Our long-time favorite Iron Ore Holdings (ASX:IOH) has received buyout offer from competitor BC Iron (ASX:BCI) which is currently producing 4.5M wmt per year from its 75% owned Nullagine project, with Fortescue Metals (ASX:FMG) owning the balance of the project.

As the offer is being made in cash and shares (A$0.10 in cash and 0.44 shares of BC Iron), we think this is a very fair and reasonable offer as IOH’s shareholders continue to have upside potential through receiving new BC Iron shares. Also keep in mind BC Iron is a producing company and it’s able to produce at a profit which reduces the risk profile of the combined entity. Based on the current share price of BC Iron (and after deducting the A$0.15 dividend which the IOH shareholders won’t receive in September), the offered price is A$1.34 per share of Iron Ore Holdings, which means that IOH is trading at a 5.2% discount to the offered price.

In absence of a better offer, we believe BC Iron is a good fit for IOH and we plan to accept the BC Iron offer as we are convinced the combined entity will offer tremendous upside potential if the iron ore price goes up again. Additionally, the risk profile will be lower as the ‘new’ BC Iron will have a very healthy cash position and will generate free cash flow from BC Iron’s producing asset and the expected cash inflow from IOH’s Iron Valley deal with Mineral Resources (ASX:MIN).

Disclosure: The author holds a long position in both BC Iron and Iron Ore Holdings and will accept the offer made by BC Iron. Please see our disclaimer for current positions.

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