Huge synergies with Cliffs’ bid for Consolidated Thompson

If Cliffs Natural Resources (CLF-N) is successful in its bid for Consolidated Thompson (CLM-T) and its Bloom Lake mine on the south end of the Labrador Trough in Eastern Canada, it will in one easy stroke acquire a world-class ore body containing high-grade iron content with sophisticated infrastructure in place to supply the seaborne market. The deal would also give Cliffs’ powerful new partners in Asia, including China’s third biggest steelmaker, Wuhan Iron and Steel (WISCO), which owns nearly 19% of Consolidated Thompson’s shares and 25% of its Bloom Lake mine.

Consolidated Thompson has two additional long-term supply contracts with Asia-based commodity brokers, too, which would expand Cliff’s North American iron ore segments’ customer base from the historical North American steelmakers and therein mitigate the risk that comes with having three large customers that collectively make up 46% of Cliffs’ total revenue.

“Pricing for these long-term supply contracts floats with seaborne prices and would meaningfully enhance our Asia exposure,” Joseph Carrabba, Cliff’s chairman, president and chief executive, explained to analysts and investors in a conference call.

Consolidated Thompson also produces an iron ore fines concentrate product that is similar to the product that Cliff’s North American iron ore business segment produces prior to the pelletizing process.

“Consolidated Thompson’s product is produced with a higher than average iron unit content of approximately 66% iron  at a time when historical mining districts around the world are experiencing declining iron ore grades,  premiums for additional iron units have emerged, and customers are willing to pay up for products containing iron units exceeding the 62% quoted products,” Carrabba maintained.

Consolidated Thompson began shipping in the third quarter of 2010 and is expected to reach an 8 million tonne run rate in the first quarter of 2011. Construction is currently underway to expand to an annualized 16 million tonnes, according to Laurie Brlas, Cliff’s chief financial officer.

The Bloom Lake mine is about 30 km away from Cliffs’ Wabush iron mine in Labrador.

Chris Lichtenheldt, a mining analyst at UBS Investment Research, believes Cliffs’ all-cash $4.9 billion bid ($17.25 per share) for Consolidated Thompson “currently represents fair value for CLM and is most likely the final offer.” But in a research note to clients he also said other bidders could emerge. “Given the sale of CLM was a negotiated deal and not an auction, we believe it remains possible other bidders could surface.”

Cliffs has already entered into a support agreement with WISCO, and doesn’t think winning the approval of the remaining shareholders will be difficult. “With the agreement with WISCO, which represents about 19% of Consolidated Thompson’s shares, we believe we have already achieved significant levels of shareholder support,” Carrabba said.

Cliffs has identified processes that would improve overall operational efficiencies and result in lower costs per unit sold, Brlas declared on the conference call, adding that she anticipates that the acquisition will generate about $75 million (pre-tax) in annual operating synergies in areas such as technical expertise, transportation and reserve and resource optimization.

“By utilizing the entire existing logistical infrastructure it would be technically possible to further process Consolidated Thompson’s iron ore concentrate into iron ore pellets using Cliff’s excess existing pellet capacity at the Wabush mine” she explained. “In addition, we believe by blending the two companies’ iron ore concentrates at the port, we could potentially optimize mix amongst pellet and concentrate products along with possibly extending the life of the reserve and resource bases at both companies’ mines.”

The additional tonnage exposure to seaborne prices creates a compelling opportunity for significant growth, earnings and cash-flow generation,” she continued, and the transaction brings “significant scale” to Cliff’s consolidated operations “which we believe builds a strong platform for future strategic transactions.”

“With four announced Canadian transactions in just over a year,” she added, “we are enthusiastic about or expanded investment in Canada.”