September 15, 2008

Investor Pans Cleveland-Cliffs’ Alpha Bid

By Tim Huber

Cleveland-Cliffs Inc.'s largest shareholder panned the iron ore miner's proposed $10 billion purchase of coal mine operator Alpha Natural Resources Friday as too risky.

"The $10 billion acquisition of Alpha is too much, too fast," Harbinger Capital Partners said in a regulatory filing. "We believe the execution risk of merging these companies ... is just too great."

Alpha bills itself as the largest exporter of metallurgical coal in the U.S. It operates about 60 mines in West Virginia, Virginia, Kentucky and Pennsylvania.

Birmingham, Ala.-based Harbinger wants to up its Cleveland- Cliffs stake to as much as one-third before shareholders vote on the Alpha transaction. Harbinger says the bigger stake would create "a strong, independent voice to advocate the cause of maximizing shareholder value," but not necessarily allow it to kill the Alpha transaction.

Harbinger owns more than 16.6 million shares, or 15.57 percent, of Cleveland-Cliffs, and needs shareholder approval to increase its holdings.

Harbinger declined to comment, as did a spokeswoman for Cleveland- based Cleveland-Cliffs. However, Cleveland-Cliffs responded with its own SEC filing Friday that repeated its plea that shareholders vote against Harbinger's bid in an Oct. 3 election.

Harbinger would gain too much influence over corporate policy and strategy, including the Alpha acquisition, and effectively change control of the company without paying a premium, Cleveland-Cliffs said in the filing. Harbinger likewise would have greater power to prevent shareholders from benefiting from other transactions in the future.

Harbinger's filing makes it clear that it doesn't want Cleveland- Cliffs combined with Alpha, largely because underground coal mining poses greater risks than open-pit iron mining. Cleveland-Cliffs entered the coal mining business in 2007 when it bought a smaller producer called PinnOak Resources for $610 million.

PinnOak's mines in West Virginia and Alabama produce primarily metallurgical coal used to make coke for firing steel mill blast furnaces. Harbinger says it supported buying PinnOak, but adds that the deal underscores why Cleveland-Cliffs should ease its way into coal mining rather than jumping in headlong.

Cleveland-Cliffs' entry into the coal business has been turbulent. Production at one of its two West Virginia mines was stalled by bad geology from March to mid-June and the company was forced to tell customers it couldn't deliver coal because of extraordinary circumstances.

"The mixed results of the company's efforts to date and the operational challenges inherent in coal mining demand a measured approach," Harbinger said in the filing. "We believe that this radical, transformative transaction represents an unacceptable risk for shareholders."

Deadly accidents in 2006 and 2007 have put coal mining under intense scrutiny by government regulators, who are mandating a series of expensive safety upgrades. The National Mining Association, a Washington, D.C.-based trade group, estimates stockpiles of emergency air supplies, upgraded communications equipment and other changes have cost mine operators $257 million.

Shares of Cleveland-Cliffs rose $6.32, or 8.5 percent, to $80.51 in afternoon trading, while Alpha's stock rose $3.72, or 5.5 percent, to $70.86.

Originally published by The Associated Press.

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