By Dale Crofts July 16 (Bloomberg) -- Cleveland-Cliffs Inc.,...

By Dale Crofts
July 16 (Bloomberg) -- Cleveland-Cliffs Inc., North
America's largest producer of iron ore, agreed to buy coal-mining company Alpha Natural Resources Inc. for $10 billion as demand surges for the ingredients used to make steel.
Alpha Natural's investors will get 0.95 of a Cleveland-
Cliffs share and $22.23 in cash, about $128.12 total based on yesterday's prices, for each share they hold, the companies said today in a statement. The offer is 35 percent higher than Abingdon, Virginia-based Alpha's closing price yesterday.
Cleveland-Cliffs Chief Executive Officer Joseph Carrabba follows steelmakers ArcelorMittal and Posco by acquiring coal mines after a year in which steel and coal both have doubled to records. Fording Canadian Coal Trust jumped on expectations of further consolidation. Cleveland-Cliffs tumbled as much as 13 percent on speculation the purchase makes it less likely to be
taken over.
``This transaction is a good strategic fit for Cleveland-Cliffs as it gives them a stronger presence in the very tight metallurgical coal market and complements their iron-ore business,'' Brian Hicks, co-manager of the $2 billion Global Resources Fund at U.S. Global Investors Inc. in San Antonio, said today in an e-mail.
The merged company, to be named Cliffs Natural Resources, will have earnings before interest, taxes, depreciation and amortization, or ebitda, of about $4.7 billion and sales of about $10 billion in 2009, the companies said.


Coal Output

Buying Alpha will allow Cleveland-Cliffs to more than double output of metallurgical coal, used as both a fuel and a reducing agent in steelmaking, to 18 million tons and become North America's largest producer of the commodity, with 30 percent of the market.
The combined company will generate about 43 percent of itssales from coal. Cleveland-Cliffs got 76 percent of last year's sales from iron ore.
Steel prices have surged as developing economies such as China, India and Brazil build more bridges, roads and skyscrapers and producers try to pass along the rising costs of iron ore and coal. U.S. steel-sheet rose to a record $1,052 a ton in June, about double the $532 a ton of a year earlier, according to Purchasing magazine.
The company will own nine iron-ore facilities and more than 60 coal mines in North America, South America and Australia.
Iron-ore reserves will total about 1 billion tons, and coal
reserves will more than triple to 916 million tons. The company expects to sell about 30 million tons of iron ore and 18 million tons of steelmaking coal a year.

Coal Prices

Prices for metallurgical coal, which trades mostly in
bilateral contracts, have more than doubled in the past year as transportation constraints in Australia and South Africa curbed supplies. Fording Canadian, the second-largest exporter of the coal, signed contracts in May for 90 percent of its 2008 production at $275 a ton, twice the average $97 a ton in 2007.
Alpha was formed in 2002 by private-equity firm First
Reserve Corp. from former Pittston Coal Co. mines. Alpha, led by Chief Executive Officer Michael Quillen, expanded with purchases of mining units from El Paso Corp.
Cleveland-Cliffs traces its history to 1847, when miners from the Ohio city pooled resources to explore for minerals in Michigan. The company now has iron-ore and coal assets in Australia and Brazil, including an 85 percent stake in Portman Ltd., Australia's third-largest producer of iron ore.
Cleveland-Cliffs is paying about $16.19 a ton for Alpha's 618 million tons of steel-grade coal reserves. That compares with an average Wall Street valuation of all U.S. coal reserves, which mostly are lower grades used in power plants, of about $4.60 a ton, according to Jeremy Sussman, an analyst at Natixis Bleichroeder in New York.