or [phone] (for international callers) and referencing code 00365099 approximately 15 minutes prior to the call. A slide deck will be used during the call. Both the slide deck and the conference call can be accessed via the investor relations section of Cliffs' website, at www.cliffsnaturalresources.com. A replay of the call and the accompanying slides referenced during the call will be available on the website for approximately 30 days.‹