A full week after Sishen Iron Ore Company (SIOC) announced the cancellation of a cost plus 3% iron-ore supply agreement with ArcelorMittal South Africa regarding material produced at the Sishen mine, and the Department of Mineral Resources (DMR) is still not commenting on whether it agrees that the steel group's 21,4% undivided share of the Northern Cape mine now vests with the State.

It has also not confirmed whether it ever notified ArcelorMittal South Africa that its rights had been forfeited, or whether it indeed needed to do so, owing to the company's failure to convert those rights in line with the Mineral and Petroleum Resources Development Act (MPRDA).

The JSE-listed steel group secured the mineral rights during a 2001 unbundling agreement, which resulted in the separation of the then Iscor into distinct mining and steel enterprises. The deal was engineered to ensure that the steel group retained a semblance of vertical integration, which was viewed as necessary for the new company's corporate sustainability, as well as to ensure the retention of competitive steelmaking capacity in South Africa.

The DMR could also not be drawn on whether SIOC had been mining the resource illegally since May, 1, 2009, the date prescribed in the Act for the first-stage conversion of minerals rights from the old to the new order.

Spokesperson Jeremy Michaels told Mining Weekly Online that, while the department was aware of the strategic importance of the arrangement, it was not making any comments "at this stage". Michaels added that the dispute had reached a sensitive stage and could head for arbitration or future litigation and the DMR would therefore be monitoring it and the potential implications.

Kumba Iron Ore (KIO), which owns 74% of SIOC, has told Mining Weekly Online that it did not need confirmation from the DMR that the rights had fallen away, as the failure to do so meant that its rights fell away automatically, "by operation of law".

Therefore, CFO Vincent Uren argued that it was immaterial whether or not the DMR had given explicit notification. "The failure to convert had the result that Mittal lost its real rights to 21,4% of the mineral rights at the Sishen mine," Uren said, adding he could not "say what government did or did not notify Mittal".

NOT MINING ILLEGALLY

Uren also dismissed a suggestion that SIOC might be mining the resource illegally, given its contention that the steel group had lost its rights, which, by implication, meant that the State was the new owner and should have provided SIOC with permission to proceed with mining it resource.

"Government is the ‘custodian' and not the ‘owner' of the portion of the old-order mineral right not converted," he explained to Mining Weekly Online.

He added that when SIOC applied for the conversion of its old-order rights, it submitted a proposed mine works programme (MRP), which was approved by the DMR.

SIOC was conducting its mining operations in accordance with that MRP, with Uren arguing there was not implication for the programme due to the "lapsing of Mittal's rights ".

SIOC had, meanwhile, offered to sell an equivalent amount of iron-ore to ArcelorMittal South Africa from the Sishen mine on commercial terms and was in talks with the DMR in relation to "the residual 21,4% old-order mining rights in respect of the Sishen mine". Uren refused to say when SIOC had made it application for that 21,4%, saying: "This has not been disclosed at this stage".

ArcelorMittal South Africa continues to argue that it was of the "firm opinion" that the long-term supply agreement remained "valid and binding" and that it would take "all steps necessary to protect its shareholders in this regard".

It indicated that material from the Sishen mine was continuing to flow on a cost plus 3% basis and would continue to do so until there was clarity on the dispute resolution process, which both parties want expedited.

PREVAILING UNCERTAINTY

In a note to clients, Citi analysts Johan Rode and Jatinder Goel argued that it was possible that the steel group could well be successful in contesting the SIOC cancellation, noting several possible legal defences.

The analysts even noted the possibility that the company could contest the State's "expropriation" of its property rights and demand compensation.

"The pursuit of an expropriation claim is likely to be an extended affair. There is no final legal precedent in this matter, but if ArcelorMittal South Africa's claim were to be upheld, the MPRDA affords plaintiffs the right to claim compensation at market value," the analysts wrote.

However, they said that either process would be protracted, and that the near-term impact on the steel group's earnings and its share price was, thus, negative.

"We believe the uncertainty of the outcome of the dispute is high," Rode and Goel wrote, while reducing ArcelorMittal South Africa's earnings and valuation estimates to reflect a worst-case scenario.

Citi also downgraded its recommendation on the company to "hold", with a "high risk" rating, and set a target share price of R85 a share as compared with R140 a share ahead of the dispute.

ArcelorMittal South Africa's share price shed about 24% to around R88 a share on Wednesday when the JSE lifted the restriction on trade, which had been instituted on Friday, March, 5, 2010, when the share was trading at R116 a share.

The stock has subsequently increased slightly, and was trading at over R92,50 a share on Friday morning.

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