Cliffs makes play for majority stake in Big Daddy

A battle for control over the high-grade Big Daddy chromite deposit in the McFauld’s Lake area of nor thwes tern Ontar io has erupted. For the moment, it looks like KWG Resources (KWG-V) and Spider Resources (SPQ-V), each with a 26.5% interest, are trying to merge in an attempt to kibosh 47%-owner Cliffs Natural Resources’ (CLF-N) plans for a hostile bid for one or both of them.

KWG and Spider call the merger “the next logical step” but the decision to join forces was only made after U.S. coal miner and steel-maker Cliffs sent separate but similar proposals to them over Canada’s Victoria Day long weekend, putting both companies in the hot seat to decide within 48-hour and 24-hour timeframes.

Cliffs has since announced it will soon put together formal hostile takeover bids for each company so it could acquire a majority interest in Big Daddy, noting that it would be happy as long as it gets one company.

Cliffs bought its interest in Big Daddy and two adjacent projects, Black Thor and Black Label, in 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.

“Our objective here is to get the operator’s control of Big Daddy so that we can manage the overall development of our chromite as one project,” says Cliffs’ new senior vice-president of ferroalloys William Boor in an interview. “We tend to be pretty indifferent between the two.”

Cliffs is offering 13¢ for each KWG share and 13¢ for each Spider share, however, Cliffs already owns 19.9% of KWG’s shares and 4% of Spider’s shares.

The price is a 62.5% premium over both companies’ closing share prices on Friday, May 21, the day Cliffs first approached KWG and two days before it approached Spider.

In contrast, under the KWGSpider deal, respective shareholders would hold 50% of the merged company, which would have an option to earn a further 7% to achieve a 60% interest in the Big Daddy project.

KWG would transfer its interest in a key railway right of way, its 1% net smelter return royalty covering Big Daddy, Black Thor and Black Label, plus cash in an amount to be decided by KWG subsidiary Debuts Diamonds in exchange for Debuts’ interest in diamond exploration projects, an undecided number of Debuts shares, and will distribute all of the outstanding common shares of Debuts to existing KWG shareholders.

Both KWG and Spider have agreed to pay the other a break fee of $2.3 million if the merger is not completed under certain circumstances.

The Cliffs offer, which KWG and Spider will still consider, caught Spider president Neil Novak off guard on a Sunday morning.

“I was up at my cottage and got an email saying to call Mr. Boor of Cliffs,” Novak says. “They gave us 24 hours notice on a proposal.”

Novak says he didn’t have enough time to get his entire board of directors together. “I asked for an extension, I asked for whatever was necessary to hold a board meeting and they weren’t going to give that.”

At the time of the offer, Novak also wasn’t aware that KWG had responded to a similar proposal over the weekend and declined.

David MacGregor, a mining analyst at Longbow Research in New York, says the offer itself was expected eventually, but the way Cliffs went about it was not.

“I was a little surprised to see them go about it the way they did but, at any rate, you knew that they were going to have to get themselves into a majority interest position,” MacGregor says. “They are not going to go spending a lot of money up there unless they control a majority interest.”

Boor says the timing of the offer wasn’t planned for the long weekend though he said it did give Cliffs time to talk to both companies individually.

“It did help give us some time to get every attempt to agree with management on a proposal,” he adds.

A formal takeover offer will be sent to Spider soon but, because Cliffs is considered an insider of KWG, it will take some time to make a formal offer. Under securities law, KWG has to prepare a formal valuation and has formed a special committee of independent directors and is looking for a financial advisor to make recommendations to the board and shareholders.

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 and higher grade.

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.

Chromite is processed into ferrochrome which is used to make stainless steel. Big Daddy has been said to be especially desirable because of its ratios of chrome to iron to waste, as the ore could be bought by steelmakers without processing.

“It’s often difficult in these situations to determine what is just positioning versus a reflection of how they really feel,” MacGregor says. “They obviously feel Big Daddy is an important part of the overall project and they want to get their majority interest so they can move on and get started.”

Boor also says it will benefit Cliffs to get rid of the annual rotating operatorship between KWG and Spider.

“This is an example of inefficiency. That makes sense when you are doing exploration work but we are moving beyond the exploration work and we’re trying to figure out how to develop an actual project,” Boor says.

That operatorship problem will be solved if KWG and Spider merge but it won’t help Cliffs fulfill its quest to be Big Daddy’s operator.

Cliffs did not respond to an interview request about the KWGSpider merger before press time.


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