Cliffs Natural Resources CLF has agreed to divest its Chromite assets in Northern Ontario, Canada, to mining company Noront Resources Ltd. for $20 million. The transaction consists of the chromite deposits and related claims (located in the Ring of Fire mining district) held by Cliffs.
The transaction gives Noront, among others, full ownership in the Black Thor chromite deposit and the Black Label chromite deposit as well as a 70% interest in the Big Daddy chromite deposit. It also provides the company 85% ownership of the McFauld's Lake copper zinc resource.
To fund the acquisition, Noront has entered into a loan agreement with Franco-Nevada Corporation FNV, under which, Franco-Nevada will loan $22.5 million to Noront for a five-year period at an interest rate of 7%. Noront will use $20 million of the loan to finance the asset purchase while the balance $2.5 million will be utilized for general working capital purposes.
Franco-Nevada will also provide $3.5 million in cash to Noront. In return, Franco-Nevada will get a 3% royalty over the Black Thor chromite deposit and a 2% royalty over all of Noront's property in the region barring the Eagle's Nest project.
Cliffs, in Nov 2013, announced its decision to discontinue all developmental activities indefinitely at its Chromite Project. The project’s uncertain timeline and risks associated with the development of infrastructure led the company to decide against investing any additional capital.
The divestment of Chromite assets underscores Cliffs' strategy of disposing non-core assets and focusing on being a major supplier of iron ore pellets to the steel industry in North America. Moelis & Company is serving as financial advisor to Cliffs on the transaction.
Cliffs sees continued economic growth in the U.S. to support domestic steel production and demand for steelmaking raw materials in 2015. The company is expected to gain from its pellet supply contracts with its U.S. iron ore customers that will help it to mitigate the impact of fluctuation in seaborne iron ore pricing.
The decision to exit the Eastern Canadian Iron Ore business represents another positive for Cliffs. Closure of the Wabush Scully mine and stoppage of operations at the Bloom Lake project marked the complete exit of the company’s Eastern Canadian Iron Ore operation. The move has allowed the company to shift into a pure-play U.S. iron ore supplier.
However, Cliffs’ North American Coal segment remains under pressure due to weak pricing for coal products. Seaborne iron ore prices are also expected to remain weak in the near future.
Cliffs currently has a Zacks Rank #2 (Buy).
Other companies in the mining space worth considering include Energy Fuels Inc. UUUU and NovaCopper Inc. NCQ with both holding a Zacks Rank #1 (Strong Buy).
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