International mining company Cliffs Natural Resources Inc. (CLF) announced today that it has increased its cash take-over bid for Spider Resources Inc. to 19 Canadian cents (18 US cents) per share from the original 13 Canadian cents (12 US cents) per share. Spider’s chances of accepting the offer are bright as it has admitted that Cliffs’ current offer is superior to the terms of a proposed merger with KWG Resources Inc. that it is also mulling. However, KWG has valued Spider at 16.5 Canadian cents (16 US cents) per share for the merger.
Cliffs’ latest offer for Spider represents a 46% increase over its own original offer of 13 Canadian cents per share and a 138% premium over the closing price of the shares on May 21, 2010 and a total equity value of C$125 million ($119 million). We think Cliffs’ current offer, which represents a premium of about 73% (up from the previous 49%) over Spider’s average trading price (approximately 11 cents) over the last three months, is profitable for the company. Cliffs currently holds approximately 4.2% of Spider.
The Lock-up Agreement
To ascertain the follow-through of its revised bid, Cliffs has executed a lock-up agreement with Spider’s largest shareholder, MineralFields Group. MineralFields, which owns about 13.8% of Spider’s shares, has accepted Cliffs’ current proposal and has also agreed to vote against the KWG merger. In an all-out attempt, Cliffs has also made its offer conditional to Spider terminating its merger talks with KWG.
The Story Behind
Cliffs, Spider and KWG are partners in “Big Daddy”, an Ontario-based chromite project. Cliffs already holds a 47% interest in the project, but intends to gain full control by acquiring Spider, who owns 26.5% of the project.
The Big Daddy project has chromite resources of 23.2 million tons. Cliffs owns 100% of its other chromite deposits − Black Thor and Black Label − located close to Big Daddy, so the company’s plans to fully own Big Daddy as well is in line with its existing portfolio. However, Cliffs plans to develop Thor and Label before focusing on Big Daddy.
To gain full control over the chromite project, Cliffs had earlier intended to acquire KWG Resources. Cliffs already holds a 19.3% interest in KWG. It had requested KWG for a complete financial valuation on May 24, 2010. However, Cliffs has now annulled its plans of taking over KWG and has revoked its valuation request.
We remain Neutral on Cliffs, supported by the short term (1 to 3 months) Zacks Rank # 3.
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