ArcelorMittal to sell $1.1bn Canadian stake

February 2013 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

ArcelorMittal, the world’s biggest steelmaker, has agreed to sell a 15 percent stake in one of its key Canadian iron ore operations for $1.1bn.

The sale of the stake in ArcelorMittal’s Labrador Trough iron ore mining and infrastructure asset, to a consortium which includes South Korean steelmaker Posco and Taiwan listed China Steel Corp, is the latest attempt by the company to reduce its enormous debt levels in a depressed market. ArcelorMittal had been exploring a sale of up to 30 percent of the Canadian business; however, following the 15 percent sale to the consortium that now appears unlikely.

ArcelorMittal was formed in 2006 when Mittal, founded by Indian steel magnate Lakshmi Mittal, purchased European rival Arcelor for $33bn. The group is one of Canada’s top exporters of iron ore, accounting for approximately 40 percent of the nation’s output. The company also produces around 6-7 percent of the world’s steel.

The deal will now give Posco and China Steel access to the raw materials they need to facilitate much needed growth. Posco, the world’s fourth largest steelmaker, imports virtually all of its raw materials and has made a number of acquisitions of overseas mines in recent years. Posco intends to boost its self sufficiency in raw materials to 50 percent from 34 percent by 2014. The transaction will see ArcelorMittal enter into long term iron ore supply agreements with both Posco and China Steel.

Iron ore production has taken on a new significance since the depression of the steel industry began; many firms are now searching for effective methods of cost cutting. Slow economic growth and spending cuts, particularly in Europe, have led to a dramatic decline in demand for steel, most notably in the automobile and construction industries. In October 2012 the World Steel Association forecast that demand for steel would only rise 2.1 percent in 2012, down from 6.2 percent in 2011. The price of iron ore fell to a three year low of $88 a tonne in September 2012.

Furthermore, in December 2012 ArcelorMittal reported that demand in the vital European market was down 29 percent from 2007. As a result of the downturn in business the company posted an operating loss of $46m on $19.7bn in revenue in Q3 2012. ArcelorMittal subsequently announced it was writing down the value of its European business by $4.3bn. The company also saw its net debt rise by $1.2bn during Q3 2012, rising to $23.2bn by the end of September. In light of the company’s mounting debt problems and the anticipated worsening environment for the steel industry, 2012 also saw ArcelorMittal’s credit rating cut to non-investment grade by all credit ratings agencies.

In response to the continuing economic gloom and in order to preserve the company’s future, ArcelorMittal has disposed of $4.2bn worth of assets since September 2011. The company has also announced controversial plans to close blast furnaces in Belgium and France, with other locations across Europe temporarily idled due to overcapacity.

The sale will see ArcelorMittal retain an 85 percent stake in Labrador Trough, with Posco and China Steel each receiving a 3.68 percent stake in the company. South Korean wire service Yonhap Infomax reported that Posco and China Steel would jointly contribute $540m to the acquisition. The remaining shares will be taken up by unknown financial investors, although it is believed that the South Korean national pension service is one of the unidentified investors.

In light of the sale ArcelorMittal will now be putting more emphasis on its mining business. The money raised from the sale to the consortium will cover the cost of the proposed $1.2bn expansion of ArcelorMittal’s mines. The company plans to increase output to 24 million tons of iron ore per year from 16 million.

ArcelorMittal feels that its mining operations will offer a better return than the depressed steel industry. Peter Kukielski, chief executive of mining at ArcelorMittal, said “We are committed to growing ArcelorMittal’s mining business. This joint venture incorporating a long-term off-take agreement is consistent with our strategy to forge strategic relationships with key customers as we build our global mining business.”

The deal is subject to approval from the Taiwanese government and is expected to close in two instalments in the first and second quarters of 2013.

Richard Summerfield