Posted on 12 Jun 2013
China's state-owned Anshan Iron and Steel Group Corp has agreed to take a majority stake in the Karara iron ore project in Western Australia, shoring up joint-venture partner Gindalbie Metals Ltd (Other OTC: GDBGF - news) after setbacks at the project.
The deal will eliminate the need for Gindalbie to pursue an impending equity raising and allows it hold on to A$35 million ($33 million) in cash at a time when mining companies are struggling to retain capital. The Karara project has experienced delays in the ramp-up of mining activity and seen shipment rates fall below internal forecasts.
Shares of Gindalbie jumped as much as 21 percent to 11.6 Australian cents after Gindalbie announced the agreement on Tuesday. Gindalbie shares had traded as high as 35 Australian cents in early January but have fallen since then on concerns that an equity raising would be highly dilutive.
"The advantage of this arrangement is it avoids the need for us to call on shareholders or the market for more funding for Karara's ramp-up and effectively marks the beginning of a new chapter for Gindalbie," Gindalbie Managing Director Tim Netscher said in a statement.
Under the agreement, Ansteel will receive an option to lift its stake in the project's 50-50 operator, Karara Mining Ltd, to as much as 52.16 percent, after providing bridging loans over the next 12 months until new longer-term loans can be secured with China Development Bank or other lenders, Gindalbie said.
Gindalbie's stake would fall to 47.84 percent.
The deal requires approvals from foreign investment regulators in Australia and China.
Strategic investment by Chinese steel mills in Australian iron ore mining is not new. Rio Tinto Ltd (Xetra: 855018 - news) , Fortescue Metals Group Ltd and Atlas Iron Ltd each have Chinese partners, though none own controlling stakes.
An economic slowdown in China has helped cool a decade-long commodities boom that briefly pushed iron ore prices to record highs, leaving Australian miners facing a painful transition to lower margins and weak investment interest.
Gindalbie said that the delays at the project were now behind it and that it was on track to reach maximum production rates of 8 million tonnes a year in July.
Ansteel and Gindalbie each hold half the 308 million private Karara Mining Ltd shares on issue with an implied value of A$1.3 billion, based on the investment by the two companies to date, excluding ongoing working capital amounting to a further $1.5 billion.
Magnetite ore predominately found at the Karara mine costs more to process than other ores. But once transformed into a useable form for steelmaking, it contains larger amounts of pure iron, enabling the material to be sold at a higher price.
Gindalbie expects its ore to fetch a 15-20 percent premium over benchmark 62-percent grade iron ore.
Ansteel holds rights to purchase the full output from the Karara project, which also includes 2 million tonnes a year of direct shipping ore that requires no processing.
So far, Ansteel has not exercised its rights to all the iron ore produced at the Karara project, allowing material to be sold to other buyers.
