July 16 (Bloomberg) -- Cleveland-Cliffs Inc., North America's largest producer of iron ore, agreed to buy coal-mining company Alpha Natural Resources Inc. for $10 billion as demand surges for the ingredients used to make steel.

Alpha Natural's investors will get 0.95 of a Cleveland- Cliffs share and $22.23 in cash, about $128.12 total based on yesterday's prices, for each share they hold, the companies said today in a statement. The offer is 35 percent higher than Abingdon, Virginia-based Alpha's closing price yesterday.

Cleveland-Cliffs Chief Executive Officer Joseph Carrabba follows steelmakers ArcelorMittal and Posco by acquiring coal mines after a year in which steel and coal both have doubled to records. Fording Canadian Coal Trust jumped on expectations of further consolidation. Cleveland-Cliffs tumbled as much as 13 percent on speculation the purchase makes it less likely to be taken over.

``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. in San Antonio, said today in an e-mail.

The merged company, to be named Cliffs Natural Resources, will have earnings before interest, taxes, depreciation and amortization, or ebitda, of about $4.7 billion and sales of about $10 billion in 2009, the companies said.

New Shares

Cleveland-Cliffs shareholders will own 60 percent of the new company, and Alpha's investors will hold the remainder. Cleveland-Cliffs will issue about 71 million shares to finance the deal, and JPMorgan Chase & Co. will provide as much as $1.9 billion in financing.

Cleveland-Cliffs plunged $7.44, or 6.7 percent, to $104.02 as of 4:02 p.m. in New York Stock Exchange composite trading. The shares have more than doubled in the past year. Alpha Natural rose $10.01, or 11 percent, to $104.93.

The Alpha purchase makes Cleveland-Cliffs less likely to be taken over, as some investors had expected, David MacGregor, an analyst at Longbow Research in Independence, Ohio, said in an interview with Bloomberg Television.

``There's been a lot of fast money in the name over the past couple of months on the expectation that this company could get taken out,'' MacGregor said. ``I think that money is probably exiting now.''

Coal Output

Buying Alpha will allow Cleveland-Cliffs to more than double output of metallurgical coal, used as both a fuel and a reducing agent in steelmaking, to 18 million tons and become North America's largest producer of the commodity, with 30 percent of the market.

The combined company will generate about 43 percent of its sales from coal. Cleveland-Cliffs got 76 percent of last year's sales from iron ore.

Steel prices have surged as developing economies such as China, India and Brazil build more bridges, roads and skyscrapers and producers try to pass along the rising costs of iron ore and coal. U.S. steel-sheet rose to a record $1,052 a ton in June, about double the $532 a ton of a year earlier, according to Purchasing magazine.

The company will own nine iron-ore facilities and more than 60 coal mines in North America, South America and Australia. Iron-ore reserves will total about 1 billion tons, and coal reserves will more than triple to 916 million tons. The company expects to sell about 30 million tons of iron ore and 18 million tons of steelmaking coal a year.

Coal Prices

Prices for metallurgical coal, which trades mostly in bilateral contracts, have more than doubled in the past year as transportation constraints in Australia and South Africa curbed supplies. Fording Canadian, the second-largest exporter of the coal, signed contracts in May for 90 percent of its 2008 production at $275 a ton, twice the average $97 a ton in 2007.

Alpha was formed in 2002 by private-equity firm First Reserve Corp. from former Pittston Coal Co. mines. Alpha, led by Chief Executive Officer Michael Quillen, expanded with purchases of mining units from El Paso Corp.

Cleveland-Cliffs traces its history to 1847, when miners from the Ohio city pooled resources to explore for minerals in Michigan. The company now has iron-ore and coal assets in Australia and Brazil, including an 85 percent stake in Portman Ltd., Australia's third-largest producer of iron ore.

Cleveland-Cliffs is paying about $16.19 a ton for Alpha's 618 million tons of steel-grade coal reserves. That compares with an average Wall Street valuation of all U.S. coal reserves, which mostly are lower grades used in power plants, of about $4.60 a ton, according to Jeremy Sussman, an analyst at Natixis Bleichroeder in New York.

`Quite a Problem'

``There's been quite a problem in coal supply, and price increases this year have been pretty spectacular,'' said Charles Bradford, a metals and mining analyst at Soleil Securities in New York who has followed the steel industry for more than 20 years. ``The advantage for Cliffs is they already know the customers.''

U.S. coal exports through May indicate total shipments this year will increase 48 percent to 52.9 million metric tons, according to London-based shipbroker Simpson, Spence & Young Ltd.

Alpha holds the biggest stake in Newport News, Virginia- based Dominion Terminal Associates, the second-largest U.S. export facility. The operation can export as much as 20 million tons of coal a year, about a fifth of total U.S. capacity, the company has said.

Advisers

JPMorgan was financial adviser to Cliffs, and Jones Day was legal counsel. Alpha received financial advice from Citi and legal counsel from Cleary Gottlieb Steen & Hamilton.

The merger requires approval of two-thirds of Cleveland- Cliffs' shareholders and a majority of Alpha's investors. Harbinger Capital Partners, the New York-based hedge fund run by Philip A. Falcone, is Cleveland-Cliffs' largest shareholder with an 18 percent stake as of June 27, according to Bloomberg data. He didn't immediately return a phone message seeking comment.

The transaction will deliver annual savings of at least $200 million starting in 2010, mainly in coal processing and administration, the company said.

Cleveland-Cliffs will consider more acquisitions, including producers of other minerals that steelmakers use, Carrabba said today on a conference call with analysts.

Fording Canadian gained C$3.36, or 4.2 percent, to C$83.33 in Toronto.

Posco said on June 30 it would pay about A$424 million ($408 million) for a 10 percent stake in Macarthur Coal Ltd. ArcelorMittal said the day before it paid the same amount per share to raise its stake in Macarthur to 19.9 percent.

To contact the reporter on this story: Dale Crofts in Chicago at dcrofts@bloomberg.net.

Last Updated: July 16, 2008 16:43 EDT