By John Helmer in Moscow
Russia’s Evraz steel group makes bid for Cape Lambert iron-ore.
Speculation that the Evraz group (EVR:RU), Russia’s largest steelmaker, is preparing a takeover bid for Cape Lambert Iron Ore Ltd (CFE:AU), the West Australian junior miner, drove the latter’s share price up by 9% in the first day of trading, and another 7.5% today.
Cape Lambert has issued a statement that its board has been meeting Evraz and Merrill Lynch in Singapore, following the disclosure that Evraz had bought a 16% stake in the company early in the week at a price of 73 Australian cents. The current share price is 86 cents, making for a market capitalization of A$324 million.
According to one of Cape Lambert’s directors, the Australians told Evraz and their bankers that for a takeover, they will require a 64% premium over Evraz’s initial acquisition price, or A$1.20 per share.
Evraz, with a market capitalization of $37.6 billion, traded up 2% on Thursday’s news, after falling almost 3% for the week, 8% on the month.
If the Evraz move is intended to block an earlier Chinese offer — for Cape Lambert’s iron-ore project, though not the company –at a price of A$400 million, the question of the Russians’ longer-term intention remains unanswered. Michael Kavanagh, steel analyst for UralSib Bank in Moscow, told Mineweb he believes Cape Lambert represents a long-term strategic source of iron-ore for Evraz’s China mills. “If Evraz is going to grow its Chinese footprint it will want to secure iron ore supplies. To my knowledge, Evraz have not ‘traded’ in an opportunistic fashion; they tend to be more strategic in their acquisitions.”
Cape Lambert has 1.56 billion tonnes of relatively low-grade iron-ore at a site near Dampier, on the West Australian coast. It bought the project rights in 2005 for A$20 million cash and options in 2005. The project papers suggest output of 15 million tonnes of ore per annum for a 20-year mine life. The company has not yet commenced production; it has yet to secure a mining lease. Estimated capital expenditure required to develop the project into a producer is significant.
Company website presentations report the offer for the project from China Metallurgical Group Corporation (MMC) in February last. The terms provided for due diligence through April, and a board vote by Cape Lambert on July 28. MMC offered A$400 million, payable in three tranches, starting with A$240 million sixty days after sale. A deposit of A$10 million has been paid; $5 million of that is refundable if MMC withdraws.
On April 21, Cape Lambert said it “is committed to, and primarily focused on, the successful completion of the sale to MCC.” After the sale was completed, the board said it wanted “to pursue new business opportunities that fit the Company’s strengths and skill set, where the potential to value add can be demonstrated,.” It cautioned that “in a time of uncertain capital markets…access to capital is likely to be limited.”
In Russia, Evraz’s three steel mills are 84% supplied by iron-ore sources the company already owns, particularly the vanadium-rich Kachkanarsky iron-ore complex. Evraz also owns mills in the US, Italy, Czech Republic, and South Africa. In February, Evraz announced a series of transactions that will enable it to acquire a 51.5% control stake in the small Chinese steelmaker, Delong, based in Hebei province. Evraz is paying up to $1.5 billion for this takeover, also advised by Merrills.
The option of the Evraz shareholding takeover for Cape Lambert appears to be more lucrative for the Australian shareholders than the MCC project acquisition, since it is estimated by Kavanagh that of the A$400 million offer price, just A$275 million would be earned by the company; only A$100 million by the shareholders.
It is therefore anticipated that Evraz will vote its 16% stake, plus another 3% of Cape Lambert already owned by Delong, to veto the MCC deal in ten days’ time. In order to rally enough Australian shareholders for their support, Kavanagh reports today that “Evraz may make a tender offer to shareholders of Cape Lambert. We estimate that the tender offer may be at a price around the net proceeds (A$275 mln) that would have accrued to Cape Lambert post sale of the project to MCC.”
Two other Russian steelmakers have preceded Evraz into the Australian iron-ore market. Magnitogorsk Metallurgical Combine (MMK) is holding an estimated 5.4% stake in Fortescue Metals Group, which has already commenced iron-ore shipments from West Australia to China. In March, MMK reported an unrealized gain of $596 million in the value of this stake, which had acquired a year earlier for $170 million. MMK views its position in Fortescue as a hedge against the rising price of iron-ore, not as a source of supply to the Siberian mill from Australia.
The first Russian to invest in West Australian iron-ore was Alisher Usmanov, and that turned out to be a highly profitable portfolio turnover.
In February last, Usmanov, an independent Russian iron-ore miner and steelmaker, disclosed that he had cashed in his stake in Mt.Gibson Iron, for a profit of about $270 million. Mt. Gibson management announced at the time, and Usmanov confirmed, that he had sold his 19.73% stake in the company.
The stake had been acquired in 2006 for about $76.5 million though an Usmanov investment vehicle, Gazmetall Holding Cyprus. The February 2008 transaction is reported to have been worth $363 million. .In the year to June 30, 2007, Mt. Gibson produced 3.5 million tonnes of iron ore. It has been surmised that Usmanov had discussed greater involvement and investment in Mt. Gibson, but decided against, and judged that the timing for a share sale was ripe for iron-ore prices close to peak.
While Evraz — part-owned and controlled by Roman Abramovich’s Millhouse holding — has substantially greater borrowing capacity to fund a new mine at Cape Lambert, no Russian steel group has shown an interest in committing long-term capital for such a mining project.
Kavanagh believes this investment is an exception to this rule. “We believe that Evraz aims to gain control of Cape Lambert to develop the Cape Lambert project and potentially use Cape Lambert as a vehicle for the acquisition of further interests in Australia. Evraz’s stated strategy is to become a global steel maker that is 100% vertically integrated into iron ore and coking coal production. The acquisition of Cape Lambert is in line with this strategy.”