Analyst Blog

Cliffs Eyes Canadian Entity

By: Zacks Equity Research

May 25, 2010 | Comments: 0

International mining and natural resources company Cliffs Natural Resources Inc. (CLF - Analyst Report) has proposed to acquire either of two junior mineral exploration Canadian companies, KWG Resources Inc. and Spider Resources Inc.

The takeover bids have substantially similar financial terms. Cliffs intends to offer a price of 12 cents (13 Canadian cents) in cash per share to both KWG and Spider, representing a premium of 62.5% over the closing price of the shares of both the companies on May 21, 2010. This offer price implies a total value of $92.2 million (C$100 million) for KWG and $79.3 million (C$86 million) for Spider Resources. Neither of the proposed take-over bids, which will be funded by Cliffs’ existing cash resources, is conditional on the completion of the other.

Cliffs intends to acquire either of the two companies in order to obtain a majority stake in “Big Daddy”, as the North Ontario-based chromite project is popularly known. Cliffs currently owns a 47% interest in the project. KWG and Spider each owns 26.5% of Big Daddy and has the option to earn up to 30% each.

Cliffs is the largest producer of iron ore pellets in North America and a significant producer of metallurgical coal. Cliffs’ increasing international iron ore exposure, recovery in its coal business and longer-term diversification into the chromium business are huge positives for the stock. The company focuses on growing its international exposure in the face of a consistent decline in North American production.

Earlier this year, Cliffs had acquired the chromite assets of Freewest Resources Canada Inc. for about $221 million (C$240 million). These included a 100% interest in the Black Thor and Black Label properties and certain non-core gold assets. We believe a longer-term potential diversification into chromium, which is sold to the stainless steel sector, could contribute about 29% of Cliffs’ total operating profits by 2015. We maintain our Outperform recommendation on the company.