Kumba to gain R1,1bn windfall on Mittal deal

THE new price ArcelorMittal SA is paying for ore from Kumba Iron Ore will give the mining group a R1,1bn boost between March and December this year in terms of an interim pricing agreement that was recently struck between the two companies.

Anglo American CEO Cynthia Carroll said at an interim results presentation on Friday Kumba would realise revenue of $53m between March and June this year from the new pricing agreement and a further $97m between July and December.

These are figures Mittal executives declined to give the market during its results presentation last week. The figures are over and above what Mittal paid under a favourable nine-year-old agreement that Kumba terminated from March.

The R1,1bn, using an exchange rate of R7,70/$, represents the price Mittal has to pay for iron ore under an interim pricing agreement that runs from March 2010 to end-July 2011 as a supply dispute between Mittal and Kumba is decided by arbitrators.

Anglo American owns 64% of Kumba, which cancelled a cost plus 3% supply agreement with Mittal from March 1 after Mittal’s 21,4% stake in the Sishen mine reverted to the state because the country’s largest steel maker did not apply to convert its stake to a new-order right.

Kumba and Mittal agreed the steel maker would pay $50 per ton of ore for its export-focused Saldanha mill and $70 a ton for ore destined for its two inland mills. Under the favourable supply agreement Mittal paid $30 a ton for supplies to the three mills.

Mittal charged its clients a surcharge from May to August to build a provision for the higher price. It would pay all this money to Kumba and have to chip in “just south of R100m” of its own money to make up a shortfall in what was owed to Kumba, Mittal CEO Nonkululeko Nyembezi-Heita said last week.

Mittal has now built in a premium to its domestic steel prices to account for the higher iron-ore price. This new all-in-one price is $25, or R193, cheaper than the old price and surcharge combined.

The government wants Kumba and Mittal to agree on a long-term price that will keep the domestic steel industry competitive. The Department of Trade and Industry intervened when a standoff between the two companies developed and Mittal threatened to close Saldanha and cut up to 4000 jobs.

Source: www.businessday.co.za

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