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Cliffs to Buy Consolidated Thompson for China Growth

Cliffs Natural Resources Inc. agreed to buy Canada’s Consolidated Thompson Iron Mines Ltd. for about C$4.9 billion ($4.97 billion) to expand iron-ore sales to Asia, the world’s largest market for the steelmaking raw material.

Cliffs, North America’s largest iron-ore producer, is paying C$17.25 a share, the Cleveland-based company said yesterday. Cliffs said the deal has the support of Wuhan Iron & Steel Co., China’s third-biggest steelmaker, which owns 19 percent of Consolidated Thompson. Cliffs rose as much as 5.8 percent in New York trading while Consolidated Thompson jumped as much as 35 percent in Toronto.

“Diversifying into Asia is extremely important to our growth,” Cliffs Chief Executive Officer Joseph Carrabba said in a telephone interview. “North America and Europe continue to move rather slowly.”

Iron-ore prices more than doubled in the past two years, according to the Steel Index, on a surge in demand from India and China. Steel production in China has risen 66 percent in the past five years as Wuhan and its domestic rivals feed the country’s economic boom. U.S. output is down 20 percent over the same period. Prices for the ore in China are forecast to rise another 7 percent this quarter, according to the Steel Index, published by London-based Steel Business Briefing Ltd.

Consolidated Thompson, which is based in Montreal, rose C$3.97, or 30 percent, to C$17.35 at 4:00 p.m. in Toronto Stock Exchange trading. The shares more than doubled in 2010. Cliffs climbed 4.1 percent to $88.43 in New York.

‘Strong Market’

Cliffs is paying a 31 percent premium on top of Consolidated Thompson’s average share price over the past 20 days. That compares with an average premium of 52 percent in 65 announced bids for iron-related companies in the past year, according to data compiled by Bloomberg. The purchase price includes net debt.

“$5 billion is a big price, but you’d expect them to pay high as there aren’t many targets of size in that part of the world,” Peter Arden, a mining analyst at Ord Minnett Ltd., said by telephone from Melbourne. “It’s going to be a very strong market for iron ore for many years.”

The deal indicates interest is growing among foreign steelmakers in Canada’s iron-ore resources. ArcelorMittal, the world’s biggest steelmaker, and Nunavut Iron Ore Acquisition Inc. are bidding against each other to acquire Toronto-based Baffinland Iron Mines Corp.

‘Iron Triangle’

Baffinland’s Mary River project is one corner of a global “iron triangle,” Liu Yikang, the Chief of the Expert Group for Overseas Resources Projects under China’s Ministry of Land and Resources, said in December.

The other corners were Brazil’s Carajas region, where Vale SA has mines, and Western Australia’s Pilbara, which is mined by BHP Billiton Ltd. and Rio Tinto Group, the official said in an issue of China Land and Resources Weekly.

Most iron ore from Cliffs’ Wabush mine in the province of Newfoundland and Labrador in eastern Canada goes to Asia, Carrabba said. The company, which has two mining operations in Western Australia, got 22 percent of its revenue from the Asia-Pacific region in the quarter ended Sept. 30. Cliffs forecast in October it would sell about 27 million tons from its North American iron-ore business and 9 million tons from its Asia-Pacific unit.

A challenge for Canadian miners seeking to compete with Brazil and Australia in the Chinese ore market is being able to retain business should freight rates rise, Ord Minnett’s Arden said. Still, Canada could become an iron-ore hub for steelmakers in Europe and North America, he said.

Shipping Costs

“They may send some material to China, which does want to diversify, but ultimately it’s the freight rates that govern it,” Arden said.

The Baltic Dry Index, a measure of dry-bulk commodity-shipping costs, fell to a 21-month low yesterday as flooding in Australia shut mines and halted railroads, curbing volumes of cargo to be delivered. The index fell to 1,480, less than a sixth of its peak in May 2008.

Cliffs’ acquisition will give it production in Quebec that’s shipped to Asian customers. Consolidated Thompson operates the Bloom Lake mine in Quebec. It plans to double production to 16 million metric tons a year by 2012. BHP, the world’s largest mining company, mined 31.2 million tons of the material in the three months ended June 30.

Cliffs said it expects to arrange financing for the deal, which may include long-term debt and equity.

JPMorgan Chase & Co. advised Cliffs. Consolidated Thompson was advised by BMO Capital Markets and the mining company’s transaction committee was advised by GMP Securities LP.

Cliffs dropped a planned $10 billion acquisition of metallurgical coal producer Alpha Natural Resources Inc. in 2008 amid opposition to the deal by Philip Falcone’s Harbinger Capital Partners, which owned 15 percent of Cliffs. Harbinger pared its stake in Cliffs to about 0.3 percent as of Sept. 30, according to Bloomberg data.

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