Reuters: Cleveland-Cliffs buys out minority holder in Minnesota
What is 30% of 5.2 million tonnes of U.S. pellet production worth? Apparently a whole lot of money. Let’s break down the math. Cleveland-Cliffs bought 30% of United Taconite from Laiwu for $100 million + 1.5 million shares + 1.2 million tonnes of seaborne pellets. That’s $100 million in cash, $167 million in shares, and $168 million in pellets (assuming the pellets are from Wabush and worth $140 per tonne). So, the total price Cliffs is paying is US$435 million.
Now United Taconite has 5.2 million tonnes of production, and 30% of that is 1.56 million tonnes of production. Cliffs is estimating North American Pellet prices to be $85. (I could devote a whole blog to the silly North American pricing model.) Costs are $56, so the margin per tonne is $29. The earnings from this stake in United Taconite pre-tax are US$44 million. So Cliffs paid 9.9 times the pre-tax earnings of this stake to buy it. This is a very good price considering that Cliffs trades for a price-earnings ratio well in excess of that.
The interesting bit here is not that Cliffs bought this, but that the Chinese sold out. Apparently they felt that they could get better returns elsewhere. I can understand the attraction of the cash to the Chinese. This is hard currency that is outside of China, and it probably can be reinvested outside of China into other things without government control. I would expect to see Laiwu go out and buy something now. The question is, just what? They can leverage, so I would expect something with a US$1.2 billion price tag—could be a mini mill, a coal mine, or maybe some ships.
