[miningmx.com] — KUMBA Iron Ore was compensated in 2001 in anticipation of lower future profits it would’ve sustained due to its iron ore supply agreement with ArcelorMittal SA (Amsa).
This is according to Amsa, which pointed out in court documents that Kumba’s debt, which it took over from the old Iscor in 2001 at the time of the unbundling, had been reduced by R2.1bn as compensation for the 6.25 million tonnes iron ore per year supply agreement at a price of cost-plus-3%.
These court documents, which included documents being used in private arbitration between Amsa and Kumba, were lodged with the North Gauteng High Court in Pretoria last week.
In the arbitration matter Kumba argued that it was no longer bound to the long-term supply agreement.
It argued the fact that Amsa allowed its mineral rights to 21.4% of Sishen to lapse meant that Kumba was no longer bound to the agreement.
But in the court documents Amsa pointed out that, before Kumba’s unbundling out of the former Iscor, both it and Kumba were jointly responsible for a large part of the debt of Saldanha Steel, a steel plant for the export market built and operated on the West Coast at an enormous loss by Iscor and the Industrial Development Corporation.
When Kumba was unbundled out of Iscor, which is Amsa today, it was decided that Iscor should always have access to iron ore. For that reason the chief executives of the two companies, Louis van Niekerk of Iscor and Con Fauconnier of Kumba, agreed that Amsa could buy 6.25m tonnes of iron ore a year from Sishen at cost-plus-3%.
Amsa said that since the price of supplying the 6.25m tonnes from Sishen would reduce the value of the mining company (Kumba) during Kumba’s listing, it had been decided to offset the reduction by having Iscor absorb a larger portion of existing debt, including that in Saldanha.
The amount of debt from which Kumba would be released was calculated as the difference between the market value of the 6.25 million tonnes a year and the cost basis at which Amsa would buy it from Kumba over the lifetime of the Sishen Mine.
The figure was then R2.1bn. In today’s terms the amount is ridiculously low, but in 2001 the price of iron ore was less than $15/tonne. On Friday in China the spot price for imported ore with a 63% iron content was $170/ton.
In 2001 the agreement had been announced in various public statements.
In its response to the allegations Kumba acknowledged that the debt apportionment for which the two companies would be responsible after the unbundling had been adjusted to provide for the difference in value resulting from Amsa’s claim to ore from Sishen at preferential prices.
However, the adjustment of the debt apportionment had not been compensation and did not represent payment for anything, said Kumba.
Also, Amsa said it could not renew its mineral rights in Sishen because the 2004 Mineral and Petroleum Resources Development Act did not provide for the subdivision of mineral rights.
The documents also contained an explanation of why Amsa failed to renew it right to 21.4% in Sishen. To date speculation has been that Amsa “forgot’ to renew its rights.
But Amsa claims that in late 2004 it informed Kumba that the companies should work together to convert the mineral rights into new-order rights, which had become necessary when the 2004 Mineral and Petroleum Resources Development Act had come into force.
The two companies had met to discuss the matter in April 2005. The agreement had been that Kumba would submit a proposal for the conversion of the rights to Amsa.
Amsa also handed to the court correspondence between the two companies which indicated that they would have together applied for conversion of the mineral rights.
In June 2005 Kumba representatives had made a presentation on the matter to Davinder Chugh, Amsa’s chief executive. At that meeting Kumba had told Amsa that only one mineral right, per mineral, would be awarded for a particular piece of ground.
Amsa had even done a cost analysis of its expenses for adjusting its black economic empowerment profile in order to do the conversion of the mineral rights. This had amounted to R140m, and Amsa had paid Kumba an amount calculated to tally with the amount of iron ore that Amsa would receive from the mine in terms of the supply agreement.