BC Iron Limited to merge with Iron Ore Holdings Ltd. – should you buy?

Here’s why investors should steer clear of one of the most promising mergers on the ASX – at least for the moment.

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Back in August, junior miner BC Iron Limited (ASX: BCI) announced a proposal to acquire fellow iron ore producer Iron Ore Holdings Ltd. (ASX: IOH) – a proposal subsequently recommended by the boards of both companies.

Since then the offer has proceeded rapidly with 83% of Iron Ore Holdings shareholders having subscribed to the takeover as at 2 October.

BC Iron announced that all conditions for its offer had been met and the offer was now final and unconditional – and set to conclude on 14 October unless extended.

Given that the offer has already been extended once I think a further extension is quite unlikely, and remaining Iron Ore shareholders should hurry up and jump on board.

With shareholders set to receive 0.44 BC Iron shares and $0.10 cash for every IOH share submitted, the deal is a fair one and will give investors a stake in 900Mt of iron ore deposits at more than 56% Fe content.

Cash of $190 million, total debt of $54 million and significant exploration potential – particularly in Minas Gerais, Brazil (BCI tenements) provide traction for the company going forwards, and allow some resilience to further iron ore market shocks.

While Iron Ore Holdings shareholders should definitely take up the offer if they’re not selling out of iron ore, investors in the wider market should steer clear for one very good reason – we haven’t seen the last of the falls in the value of iron ore.

With the uncertainty facing the market in the short term, investing in junior iron ore companies could be very much like trying to catch a falling knife.

Investors who desperately must own an iron ore investment should look to the majors BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) who have extensive deposits, very low costs and a considerable amount of market influence.

Fortunately the outlook for other resource sectors is not as dim, and investors can make a sizeable fortune by buying the right companies at the right times.

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

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