CLIFFS Natural Resources and Alpha Natural Resources have terminated their $US10 billion merger pact, citing the global downturn. The termination of the pact - under which Cliffs would have acquired Alpha to create one of the largest US mining companies - comes as the market for iron ore has almost collapsed and metals prices have plunged.
Last week, BHP Billiton, the world’s biggest mining company, said major Chinese customers were trying to delay purchases of iron ore, and other miners were cutting iron ore production.
Cliffs and Alpha also noted that uncertainty in the steel industry, shareholder dynamics and the costs of potential litigation hurt the viability of the deal, which was originally announced in July and consisted of a combination of cash and stock.
The likelihood of the deal had earlier been in doubt due to opposition by Cliffs’ largest shareholder, Harbinger Capital Partners.
Harbinger chief Philip Falcone had said that instead of making an acquisition, Cliffs, formerly known as Cleveland Cliffs, should instead focus on a sale.
He argued the company could fetch at least $US130 a share from any number of suitors, adding the company’s role in supplying iron ore pellets and metallurgical coal to steelmakers in North America made it a prime strategic target.
However, Cliffs shares have lost almost two-thirds of their value since the end of September.
As part of the agreement to terminate the merger Alpha will dismiss litigation filed against Cliffs with prejudice, and Cliffs will pay Alpha $US70 million. Alpha filed a suit earlier this month seeking to require Cliffs to hold its shareholders meeting to vote on the pending merger.
The combined company would have included nine iron ore facilities and more than 60 coal mines across North America, South America and Australia.
The original deal had come at a time when iron ore prices surged amid increased demand for steel.
The mining giants that feed the world’s appetite for iron, copper and other industry staples earned piles of money as commodities prices soared the past few years.
But those days are over for now. Metals prices fell 35 per cent in just four weeks last month, the steepest decline ever recorded, according to Barclays Capital.
Amid the woes, Rio Tinto cut 10 per cent of its iron ore production last week, matching a similar move by the world’s largest iron-ore producer, Brazil-based Vale .
Although spot iron ore prices have dropped below 2008 contract prices as talks to settle 2009 prices are about to begin, some analysts have projected the spot market will recover in the second half of 2009, still in time to influence next year’s prices.
A Citigroup analyst has projected global iron ore prices will drop a moderate 20 per cent in the 2009 contract year, while other analysts are forecasting a drop in prices of as much as 40 per cent next year.
One of the key factors affecting current prices is the high stock levels at ports in China, the world’s biggest importer of iron ore.
GWR Price at posting:
37.5¢ Sentiment: None Disclosure: Held
