First, let me apologize for not having posted in a while. I changed the email address on my Agoracom account about four weeks ago, and inadvertently locked myself out of my account until today. I was considering starting a second account, but I figured that I’d be able to figure out how to get back into this account eventually, so I didn’t bother. However, there were a few times earlier this month when I had wanted to post some comments, including thoughts about a KWG/SPQ merger before the CLF’s “offer” came through.

Anyway, I want to comment on my own take on the eventual take-out price. I’m not a big investor in the ROF right now, owning less than a million shares, split 50:50 between KWG and SPQ. I got into (and subsequently out of) SPQ a few years ago, lucking out on my timing. I got back into KWG a few months ago after FWR was taken out, choosing it over SPQ based on the NSR alone. A few weeks later, I got a good feeling and decided to match the position with SPQ to hedge my bets. So that’s where I stand now.

First of all, I feel that a few of the comments thrown out around here show a complete lack of understanding of the markets and valuations. Thankfully, there are also a lot of very astute posters here. The problem, however, lies in “weighted averages” and the size of share floats. $5 is not a reasonable price per share. $1 is not a reasonable price per share (probably). So I sat down to take a quick look at what a reasonable price per share is.

First of all, people have pounced on the fact that analysts commented on the FWR purchase adding $5 per share to CLF’s value. I think some people mis-interpreted this as meaning that FWR shares should have been worth $5 each. I believe that the implication was that each CLIFF’s share value would be increased by $5, in a theoretical sense.

So let’s multiply that by the number of Cliffs shares outstanding (135m now, although I think it was slightly less at the time). That gives us a market value of about $675m for the 47% stake of Big Daddy. Now I admit that this is slightly misleading, because that deal also included BT, etc. But let’s keep this simple. We have to be careful to distinguish numbers here. That stake COST them about $240 million if I remember correctly, about a quarter billion shares at just under a dollar. But the analysts indirectly have pegged the value of the stake at that $675m.

So let’s make a small assumption and say that if 47% of BD was “worth” about $675m, then the remaining 53% is worth about $700m. There are lots of little factors influencing this (ie. gaining 100% control is worth more on a percentage-by-percentage basis than gaining control of a non-controlling interest percentage), but we’ll ignore this and go with a round $700m.

If you figure out the fully diluted number of shares of KWG and SPQ, then we’re looking at maybe a top value of slightly over 40 cents per share for the remainder of Big Daddy. Remember, this analysis assumes that the value of BD to Cliffs is in line with those analyst comments. This would value BD in total at about $1.375b, NPV, discounting unknown factors. I know that some people have been throwing around numbers as if the deposit is worth $50 billion in past weeks. Well, in a very general sense, yes, the future revenue coming out of BD could very well end up being $50b. But expenses and future values need to be factored in. If the contribution margin on the mine is 20% eventually, then that means expenses of 80% over time, which means that a $50b of product at selling price requires $40b in expenses (fuel, labour, transportation, capital assets, etc.) to produce the product. And $10b in contribution margin over time has to be discounted to a net present value. Anyway, long story short, a current valuation for BD of a couple billion seems quite logical, no matter if it turns out to be the mother of all global chromite deposits. That might be increased a bit if the resource can be defined better, but for the present time, I’m standing by a realistic fair valuation maximized at only slightly over 40 cents per share, despite wishing that it was much higher.

Ok, so if we assume 40 cents as the “fair” value of the shares, and Cliffs not being willing to pay a premium over that fair value, then the question is “where do we end up with as a final price?” My opinion is that it will end up between 13 cents and 40 cents. But that’s a pretty broad range. What factors will affect the final number?

1. 1. Cliffs has a history of coming out low, knowing that when a subsequent offer is made, it “seems” to be a big jump up, and “generous” on their part. Based purely on gut feeling, I’d say that their next move would be an actual offer at 18 cents. That’s a 20% premium over a high of 15 cents, which both stocks have touched. Actually, I was lucky to sell out SPQ a few years ago at 15cents, one of the few times that I’ve actually (through pure good luck) sold at a high. Would 18 cents carry the day and swing enough shares to be the final offer? Possibly. I’d say 40% odds.

2. 2 . Based on the recent PP that Cliffs made, which included the option of “strategic acquisitions,” they have a war-chest of about double what they’ve offered to date, which would imply that they could easily put forth an offer at 26 cents. Actually, they could probably offer more, because it wouldn’t be hard to make another PP.

3. 3. I think that 20 cents and 30 cents are two psychological barriers. 20 cents would convince a lot of shareholders to take the money and run. However, SPQ and KWG have a decent number of retail shareholders who would scream bloody murder at a takeover at 20 cents, after holding out for years hoping for “the Big Dirty.” So while 20 cents would have a lot more impact than 18 cents, it would still be grounds for a huge fight. Thirty cents, however, would certainly carry the day in my mind. There is no doubt that enough current shareholders would capitulate at 30 cents to finalize a takeout.

4. 4. Khareema mentioned that Neil stated that his greatest fear was having to do a deal with CLF for a quarter. That in itself says something. It says that Neil wants more than that, but knows intuitively that Cliffs can find justification to argue for that price. So let’s say low end of 25 cents, in Neil’s opinion. But the problem is that I think Neil is going to end up fighting just to get to that number, and will have no reserves left for a fight for anything over that amount.

Those are just a few thoughts. In the end, they don’t mean anything to anyone except myself. Every shareholder will have a different take on the situation. The only person that I can speak for is myself. I feel that there is a very good chance that the offer will be raised to at least the 18-20 cent range. I hope that it is raised to the 26-30 cent range in the end (which would take some protracted back-and-forth). But the fact is that in the end, I have no emotional attachment to either stock. If I was given a “final” chance to sell out at 18 cents, I'd wait. If I was given a "final" chance to sell out at 24-26 cents, I’d do so without batting an eye. I wish that it would end up running a lot higher, but I don’t place the odds high on getting above 30 cents. My apologies if this post depresses some shareholders hoping for more.

Best of luck to all …