Cliffs gets control of Big Daddy (July 12, 2010)

Spider Resources (SPQ-V) has called off its merger with KWG Resources (KWG-V), leaving it free to be swallowed by Cliffs Natural Resources (CLF-N). It ends the battle for control of the high-grade Big Daddy chromite deposit near McFaulds Lake in northwestern Ontario.

KWG had the option to match the final 19¢-per-share cash offer from iron ore and steel giant Cliffs but the junior maintained that its merger deal, valuing Spider at 16.5¢ per share was just as good.

Cliffs’ final offer, which works out to $125 million, is a 138% premium over Spider’s closing price on May 21, the last trading day before Cliffs first announced its intentions to buy Spider for 13¢ apiece.

Spider president Neil Novak told shareholders that the board and special committee had negotiated “long and hard” with KWG about the potential merger as well as with Cliffs to get the 19¢ offer. The time period for Spider shareholders to tender their shares was extended by 10 days to July 16. At presstime, 52.1% of Spider shares had been tendered.

All three companies hold minority stakes in Big Daddy, but Cliffs, with 47%, wasn’t interested in moving forward with the project without control.

Cliffs bought its stake in Big Daddy and two nearby projects, Black Thor and Black Label, when it acquired Freewest Resources for $240 million last January.

“What this does for us, it allows us to put all three of the major deposits under one project. We’ll evaluate the projects from a technical perspective as one,” says William Boor, president of Cliffs’ ferroalloys business unit.

Boor envisions developing Black Thor first ahead of Big Daddy. “We’ve made more progress on Black Thor.”

Black Thor is about 300 metres away from Black Label and about 1.5 km from Big Daddy.

In 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 cutoff grade of 25% chromite.

Big Daddy has been said to be especially desirable because of its ratios of chrome to iron ore to waste, as the ore could be bought by steel-makers without processing.

Chromite is processed into chromium, the key ingredient for making stainless steel.

Spider and KWG have been exploring together in the area, known as the Ring of Fire, since the early 1990s.

Freewest began exploring the Big Daddy claims after they were first staked in 2003 but the actual discovery wasn’t made until 2006, shortly after KWG and Spider got involved. They signed an option agreement with Freewest and the two have shared a rotating operatorship since then, switching each year. KWG is the current operator until March 2011, but after that KWG and Cliffs will become joint-venture partners in the project with Cliffs assuming full-time control.

Cliffs held talks with both juniors, which each hold 26.5% with the option to hold 30% apiece, and wasn’t particular about which company it acquired.

Long-time partners KWG and Spider then made plans to merge instead of selling out to Cliffs. Cliffs decided to scrap its plan to buy KWG and focus only on Spider, which created a bidding war.

“Our objective was to get in a control position with Big Daddy and we’ve met that with Spider and we have no intention to bid on KWG at this point,” Boor says.

Cliffs, which holds 4.2% of Spider shares, entered into a lock-up agreement with Spider’s largest shareholder, Toronto-based Mineral Fields Group, which holds 13.8% of Spider shares. When Cliffs’ and Spider’s management and directors’ holdings are considered, including warrants and options, plus the Mineral Fields lock-up, the combined ownership is 21.5% fully diluted. Cliffs also owns 19.3% of KWG shares.