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ArcelorMittal SA to buy ICT should Sishen rights be confirmed
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10th August 2010
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By Chanel de Bruyn and Terence Creamer

JOHANNESBURG (miningweekly.com) – Local steel producer ArcelorMittal South Africa (AMSA) on Tuesday announced that a subsidiary company would acquire Imperial Crown Trading 289 (ICT) for R800-million, with the shareholders in ICT also to be included in AMSA’s R9,1-billion black economic-empowerment (BEE) deal.

ICT had controversially been awarded prospecting rights over the 21,4% interest in the Sishen iron-ore mine, which AMSA had “lost” over a failure to renew the mining rights.

In terms of the acquisition, a newly formed subsidiary, AMSA Operations (OPCO), which will hold all the operating assets of the JSE-listed steel company, would buy ICT, conditional on ICT being awarded mining rights for the portion it held in the Sishen mine and legal battles in this regard being resolved favourably.

Kumba Iron Ore (KIO), which owns the majority stake in the Sishen mine, has lodged a complaint with the Department of Mineral Resources (DMR) over its decision to award the prospecting rights to ICT, prompting the department to review the matter.

Analysts canvassed by Mining Weekly Online questioned the timing of the announced purchase of ICT, as the DMR was expected to report imminently on the outcome of a review into the granting of the Sishen prospecting rights to ICT.

One analyst, who spoke on the condition of anonymity, said that the timing might indicate that AMSA had insight into the outcome of the review. Alternatively, it was merely a bid by the steel company to cap the overall purchase price of the 21,4% undivided share of the Sishen mine, the value of which would surge to well above R800-million should the rights indeed be confirmed.

However, KIO had also lodged a High Court application against the DMR’s decision, which would presumably be pursued in earnest should the review process prove unfavourable to the Anglo American subsidiary.

AMSA CEO Nonkululeko Nyembezi-Heita said at a presentation in Johannesburg that the company was well aware of the legal hurdles facing ICT.

She stated that it would have been “reckless” of AMSA not to take active steps to try to resolve the iron-ore supply and pricing issues and to find a long-term solution.

The steel maker and KIO have been involved in a price war over the cost of iron-ore being supplied from the Sishen mine to AMSA’s steel plants, but last month reached an interim pricing agreement, while arbitration in a long-term agreement was under way.

Nyembezi-Heita said that while the dispute over the Sishen mineral rights primarily involved KIO and itself, neither of these organisations could wish away ICT as a third party, given that the DMR had already awarded it the prospecting rights.

Any long-term solution to the dispute would, thus, have to involve ICT, she stated.

Further, she said that if AMSA was successful in acquiring the mineral rights, this would allow for an easier arbitration solution than would have otherwise been possible.

The transaction was an attempt to restore the status quo in its iron-ore supply, emphasised Nyembezi-Heita.

POTENTIAL RISKS TO KIO

Meanwhile, there were also mixed reactions to whether the proposed transactions posed new risks to KIO itself.

An analyst, who refused to be identified in line with company policy, argued that the risks were “relatively small”.

He calculated that the impact on the overall value of KIO would be less than 10%, even if the arbitration process found in favour of the current cost-plus 3% supply arrangement between Sishen and AMSA and even should ICT prevail in securing the Sishen rights.

However, another analyst argued that the downside risks to KIO had increased materially.

The worst-case scenario for the iron-ore miner would be for AMSA to prevail in its arbitration defence of the discounted supply deal, and for both the DMR and the courts to confirm ICT’s rights. Under such a scenario, KIO would not only forfeit any windfall associated with higher domestic iron-ore prices, but could even face a move by the new OPCO to participate in 21,4% of KIO’s profits arising from the Sishen mine.

But the analysts also saw little, if any, downside risk for ICT as a result of the proposed transactions. They not only secured a price for a relatively precarious right, but its shareholders had also embedded themselves into the actual BEE deal, where no “cross conditionality” existed with relation to the securing of the mineral rights.

In other words, even if they failed to sell the Sishen rights to the JSE-listed steel producer, they would still be in a position to earn dividend profits from the operations of the steel company. “A very sweet deal indeed,” one analyst asserted.

There was also no difference of opinion on the fact that the current confusion over mineral rights security was causing reputational damage to South Africa, which could, ultimately, erode investor confidence.

Taken together with recent developments at platinum-group metals miner Lonmin, the Sishen matter was an “embarrassment” to the country and had increased the perceived “risk temperature” around the domestic mining industry.

“It an abysmal situation,” one observer noted, adding that it was “doubly concerning” that much of the opportunism was being pursued by individuals with strong connections to the governing African National Congress.

“The risk this poses to South Africa’s reputation is massive,” an analyst noted.

EMPOWERMENT PARTNERS

AMSA’s proposed R9,1-billion BEE transaction would see it sell a 21% shareholding in OPCO to the Ayigobi Consortium, a BEE special purpose vehicle that provided for the economic empowerment of women, youth and other strategic groups.

Of the 21% stake, 75% of the benefits would go to a number of BEE equity partners, including Mabengela Investments, which is led by President Jacob Zuma’s son Duduzane Zuma; Oakbay Investments, which is run by Gupta family members; and Pragat Investments, which is run by businessperson Jagdish Parekh, who was a major shareholder in ICT.

Mabelindile Archibald Luhlabo, Mojalefa Mbete, Prudence Zerah Mtshali, Phemelo Ohentse Robert Sehunelo and Zebo Lesego Edwin Tshetlho were the other ICT shareholders participating in the BEE deal.

Sandile Zungu who also led the ZICO special purpose vehicle, would lead the consortium.

The remaining 25% of the Ayigobi Consortium would be allocated to women, youth groups and new entrants to the BEE landscape. These parties would still be determined by AMSA and ICT.

The consortium, which would remain an AMSA shareholder for up to 14 years, would have to make no equity injection to participate in the BEE deal and would be provided with an upfront loan, which had been secured by the minimum future gains of R901-million.

The Ayigobi Consortium would also have the right to appoint one director to OPCO’s board of directors. The boards of directors of OPCO and AMSA would be identical.

Preliminary indications were that Zungu would be appointed as the consortium’s representative on the boards of directors.

Nyembezi-Heita highlighted that while there was a link in the ICT shareholders’ participation in both the transactions, neither of the transactions would be conditional on the completion of both transactions.

Meanwhile, the remaining 5% stake in OPCO would be distributed to about 8 500 employees through an employee share ownership plan (ESOP).  About 10% of the ESOP shares would be reserved for previously disadvantaged individuals who would join the company in future.

 

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