Before you go cliff-diving on your next vacation, don't forget to test the waters below.
Cliffs Natural Resources
Investors may be rightfully wary of large acquisitions in the commodity space, but this particular pairing has the stuff that strategic dreams are made of.
To be sure, some of the more noteworthy injuries that commodity investors have suffered over recent years involved the more massive debt-fueled acquisitions conducted before the financial crisis struck. In other words, buyers jumped off a cliff seeking growth, and the water drained away while they were airborne. Patient shareholders of Teck Resources
Cliffs will rely substantially upon debt (and likely some equity) to finance this deal, valued at more than 40% of the company's existing market capitalization. But the resulting scaled-up capacity to supply China and other Asian markets with seaborne iron ore will likely supply a soft landing for this daring leap toward growth.
Following a planned doubling of capacity at Thompson's Bloom Lake mine -- to some 16 million tons by 2012 -- the pro forma Cliffs would firmly enter the ranks of the world's top iron ore suppliers. Vale
When I took in the view from atop Cliffs Natural Resources after the third quarter of 2010, I noted the superior 36% operating margin of its North American iron ore segment relative to its higher-cost coal operations, which were struggling to break even. This transaction moves logically toward Cliffs' more profitable segment, and into an export market hungry for additional volumes. Elsewhere in Canada, an unidentified Chinese company is reportedly rivaling ArcelorMittal's
I admire Cliffs' form on this particular dive into growth, and I continue to consider Asia-focused commodity production the surest path to profits for commodity investors.
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