ArcelorMittal mistake devastates

Johannesburg - ArcelorMittal South Africa [JSE:ACL] slipped up horribly in failing to apply to have its mineral rights in the Sishen iron-ore mine converted. This was an absolutely devastating oversight that could result in the company closing its doors.

On Monday this was the reaction of various players with whom Sake24.com spoke. It was also the clear message in various investment banks' research reports to clients.

On Friday ArcelorMittal SA said Kumba [JSE:KIO] - which operates the Sishen mine - had cancelled an agreement to deliver to it 6.25m tons of ore at cost-plus-3%.

Kumba explained that this was because Arcelor had failed to apply for new-order mineral rights before April 30 2009, and its old-order rights had therefore expired.

In 2001 Arcelor paid R2.8bn for a 21.4% indivisible stake in the mineral rights of the Sishen Iron Ore Company (SIOC). In terms of this agreement it also owns 21.4% in the ore body and SIOC acts as a contract miner for Arcelor. Kumba owns the mineral rights in the remaining 78.6% of SIOC.

The rights of companies that did not apply for new-order mineral rights before April 30 2009 return to the state, and new applications can be made. The act is pretty unambiguous about this, said a legal expert on Monday.

Because the right to a contract of cost-plus-3% goes to the owner of the 21.4% right - which is now apparently the government - Kumba had to cancel the contract with Arcelor when it realised the situation so as to protect its own rights, explained Deutsche Bank.

If it simply continued supplying iron ore to Arcelor, it could be legally assumed that it ratified the cost-plus-3% contract and would experience serious problems if the new holder of the 21.4% right insisted on a similar contract, Deutsche Bank continued.

The department of mineral resources, which will need to play a key role in sorting out the mess, was unable to confirm on Monday that Arcelor's rights had indeed expired or whether a new application had been received.

Although a great deal of uncertainty still exists as to Kumba and ArcelorMittal's legal positions in the matter, analysts are of the opinion that a protracted court case lies ahead and that successful cancellation of the contract could be the kiss of death to Arcelor because of the absolutely devastating impact on its financial performance.

It will have a crushing effect on its earnings and valuation because it would immediately lose its production-cost advantage, pointed out Kagiso analyst Hennie Vermeulen.

This could have serious consequences for local management because the head office in London will certainly not be impressed with this development.

Macquarie First South told clients that the valuation of ArcelorMittal, which on Friday asked the JSE to suspend trading in its shares until it makes a further announcement on Wednesday, could halve and its survival would be in doubt if it had to pay market-related prices for the ore.

There will also be considerable political pressure to resolve the situation. Even if Kumba legally has the upper hand, there could be a flood of political and other pressures from players who could drive matters in a direction other than what could be expected from a legal perspective, said Macquarie.

On Monday Kumba spokesperson Tebello Chabane said that iron-ore sales to Arcelor had continued, but at commercial export-parity prices.

No legal documents attempting to contest Kumba's decision have yet been received from ArcelorMittal.

- Sake24.com

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