Arcelor, Liberia Bank on Project

May 30, 2008

May 30 (The Wall Street Journal) – A complex plan by ArcelorMittal to rehabilitate an abandoned iron-ore mine in Liberia is shaping up to be a crucial test for the global steel company and the Liberian government.

Liberia, recovering from two decades of civil war and instability, desperately needs to establish its credibility with investors as, five years after the end of hostilities, aid agencies and donors begin to wind up their projects.

For ArcelorMittal, which seeks to insulate its steel business from surging iron-ore prices, the Liberian mining project is its most ambitious to date. It is an acid test of whether the company can execute the difficult new mining projects that underpin its expansion plans.

As the cornerstone of a new iron-ore supply hub for the company in West Africa, the Liberian project would carve out a stake in one of the few regions that haven’t already been locked down by one of the big three global miners: Brazil-based Cia. Vale do Rio Doce and Anglo-Australian Rio Tinto PLC and BHP Billiton Ltd. The three control more than 75% of the world’s seaborne iron-ore trade.

ArcelorMittal has plenty of experience operating in countries with problems. Chief Executive and Chairman Lakshmi Mittal built the company into the world’s largest steelmaker by snapping up aging steel mills and mines from Kazakhstan to Bosnia and turning them around. The strategy culminated in the 2006 merger of Mittal Steel and Europe’s Arcelor SA.

But whereas earlier acquisitions were often rundown assets in inhospitable regions, they were still functioning. In Liberia, ArcelorMittal plans to take over an old mining project that was abandoned by a Liberian-Swedish-American company, Lamco, in 1989 during the country’s first civil war. The operation will have to be rebuilt nearly from scratch.

In previous projects, “we went in and made them more efficient, profitable, but most of the wheels were still working,” Joseph Mathews, CEO of ArcelorMittal Liberia, said in an interview. “In Liberia, none of the wheels are running.”

Liberian President Ellen Johnson Sirleaf, who took office two years ago, faces the difficult task of weaning the country off foreign aid and replacing it with private investment. ArcelorMittal’s $1.5 billion projected investment would be the largest ever for Liberia; in comparison, the country’s estimated gross domestic product last year was $730 million, according to World Bank data. Much of ArcelorMittal’s investment will go to fill the huge infrastructure gaps.

Robert Ferguson, an ex-defense attache formerly posted at the U.S. Embassy in Monrovia during the civil war, is ArcelorMittal’s project manager for Liberia. Based in this port city, from where the iron ore will be exported, his to-do list includes the rehabilitation of a 186-mile railway through dense jungle, the reconstruction of Buchanan’s port to accommodate iron-ore carriers, and the construction of a 250-megawatt power plant to supply an iron-ore processing facility.

Death threats because of the company’s refusal to pay bribes to local officials, the pillaging of scrap metal and spiraling costs are among the problems he cites. Mr. Ferguson’s current quandary is how to build a power plant requiring a 250-ton generator.

“The road and bridges can’t take it. We’d have to rebuild the entire highway to the mine” at Yekepa, near the border of Guinea, Mr. Ferguson says. The various additional expenses have lifted the total investment to $1.5 billion from the $900 million originally planned, he says.

Production at the mine is set to begin next year, initially at 500,000 metric tons a year and gradually ramping up to as much as 25 million tons by 2011. If successful, it will boost by more than half ArcelorMittal’s current captive iron-ore supply of 46 million tons a year.

This expansion is critical to ArcelorMittal’s growth strategy as raw-material costs have soared; iron-ore prices have more than quadrupled since 2003. Scrap metal, the other substitute raw material for steel production, is in short supply, creating a growing demand for new iron-ore exploration and production, experts say.

Mr. Mittal has said he envisions creating an iron-ore mining hub in West Africa. Mining licenses are still available in the region, and it is more conveniently situated for markets in Europe, the Middle East and the U.S. than for current major exporters such as Western Australia or Brazil.

In addition, the company is developing a $2.2 billion iron-ore project in Senegal, also from scratch, to produce as much as 25 million tons a year and has signed a preliminary agreement for a mine in Mauritania, which could produce 12 million tons a year.

Liberian President Johnson Sirleaf says the investment is crucial for her country. “We have thousands and thousands of ex-combatants or war-affected youth who today don’t have the skills training to compete. They need employment to … reduce their vulnerability to recruitment that would take us back to war,” she said in an interview.

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