Johannesburg -
Kumba Iron Ore [JSE:KIO] could add some R9.4bn to its value if it can get the 21.4% of Sishen's mineral rights that belonged to
ArcelorMittal SA [JSE:ACL] (Amsa) until April 2009.
However, government will probably dilute the value of this share, attaching conditions to it that are aimed at benefiting the domestic steel market.
Provisional estimates based on the iron-ore prices that Kumba and Amsa agreed on last week indicate that by March 2011 Kumba would add about R2bn to its pre-tax profits from iron-ore sales to Amsa.
This is immediately being calculated as revenue for Kumba, no matter the outcome of the private arbitration on which the two have agreed. This arbitration is aimed at determining the validity of Kumba's decision to cancel the supply contract agreed upon in 2001. The R2bn will at the same time disappear off Amsa's revenue statement in the coming year.
Last week's agreement represents acknowledgement by Amsa that it is no longer entitled to iron ore at cost-plus-3%.
Amsa lost its mineral rights because of its failure to convert them into new-order rights as required by legislation. But for government, which considers competitive steel prices crucial to the country's industrial policy, a difficult decision lies ahead.
It will be entirely possible to force Kumba to continue to supply 6.25 million tonnes of iron ore a year at cost-plus-3% in order to force steel prices down.
The situation is made even more complex by demands from Imperial Crown Trading 289 (ICT), to whom the department of mineral resources granted a prospecting right in Sishen on the basis of Amsa's expired mineral rights.
ICT's demands are being contested by Kumba. The departmental review of that process has already lasted for several months.
The outcome is being anxiously awaited because the worst fears of investors in mining will be realised if the rights are awarded to ICT which would indicate an absence of security in holding mineral rights.
International mining consultancy SRK valued Kumba at R32.5bn in October 2006.
The company's stake at that time was 74% of Sishen, excluding ArcelorMittal's 21.4% share in the mine's mineral rights.
At the time the 21.4% was therefore worth R9.4bn, and could today be worth even more, owing to iron-ore price increases.
In 2005 Anglo American offered R37/share for Kumba Resources shares while the share price at the time was R34/share.
Anglo certainly did not pay for the 21.4% of Sishen's mineral rights that were awarded to Amsa, and which Kumba Iron Ore is now attempting to acquire, said a source who was involved at the time.
The 21.4% was forced on it by the then minister of trade and industry,
Alec Erwin, and
Khaya Ngqula, the then CEO of the Industrial Development Corporation.
When Iscor's mining assets were unbundled it was decided that Iscor should receive 6.25 million tonnes of iron ore from Sishen at cost-plus-3%. The mining assets were far more profitable than Iscor's steel production and the steel works were deeply in debt.
This was a way to transfer the steel division's indebtedness to the mining division, said the source.
This could take place only with a long-term contract, but Erwin insisted that Iscor should get a stake in Sishen to guarantee that it would always get iron ore cheaply.
At the time the 6.25 million tonnes represented 21.4% of Sishen's production.
This stake vas very significant in making Lakshmi Mittal, CEO of the parent company, one of the richest people in the world after he assumed ownership of Iscor.
In just the first two years after the takeover Mittal made R2.5bn profit out of Iscor, the source pointed out.
- Sake24