An Iron Company That's a Steel
It’s time Cramer clued in all you Home Gamers to a lucrative pattern that always seems to arise just before a company gets taken over. First, the leaks start, then people buy the call options, then the stock runs and the deal often happens anyway. Sometimes there is no deal. It falls apart or it never was going to happen to begin with. Either way, the stocks don’t seem to take a hit when the takeover never materializes.
Cramer points this out because the pattern is arising in Cleveland-Cliffs , a company he recommended a couple weeks ago. CLF is the largest supplier of iron ore pellets in North America, owning about half the capacity for the entire continent. An article in American Metal Markets, one of the trade papers, said Cleveland-Cliffs was in talks with CVRD. That started the whispers; the unsubstantiated rumors of a takeover which took the stock much higher. Today CLF blew right past its high, despite the fact that other metal and minerals companies were down, Cramer says. People think Cleveland-Cliffs will be bought.
RIO isn’t the only logical buyer. Cramer could see BHP Billiton or Rio Tinto swooping in. Those are the three largest global iron ore suppliers and any one of them could own the American iron market by simply snatching up Cleveland-Cliffs. Even if none of the iron companies want it, Cramer wouldn’t rule out a steel company buying it as a way to integrate vertically. He doesn’t see how CLF could stay independent with all that pressure.
If Cleveland-Cliffs is valued the same as Ipsco was when it was acquired by SSAB, Cramer thinks it is worth $88 per share. It’s an imperfect comparison because that was a steel acquisition, but even $88 is a conservative target for CLF, Cramer says. In fact, he thinks the iron company deserves a steel multiple and then some, in part because the big steel players are potential acquirers, but mostly because Cleveland-Cliffs has scarcity value in a world where the overall iron market has thoroughly consolidated. There just aren’t that many small, independent iron companies left, and that makes CLF even more attractive to any of the big boys, Cramer says.
There’s no question the stock is getting all this attention now because it is seen as a takeover target, Cramer says. Even if it doesn’t get bought, the attention will probably stick because the fundamental story is strong. CLF is expanding internationally, with a 30% stake in a Brazilian ore mine that comes on at the end of this year. It also has a 45% stake in an Australian coking coal mine, which is the kind of coal that is used to make steel. The stock has gone from $31 to $81 in a year, almost entirely under the radar, Cramer says, and he thinks there’s a tremendous amount of upside potential left.
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