Why Mineral Resources Limited is acquiring Atlas Iron Limited

Mineral Resources Limited (ASX: MIN) announced the acquisition of Atlas Iron Limited (ASX: AGO). Is it a good deal?

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The Mineral Resources Limited (ASX: MIN) share price fell 3.45% to $16.64 on Monday, after the company announced the acquisition of Atlas Iron Limited (ASX: AGO). Media speculation about the transaction induced the two companies to request a trading halt last Thursday.

The details of the transaction

The two companies entered into a binding agreement under which Mineral Resources will buy the entire issued capital of Atlas. Atlas shareholders will receive one new share in Mineral Resources for every 571 Atlas shares, implying an offer price of 3.02 cents per share. This amounts to a generous 59% premium on the last closing price of the stock.

The transaction will be completed by August 2018, subject to court approval and the vote of Atlas shareholders. Atlas directors unanimously recommended voting in favour of the deal.

Atlas' share price rocketed 42% higher to 2.7 cents on Monday, nearing the implied offer price.

Why Atlas Iron?

Atlas owns a number of iron ore mines and exploration projects in the Pilbara region that will augment Mineral Resources' production capacity.

With Chinese steel mills shifting towards higher grade ores and a trade war looming, the price of low-grade iron ore came under pressure recently. Small players like Atlas have been affected, as well as larger firms like Fortescue Metals Group Limited (ASX: FMG), which has been trading at a 52-week lows since the end of March.

However, Mineral Resources is primarily a provider of mining services, including logistics, and Atlas brings along another strategic asset: a large single-user facility in Port Hedland.

Foolish takeaway

The acquisition seems a bit high-priced, but it fits perfectly into Mineral Resources strategy of growing into an integrated mining business.

Given the iron ore market conditions, I expect volatility in the Mineral Resources' share price in the next few months, after which the stock could become a good option for investors seeking exposure to the resources sector.

Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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