Baosteel To Edge Out Xstrata in Anglo American?

By Kishori Krishnan Exclusive To Iron Investing News

Iron clad deals are in play. Chinese steel and iron ore group Baosteel has proposed to pay US$ 1.6 billion for a 30 per cent stake in Anglo American‘s (AAL.L) huge Minas Rio iron ore mine in Brazil. Traders maintain that any deal with Baosteel could help Anglo fend off suitor Xstrata (XTA.L), which last week was told to make a formal bid for Anglo by October 20 or walk away for six months.

The opposition to Xstrata’s proposal for a nil-premium merger, which would create a company worth £40 billion is gathering steam.

A spokesman for Anglo declined comment initially but reiterated the firm would consider the introduction of an investor to Minas Rio as it moves to the second phase of development of the mine. Anglo has estimated that it would cost US$ 3.6 billion to develop the Minas-Rio project.

“Two other companies are understood to have contacted Anglo about buying a stake in Minas – the Bahrain-based Gulf Industrial Investment company and Sojitz, a Japanese conglomerate. But Baosteel is understood to be the frontrunner,” media reports said.

Pranill Ramchander, an Anglo spokesperson, said the first production from Minas Rio is expected from 2012 with full production of 26.5 million tons a year in 2013.

Minas Rio is a world class asset and has the benefit of an integrated logistics system and is therefore highly scaleable, with potential to considerably expand production from its multi-billion tonne resource.

“We are developing our thinking on the second phase and developing an integrated mine plan to optimise the ore body; only then will we consider inviting potential partners,” Ramchander said.”There has been a lot of interest shown in this project by potential investors,” he added.

Anglo bought the Minas-Rio iron ore project, 70 per cent of the Amapa iron ore system and 49 per cent of LLX Minas Rio for US$ 6.65 billion.

Faster development

Analysts had said that if Anglo were to sell an interest in the Brazilian iron ore it would allow it to develop its iron ore, nickel and copper projects more quickly. Anglo expected the mine to ultimately increase iron ore production to 53 million tons a year or more .

Anglo’s shareholders have made it clear to new chairman John Parker, who took over from Mark Moody-Stuart in August, that Xstrata’s offer is unacceptable because of the absence of any takeover premium. Xstrata, led by Mick Davis, is under pressure to add a cash component to any future offer for Anglo, but will need to raise funds via a rights issue to make additional cash available.

“It is hard to see how they can get funds to provide a premium, so the deal must be as good as dead,” one analyst said.

Fresh round of talks

Meanwihile, China is intent on flexing its muscles and will kick off its next round of iron ore price talks hoping finally to extract some advantage from its position as the world’s top steel consumer by squeezing a better deal out of reluctant iron ore miners.

Despite producing nearly half of the world’s steel and being the top iron ore importer, China failed to convince the top three miners that it deserved cheaper prices. Will it be able to achieve a better result in the next round of talks is a moot point.

Spot prices for ore have rebounded, the global economy has bottomed out from the financial crisis and China continues to churn out record amounts of steel.

At an annual conference traditionally seen as a warmup for annual term talks, China’s steel industry, led by top producer Baosteel and industry body the China Iron and Steel Association (CISA), are looking to set the scene for 2010/11 price talks.

But the absence of top iron ore miners Vale (VALE5.SA) RIO.N of Brazil and Anglo-Australian rivals BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX) from the speaker list could downgrade the importance of the October 15-17 meeting in the Chinese city of Qingdao.

Moreover, it is not clear on what basis prices for the 2010/11 contract year will be negotiated, as China has not officially accepted a 33 per cent price reduction from 2008/09 prices.

Even executives from Australian iron ore explorer Aquila Resources (AQA.AX) and the country’s third-largest producer, Fortescue Metals Group (FMG.AX), were invited to deliver speeches to the Qingdao conference, but Fortescue missed a self-imposed deadline on Wednesday.

The firm was to agree $6 billion in debt financing from Chinese steel mills, casting doubt on a related deal to sell China 20 million wet tonnes of iron ore at a discount of 3 per cent to rival miners.

Relations between China and Australia, one of its biggest raw material suppliers, have been strained by the rejection of a number of attempts by Chinese state-owned firms to buy Australian miners.

Price rise

Mark Pervan, senior commodities analyst at Australia & New Zealand Bank, said he expected term iron ore prices to rise 15 per cent in the 2010/2011 fiscal year, based on the prices agreed by Rio Tinto and Japanese steel mills several months ago.

Taiwan’s Feng Hsin Iron & Steel has announced its intention to cut its rebar price early on October 2, 2009 due to the dropping international scrap price. Usually, the new price is announced every Monday.

Feng Hsin Iron & Steel’s rebar price has fallen by TWD 300 per tonne, hitting TWD 17,100 per tonne. Meanwhile, the scrap purchasing price has dropped by TWD 300 per tonne, reaching TWD 10,200 to TWD 10,700 per tonne.

A survey of five analysts in banks and securities brokerages showed a range of a 10 to 15 per cent rise for the fiscal year starting from April 2010.

“China’s economic expansion will sustain both steel production and steel prices, hence forming a floor for iron ore prices and leaving room for further upside,” said Hong Kong-based analyst Helen Lau of OSK Securities.

CISA has been setting out its position, saying it sees iron ore markets oversupplied next year as global steel output recovers slowly.

Higher deals

India’s iron ore deals were heard at $93 a tonne C&F this week, up from a week ago, and traders said they were eyeing higher prices when China reopened after its eight-day holiday next week.

“China will likely be reopening with better prices,” said a dealer based in a large mining company in east India. “The next year’s negotiation will start and I believe the Australians and Brazilians won’t let the spot prices fall.”

The dealer said he had heard deals at $93 a tonne for ores with 63 per cent iron, freight included, which was higher than $88-$90 early last week.

China, world’s largest iron ore buyer, broke for its National Day and Mid Autumn festival holidays on Thursday after some hurried buying earlier that pushed up prices.

Brazil shines

On Monday, Brazil’s Bovespa index futures gained after Bank of America Corp said earnings growth may top estimates as consumer spending grows and corporate-financing costs drop.

Vale SA, the world’s biggest iron ore miner, gained 1.2 per cent in US-trading after Bank of America Corp said 5.3 per cent profit growth next year will sustain consumer spending.

Brazil’s planned $11 billion in infrastructure spending for Rio de Janeiro’s 2016 Olympic Games may also spur gains for other iron and steel firms and for the infrastructure sector as a whole.

“We remain bullish on Brazil private consumption,” wrote Pedro Martins Jr., a Sao Paulo-based equity strategist for Bank of America. “We see upside risk for earnings estimates.”