Iron Ore Down Under
By Andrew K. Burger
16 Oct 2006 at 11:26 AM EDT
DAMMAM, Saudi Arabia (ResourceInvestor.com) -- With a 19% per tonne price increase for 2006 piled on top of last year’s record-setting 72% increase, and with Asian, particularly Chinese, demand for steel still going strong, it’s hard to imagine better conditions for iron ore producers and explorers. Industry giants, such as BHP Billiton [NYSE:BHP], Brazil’s CVRD [NYSE:RIO] and Rio Tinto [NYSE:RTP], as well as smaller producers, have been posting record-setting earnings, and interest in their shares has risen in tandem.
All this has led to a no-holds barred push to ramp up development and production schedules, as well as locate promising new prospects. Constraining the acceleration are the high cost of fossil fuels and a dearth of skilled labour. It is also contributing to a rush of currents and cross-currents to do with the other principal means of acquiring producing assets: mergers and acquisitions.
A case in point is Australia, the world’s largest iron ore exporter, whose iron ore market has been a hotbed of exploration, production and mergers and acquisitions activity.
Iron Ore Bonanza
“Driven by the increasing dominance of the blast furnace in world steelmaking, iron ore mine expansion plans are being accelerated, new capacity is being brought on stream, and producer companies are pushing to extract benefits from industry consolidation and cost improvement programmes,” according to Sydney-based AME Mineral Economics’ “Iron Ore 2006” cost analysis report.
The report “shows how the industry is responding to an unparalleled demand surge and to a new global business environment characterized by record prices, stratospheric ocean freight rates, and a weaker U.S. dollar,” according to AME information.
“Although the industry’s giants – CVRD, Rio Tinto and BHP Billiton –have fast-tracked new projects to feed China’s insatiable demand, they continue to report being sold out well into the future. And the big three alone have a combined production in 2004 of more than 450Mt-- this accounts for roughly 35% of world production!” the authors state. A May 2006 Wall Street Journal article puts the three companies’ market share at 75%.
Australia’s iron ore community, which includes a host of smaller iron ore producers and explorers looking to capitalise on the good times, has been rife with news and rumours of industry consolidation for some time now. Mining executives, analysts and investment bankers have been very busy assessing the lay of the land and prospects for merging with, or acquiring, another producer as the fastest and cheapest route to growing assets, revenues, and profits. As long as demand, and hence prices, don’t collapse, industry consolidation looks likely to remain in the cards.
Western Plains & Southern
Accounting for more than 90% of Australia’s estimated reserves, the state of Western Australia has been a crucible of iron ore mining activity and mergers and acquisitions. Prominent among the latter is fast-growing Mt.Gibson’s [ASX:MGX] ongoing attempt to acquire Aztec Resources. [ASX:AZR]. Among the latest news in this ongoing hostile bid was the extension, to Oct. 27, of its A$280 million (US$211 million), 1:3 stock swap for control of Aztec.
More recently, and elsewhere in Australia, Southern Iron Pty. Ltd., which is being acquired by Western Plains Gold Ltd. [ASX:WPG], Oct. 10 announced that it had signed a Memorandum of Understanding (MOU) with China Kingdom International Group Co. Ltd.
China Kingdom is a vertically integrated conglomerate focused on international trade, investment and financial services, along the lines of CITIC. It has ties to the JiuQuan Iron and Steel Plant, one of China’s largest producers, and supplies iron ore to the Baotou Stell Plant, Shijiazhuang and AnShan stell plants. The company is also a major shareholder in Shanxi Iron and Stell Co. Ltd., which has a 3 million tonnes per annum steelmaking capacity.
If a 45-day due diligence process proves favorable, China Kingdom has agreed to take an A$5 million (US$3.7 million) equity interest in Southern Iron or WPG, as well as a joint venture interest in Southern’s Peculiar Knob iron ore project in South Australia. Included is a loan of up to A$30 million (US$22.6 million) for development of a direct shipping iron ore mine and China Kingdom being granted an option to purchase the majority of the ore mined at Peculiar Knob on a take-or-pay basis with terms favourable to WPG.
Peculiar Knob was estimated in 1997 to contain an inferred resource of 14 million tonnes of haemetite mineralization at an average grade of 63.2% iron with low levels of impurities, mainly phosphorous, at 0.02%.
WPG shareholders at an extraordinary general meeting on Oct. 26 are set to consider and approve or disapprove of the Southern Iron acquisition, along with other matters. These include management’s plans to initiate a drilling programme shortly thereafter, which aims to upgrade the status of Peculiar Knob’s inferred resources to the measured and indicated categories, to explore for additional mineable ore at depth and to obtain metallurgical and geotechnical data for use in mine design studies, according to information released through the Australian Stock Exchange.
Southern is also exploring and developing the Hawks Nest property, which reportedly contains two large and promising iron ore prospects: Kestrel (magnetite) and Buzzard (haemetite), with an indicated and inferred resource of 6.7 million tonnes at a 60% grade.
A Three-Way Play
Meanwhile, jockeying for position and the favour of shareholders continues between the managements at Mt. Gibson Iron Ore and Aztec Resources. Given recent developments at its potential 4 million tonne plus potential Koolan Island iron ore property, Aztec’s management has claimed that Mt. Gibson’s bid is opportunistic and undervalued.
It appears that most shareholders agree, or at least are willing to hold out and wait for further developments. With Mt. Gibson’s Oct. 6 voting deadline having passed without it garnering anywhere near its initially stipulated 90% of shares Mt. Gibson has extended its 3:1 stock swap offer to Oct. 27.
Outside of the nearly 32% stake granted by Cambrian Resources, Aztec’s largest shareholder, Mt. Gibson, as of October 11, now has tenders for 33.5% of Aztec’s issued and fully paid shares. Management has called into question Aztec management’s skills, citing recent comments by an Ernst & Young accountant that question whether Aztec has enough cash to survive past the end of the month.
Aztec management responded that an A$100 million (US$75 million) bank facility will be in place by month’s end. It also recently secured an A$65 lease for mobile mining equipment with Japan’s Komatsu and announced that it is accelerating Koolan’s development schedule, with production commencing any day now, a year ahead of initial plans.
It also previously raised more than $84 million in equity and signed an off-take agreement with China’s CITIC Group and Marubeni, the Japanese trading house.
In any takeover bid, it’s worthwhile noting the interests of incumbent management. “If Mt. Gibson’s bid was to succeed, “As I understand it, the bidder has indicated that two of the Directors be retained with [Chairman Ian] Burston becoming a NED of Mt. Gibson and Peter Bilbe [Aztec’s managing director] the chief operating officer of the group,” Tim Barker, resources analyst and portfolio manager at Australia’s BT Financial Group, told RI.
“It is unclear what will happen to other personnel although there would appear to be little in the way of direct rationalisation benefits outside of the head office, suggesting that concurrent development of the two companies’ ore bodies will require the continuation of current personnel outside of Perth,” he added.
From Barker’s perspective, “Aztec has certainly picked up a following of larger institutional shareholders but not exclusively so. The Chairman has a wide following in the market from his numerous appointments at other companies so I would expect a reasonable retail component as well,” he said.
“At the end of the day shareholders will take notice of both sides and make a decision as they see fit. However, the lack of board endorsement must be taken into account despite the apparent approval of the major shareholder to the deal. In the end the ability to receive roll-over relief from capital gains tax if the bidder accepts less than the required level may have some impact on the desirability of the offer to some shareholders.”
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