Cleveland-Cliffs All Set to Exploit Emerging Market Steel Demand

By Jason Simpkins

Cleveland-Cliffs Inc. (CLF), a top producer of iron ore pellets and supplier of metallurgical coal in North America, will buy Alpha Natural Resources Inc. (ANR) in an effort to bolster its coal reserves and exploit the soaring demand for steel among emerging markets worldwide.

Cleveland-Cliffs is paying $10 billion for Alpha Natural Resources, a company that specializes in mining thermal coal used in steel production, the company said on its website. The deal values Alpha at $128.12 per share, a 35% premium to its closing share price on Tuesday.

Alpha shareholders will receive 0.95 Cleveland-Cliffs shares and $22.23 in cash for each share they hold. Alpha shareholders will hold 40% of the resultant company.

"By combining our companies’ complementary operations and management capabilities, we will be well positioned to meet the world’s increasing demand for raw materials," Joseph Carrabba, Cleveland-Cliffs’ chairman and chief executive officer, said in a statement.

The new company, which will be known as Cliffs Natural Resources, will operate nine iron ore facilities and more than 60 coal mines throughout North America, South America, and Australia. The company’s iron-ore reserves will total one billion tons, while its coal reserves will more than triple to 916 million tons. The annual savings from cost synergies will be at least $200 million by 2010.

Cleveland-Cliffs brought in $2.28 billion in revenue last year, while Alpha took in $1.64 billion. Together, the companies expect to see total revenue of $10 billion by 2009.

"This transaction is a good strategic fit for Cleveland-Cliffs as it gives them a stronger presence in the very tight metallurgical coal market and complements their iron-ore business," Brian Hicks, co-manager of the $2 billion Global Resources Fund at U.S. Global Investors Inc. told Bloomberg News.

Coal and iron ore are the two key ingredients in the production of steel, which is in high demand throughout the developing world.

"Global steel demand growth continues to be led by emerging economies to meet the requirements of expanding industrial sectors and infrastructure growth," Risaburo Nezu, chairman of the Organization for Economic Cooperation and Development [OECD] steel committee, told Forbes. "Demand in many mature economies has slowed in line with weaker economic activity."
According to Nezu, steel use continues to grow most rapidly in the so-called "BRIC" economies of Brazil, Russia, India, and China. In 2007, steel use rose:

• 18.6% in Brazil
• 13.5% in Russia
• 11.3% in India
• 13% in China

All told, those four countries found uses for 521 metric tons of steel, with China accounting for 78% of that total.

While the price of U.S. steel-sheet hit a record $1,052 a ton in June, rising from $532 a year earlier, the price of coking coal and iron ore have doubled in the past year as well. As a producer of both products, Cliffs Natural Resources will be well positioned to exploit emerging market growth.

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Comments

[BlueDog]

Looks like a head and shoulders pattern is forming on the 6 month daily chart. If the neckline of $100 breaks, retests and fails on higher volume it will likely head lower. It looks like a good stock but I'm going to wait until the H&S pattern breaks before going long.

[User 186090]

This is very similar to the FCX / Phelps Dodge merger. Freeport felt some initial weakeness then went on to double in 3 months.

CLF is a great company with excellent resources that are no going to be better. I feel that the easing of Oil prices will only help the Global infrastructure plays. More $ being freed up for construction, cheaper to run the machines.

CLF is just caught in the double whammy of being the aquierer and a sell off in all commodities. CLF just got another upgrade by Key Bank Tuesday with a target of $180.

I feel by the end of next week it'll be back the the mid 110-120 range.

[John Egan]

FCX/Phelps Dodge occurred during a commodities boom. This merger is occuring during a period where coal is dropping with other energy stocks and steel may be up against it's limit. (The big 4 steel companies are having problems passing on their surcharges right now.)

Issues such as the slow mandated China slowdown of polution producing industries (for the Olympics), and concern with a worldwide economic slowdown led by the USA as well as a very probable 'options expiration' week are all affecting energy and metals.

It will be interesting to see what the world will look like come Monday morning. In the interim, I'm being stopped out of just about everything I buy as they leg down lower and lower.

Thx jegan ;-)

[cbas2249]

From experience I can tell you that CLF is a well run organization. Sky is the limit for this stock price.