[miningmx.com] – ARCELORMITTAL South Africa (AMSA) said it would book an R1.8bn write-down following an agreement to hand management of the Thabazimbi iron ore mine in the Limpopo province to Anglo American’s listed subsidiary, Kumba Iron Ore. The write-down would be expensed in the current fourth quarter.
The hand-over is part of the iron ore supply agreement AMSA signed with Kumba on November 5 in which AMSA is to buy 6.25 million tonnes of iron ore from Kumba annually at cost plus 20%; that is, the average price it costs Kumba to produce iron ore from its Sishen and Thabazimbi mines plus a one-fifth mark-up.
As a ‘captive’ mine – one that exclusively supplied AMSA with iron ore – the steelmaker carried the cost risk of managing the operation.
In return for resuming management of the mine, Kumba is to be paid an average price by AMSA that could support mining of low-grade material from Thabazimbi, potentially extending the life of the nearly mined-out asset.
Commenting on the firm’s third quarter production results, Nonkululeko Nyembezi-Heita, AMSA’s CEO, said the company would start a feasibility study into its Northern Cape Iron Ore Project in the first quarter of 2014, and apply for a mining right for the property in the last quarter of that calendar year.
AMSA posted a third quarter net profit of R248m compared to a profit of R135m in the previous quarter. The performance was a significant turnaround compared to the R148m loss in the corresponding quarter of the previous financial year.
Shares in AMSA gained 6% in Johannesburg trade today and are some 27% higher since the beginning of September as shareholders take comfort from the firm having removed at least one dispute from its long-list of legal challenges.
The iron ore agreement with Kumba, however, could be stymied if the Constitutional Court rules in favour of an appeal from Imperial Crown Trading which is disputing the right of Kumba subsidiary Sishen Iron Ore Company to 100% of the mining right of the Sishen mine.
Commenting on steelmaking prospects, Nyembezi-Heita warned that seasonal factors would affect earnings in the current quarter. “Domestic sales are expected to be significantly lower due to the normal seasonal slowdown and general weakness in the domestic market. Accordingly, earnings are expected to be lower than in the preceding quarter,” she said.
Nyembezi-Heita also said business conditions in South Africa remained depressed with infrastructure projects coming on stream slower than expected.
“Whilst there were activities in the building sector on a small scale, the absence of large infrastructure development and slow pace of project implementation continued to hinder recovery in domestic steel demand,” she said.
“The overall industrial production trend also remained relatively weak, despite the purchasing managers index averaging 52.6 in the third quarter, primarily due to some improvement in demand conditions for machinery and other manufactured exports destined for the African market,” Nyembezi-Heita said.
