Cliffs to acquire chromite deposits from Freewest

Noront Resource‘s (NOT-V) hostile takeover bid for Freewest Resources (FWR-V) last month jolted Cliffs Natural Resources (CLF-N) out of complacency — prompting the world’s largest iron ore pellet supplier to acquire the junior’s chromite-rich deposits before anyone else tries to make another pass at them.

Cliffs believes Freewest’s share of the high-grade Black Thor, Black Label and Big Daddy deposits in the remote “Ring of Fire” metals district of northern Ontario will support a relatively low-cost open-pit mine that can supply markets in Europe, North America and Asia for decades to come.

Cliffs asserts that the Ring of Fire assets are world-class deposits with the potential to support an open pit mine producing 1 to 2 million tonnes per year for more than thirty years, Joseph Carrabba, Cliffs’ president and chief executive, noted on a conference call announcing the acquisition. The ore will be further processed into 400,000-800,000 tonnes of ferrochrome, he said.

Under the acquisition, Cliffs will acquire Freewest’s 100%-owned Black Thor and Black Label deposits, and 50% of its Big Daddy deposit, which Freewest has joint-ventured with Spider Resources (SPQ-V) and KWG Resources (KWG-V). Cliffs already owns 19.9% of KWG Resources, which holds a 25% stake in the Big Daddy deposit.

“Ferrochrome is imported by the world’s fastest growing steel markets and many countries have categorized it as a strategic metal resource,” Carrabba said. “We believe this discovery represents one of the premier chromite deposits in the world. Given the operation’s unique location, our objective will be to supply ferrochrome to stainless steel producers around the world.”

Cliffs has been involved in the development of these deposits for most of the year and in June acquired a significant position in Freewest through a private placement. Currently Cliffs owns 6.9% of Freewest’s shares outstanding and owns warrants to purchase additional shares, which if exercised would increase Cliffs’ ownership to 9.75%.

Under the definitive agreement with Freewest, each Freewest shareholder will receive a fraction of a Cliffs share representing a fixed value of C$0.55, and one share of a new company, Freewest Resources Inc. (or “New Freewest”), which will own Freewest’s current portfolio of non-chromite exploration properties, estimated by Freewest to have a value of C$0.15 per share, for a total estimated value of C$0.70 per Freewest share.

Market reports estimate that four countries-South Africa, Kazakhstan, Finland and Turkey-control nearly 80% of the world’s 24 million tonnes of chromite ore production.

Cliffs believes Freewest’s deposits can make up between 6% and 11% of the global supply of chromium.

In 2008, ferrochrome consumption in the U.S. reached 7 million tonnes. In Asia consumption reached 4.6 million tonnes and in Europe 1.9 million tonnes. Cliffs notes there was a deficit of 4.6 million tonnes last year of chromium in the U.S. and Europe.

Last year the price of chromium reached US$1.75 per lb. This year the metal is US$0.82-US$0.88 per lb.

But operating an open pit with such high-grade chromium should put Cliffs in the bottom third of the cost quartile, Carrabba said.

“If you want to compare the current deposits [in the Ring of Fire] with classic chromite deposits in South Africa,” Carrabba said, “the big difference is the larger seams and an open-pit versus underground scenario, which gives you a very good cost advantage.

Cliffs expects to finish the permitting process in three years and start commercial production by 2015.

Highlights from Freewest’s drilling for chromium include 100 metres running 30% chromite at Black Thor (the discovery hole in September 2008) and a subsequent hole returned 34.1% chromite over a core length of 174 metres.

Its Black Label chromite zone, discovered in Feburary 2009, has yielded up to 32.4% chromite in a 37.2 metre intersection.

Big Daddy, about 4 km southwest of Black Thor and about 5 km northeast of Noront’s Blackbird One and Two discoveries, is open at depth as well as along strike in both directions. In January 2009, Freewest, the joint venture published the results from the final two holes in the 2008 exploration program. The highlights include an intersection in one of the holes of 42.08% chromite over 34.8 metres and in the other, 34.96% chromite over 42 metres.