Cleveland-Cliffs Taps Into Emerging Market Steel Demand with $10 Billion Buyout of Alpha Natural Resources

By Jason Simpkins
Associate Editor

Cleveland-Cliffs Inc. (CLF), a top producer of iron ore pellets and supplier of metallurgical coal in North America, will buy Alpha Natural Resources Inc. (ANR) in an effort to bolster its coal reserves and exploit the soaring demand for steel among emerging markets worldwide.

Cleveland-Cliffs is paying $10 billion for Alpha Natural Resources, a company that specializes in mining thermal coal used in steel production, the company said on its website. The deal values Alpha at $128.12 per share, a 35% premium to its closing share price on Tuesday.

Alpha shareholders will receive 0.95 Cleveland-Cliffs shares and $22.23 in cash for each share they hold. Alpha shareholders will hold 40% of the resultant company.

"By combining our companies' complementary operations and management capabilities, we will be well positioned to meet the world's increasing demand for raw materials," Joseph Carrabba, Cleveland-Cliffs' chairman and chief executive officer, said in a statement.

The new company, which will be known as Cliffs Natural Resources, will operate nine iron ore facilities and more than 60 coal mines throughout North America, South America, and Australia. The company's iron-ore reserves will total one billion tons, while its coal reserves will more than triple to 916 million tons. The annual savings from cost synergies will be at least $200 million by 2010.

Cleveland-Cliffs brought in $2.28 billion in revenue last year, while Alpha took in $1.64 billion. Together, the companies expect to see total revenue of $10 billion by 2009.

"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. (GROW) told Bloomberg News.

Coal and iron ore are the two key ingredients in the production of steel, which is in high demand throughout the developing world.

"Global steel demand growth continues to be led by emerging economies to meet the requirements of expanding industrial sectors and infrastructure growth," Risaburo Nezu, chairman of the Organization for Economic Cooperation and Development (OECD) steel committee, told Forbes. "Demand in many mature economies has slowed in line with weaker economic activity."
According to Nezu, steel use continues to grow most rapidly in the so-called "BRIC" economies of Brazil, Russia, India, and China. In 2007, steel use rose:

• 18.6% in Brazil
• 13.5% in Russia
• 11.3% in India
• 13% in China

All told, those four countries found uses for 521 metric tons of steel, with China accounting for 78% of that total.

While the price of U.S. steel-sheet hit a record $1,052 a ton in June, rising from $532 a year earlier, the price of coking coal and iron ore have doubled in the past year as well. As a producer of both products Cliffs Natural Resources will be well positioned to exploit emerging market growth.

News and Related Story Links:

• Cleveland Cliffs Inc.:
  Cleveland-Cliffs and Alpha Natural Resources to Merge, Creating Cliffs Natural Resources, a Leading Diversified Mining and Natural Resources Company

• Bloomberg:
  Cleveland-Cliffs to Buy Alpha as Coal Prices Surge

• Money Morning:
  Merrill Lynch: Emerging Market Infrastructure Spending Will Surge 80% in the Next Three Years

• Money Morning:
  Cashing in on Commodities: Gold May Glitter, But Heavy Metals Shine