Evraz in Australian iron ore pact with China’s MCC

August 1, 2008

August 1st (Reuters) – Russian steel maker Evraz Group (HK1q.L: Quote, Profile, Research) has joined forces with China Metallurgical Group Corp (MCC) to gain access to Australia’s vast iron ore reserves and supply Chinese steel mills hungry for the key raw material.

Evraz, part-owned by billionaire Roman Abramovich, said on Thursday it would own 75 percent of a joint venture to develop the Cape Lambert Iron Ore project in Western Australia. MCC will own a quarter of the project, which will ship its ore to China.

 

“Given Chinese demand for the raw materials used in steel production is expected to remain very strong, having something in Australia seems like the right move,” said Vladimir Zhukov, senior mining analyst for Lehman Brothers in Moscow.

 

Global prices for iron ore, a crucial ingredient in steel, have quadrupled in the last five years as China — producer of a third of the world’s steel — devours ever more raw materials.

 

Benchmark prices set by leading miners BHP Billiton (BHP.AX: Quote, Profile, Research) (BLT.L: Quote, Profile, Research) and Rio Tinto (RIO.AX: Quote, Profile, Research) (RIO.L: Quote, Profile, Research) with Chinese buyers rose as much as 96.5 percent this year, the highest jump in a decade.

 

Evraz said in a statement MCC would be entitled to sign an offtake agreement for up to 60 percent of the iron ore produced.

 

Evraz said the Cape Lambert project would be able to produce 15 million tonnes a year of magnetite concentrate. It said the project was in the feasibility stage, but gave no time frame for the start of production or the cost of developing the project.

A potential drawback to the Cape Lambert project is its reliance on magnetite-type ore, which has been largely untested as a reliable source of feed for steelmaking.

 

Traditionally, the Australian iron ore industry has been based on mining higher-grade hematite ores, which currently account for 96 percent of Australia’s total iron ore production.

 

 

 

LONG-TERM INVESTMENT

 

Cape Lambert contains 1.56 billion tonnes of magnetite iron ore resources to internationally recognised Joint Ore Reserves Committee (JORC) standards, Evraz said.

 

“Evraz and MCC’s long-term commitment to the joint development of the project will further unlock the significant value of Western Australia’s mining industry,” Evraz Chairman and Chief Executive Alexander Frolov said through a spokesman.

 

He said the investment represented “an important milestone in the development of magnetite iron ore deposits in Australia”.

 

Cape Lambert Iron Ore Ltd (CFE.AX: Quote, Profile, Research) (CLIO.L: Quote, Profile, Research) this week completed the A$400 million ($378.8 million) sale to MCC of its namesake iron ore deposit, in a region where BHP Billiton and Rio Tinto both have major mining and shipping operations.

 

“Four hundred million dollars is a drop in the ocean for MCC,” said James Wilson, mining analyst for DJ Carmichael & Co in Perth, Australia. “It’s a long-term investment. They have 30 to 50 years of feedstock.”

Cape Lambert paid A$20 million in cash and stock options for the 408 sq km deposit in 2005. Its shareholders approved the sale on Monday following clearance from Australian foreign investment regulators, who have become wary of increased interest by foreign parties in Australia’s resources sector.

 

The Evraz deal is still subject to regulatory approval.

 

Evraz has already agreed to pay $1.5 billion for a controlling stake in another steel group, Delong Holdings (DELO.SI: Quote, Profile, Research), which holds an option to take about 12 percent of Cape Lambert. This had sparked speculation of a pending takeover bid until the sale to MCC was approved.

 

“Evraz already has a foothold in China. There could be synergies with Delong,” Lehman Brothers’ Zhukov said.

 

MCC, which controls assets worth $22 billion worldwide, is also involved in partnerships to develop nickel mines in Australia and Papua New Guinea. In the Pilbara region, it owns 20 percent of the Sino Iron Project near Cape Lambert.

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