You can’t keep a good man down.
A state-owned Chinese industrial conglomerate, China Railway Materials Commercial Corp, is (subject to due diligence, naturally) making a £153m investment in the company and has also agreed to buy 40 per cent of the iron ore produced by its flagship deposit in Sierra Leone, Tonkolili.
But it is not just Frank’s involvement which makes this deal interesting: it also demonstrates, once again, how China is trying to break the hold that the three major iron ore producers — Rio Tinto, BHP Billiton and Vale — have over the market.
And it comes just as the annual iron negotiations begin.
Here’s the take of North Square Blue Oak, a new London-based broker that among other things specialises in Chinese macro-economic policy:
The African Minerals deal with China Railway Materials Commercial Corp is reflective of China’s stance prior to the annual iron ore negotiations with Rio, BHP and Vale. Steel production in China went up 11% in 2009, after dropping earlier in the year by around 2%, and the recent rise in property construction and auto manufacturing is leading to an increase in demand for iron ore – imports up 35.4% ytd yoy by volume and 57% yoy in November 2009 alone. Last year, the iron ore negotiations were not completed, following China’s demand for a 40-50% drop in the iron ore price. It was eventually settled informally with a 33% decrease in the contract price, in line with the other international agreements.
China is continually trying to break the hold that the three major iron ore producers have over the market. This includes rational measures, such as consolidation of the domestic steel sector into three major Chinese steel companies in order to increase their bargaining power with the iron ore producers. It also includes irrational measures, such as releasing ‘discoveries’ of domestic iron ore deposits which, unfortunately, tend to be low grade (30-40% vs 60-70% in Western Australia), small and buried deep underground, and arresting Rio Tinto employees.
The African Minerals deal is an attempt to diversify its iron ore supply – it currently does not import any iron ore from Sierra Leone. Its absolute reliance on Australia and Brazil is shown in the chart below, with 66% of its supply from these two countries alone. The African Minerals deal, at 5-8m tons pa, would only represent just over 1% of China’s total iron ore imports.
Ultimately, NSBO reckons that China will fail in its attempt to break the dominance of the big three, simply because it does not have a hope of matching its iron ore needs from any other source.
But that won’t stop it trying, which presents plenty of opportunities for master entrepreneurs like Frank.
Mirabaud reflects on the deal with the Chinese. And it has plonked a 632p target price on the company.
African Minerals (AMI LN) has announced a conditional strategic agreement with China Railway Materials Commercial Corp (CRM) regarding an equity funding and off-take deal for AMI’s Tonkolili iron ore project in central Sierra Leone. The deal remains subject to due diligence, and the parties expect to sign definitive agreements on the various elements at the end of March 2010.
We regard the news as very positive, as it greatly reduces a key risk – sourcing the funding requirement for the large capex inherent in a greenfield iron-ore project such as Tonokili. We have reduced the risk weighting on our NPV for Tonokili, and raised our valuation to 632.0p (see details on p2 of attachment).
However, our valuation thus far includes nothing for the planned starter operation on Tonkolili’s hematite cap, which we have been expecting to be significant but for which we were awaiting further details. We expect data on this direct-ship operation shortly, which we will then incorporate in our model.
We believe the deal is particularly attractive in that it does not preclude further corporate activity with regard to AMI. CRM’s planned 12.5% of the share capital is not a blocking stake, and the off-take agreements leave an attractive 35Mtpa of magnetite concentrate available to other potential customers/off-takers.