Cynthia Carroll, Anglo American CEO
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Anglo steps up iron ore race

Posted: Thu, 17 Jan 2008

[] -- ANGLO American is to plough another $5.5bn in cash into expanding its iron ore business by taking outright control of the Minas-Rio and Amapa iron ore projects in Brazil.

This follows the group's initial move last April when it bought a 49% stake in Minas-Rio for $1.5bn in the first major deal initiated by CEO Cynthia Carroll, who had just taken over running the group.

Barnard Jacobs Mellet analyst Mike Bedford commented: "What's going on is like an arms race in iron ore between the major resource groups."

Anglo is playing "catch-up" to established major producers Rio Tinto, BHP Billiton and Vale (formerly CVRD). Two prior attempts by Anglo to establish a foothold in Western Australia's iron ore sector during the past decade were stymied by Rio Tinto.

Despite yet another outbreak of investor jitters over a possible global recession, conditions in the iron ore market remain firm with negotiations continuing for contract deliveries to China for the 12-month period starting in April.

According to UK firm Fairfax IS, negotiations under way are looking at price increases in a range of 35% to 70% and the firm believes a 50% rise is possible.

In this latest deal Anglo has "entered into a period of exclusive discussions" with businessman Eike Batista to buy his 63.6% stake in a company - "newco" - which will own 51% of Minas-Rio and 70% of Amapa.

Anglo will pay $5.5bn for "newco" as well as make unspecified royalty payments to Batista's holding company MMX beginning in 2025 for Minas-Rio and 2023 for Amapa.

Following completion of the deal and an offer to "newco" minorities Anglo would end up with 100% of Minas-Rio, 70% of Amapa and 49% of LLX Minas-Rio, which owns the Port of Acu.

The iron ore will be exported from this port, which is currently under construction in the state of Rio de Janeiro.

Strategic fit

According to Carroll: "These two projects are a great strategic fit for Anglo American and, together with the planned Kumba expansions, will significantly increase our participation in the sea-borne iron ore market to approximately 150 million tonnes per year by 2017".

Anglo spokesperson James Wyatt-Tilby said Anglo would fund the acquisition from internal resources including the group's credit facilities.

According to one Johannesburg analyst: "Anglo can obviously afford this purchase but the consequence might be an end to the group's share buy-back schemes.

"That would put long-term earnings growth ahead of short-term benefits to shareholders. Some investors might not like that because their investment horizons have shortened drastically under present financial market conditions."

Minas-Rio is located in the Minas Gerais state and will consist of a mine and beneficiation plant producing high-grade pellet feed. This will be transported through a slurry pipeline to the Port of Acu.

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Production should start in the first half of 2010 with potential production of 26.5 million tonnes a year from the first pipeline.

Additional slurry pipelines may be built in future to allow increased production to be delivered to the port.

Amapa is in Amapa state in northern Brazil and production from the mine started in December. Annual production is 6.5 million tonnes.

Anglo shares dropped 4% on the JSE today to R365 from R380, which compares with a 12-month low of R324 and a 12-month high of R501.