Cliffs goes after Spider to get Big Daddy

Iron ore and coal giant Cliffs Natural Resources (CLF-N) has raised its offer for Spider Resources (SPQ-V) by 27% to $109 million putting a wrench in Spider’s plans to merge with KWG Resources (KWG-V) and starting a potential bidding war for control of the Big Daddy chromite deposit in the McFaulds Lake area of northwestern Ontario.

All three company’s hold minority stakes in the project but Cliffs, with 47%, made its intentions for control known in late May when it said it would send takeover offers to both KWG and Spider, which each hold 26.5% with the option to hold 30% apiece.

KWG and Spider retaliated with plans to merge, giving the juniors a shot at control of the project, but Spider says the Cliffs offer tops the merger deal. KWG has until June 21 to make a competing offer.

Although Spider president and CEO Neil Novak has been working with KWG on the project for nearly two decades, Novak says he has to put emotions aside.

“I’m in love with the project, I found it,” Novak says. “But you have to let that go. I have to look out for the best interest for our shareholders.”

Cliffs has offered to buy Spider for 16.5¢ per share, up from its original offer of 13¢ per share. Spider must call off its merger plans with KWG for the deal to go through.

Cliffs has also told KWG to stop the valuation it’s conducting as a legal requirement for Cliffs’ takeover offer for KWG. Cliffs holds 19.3% of KWG on a fully-diluted basis.

“We have said all along that our objective is to obtain control of the Big Daddy chromite deposit,” said William Boor, president of Cliffs’ ferroalloys business unit, in a statement. “We believe we can achieve that objective with our proposal to increase our offer with Spider.”

Under the support agreement between Cliffs and Spider, Cliffs needs to receive tenders for at least 50.1% of Spider’s common shares by the time the bid expires for Cliffs to be obliged to pay for the shares. Cliffs must also approve of other aspects and receive regulatory approvals.

Cliffs just bought its stake in Big Daddy and two adjacent projects, Black Thor and Black Label, last January when it acquired Freewest Resources for $240 million. The company says it wants to develop all these projects as a single entity. As it stands now, KWG and Spider rotate operatorship of the project, switching between the two each year.

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. That’s because Black Thor is larger, wider and closer to surface, and thus more amenable to open pit mining while Big Daddy is a bit deeper with a significantly higher grade.

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

Although Novak was looking forward to the merger with KWG, he says his main concern is reaching development.

“I’d like to see Big Daddy go through development no matter which way it goes,” Novak says. “I’ll be satisfied to be in the process and as long as Spider shareholders get looked after.”

He says the company had been in the process of launching a new website prior to Cliffs original offer.

“At the end of the day, we probably don’t need one,” he jokes.

Spider shares rose nearly 18% in Toronto today, or 2.5 to 16.5¢ apiece on a trading volume of 13.4 million shares. Spider has 474.7 million shares outstanding.

KWG shares were down half a peny to 12¢ on the TSX on a trading volume of 9.8 million shares. KWG has 577.7 million shares outstanding.

Cliffs shares rose 2%, or US$1.35, in New York to US$57.47 on a trading volume of 3.6 million shares. The company has 135.4 million shares outstanding.