ArcelorMittal S. Africa Rises on Deal: Johannesburg Mover

ArcelorMittal (MT) South Africa Ltd. surged in Johannesburg trading after the continent’s largest steelmaker ended a three-year pricing dispute with raw material supplier Kumba Iron Ore Ltd. (KIO)

The stock rose as much as 10 percent and was up 6.6 percent at 40.23 rand by 2:32 p.m. in Johannesburg, heading for its biggest daily gain since June 4. About 943,000 shares were traded, more than twice the three-month daily average.

Anglo American Plc (AAL)’s Kumba will sell as much as 6.25 million metric tons of iron ore a year to ArcelorMittal South Africa, a unit of the world’s largest steelmaker, from its Sishen and Thabazimbi mines at the cost of production plus a 20 percent margin, the companies said in a statement yesterday. AMSA dropped 3.7 percent yesterday in Johannesburg trading.

“People might have looked at cost plus 20 percent and thought that was bad,” Campbell Parry, an analyst at Abax Investments (Pty) Ltd. in Cape Town, said by phone today. “Once they sliced and diced the numbers last night they realized it was not such a bad deal at all.”

Kumba in March 2010 canceled a 2001 accord to supply AMSA with 6.25 million tons annually from the Sishen mine, Africa’s biggest iron-ore operation. Kumba ended the deal, in which the raw material was sold at cost plus 3 percentage points, after AMSA’s mining right over the operation expired the year before.

Kumba rose 1 percent to 443.39 rand, adding to a 2.3 percent gain yesterday after the announcement.

Price Agreement

The new pricing agreement follows a one-year deal where Kumba agreed in December to supply AMSA as much as 4.8 million tons of iron ore from Sishen at an average price of $65 a ton. AMSA also kept sourcing ore from the Thabazimbi mine in Limpopo province at cost plus 3 percentage points, paying about $108 a ton in 2012 as the mine neared the end of its lifetime.

The purchases meant an average payment of $85 to $90, Chief Executive Officer Nonkululeko Nyembezi-Heita said yesterday.

“Our estimate indicates that in this deal, at that time, we would have been paying between $60 and $65” a ton, Nyembezi-Heita said. The new deal would last for the life of Sishen, estimated at 18 years, and will be subject to a ceiling equal to the level Kumba is able to earn for exported output, she said.

“The agreement is an entitlement to buy,” Nyembezi-Heita said. “If we can get iron ore at a better price, then that’s what we’re going to do without having any obligation to Kumba” from the third year of the deal, which takes effect Jan. 1.

Losing Rights

The deal might lapse should Kumba lose part of its mining right for Sishen, which remains the subject of a dispute in South Africa’s highest court. The state in September asked the Constitutional Court to overturn rulings preventing it from granting a partial prospecting permit to Imperial Crown Trading 289 (Pty) Ltd. A former shareholder of ICT, Jagdish Parekh, was a business associate of President Jacob Zuma’s son, Duduzane.

The Department of Mineral Resources granted the partial right to ICT after AMSA’s permit expired. The right was again revoked in Kumba’s favor by the North Gauteng High Court in Pretoria in December 2011, after which the Supreme Court of Appeal upheld the decision in March 2013.

The Constitutional Court is yet to announce its judgment.

The agreement would allow Kumba to extend production at its Thabazimbi mine, which previously had about two to four years of life remaining, Kumba CEO Norman Mbazima said.

The deal “moves the risks and rewards towards Kumba as it takes ownership of Thabazimbi and seeks to optimize sales channels,” Investec said in a note to clients.

To contact the reporters on this story: Kevin Crowley in Johannesburg at kcrowley1@bloomberg.net; Andre Janse van Vuuren in Johannesburg at ajansevanvuu@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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