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Xstrata in R2.4bn coal deal with ARM Posted: Tue, 28 Feb 2006 [miningmx.com] -- AFRICAN Rainbow Minerals (ARM) is to buy an effective 29% in the coal business of London-listed Xstrata in a deal valued at R2.4bn. The transaction, which includes 51% control of the R2.3bn Goedgevonden coal project, propels ARM into a new commodity and makes it a shareholder in South Africa’s third largest exporter of thermal coal. In 2004, consolidated production of thermal coal by Xstrata from South Africa totalled 19.2 million tons/year. Consolidated sales were 17.5 million tons/year produced from 13 mines mostly in the Witbank and Ermelo regions. Of sales, 74% was exported most of it chanelled to the Atlantic market. The empowerment deal will be contained in a newly created business called ARM Coal which will be 51% owned by ARM and 49% owned by Xstrata. The parties will pay R400m and R384m for their equity interests respectively. "It looks like a very good deal for ARM. They are putting in R400m and their risk in this whole exercise is very limited," said Stephen Roelofse, a fund manager at Sanlam Investment Managers. "Xstrata is providing all the finance for the joint venture and Goedgevonden." "ARM gets their hands on cash flow immediately, and they're involved in a massive mine," he said. "Coal is going to be a very good commodity to be in for the next few years because of the demand for energy around the world." ARM is also entitled to buy a further 10% direct equity participation in Xstrata’s coal business for R400m taking the empowerment interest in Xstrata’s coal business to 36%. The partners have also agreed to pursue opportunities in other commodities in Africa. When built, the Goedgevonden project will produce a further 6.6 million tons of thermal coal a year of which just over half will be for the domestic market. ARM is to apply for entitlement to the fifth phase of the Richards Bay Coal Terminal expansion enabling it to export product from Goedgevonden. ARM also confirmed that it was in negotiations that would see it 56.9% controlled by historically disadvantaged South Africans. Currently, 42.9% of the firm is owned by African Rainbow Minerals and Exploration Investments. ARM will have management control of ARM Coal. Of its seven directors, four will be nominated from ARM. ARM will also have participation in the management of Xstrata’s coal business which will contain two ARM directors. ARM Coal will control the management of the Goedgevonden project. ARM has a number of capital projects on its books including the development of the BKM iron ore mine owned by subsidiary, Assmang. However, the mine, which will cost R3.2bn to develop in its first phase (R1.8bn in phase two), is being funded by debt and cash flow internally by Assmang. In addition, ARM’s 55% stake in the R1.3bn Two Rivers project is fully already funded and some R500m in debt sits on ARM’s balance sheet representing its contribution to the development of the Modikwe Platinum mine in joint venture with Anglo Platinum. ARM must still find funding for the R384m required to pay for the interim expansion of Nkomati Nickel, a project held in joint venture with LionOre Mining. Including the R400m ARM contributes to buy control of ARM Coal, total net debt:equity is 16%, said Pieter Rorich, investor relations manager for ARM. “This is low by industry standards,” he said. “The beauty of this deal is that the funding is minimal to ARM. There are capital standstills on Goedgevonden, the interest rates payable are very reasonable and there’s a cash upstream,” he said. This means ARM does not have to contribute towards the capital cost of Goedgvonden and also has access to cash flow generated by the project, and ARM Coal in general, to fund its capital commitments. In terms of the deal structure, Xstrata will provide debt funding of R765m to ARM Coal for development of Goedgevonden, repayable over ten years. For the first five years of the project, ARM will receive its relative portion of 20% of the cash flow from the project. The remaining 80% of the project will be used to finance the debt incurred in developing Goedgevonden.Free news alerts: click here to subscribe
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