International mining and natural resources company, Cliffs Natural Resources Inc. (CLF) announced on Oct 12 its decision to exercise its right of first refusal to acquire U.S. Steel Canada’s 44.6% interest and ArcelorMittal Dofasco’s 28.6% interest in the Wabush Mines joint venture in Canada. Wabush Mines includes the Scully Iron Ore Mine near Wabush, Newfoundland, Labrador; the pellet plant and port facilities at Point Noire, Quebec ; and integrated rail facilities. In addition, Wabush Mines owns an equity position in an electricity generation utility in Newfoundland that provides power for its mining operations.

On Oct 9, Consolidated Thompson Iron Mines Ltd. (CLM) had announced an agreement with U.S. Steel Canada and ArcelorMittal Dofasco (other two joint venture partners), to acquire their interests in the Wabush mine for about $88 million in cash if Cliffs, the third partner to the joint venture had no objection. Under the terms of the partnership, Cliffs has a right of first refusal to acquire each of U.S. Steel Canada’s and ArcelorMittal Dofasco’s interest. By exercising its right of first refusal, Cliffs is entitled to receive the same terms and conditions contained in the agreement with Consolidated Thompson and thus increase its ownership stake of Wabush Mines to 100%.

We believe that there will be no integration risk involved in the acquisition as Cliffs has been the managing partner in the Wabush Mines joint venture since 1965 when it began operations.

Wabush Mines had 75 million tons of proven reserves (iron ore pellet equivalent) and over the previous five years has produced between 3.8 million and 5.2 million tons of iron ore pellets annually as of Dec 31, 2008. It produced 4.2 million tons of pellets in 2008. With Wabush Mines’ 5.5 million tons of rated capacity, acquisition of the 73.2% will increase Cliffs’ North American Iron Ore rated equity production capacity by about 4 million tons. The transaction is expected to close in the fourth quarter.

We are optimistic about Cliffs focus on growing its international exposure with consistent decline in the North American production. The Wabush mine transaction is consistent with this approach, as production will be sold primarily in Europe. Cliffs has also enhanced its financial flexibility by raising about $347 million through equity followed by compensation reductions, which would result in an annual savings of $37 million. The company has also maintained its debt to capital ratio at around 20% in the first half of 2009. This should help Cliff to fund the acquisition by raising debt if required.

We maintain our neutral recommendation on the stock.
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