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Johannesburg - Kumba Iron Ore [JSE:KIO] stands to benefit massively from the cancellation of the nine-year supply agreement it had with ArcelorMittal South Africa.
It is estimated that the value of the 6.25 million tons a year of iron ore that was supplied to ArcelorMittal [JSE:ACL] under the agreement could fetch $400m a year at current spot prices.
Kumba confirmed on Friday it had issued ArcelorMittal notice that the long-standing supply agreement had been cancelled and that its subsidiary Sishen Iron Ore Company (SIOC) would no longer be supplying the steel maker with iron ore on a cost plus 3% basis from Monday.
Macquarie First South said in a note to clients that if the agreement was cancelled, then Kumba Iron Ore would benefit materially as export prices for ore at above $100 a ton were way ahead of the price that ArcelorMittal is paying - an estimated $25 a ton - for the ore under its supply agreement.
"Of course, there is no export capacity to move this ore in any event, hence we do expect that whatever the outcome, the ore will still go to ACL; the question is at what price," Macquarie said.
Investec Securities pointed out that if the full 6.25 million tons was exported at market prices of R700 a ton instead of cost plus 3%, which is an estimated R200 a ton, Kumba Iron ore could increase its earnings by and estimated 10% to 15%.
The deal between the two companies has been in place since former steel parastatal Iscor was unbundled into two separate businesses in 2001.
Iscor's mining assets were housed in Kumba, which is now 64% owned by Anglo American, while the steel business was bought out by Mittal and later changed to ArcelorMittal when the holding company acquired and merged with Arcelor internationally.
"SIOC has offered to sell an equivalent amount of iron ore to Mittal from the Sishen Mine on commercial terms," said Kumba.
But ArcelorMittal is not happy about the sudden change of plans.
"ArcelorMittal rejects Kumba's cancellation of the contract and is engaging the management of Kumba as a matter of urgency. If the matter is not resolved satisfactorily then ArcelorMittal South Africa will proceed with legal action," ArcelorMittal said in a statement.
According to Kumba, SIOC notified ArcelorMittal of its intention to cancel the agreement at the beginning of February but only received communication from the steel maker 21 days later on Friday, when it was advised among other things it had declared a dispute in response to the notification.
Kumba explained that in terms of the Sishen Supply Agreement, SIOC has by virtue of Mittal's ownership of a 21.4% undivided share of the mineral rights to the Sishen Mine.
SIOC was contracted to mine at the Sishen Mine on behalf of ArcelorMittal and to supply 6.25 million tons of iron ore per annum, which represents the steel makers share of production from that mine.
It said as a result of ArcelorMittal having failed to convert its old order mining right in respect of its 21.4% undivided share of the mineral rights to iron ore at Sishen Mine, as required in terms of the Mineral and Petroleum Resources Development Act, SIOC was no longer obliged to supply under the original agreement terms.
This is not the first time the two companies have locked horns.
Last year ArcelorMittal fought for what it saw as its right to participate in Sishen's expansion.
The new R8.5bn Sishen South project will produce 9 million tons of iron ore each year once the project is completed and will double Kumba's current output by 2015.
But an arbitration panel ruled in Kumba's favour by determining that ArcelorMittal was not entitled to participate in the Sishen South project.
Releasing Kumba's annual results this week, CEO Chris Griffith said the arbitration success meant significant EBIT preservation. At current spot prices, this represented $280 million per year.
Realising the price sensitive nature of the cancellation, ArcelorMittal moved quickly to have trading in its shares on the JSE halted.
- I-Net Bridge.com
