Cliffs goes after majority stake in Big Daddy

Cliffs Natural Resources (CLF-N) has made separate but similar cash offers to acquire KWG Resources (KWG-V) and Spider Resources (SPQ-V) to gain a majority stake in the Big Daddy chromite deposit near McFauld’s Lake in northwestern Ontario.

Both KWG and Spider rejected the initial offers, which valued them at $100 million and $86 million, respectively, due partly to the short timeframe they were given to decide – Cliffs sent separate proposals over Canada’s Victoria Day long weekend and gave 48-hour and 24-hour deadlines. Cliffs is now in the process of making formal hostile offers for both.

Cliffs bought a 47% interest in Big Daddy and 100% in two adjacent projects in January when it acquired Freewest Resources for $240 million. KWG and Spider each hold 26.5% and share a rotating operatorship. Cliffs is willing to acquire one or both companies to gain control of the sizable deposit.

“Our objective here is to get the operator’s control of Big Daddy so that we can manage the overall development of our chromite as one project,” said Cliffs’ new ferro-alloy business unit president William Boor in an interview. “We tend to be pretty indifferent between the two.”

Cliffs has offered 13¢ for every KWG share and 13¢ for every Spider share, however, Cliffs already owns 19.9% of KWG’s shares and 4% of Spider’s shares.

The price is a 62.5% premium over both companies’ closing share prices on May 21, the last trading day before the offers were made .

The offer caught Spider president and CEO Neil Novak off guard on Sunday morning.

“I was up at my cottage and got an email saying to call Mr. Boor of Cliffs,” Novak says. “They gave us 24 hours notice on a proposal.”

Novak says he didn’t have enough time to get his entire board of directors together. “I asked for an extension. I asked for whatever was necessary to hold a board meeting and they weren’t going to give that.”

At the time of the offer, Novak also wasn’t aware that KWG had responded to a similar proposal over the weekend and declined.

David MacGregor, a mining analyst at Longbow Research in New York, says the offer itself was expected eventually but the way Cliffs went about it was not.

“I was a little surprised to see them go about it the way they did, but at any rate you know that they were going to have to get themselves into a majority interest position,” MacGregor says. “They are not going to go spending a lot of money up there unless they control a majority interest.”

Boor says the timing of the offer wasn’t planned for the long weekend though he said it did give Cliffs time to talk to both companies individually. “It did help give us some time to get every attempt to agree with management on a proposal,” he says.

A formal takeover offer will be sent to Spider soon but because Cliffs is considered an insider of KWG, it will take some time to make a formal offer. Under securities law, KWG has to prepare a formal valuation and has formed a special committee of independent directors and is looking for a financial advisor to make recommendations to the board and shareholders.

Although the Big Daddy deposit is more advanced, Cliffs says that it actually sees itself developing its wholly-owned Black Thor deposit before Big Daddy. Cliffs says that’s because it’s larger, wider and closer to surface, and thus more amenable to open-pit mining, while Big Daddy is a bit deeper and higher grade.

In early May, an initial resource estimate for Big Daddy put indicated resources at 23.2 million tonnes grading 40.66% chromite and inferred resources at 16.3 million tonnes averaging 39.09% chromite.

Black Thor has inferred resources of 69.55 million tonnes grading 31.9% chromite at a cut-off grade of 25% chromite.

Chromite is processed into ferrochrome which is used to make stainless steel. Big Daddy has been said to be especially desirable because of its ratios of chrome to iron to waste, as the ore could be bought by steelmakers without processing.

“It’s often difficult in these situations to determine what is just positioning versus a reflection of how they really feel,” MacGregor says. “They obviously feel Big Daddy is an important part of the overall project and they want to get their majority interest so they can move on and get started.”

Boor also says it will be a benefit to Cliffs to get rid of the annual rotating operatorship between KWG and Spider.

“This is an example of inefficiency. That make sense when you are dong exploration work but we are moving beyond the exploration work and we’re trying to figure out how to develop an actual project,” Boor says.