[miningmx.com] — SPEAKING at the Mining Indaba conference almost a year ago, Anglo American CEO, Cynthia Carroll, warned the South African government against failing to honour the rule of law. Little did we know just how the rule of law would come to be linked with Anglo, and two of its most important assets: Kumba Iron Ore and Anglo American Sur.
Kumba Iron Ore is money tree for Anglo. It makes a packet out of its 65% share in the firm and is hoping to make more if it wins arbitration this year enabling it to supply iron ore to Arcelor Mittal SA (Amsa) at market prices. Iron ore sells for about $140 per tonne on international markets compared to the $50 to $70/t captured in the current interim pricing agreement with Amsa, and the even lower price of the disputed cost plus 3% arrangement Amsa looks odds-on to have restored.
Anglo is similarly relying on its legal counsel by boldly dismissing Codelco’s claim for its 49% option in Anglo American Sur, the copper producing asset that, in the group’s portfolio of mines, has the best growth profile.
To be honest, however, one wonders just how fruitful it is to shareholders to pursue these legal arguments, which is not to say they should be avoided. Has anyone conducted a survey on legal outcomes when the private sector goes head to head with sovereign states, or by taking up positions that fly in the face of government strategies? I’d wager not very well. Such legal odysseys, as they often become, are costly, distracting, and tend to establish management as a tad trigger happy.
Fighting off Codelco’s cut price 49% option was an unlooked for contest, true; but the negotiations of today would have best worked yesterday instead of opportunistically selling off a stake in Anglo American Sur to Mitsuibishi. (Still you’ve got to admire Carroll: she has learned to fight fire with fire over the years.)
But it’s the Kumba dispute that interests here. Although it is a fight with Amsa and not the South African government, Anglo isn’t doing its relationship with the state much good by raising the cost of iron ore.
And as fate would have it, Kumba looks like it may lose the arbitration on pricing. The latest stockbroker to suggest so is Imara SP Reid which has turned positive on Amsa’s share as a result. “We believe the recent finding by Judge Zondo undermines the basis for Kumba’s cancellation of the cost plus 3% iron ore supply arrangement installed when Iscor split into Amsa and Kumba,’ analyst Stephen Meintjes said. He’s referring to the High Court rejection in December of Imperial Crown Trading’s prospecting right application and judgement that Kumba 100% of its new order mining right, renewing on behalf of Amsa to boot.
The broker also contends Kumba may have to backpay the difference between its interim supply agreement and the old cost plus 3% deal, equal to some R2.6bn if the arbitration hearing this year rules against the Anglo American listed subsidiary.
This isn’t so, say Amsa and Kumba. According to the interim supply agreement “. neither SIOC (Sishen Iron Ore Company) nor ArcelorMittal shall have any claim arising out of the Sishen Supply Agreement for the supply of iron ore during the interim period’.
So the effects on Kumba of any hearing outcome at neutral at worst, unless of course its “manoeuvrings’, as Imara terms it, is remembered by government as it attempts to have its developmental pricing of steel policy installed.