For all the acquisitions being struck in the mining industry, no company in North America is a cheaper takeover candidate than Cliffs Natural Resources Inc.
The biggest North American iron-ore producer yesterday sold for 6.4 times its cash from operations, after deducting capital expenses, according to data compiled by Bloomberg. That was less than every other metals or mining company in the U.S. or Canada exceeding $5 billion in market value, and a 70 percent discount to the median. Cleveland-based Cliffs, which analysts say will generate record sales in 2012, was also the least expensive relative to its estimated net income this year and next.
Mining takeovers accelerated to a four-year high in 2011 as companies sought to replace deposits and industrial growth in China and the developing world fueled demand for raw materials. With Glencore International Plc and Xstrata Plc (XTA) agreeing to merge to create a $90 billion global mining company, Cliffs may attract interest from BHP Billiton Ltd. (BHP) or Rio Tinto Group, Lutetia Capital said. An acquirer could pay a 30 percent premium and still get Cliffs for less than any comparable publicly traded mining company versus its free cash flow, the data show.
“There could be more vertical integration” after Glencore and Xstrata, Mark Keller, chief executive officer of Confluence Investment Management in St. Louis, which manages $1 billion including shares of Cliffs, said in a telephone interview. As a result, “the first-rate mid-sized companies like Cliffs I think potentially become takeover targets,” he said.
Steve Baisden, a spokesman for Cliffs, declined to comment on whether the company has been approached about an acquisition or is considering putting itself up for sale.
Cars, Skyscrapers
Ruban Yogarajah, a spokesman for Melbourne-based BHP, declined to comment on whether the company is considering buying Cliffs. Illtud Harri, a spokesman for London-based Rio Tinto, didn’t respond to a telephone message seeking comment.
Shares of Cliffs advanced as much as 2.7 percent today and were up 2 percent to $76.48 at 1:17 p.m. in New York. The gain was the biggest among 30 companies in the Standard & Poor’s 500 Materials Index.
Founded in 1847, when investors from Ohio pooled resources to explore for minerals in Michigan, Cleveland-Cliffs Inc. renamed itself Cliffs Natural Resources after it agreed to buy Alpha Natural Resources Inc. in July 2008. While the deal was scrapped four months later in the midst of the biggest financial crisis since the Great Depression, Cliffs kept its current name.
The company now produces the most iron-ore pellets in North America. It also exports the raw material, used to make steel found in everything from automobiles to skyscrapers, to China and other Asian markets from its mines in eastern Canada and Australia, according to its regulatory filings.
Relative Value
Since reaching an almost three-year high on July 19, shares of Cliffs retreated 26 percent through yesterday, the largest drop after Alcoa Inc. among 30 companies in the S&P 500 Materials Index, data compiled by Bloomberg show.
In September, Cliffs posted its biggest two-day slump in more than two years amid concern the U.S. economy would fall back into a recession, curbing iron-ore demand. The company said last month that 2011 sales volume for eastern Canada would reach 7.4 million tons, short of its forecast of 8 million as Cliffs suffered crusher, dryer and other equipment outages.
Shares of Cliffs ended at $74.99 yesterday, leaving the company valued at $10.7 billion. That was 6.4 times its free cash flow in the past year, data compiled by Bloomberg show. In North America, the median multiple for the 20 metals and mining companies with more than $5 billion in value was 23.5 times.
BHP, Rio Tinto
Cliffs also traded at 7.3 times analysts’ per-share estimates for 2012 profit and 6.3 times their projections for 2013. That was at least 40 percent less than the industry’s median ratio in each of those years, the data show.
BHP and Rio Tinto, which both get more than a quarter of their revenue from China, may now want Cliffs’ iron-ore business to increase exports to the world’s fastest-growing major economy, according to Confluence’s Keller and Jean-Francois Comte, co-founder of Paris-based Lutetia.
China, which used more iron ore than all other countries combined last year, relied on imports to meet almost 70 percent of its demand, data compiled by Bloomberg show. It imported 687 million metric tons of iron ore in 2011, more than double the amount it bought from overseas suppliers five years ago.
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