Steelmaker MMK to buy Australian Iron Ore Company

Russian steelmaker MMK is to buy Australian group Flinders Mines for an agreed $538 million to boost mining operations and stabilize supply: IMMDH - International Mineral Mining Development Holdings End Quote

(1888PressRelease) December 06, 2011 - Russian steelmaker MMK is taking over Australia's Flinders Mines for $537m (AUD$554m). MMK is offering $0.30 cash per share, representing a 92.5% premium to Flinders' 30-day volume weighted average share price as of November 22. Magnitogorsk Iron & Steel Works (MMK) has been seeking to boost its mining operations and increase the proportion of iron ore demand it can supply itself. Currently, it is 30 per cent self-sufficient in iron ore, according to analysts. The deal will make the steelmaker self-sufficient in ore supplies. Steelmakers have been buying upstream assets to lock in supply and keep costs down, allowing them to remain profitable during downturns. Arcelor Mittal, the world's largest steelmaker, is also one of the top five producers of iron ore and coking coal. MMK's deal comes a day after Japanese group Mitsubishi Corp offered to buy Murchison Metals' stakes in another iron ore project and infrastructure in Australia for $315 million.

Analysts, however, said the deal raised questions about the success of MMK's existing iron ore project, Prioskol. The acquisition will probably not contribute to earnings until 2015 at the earliest. According to Kommersant Daily, MMK has a lack of ore resources and is very sensitive to changes in prices on the market. In the latest financial report for the 1H of 2011 the company mentioned the adverse effect of raw materials price increase on its financial performance saying in a statement: "In the 1H 2011 Iron ore was up 30%, coal up 15% and scrap up 5%." Flinders' major asset is its Pilbara iron ore project (PIOP), in the region of the same name in the state of Western Australia, targeting production by early 2015 with estimated annual volumes of 15 million tons/year of saleable product, according to MMK. The project contains a total resource of 917.3 million tons at 55.2% iron and would be able to produce at 15 million tons/year, according to Flinders. A definitive feasibility study on the Pilbara project is due to be completed in the second quarter of 2012.

MMK is offering 6.12 times the book value of Flinders' assets, compared with a multiple of 2.5 for 10 similar deals, according to data compiled by Bloomberg. The premium compares with a 34% average premium for global diversified minerals deals of more than US$100 million announced in the past 12 months. Analysts also pointed to debt at MMK, which had long term borrowings of $2.6 billion at the end of June and total non-current liabilities of $4.2 billion. MMK said earlier in the week, in a statement expressing interest in Flinders, that it could obtain a loan from Bank of Moscow for up to $100 million. Bank analysts say that MMK, which had about US$400 million of cash at the end of the first half and has agreed on a US$100 million bank loan, will have no problem for raising funds for the deal. The Russian company may need to invest about US$1 billion in developing the project. MMK may use its 5% stake in Fortescue Metals Group, worth about US$700 million, to fund the acquisition. Flinders' Board of Directors unanimously recommends that all Flinders shareholders vote in favour of the acquisition.

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