Stage set for Govt to enter Amsa, Kumba fray

First published 15 December.

[] — WELL before High Court Judge Raymond Zondo ratified Kumba Iron Ore’s exclusive right to 100% of the prospecting rights of its iron ore fields, the press releases forcing home the respective interpretations of Kumba and ArcelorMittal SA (Amsa) had been prepared.

Within minutes of the preliminary judgement, both were declaring victory. It was important to do so because, notwithstanding an appeal from Imperial Crown Trading (ICT) which will continue to claim its right to 21.4% of Sishen Iron Ore Company’s (SIOC’s) output, attention now moves to next year’s arbitration hearings between Kumba and Amsa.

This is the arbitration to see whether Amsa can still benefit from an historic cost plus 3% iron ore supply arrangement, or whether Kumba is now in its rights to offer iron ore to Amsa at market-related prices. At stake is Amsa paying $70 per tonne of iron ore, or $140/t.

For the present, the market thinks this is an Amsa victory. The steelmaker’s shares were up 7.8% at the time of writing, while Kumba was neutral.

In reality, Kumba has the least to lose because the worst outcome is enforcement of the status quo. In other words, it is already supplying its iron ore to Amsa at a discount to the market. If it loses the arbitration, this will continue to be the case.

“The judge supported the DMR’s decision to grant an exclusive right to mine SIOC,” said a Kumba spokesperson who added that Amsa could have challenged the DMR’s (Department of Mineral Resources’) award when it was made in 2008 but didn’t, or chose not to.

“The fact remains that Amsa simply failed to convert its old order mining right as to 21.4% and the fact that SIOC became the exclusive holder of the mining right is unrelated to the fact that Amsa once held an old order mining as to 21.4%,’ a Kumba spokesperson said. “Kumba remains convinced that the contract lapsed and this judgment does not change that.’

The word from Amsa’s lawyers, however, is that Kumba’s position in the arbitration hearings is significantly weakened, and here’s why.

Amsa has long contended that its 21.4% right in SIOC was for acknowledgement of capital contributions the steelmaking side of Iscor made to Iscor Mining projects (the forerunner of Kumba) when they were one company, and also to keep steel affordable in South Africa. “The judge has said there can be no fractionalised prospecting rights,’ an Amsa spokesman added.

Development steel pricing

So where’s all this going? To arbitration and further months of limbo? Possibly not.

A clue to a possible outcome is Amsa’s contention that the 21.4% right was intended, partly, to make conditions amenable to a sustainable steel industry. One can’t say Amsa has done a fantastic job of providing affordable steel in particular, but it’s likely Government will in 2012 enter the dispute in a meaningful way by forcing an agreement between Kumba and Amsa in the name of development steel pricing legislation.

At the end of the day, the outcome Government wants is a sustainable steel industry in order to help stimulate economic growth. This is why there’s been rumours and murmurs of a state-backed steel producer, incidentally.

What could happen is for an agreement to be stitched which says Amsa will pay more than cost plus 3% for Kumba’s iron ore, but less than the current interim steel pricing agreement Kumba and Amsa have agreed to while they wait for the arbitration proceedings.

“Net, this is a good deal for South Africa,’ said a UK analyst who can’t be quoted on unresolved legal matters. “The suspicion was that ICT would win the day owing to its political ties,’ he said.

What this all means for future mining rights is still to be fully delivered when Judge Zondo provides his entire judgement, due December 20.

Kumba doesn’t expect any surprises from it, but one hopes the High Court can provide useful perspectives on mineral tenure in South Africa that might even settle investor nerves on the matter.