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Does BC Iron Limited’s takeover offer for Iron Ore Holdings Ltd mean it’s time to buy?

It’s doom and gloom in the iron ore sector.

Investors are running for the hills.

While BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are sitting pretty, down only 5% for the year, other iron miners have lost a third of their value or more.

Mount Gibson Iron Ltd (ASX: MGX) has slipped 28%.

Atlas Iron Ltd (ASX: AGO) is down 35.8% in the past year, and even more from its recent highs.

One particularly promising miner, BC Iron Limited (ASX: BCI) has been absolutely hammered, slipping 58% since this time last year.

Despite that, BC Iron seems intent on consummating its off-market takeover of fellow miner Iron Ore Holdings Ltd. (ASX: IOH), apparently disregarding a ‘get out of jail free’ exit clause which allows withdrawal of its offer in the event of sustained iron ore price falls.

Late last night BC Iron informed the market that it had captured 72.5% of Iron Ore Holdings at the closure of its initial offer on 19 September.

The company chose to extend its offer by a week until 30 September in the hope of capturing more shares during its off-market takeover.

While this final offer seems a strange move in the context of the current iron ore market, the merger will put BC Iron on a solid footing with enormous reserves, a strong cash position and low debt.

Together the companies are expected to have total reserves of 294 million tonnes (Mt) at 58% Fe, 626Mt at 56.8% Fe, and 1.1 billion tonnes at 30.4% Fe as well as $190 million in cash and $54 million of debt.

Despite this I expect the combined company to face difficulties keeping all-in production costs below the realised price for their iron ore sales, in a situation that could become quite unpleasant if ore prices continue to fall.

However resource markets are cyclical and BC Iron will be in a very strong position for when the market begins to improve.

This may not be for several years so I would warn investors against making a purchase now, but BC Iron definitely is one for your watch list in better times.

As many readers will know, successful resource investing – getting in before the rises and out before the falls – can easily outperform the wider ASX.

Actually doing it however requires a lot of research and may be beyond the ability of investors who don’t spend every day working in the share market.

If this is you, you’re better off finding a great business with the potential for long-term earnings growth to deliver outperformance over time without the stressful highs and lows of resource shares.

One such company is The Motley Fool‘s Top Stock recommendation for 2014-2015.

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Motley Fool contributor Sean O'Neill owns shares in Rio Tinto Ltd.

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