First appeared in Bloomberg News
For all the
acquisitions being struck in the mining industry, no company in North America
is a cheaper takeover candidate than Cliffs Natural Resources Inc.
The biggest North American iron-ore producer sells for 6.4
times cash from operations, after deducting capital expenses, according to data
compiled by Bloomberg. That’s less than every other metals or mining company in
the U.S. or Canada exceeding $5 billion in market value, and a 70 percent
discount to the median. Cleveland-based Cliffs, which analysts say will
generate record sales in 2012, is also the least expensive relative to its
estimated net income this year and next, the data show. An Sacramento M&ALawyer finds this curious.
Mining takeovers accelerated to a four-year high in 2011 as
companies sought to replace deposits and industrial growth in China and the
developing world fueled demand for raw materials. With Glencore International
Plc and Xstrata Plc agreeing to merge to create a $90 billion global mining
company, Cliffs may attract interest from BHP Billiton Ltd. or Rio Tinto Group,
Lutetia Capital said. An acquirer could pay a 30 percent premium and still get
Cliffs for less than any comparable publicly traded mining company versus its
free cash flow, the data show.
“There could be more vertical integration” after Glencore and
Xstrata, says an executive at Confluence Investment Management in St. Louis,
which manages $1 billion including shares of Cliffs. Several first-rate
mid-sized companies like Cliffs Could potentially become takeover targets and
are predicted to turn in the M&A arena. A Buenos
Aires M&A Lawyer is interested in the outcome.
Cliffs, declines to confirm whether the company has been approached
about a merger, an acquisition or is considering putting itself up for sale.
Cars, Skyscrapers
A spokesman for Melbourne-based BHP, declined to comment on
whether the company is considering buying Cliffs.
Meanwhile a spokesman for London-based Rio Tinto, didn’t
respond to a telephone message seeking comment.
Founded in 1847, when investors from Ohio pooled resources
to explore for minerals in Michigan, Cleveland-Cliffs Inc. renamed itself
Cliffs Natural Resources after it agreed to buy Alpha Natural Resources Inc. in
July 2008. While the deal was scrapped four months later in the midst of the
biggest financial crisis since the Great Depression, Cliffs kept its current
name.
The company now produces the most iron-ore pellets in North
America. It also exports the raw material, used to make steel found in
everything from automobiles to skyscrapers, to China and other Asian markets
from its mines in eastern Canada and Australia, according to its regulatory
filings.
Relative Value
Since reaching an almost three-year high on July 19, shares
of Cliffs have retreated 26 percent, the largest drop after Alcoa Inc. among 30
companies in the Standard & Poor’s 500 Materials Index, data compiled by
Bloomberg show. An Atlanta M&ALawyer watches these changes.
In September of 2011, Cliffs posted its biggest two-day
slump in more than two years amid concern the U.S. economy would fall back into
a recession, curbing iron-ore demand. The company said last month that 2011
sales volume for eastern Canada would reach 7.4 million tons, short of its
forecast of 8 million as Cliffs suffered crusher, dryer and other equipment
outages. This is interesting to a Paris M&A Lawyer.
Shares of Cliffs ended at $74.99 yesterday, leaving the
company valued at $10.7 billion. That’s 6.4 times its free cash flow in the
past year, data compiled by Bloomberg show. In North America, the median
multiple for the 20 metals and mining companies with more than $5 billion in
value was 23.5 times.
Cliffs also traded at 7.3 times analysts’ per-share
estimates for 2012 profit and 6.3 times their projections for 2013. That’s at
least 40 percent less than the industry’s median ratio in each of those years,
the data show.
Chinese Demand
BHP and Rio Tinto, which both get more than a quarter of
their revenue from China, may now want Cliffs’ iron-ore business to increase
exports to the world’s fastest-growing major economy, according to Confluence’s
Keller and Paris-based Lutetia.
China, which used more iron ore than all other countries
combined last year, relied on imports to meet almost 70 percent of its demand,
data compiled by Bloomberg show. It imported 687 million metric tons of iron
ore in 2011, more than double the amount it bought from overseas suppliers five
years ago.
Buying Cliffs, which produced about 40 million metric tons
of iron ore in the past 12 months, could boost BHP’s total output by almost 30
percent and Rio Tinto’s by about 20 percent, the data show. BHP and Rio Tinto,
the world’s largest and third- largest mining companies by market value,
compete with Rio de Janeiro-based Vale SA in the global iron-ore market.
Iron ore is where most of the shortage in China according to
Lutetia, a firm that oversees a $100 million event-driven, merger and
acquisition fund. Cliffs is believed to be undervalued and extremely well
positioned to be an acquisition target.
Glencore-Xstrata
Anglo American Plc, less than half the size of BHP and Rio
Tinto, may look to acquire Cliffs as the Glencore-Xstrata merger increases
pressure on smaller mining companies to combine or risk being taken over.
Baar, Switzerland-based Glencore, the world’s biggest
commodities trader, and Xstrata of Zug, Switzerland, together will become the
world’s biggest producer of zinc, lead and thermal coal and one of the five largest
suppliers of copper and nickel, according to UBS AG.
Cliffs may also entice ArcelorMittal, the world’s biggest
steelmaker, with the possibility of securing more supplies of the material it
needs to make the alloy report analysts at
Davenport & Co.
ArcelorMittal earned less than 5 cents operating income for
every dollar of revenue in 2010, about three-quarters less than in 2005, data
compiled by Bloomberg show.
Slipping Away
Cliffs is a very attractive stock in the long term and from
the M&A side, according to analysts at Dahlman Rose & Co. in New York.
If a mining company makes an M&A offer for Cliffs, it could spur multiple
merger or buyout offers from many steel companies seeking an opportunity to
acquire Cliff's assets.
Multiple entities are interested in conducting an M&A
transaction with Cliff's.
London-based Anglo, and Luxembourg-based ArcelorMittal,
declined to comment on whether their companies are considering buying Cliffs.
A slowdown in China, the world’s largest user of industrial
metals, may reduce earnings for raw materials suppliers and deter the pace of
dealmaking in 2012.
The International Monetary Fund cut its 2012 growth forecast
for China to 8.2 percent from 9 percent last month, after the nation expanded
in the last three months of the year at the slowest rate in 10 quarters.
Takeover Deterrent
China’s growth would be cut almost in half if Europe’s debt
crisis worsens. If Chinese demand falls short, demand and prices for iron ore
are likely to decline. Potential bidders have cited demand concerns as possible
deterrents that could prohibit an M&A offer. This is interesting to a Charlotte M&A Lawyer.
Economists estimate that China will grow 8.5 percent this
year. Even at the 8.2 percent rate that they are projecting for 2013, Chinese
demand for iron ore will probably keep prices from falling because the country
uses more than 40 percent of the world’s steel.
Cliffs could command a takeover premium of at least 30
percent, or about $97.50 a share.
Bullish Options
At $110 a share, the price Cliffs could get in an
acquisition, would still be cheaper than any other mining company in North
America relative to free cash flow. An Istanbul
M&A Lawyer is interested in the outcome.
Options traders are betting that the value of Cliffs will
also increase. The ratio of calls to buy Cliffs shares versus puts to sell
reached 1.28-to-1 on Jan. 25, the highest level since January 2010.
Many companies are working with corporate counsel in
packaging potential M&A bids for Cliff's Natural Resources.
