US iron-ore and coal producer Cleveland-Cliffs has agreed to buy coal-miner Alpha Natural for about $10-billion in cash and shares.

Cleveland-Cliffs is the largest producer of beneficiated iron-ore pellets in North America and, after the tie-up, the company will hold the distinction of the biggest iron-ore producer on the continent and the largest metallurgical coal producer in the US, Cleveland-Cliffs chairperson, president and CEO Joseph Carrabba said on a conference call.

The combined company will be renamed Cliffs Natural Resources, and will operate nine iron-ore facilities and more than 60 coal mines, in North America, South America and Australia, putting it in a strong position to capitalise on surging demand for both steelmaking ingredients.

Brazilian-miner Companhia Vale do Rio Doce is the world's biggest iron-ore producer, and diversified mining giant BHP Billiton leads the pack in exported metallurgical and thermal coal.

Prices of both coal and iron-ore have surged in recent years, driven by demand from developing countries like China and India.

The merged entity, which will be based in Cleveland, is expected to be the sixth largest mining company in the US by market capitalisation, and will have an annual sales volume of more than 30-million tons of iron-ore and nearly 18-million tons of metallurgical coal, making it one of the largest suppliers to the world's steel industry, Cleveland Cliffs said.

It also expects to ship approximately 17-million tons of thermal coal a year, for use in power generation.

However, not content with what an analyst on the conference call referred to as a "company defining transation", Cleveland Natural Resources has set its sights on further growth, and plans to use its new position to diversify its portfolio, both geographically and into new commodities, Carrabba said.

"We are looking at other minerals to grow significantly and to continue on into a global diversified mining company."

Cleveland Natural Resources' pro forma revenue in 2008 is expected to reach almost $6,5-billion, with earnings before interest, tax, depreciation and amortisation (Ebitda) of $1,9-billion.

The company's estimated 2009 revenue would reach $10-billion with estimated Ebitda of $4,70-billion.

“The company's significant position in both iron ore and metallurgical coal will make it a major supplier to the global steel industry, as well as provide a platform for further diversification both geographically and in terms of the mineral and resource products it sells,” Carrabba said.

Alpha's thermal coal assets would also help in improving the group's commodity balance, he commented.

“No one wants to put all their eggs in one basket.”

Cleveland Natural Resources expects to realise annual synergies of at least $200-million beginning in 2010, mainly by applying Alpha's expertise in coal processing and blending efficiencies to Cleveland-Cliffs existing coal assets, as well as some benefits from combining the administration of the two companies.

Savings will likely already be achieved in 2009, but these will be offset by the costs associated with the transaction, said Cleveland-Cliffs CFO Laurie Brlas.

According to the agreement, which has the backing of both companies' boards, Alpha shareholders will receive 0,95 Cleveland-Cliffs shares and $22,23 in cash for every Alpha share.

Based on Cleveland-Cliffs' closing share price on July 15, 2008, Alpha stockholders would receive $128,12 per share, which represented a premium of 35% to Alpha's closing stock price the same day.

Cleveland-Cliffs expects to pay about $1,7-billion in cash and about 71-million new shares, Brlas said.

JPMorgan Chase Bank has agreed to underwrite up to $1,9-billion, which will be used to fund the cash portion.