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Alderon pegged as possible takeover target

In the Canadian iron ore business, everyone's trying to guess who'll be the next takeover play. One possibility is Alderon Iron Ore Corp .

The reason? Its pedigree. The Montreal-based junior has attracted the key players behind Consolidated Thompson, the biggest acquisition to date in the sector.

In addition, Alderon's major shareholders look as if they might be eager sellers at the right price. Altius Minerals , a savvy Newfoundland-based mineral royalty company, helped found Alderon and owns 33 per cent. It is thought to be open to a sale.

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An arm of U.S. insurer Liberty Mutual Group is the second largest holder, with a 15 per cent interest acquired in January at $2.67 a share. Mainstream financial companies usually don't own junior mining companies.

The interest in identifying the next buy out candidate in the iron ore patch has been at a fever pitch since the acquisition last year of Consolidated by Cliffs Natural Resources . As recently as 2006, Consolidated was an unheralded junior explorer sporting an insignificant market capitalization of $6-million. But Cliffs bought it for a staggering $4.9-billion.

Now, with three of the players who were instrumental in setting up Consolidated, including its former CEO, mining promoter Stan Bharti, on the board of Alderon, some market players are speculating it may be next. Mr. Bharti serves as vice-chairman of Alderon.

"I really think the son of Consolidated Thompson is ready to become its own man," says U.S. financial newsletter writer Peter Grandich, referring to Alderon, in which he's taken a personal interest as a shareholder and consultant.

Given the huge rise in Consolidated's stock through a takeover, Mr. Grandich says he's counting on Alderon providing investors with "a triple [in the stock price]from here."

Not everyone is that optimistic. Desjardins Capital Market analyst Jackie Przybylowski says Alderon has a good property and a highly regarded management team, "but I think that investors have already recognized a lot of the positives" and that good news is reflected in the current share price.

On a cautionary note, Alderon is still a couple of years away from being able to ship any ore from its deposit on the western edge of Labrador.

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As well, it has yet to sign a partnership agreement with a major steel company. The usual procedure is for a steel maker to put up some of the cash to develop a mine in exchange for bargain pricing on the ore that is produced. With development costs currently estimated at about $1-billion, Alderon needs a deep-pocketed partner.

The company has pledged to announce a deal with a major steel producer this year. "I have full confidence that we will be able to meet the market's expectations, which we ourselves have set," says Mark Morabito, executive chairman.

Once Alderon gets a partnership deal "either we'll end up being a producer or we'll end up making ourselves, through that process, an attractive target for a bigger company," he said in an interview.

Alderon's best hopes for a partner may lie in China, where steel producers are tired of depending on the industry's three dominant producers – Rio Tinto, BHP and Vale – for most of their iron ore.

Of course, China could fall victim to an economic slowdown, which would cut ore prices. Many investors fear just such a scenario.

"The reaction in the market is: 'It's all over, and the great commodities run sponsored by the growth of China is finished,'" Mr. Morabito says.

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But he says the fears are overblown. Even if growth in China this year slows from around 9 per cent to 7.5 per cent, the country's economy has become so much larger through growth it will continue to demand raw materials. "There is absolutely no change in their appetite for securing products," he says.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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