Cliffs to acquire INR Energy

CLIFFS Natural Resources has secured a binding agreement to acquire all of the coal operations of privately owned producer and exporter of high-volatile metallurgical and thermal coal INR Energy for $US757 million.

Lou Caruana

The acquisition will lift Cliff’s total global coal equity production capacity to 11 million tons by 2012 and will add complementary high-quality coal products that will immediately contribute to EBITDA and cash flow generation.

It includes a multi-mine complex that provides several important advantages and features such as long-life mine assets, operational flexibility, new equipment and no legacy liability exposure, said Cliff chairman, president and chief executive officer Joseph A Carrabba.

“When combined with our current coal production in West Virginia, Alabama and Queensland, Australia, Cliffs estimates 2011 global equity production capacity of approximately 9 million tons at a split of approximately 7 million tons metallurgical and 2 million tons thermal,” he said.

"We currently anticipate expanding INR's production of high-volatile metallurgical coal to 2.4 million tons by 2012, increasing Cliffs total future global equity coal production capacity to nearly 11 million tons, split at 8 million tons metallurgical and 3 million tons thermal.”

The acquisition includes a metallurgical and thermal coal mining complex with a state-of-the-art coal preparation and processing facility located in southern West Virginia.

This includes a large, long-life reserve base with an estimated 68Mt of metallurgical coal and 51Mt of thermal coal.

INR's operations include two underground continuous mining method metallurgical coal mines – the Powellton and Chilton-Dingess mines, and one open surface mine – the Toney Fork #2 mine.

In addition to these mines, INR is working on several other development projects in this same complex that Cliffs will actively pursue.

This reserve base would increase Cliffs' total global reserve base to more than 175Mt of metallurgical coal and over 57Mt of thermal coal.

All current INR operating and near-term development mines are fully permitted for life of mine, which equates to approximately one-third of the reserve base.

Under its long-term operating plans, Cliffs would not anticipate a need to bring additional newly permitted mines online prior to 2017.

INR's coal operations have established customer relationships, and in 2009 approximately half of INR's production was exported.

While a vast majority of remaining 2010 production is under contract, production in 2011 and beyond remains largely open.

High volatile metallurgical coal volume in 2011 is expected to reach 1.7Mt, of which 200,000t are committed and priced at $100 per short ton FOB mine.

Total 2011 production of thermal coal is expected to reach 1.2Mt, of which 500,000t is committed and priced at $66/t FOB mine.

Assuming current market pricing of approximately $140 and $75/t FOB mine for uncommitted high-volatile metallurgical and thermal coal production, respectively, and expected cash costs of approximately $70/t, the acquisition is expected to contribute significantly to Cliffs' revenue and EBITDA.

In 2011, Cliffs anticipates this business will generate approximately $300 million in revenue and $100 million in EBITDA.

Utilizing increased volumes and similar pricing and cost assumptions, in 2012 Cliffs expects this business to generate more than $400 million in revenue and about $175 million in EBITDA.

Cliffs indicated that INR's expected 2010 production is split equally between metallurgical and thermal coal products.

The metallurgical/thermal coal mix is expected to shift to increased metallurgical coal production with a percentage split of approximately 65/35 in future years based on current production plans.

Cliffs also indicated that INR's operations include a state-of-the-art coal preparation and processing facility completed in 2008, along with a new 110-car unit-train batch-weight load out facility with access to the CSX railroad.

Coal from INR-owned mines is processed by INR's Preparation Plant, then shipped to customers via the CSX rail line and exported from the port of Norfolk, Virginia.

The coal products can also be trucked to a wholly owned river loading facility on the Big Sandy River and then barged via the Ohio River system to the port of New Orleans for export.

While maintenance capital expenditures are approximately $25-30 million annually, growth capital expenditure totalling $125 million is expected to be made by 2012 to support the build-out of additional mine assets and preparation plant infrastructure.

As development projects evolve into fully operating mines, Cliffs intends to increase INR's 400-member labour force to meet estimated production levels.

Cliffs said each operating mine in West Virginia is currently managed by an experienced operator and the business will be reported in Cliffs North American Coal business segment, led by the president of Cliffs' North American business unit, Donald Gallagher.

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