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Cliffs Natural Resources (CLF-N) has reached a deal to acquire Consol. Thompson (CLM-T) for about $4.7 billion, tapping the Montreal-based company's iron ore assets as part of a strategy to expand into the crucial Chinese market.
Cleveland-based Cliffs cited Consolidated Thompson's "world-class" operations in the iron ore-rich areas of northeastern Quebec and western Newfoundland and Labrador, along with its coveted Asian supply contracts as reasons behind the deal - its latest and largest in a series of Canadian resource buys over the past several months.
The price of iron ore has risen rapidly in recent months as demand for the steel-making ingredient grows, particularly in fast-growing countries such as China. Miners are also scrambling to secure often-scarce global mineral reserves to grow and meet continued increases in consumption.
The proposed deal comes amid a takeover battle between giant steel maker ArcelorMittal and a U.S. private equity firm for Toronto-based Baffinland Iron Mines Corp., owner of the undeveloped Mary River iron ore project in Canada's high Arctic.
Cliffs' proposed transaction, announced after markets closed on Tuesday, values Thompson shares at $17.25 a share.
The deal price is a 30-percent premium to the company's closing price on Monday. Including debt, the deal values Thompson at about $4.9 billion.
It said the deal is supported by Consolidated Thompson's largest shareholder, Wuhan Iron and Steel (Group) Corp. of China, which owns a 19-percent stake. The agreement also has the support from directors and officers holding about 4 percent of the Consolidated Thompson's shares, Cliffs' executive said.
The deal requires approval of two-thirds of Consolidated Thompson's shareholders, as well as other regulatory and government approvals, including Investment Canada and the Canadian Competition Act.
The combined company would result in a resource heavyweight with 10 iron ore facilities, six coal mines and a chrome project in locations across North and South America and Australia. With Consolidated Thompson's expansion plans, the new entity could produce up to 30 million tonnes of iron ore pellets and up to 16 million tonnes of iron ore concentrate.
The deal is scheduled to close in the second quarter and includes a break fee of about $150 million, Cliffs said. The company also said it is considering a listing on the Toronto Stock Exchange.
Cliffs chairman and chief executive officer Joseph Carrabba said the merger was the result of exclusive talks that came about as the two sides worked on transportation issues at their nearby sites in Newfoundland and Labrador.
"We have been in and out of dialogue as we work close together," Carrabba said in a conference call with investors. "The timing just seemed to be right for both parties."
It's the latest in a string of deals Cliffs has made for Canadian assets over the past couple of years, including its purchase of Montreal-based Freewest Resources Canada Inc. and the buyout of its partners in Wabush Mines, which operates iron ore mining and pellet facilities in Labrador and Quebec. Last year, Cliffs also took a majority position in Spider Resources, an explorer developing chromite deposits in the James Bay region of Northern Ontario. Carrabba said he expects the deal to satisfy Canadian regulatory requirements.
The proposed deal would allow Cliffs to expand beyond its largely North American steel-making customer base. Consolidated Thompson has long-term arrangements with China's third-largest steel producer, and two large Asian commodity brokers.
"In a commodity play, if you are not doing some portion of your business in China ... you are really not a player in these commodity markets," Carrabba said in an interview.
"We are delighted that a company of the financial and technical strength of Cliffs ... is going to take our world-class mine and projects to the next stage," said Brian Tobin, executive chairman, president and chief executive officer of Consolidated Thompson, and a former premier of Newfoundland and Labrador.