Cliffs takes hit on takeover deal

Writing down $1B on mine acquisition

TORONTO — For the second week in a row, an over-priced Canadian acquisition has come back to haunt the global mining giant that made it.

Last week, Rio Tinto Ltd. axed its chief executive as it announced up to $11 billion U.S. of writedowns tied to its acquisition of Alcan Inc. On Thursday, the bad news came from Cliffs Natural Resources Inc., which plans to write off $1 billion of goodwill from its takeover of Consolidated Thompson Iron Mines Ltd.

Both deals were struck in the middle of red-hot commodity markets. Cliffs agreed to pay a whopping $4.9 billion in cash in early 2011 to acquire Consolidated Thompson and its Bloom Lake iron ore mine in Quebec.

Bloom Lake was a brand new mine when Cliffs bought it, and was ramping up to its expected production capacity of eight million tonnes a year. But that was just the start, as Cliffs planned to implement a “Phase II” expansion to double capacity to 16 million tonnes by 2013.

At the time, the high acquisition cost and rapid expansion made some sense. Iron ore prices were hitting unprecedented prices above $180 a tonne, and Asian steelmakers were scouring the world in search of supply to feed their mills.

But for Cleveland-based Cliffs, very little has gone right at Bloom Lake since then. The production ramp- up was troubled from the start.

To date, the mine has not even reached its initial planned capacity of eight million tonnes, much less 16 million. Cash costs are currently running at $88 a tonne, far higher than the $60 to $65 per tonne that Cliffs expected.

“It’s really reflective of how difficult it is, and what a big earth-moving and infrastructure-based exercise it is, to construct and develop iron ore assets,” said John Hughes, an analyst at Desjardins Securities.

It didn’t help Cliffs that the iron ore market cooled off significantly last year, with prices dropping below $90 a tonne. They have rebounded since then to more than $140, but buyers are not nearly as aggressive as they were in 2011.

Cliffs said the writedown is driven by Bloom Lake’s “anticipated lower long-term volumes and higher capital and operating costs.”

Ultimately, experts said the company bought a good asset. But like Rio Tinto with Alcan, it simply paid far too much in an overheated market. The writedown did not come as a shock.

“BMO Research estimated at the time (in 2011) that Cliffs overpaid for the asset by $2 billion US,” BMO Capital Markets analyst Tony Robson wrote in a note.

Including Bloom Lake, Cliffs announced total asset writedowns on Thursday of about $1.9 billion.

The company took a number of other one-time charges, including $100 million to $150 million on its other iron ore operations in Eastern Canada.