Baosteel, Aurizon Bid for Aquila in $1.3 Billion Iron Deal

Baosteel Group Corp., the owner of China’s biggest listed steelmaker, and Aurizon (AZJ) Holdings Ltd. offered to buy Aquila (AQA) Resources Ltd. in a deal that values the Australian ore and coal company at A$1.4 billion ($1.3 billion).

The offer signals a possible resumption of Chinese companies buying up global resources to take advantage of a price slump. Baosteel and Aurizon, Australia’s biggest haulage company, will pay A$3.40 a share in cash, a 39 percent premium to Aquila’s last closing price, according to a statement. The stock rose 36 percent today in Sydney.

Buying Aquila would give Baosteel and Aurizon a half stake in the A$7.4 billion West Pilbara iron ore mine, port and rail project in Western Australia. Iron ore fell into a bear market in March amid a credit squeeze and rising stockpiles.

“Baosteel has been looking to acquire iron ore resources for a long time to meet its demand,” said Le Yukun, a Shanghai-based analyst with BOC International Ltd., Bank of China’s investment banking unit. “Now the prices have dropped, it’s time for Baosteel to make acquisitions.”

Shares in Aquila, also developing the A$1.4 billion Eagle Downs steelmaking coal project in Queensland state in a joint venture with Vale SA, closed at A$3.34, notching its biggest gain since Dec. 15, 2008. Aurizon declined 4.8 percent, the most since February last year.

Photographer: Doug Kanter/Bloomberg

Steel production takes place at the Baosteel Group Corp. facilities in Shanghai. Baosteel, Aquila’s second-largest shareholder, and Aurizon offered A$3.40 a share for the 80.2 percent of the company they don’t already own in Perth-based Aquila, the companies said today in a statement. Close

Steel production takes place at the Baosteel Group Corp. facilities in Shanghai.... Read More

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Photographer: Doug Kanter/Bloomberg

Steel production takes place at the Baosteel Group Corp. facilities in Shanghai. Baosteel, Aquila’s second-largest shareholder, and Aurizon offered A$3.40 a share for the 80.2 percent of the company they don’t already own in Perth-based Aquila, the companies said today in a statement.

Falling Prices

Aquila, which slowed development of the iron ore project after the price fall, will form an independent board committee to study the proposal, the company said in a separate statement. Chief Executive Officer Tony Poli is the company’s biggest shareholder with a 29 percent stake, according to data compiled by Bloomberg.

China’s foreign mining investment peaked in 2008 at $24 billion, according to data last year from a Bank of China Ltd. unit, when copper fell 54 percent in London. Now the world’s biggest buyer of metals may be stepping up acquisitions. China Minmetals Corp. last month led a group that agreed to acquire Glencore Xstrata Plc’s Las Bambas copper project for $5.85 billion, while Citic Group Corp. agreed in February to buy a 13 percent stake in Alumina Ltd.

Baosteel, which has held a stake in the Perth-based company since 2009, decided to make a bid after efforts to arrange funding for Aquila with China Development Bank Corp. failed and lack of progress on negotiations about iron ore sales accords, Wu Yiming, chief financial officer of Baosteel Resources International Co., said at a press briefing in Sydney.

Photographer: Brendon Thorne/Bloomberg

Wu Yiming, chief financial officer of Baosteel Resources International Co., right, and Lance Hockridge, chief executive officer of Aurizon Holdings Ltd., at a news conference in Sydney. Close

Wu Yiming, chief financial officer of Baosteel Resources International Co., right, and... Read More

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Photographer: Brendon Thorne/Bloomberg

Wu Yiming, chief financial officer of Baosteel Resources International Co., right, and Lance Hockridge, chief executive officer of Aurizon Holdings Ltd., at a news conference in Sydney.

Becoming Frustrated

“Our original investment is to support Aquila to develop its major projects but after five years, we haven’t seen any projects being started,” Wu said. “We’ve become frustrated, so what we’re going to do now is to get things started.”

Aquila had held talks with Asian steel mills to sell a stake in the Eagle Downs project to help fund the final stages of development, Poli said in March. Vale was relying on the project to help it become one of the top coal producers by the end of the decade, the Brazilian company said last year.

Of the 288 proposed or pending deals in mining and steel industries this year, the average premium has been 32 percent, according to data compiled by Bloomberg.

“It’s expensive,” Evan Lucas, a market strategist in Melbourne at IG Ltd., said today by phone. “There’s no doubt that some of their tenements are quite large, and they certainly have the ability to ramp up and it would be in Baosteel’s interests to hold them and you’d get Aurizon doing the haulage system for it.”

Slow Project

The West Pilbara Iron Ore project would remain competitive even if iron ore prices fell to $80 a metric ton, including cost and freight, said Wu. Prices are forecast to decline every year until at least 2017, falling to about $98 a ton, according to an average analyst forecast compiled by Bloomberg. The steelmaking raw material last traded at $106 a ton. China accounted for about 72 percent of the iron ore imported globally last year, according to Bloomberg Industries.

Baosteel’s Baoshan Iron & Steel Co. imports about 20 million metric tons of iron ore from Australia a year, according to the board secretary office of the listed company.

While brokers including CLSA Ltd. see further price declines, Fortescue Metals Group Ltd., Australia’s third-biggest exporter, said last month that China’s demand for iron ore remains strong with the government committed to continued economic growth and urbanisation,

“Since the bidders have been unable to meet the Aquila board, we have respectfully decided to put the offer directly to shareholders,” said Zhihao Dai, chairman of Baosteel Resources, according to the statement. The bid comes “at a time of uncertainty of the funding and development pathway for Aquila’s suite of greenfield projects.”

Posco, AMCI

Baosteel, Aquila’s second-largest shareholder, will own as much as 85 percent of the company, with Aurizon holding the balance. AMCI Group, a private equity company, owns 25.5 percent of West Pilbara, and South Korean steel mill Posco owns 24.5 percent. In January last year, Aquila cut staff numbers after failing to agree on a budget for the project with AMCI, slowing development.

AMCI had “no intention” of selling its stake, AMCI’s CEO Harris Antoniou said in an interview Feb. 5. A call seeking comment on the bid for Aquila to AMCI’s Australian office wasn’t immediately answered.

Deutsche Bank AG are advising Baosteel, with Satori Investments and UBS AG acting as financial advisers for Aurizon. Aquila has appointed Goldman Sachs Group Inc.

The offer is subject to Baosteel and Aurizon gaining acceptance of 50 percent of shareholders and approval from Australia’s foreign takeovers regulator.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; David Stringer in Melbourne at dstringer3@bloomberg.net

To contact the editors responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net Keith Gosman

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