The Rising Influence of Rising Affluence

[DewDiligence]

More on the CLF deal from the WSJ….

http://online.wsj.com/article/SB10001424052748703791904576076322191204698.html

›Cliffs to Buy Canadian Iron-Ore Miner

JANUARY 12, 2011
By ROBERT GUY MATTHEWS

In a bid to capture more international markets, U.S.-based mining company Cliffs Natural Resources Inc. said it agreed to buy Canada's Consolidated Thompson Iron Mines Ltd. for about 4.9 billion Canadian dollars (US$4.95 billion).

The deal, an all-cash offer of C$17.25 a share already approved by Consolidated Thompson's board, is expected to be completed in the second quarter.

If approved, Cliffs, a Cleveland-based coal and iron-ore producer, would add about eight million metric tons of capacity to its existing 40 million metric tons of capacity located in Canada, the U.S., Australia and Brazil. [I.e., CLF is shelling out cash worth about 50% of its market cap to increase iron-ore production capacity by 20% immediately and 40% eventually. When viewed in these terms, the deal does not seem to be such a no-brainer, IMO.]

The company expects to double Consolidated Thompson's current iron-ore production by 2013.

The deal would also expand beyond Cliffs' existing customer base. Its three biggest customers—ArcelorMittal, Severstal SA and Essar Steel Algoma Inc.—all have operations located in North America.

"This will mitigate the risk of three large customers that make up 46% of total revenue," said Joseph A. Carrabba, Cliffs' chairman, president and chief executive.

Mr. Carrabba said that once the deal is completed, he expects nearly half of the combined company's iron-ore production in North America will be exported.

Thompson's iron-ore production will be part of the seaborne trade in iron ore, able to tap into lucrative markets in Asia, which has more growth potential than North America, said Mr. Carrabba.

The deal is expected to generate about $75 million in synergies and would add to Cliffs per-share earnings and cash flow beginning this year.

Cliffs said it is confident that it won't face opposition from the Canadian government over its plans to buy Thompson. Last year, Canada shut down Anglo-Australian miner BHP Billiton's attempt to buy Canadian potash producer Potash Corp. of Saskatchewan Inc.

"We have been working in Eastern Canada for 45 years. We are not a Johnny-come-lately to the area," he said. "So we have exercised our social responsibility."

Cliffs said that there isn't likely to be a problem in Canada from an antitrust standpoint.

Mr. Carrabba said that by offering an all-cash deal, it would be the "speediest" way to get a deal done in Canada. He also said that he had been talking with Thompson for about a year before cementing the deal offer.

Thompson, 19%-owned by China's Wuhan Iron & Steel Co., also owns the Lamalee-Peppler development project in Quebec, with resources of 302 million metric tons.

For months, Cliffs has signaled that it was looking to expand and acquire new companies. But after this acquisition, the company said that it would likely focus on integrating and expanding operations before looking for more deals.‹