- Iron ore and coal miner Cleveland-Cliffs Inc (NYSE:CLF - News) said on Wednesday that it would acquire Alpha Natural Resources Inc (NYSE:ANR - News) for $10 billion in cash and stock, expanding its coal assets and positioning itself to capitalize on the boom in the global steel industry.
- Alpha mines vast amounts of metallurgical coal, which is used primarily to make coke, a key component in steel making. It also produces steam coal, used mainly by utilities as fuel for electricity generation.
- Stockholders of Alpha, an Appalachian coal producer, will receive 0.95 Cleveland-Cliffs share and $22.23 cash for each of their shares.
- Based on closing stock prices on Tuesday, the deal values Alpha at $128.12 per share, a premium of 35 percent, the companies said in a statement.
- The combined company, which will be named Cliffs Natural Resources, will include nine iron ore facilities and more than 60 coal mines located across North America, South America and Australia.
- The boards of both companies have approved the deal, which is expected to close by the end of 2008. JPMorgan Chase Bank is providing an underwriting commitment for up to $1.9 billion to finance the deal.
- The combined company will have a reserve base of about one billion tons of iron ore and about one billion tons of metallurgical and thermal coal, with annual sales volume of over 30 million tons of iron ore and nearly 18 million tons of metallurgical coal. It will ship about 17 million tons of thermal coal annually.
- At current prices, this is outright thievery by Cleveland Cliffs
- This is a poor price for Alpha Natural Resources - based on my projections for 2009/2010 pricing ANR would be a $200+ stock in 12-15 months
- 2 scenarios from here - either the deal goes through as is, or a new bidder emerges
- If deal goes through as is, Cleveland Cliffs is a massive strong buy as you have just combined the #1 and #3 metallurgical coal exporters in the US into 1, and thrown in the iron ore business of CLF to boot
- If other bidders emerge, Alpha Natural Resources is a massive strong buy for obvious reasons
- This deal is mostly stock, with a bit of cash thrown in - so effectively ANR will now trade with CLF, directionally and in magnitude.
- ANR was my favorite coal play, so this leaves us 1 less "long term" stock to own. People appear giddy but I'd rather have another 100%+ gain over the next 12-15 months than settle for a quick 20-30% pop.
- If the deal goes through we effectively own 6.5% of the new Cliffs Natural Resources, which is fine considering this combines 2 of our top 5 ideas into 1 company.
- This puts Massey Energy (MEE) as the #2 US exporter of metallurgical coal as the next logical candidate
- Walter Industries (WLT) is another metallurgical coal producer although not of the same scale
- A contrarian might argue when you see deals like this it marks the "top" in the industry and/or if Alpha Natural Resources is willing to sell out as such a price, maybe they are not as bullish on the long term as I've been. While I disagree with that thesis, it is something to consider.
- I continue to believe we own the correct stocks, but we will be punished along with everyone else as stocks do not trade in a vacuum. But today's actions shows how quickly you can lose when you are out of the "right" stocks even in an "awful" market.
Ironically, I think I've written at least 5 times that I've been amazed that Cleveland Cliffs (CLF) has not been taken over and still remains an independent company. [Jul 9: Cleveland Cliffs Up 15% on Guidance and Starting a Dividend] So to see them actually be the acquirer is sort of funny. I still think a combined Cliffs Natural Resources - if the merger goes through - would be a very attractive target for one of the major steel players such as Mittal (MT).
So I did think this was a likely scenario, but frankly I thought a major worldwide steel player would be acquiring the metallurgical coal players in the US to protect the costs in their supply chain. This is a bit of a curve ball but gives me even more respect for foresight of Cleveland Cliffs management who has been criticized in the past for people focused on the short term, when they have made some very smart long term acquisitions
- The company's then chief executive John Brinzo didn't stop there. In early 2005, flush with cash, the company bought into an Australian iron ore company called Portman Ltd. The move didn't sit well at the time with Cliffs investors who chastized Brinzo. They thought a better use of Cliffs' new-found wealth was to buy back shares, thereby rewarding current shareholders with instant gains.
- Last year, Cleveland-Cliffs expanded again under Brinzo's successor Joe Carrabba, this time into metallurgical coal. Cliffs' paid $450 million and absorbed $150 million in debt for PinnOak Resources LLC, which included coal mines in West Virginia and Alabama.
[Jun 24: Cleveland Cliffs - A Man Among Boys]
[May 5: Alpha Natural Resources Booming Earnings - Just the Start]
[May 1: Walter Industries - the Most Fascinating Company]
[Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In]
[Apr 7: ArcelorMittal (MT) Sees Metallurgical Coal Prices Rising 150-200%]
[Dec 6: Coal Stocks Quietly in a Bull Market]
Long Cleveland Cliffs, Alpha Natural Resources, Walter Industries, Massey Energy in fund and personal account
12 comments:
this took me by surprise for sure. CLF will be a screaming buy and looks like it will be the next play added to my basket as i can essentially now get anr and clf rolled into one haha perfect.
agree with your thesis that the steel companies would actually be buying these guys (and they still might). steel co's need to get vertically integrated to not get *too* screwed by input costs. i think it starts to happen for sure with all the cash they've been raking in from rising steel prices
oh also did you find/see anything about them starting CLF under a new ticker & price like they did with the RIG/GSF merger? I can't find anything
reason i ask is because as of right now, it might actually make more sense to buy ANR since you'd be getting 0.95 CLF + 22 cash for each ANR share assuming all they do is add more shares to the existing clf float
Mark here's your rally of junk you've called for...it's just 3 weeks late ;)
Bill,
Not really. We had this same rally last Tuesday
The question is do we get more than 1-2 days, or can they actually run for a week
Wells Fargo was impressive - unfortunately its best of breed
What we want to see is stocks go up on bad news. THat would mark a turn.
WFC news was good news. (relatively)
why didnt ANR stay up 22 bucks which it was bid up this AM, I thought that was the price of the deal in cash and .95/1 CLF in stock?
thanks Ross
Mark,
It appears RIO is setting up for a purchase as well. Do you think its better to wait it out and buy on the buyout news weakness or maybe its priced in already?
Thanks,
Mike
Q,
if you have noticed all the commodities are being taken out and shot today. I really am not that concerned about the day to day moment. I guess if you bought last night hoping for a buyout news it matters. My coal thesis will be the same in 2 years as it is today so the day to day action is irrelevent other than making the fund look better or not for that day.
Michael,
RIO seems to show signs of bottom at 30.50 which it has tested consistently this week. I've been shocked to see it fall so much. Amazing to see the difference in action of RIO vs CLF the past month. The value here for RIO is super compelling.
Too many opportunities, not enough money.
Got it thanks, I bought it end of May as it came on to my screens along with MEE and PCX and JRCC, I held right through the painful correction but I sold MEE and PCX and JRCC a couple of days ago luckily I held on to ANR til this am. Long MOS, CHK, POT, HK and PQ rest in cash, can't take the pain of this market.
Hey! Mark,
RIO may want to buy some companies in the future, like CLF did today. Any guess what company they may interested in??
From what I've read, RIO is potentially looking at AA or FCX.
Q, it is a very difficult market
It really is only working for short term traders and even they are getting smashed since we are seeing wild intraday swings. Literally for many months over the past year, if you have a gain within a few hour you have to take it - as it will disappear within a day.
This is not an investors market. Keep in mind 70% of trading is now done by hedge fund computers. And their programming changes on a dime it appears with the huge herky jerky switches we get.
I don't envy anyone entering the market relatively new. Even the most veteran guys I read are constantly frustrated by total lack of trend or pattern.
We've been fortunate but it has been like swimming upstream as a trout in a tsunami. Not easy work.
Oa, do a search on RIO - on the right side of my blog is a label cloud, click on CVRD (which was the old name for RIO)
I wrote a piece on new potential acquisitions I think maybe a month or two ago.
Now that Xstrata is off the table there are a few. I pray AA is not one (yuck)
FCX would be an excellent fit.
Post a Comment