MAC: Mines and Communities

Will China and Chile clasp iron hands?

Published by MAC on 2008-09-29

Chinese steel mills are considering buying a massive iron ore concession in Chile.

However, the size, nature and location of the project may ultimately prove too expensive for most steel companies to develop.

Chilean iron ore concession sale interests potential Chinese buyers

Fang Yan and Tom Miles


25th September 2008

SHANGHAI/HONG KONG - Chilean iron ore firm Sociedad Contractual Minera Hierro Paposo is in talks with potential Chinese buyers, sources familiar with the situation said, and could fetch "hundreds of millions" of dollars.

The owners hope to conclude a sale by the year-end and have approached several Chinese steel firms, one source familiar with the sale said, adding: "It's moving very quickly."

Potential bidders include second-tier steel firms such as RockCheck Steel Group, a top-10 private Chinese steelmaker, Wuhan Iron and Steel Co Ltd and Laiwu Steel Corp, which is merging with a rival to create a major player, sources said.

Two sources said Indian buyers might also be interested.

Hierro Paposo will take at least four years to start producing and could eventually produce around 15 million tonnes of iron ore a year from an open pit and an underground mine, an industry source said. But another source familiar with the asset said output would likely be only around half that figure.

Hierro Paposo's ultimate owners include the Quantek Opportunity fund, run by Latin American asset managers Quantek. The project's owners have hired advisory firm Hatch Corporate Finance to run the sale.

"Many Chinese mills would be interested in the assets given sky-rocketing ore prices, but a project of that size might be too costly for most of them," said one of the sources, who asked not to be named because of the sensitivity of the process.

Hatch declined to comment.

Chinese steel mills are increasingly looking to secure supplies of iron ore given the soaring prices charged by global miners such as BHP Billiton and Vale

One source familiar with Hierro Paposo's mining concession, which is about 70 km from the Pacific coast in Chile, said the project area had a total potential resource of 6.7 billion tonnes, although at an iron ore cut-off grade of 20 percent, the resource was less than one-tenth that size.

One investment banker not involved in the sale said the asset might fetch a price in the hundreds of millions of dollars, but he was sceptical about how attractive it was, given the location, the ore quality and the number of other assets for sale.

"There's just piles of these projects around right now. This kind of thing is for the next (economic) cycle, not this one," he said.

The banker said the asset might appeal to private Chinese firms such as Jiangsu Shagang or RockCheck, or to state-backed Laiwu.

An executive from the general manager's office of Jiangsu Shagang's international trading arm did not say whether Shagang had been approached, but noted the asset was too far away.

"We are more interested in opportunities in Australia. Chile is too far away," she said.

Shagang is already bidding for some or all of the Namisa iron ore business being sold by Brazil's CSN. That much larger sale process, with an asset valued at anywhere up to $10 billion, is expected to end within weeks.

A senior executive at the resource division of Wuhan Iron and Steel said the firm had not yet been invited to bid for the Chilean mine, but would be interested in taking a look at it.

Laiwu's investor relations officer said it was up to its ultimate parent, Shandong Iron and Steel Group, to decide whether it would bid. Shandong Steel is being formed by a merger of the parents of Laiwu and Jinan Iron and Steel

China's top steel firm, Baosteel, declined to comment as did state-owned metals trader China Minmetals Corp. (Editing by Ian Geoghegan)

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