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Australian iron ore producer Mount Gibson Iron Ltd (MGI) announced yesterday in Sydney that it has agreed to sell its stake in a Hong Kong-registered affiliate to China's No 4 steel maker Shougang Group.

 

According to the deal, Shougang will pay US$52.5 million for MGI's 73 percent stake in Asian Iron Holdings Ltd, the subsidiary registered in Hong Kong.

 

The deal is "a mutually beneficial transaction" for both Shougang and MGI, said the company's Managing Director Luke Tonkin in a statement to the Australian Stock Exchange.

 

With the deal, Shougang will gain a controlling stake in a strategic iron ore asset, the Extension Hill Magnetite Project in Western Australian, providing long-term magnetite concentrate supplies for its steel production in China, Tonkin said.

 

MGI will retain ownership of the hematite resource at Extension Hill, and could use the proceeds of the deal to develop the hematite mining operation there.

 

This will "generate significant free cash flow without raising any debt or diluting our shareholders," he said.

 

The firm ended at 0.84 Australia dollars (63 US cents) per share yesterday, down 3.45 percent.

 

An official from Shougang, who asked not to be named, yesterday told China Daily: "The deal is very important for us because we need to have a stable iron ore supply."

 

He said iron ore reserves at Extension Hill in Australia exceed 1 billion tons.

 

The company, which has its headquarters in Beijing, plans to kick off iron ore production in Australia in 2008 with an initial capacity of 5 million tons a year, he said.

 

Its current iron ore imports are estimated at 10 million tons annually. Last year, it produced 9 million tons of steel.

 

The Shougang-MGI deal comes at a time when Chinese steel makers, led by the biggest, Baoshan Iron and Steel Corp, are in last-ditch talks over iron ore prices with the world's three biggest providers of the resource - Rio Tinto and BHP Billiton from Australia, and Brazil's Cia Vale do Rio Doce.

 

The three groups, controlling three quarters of global iron ore trade, have insisted on a 19 percent increase in prices.

 

European and Japanese steel mills have accepted the price hikes. Last year, the three miners lifted prices by 71.5 percent from 2004.

 

Qi Xiangdong, deputy secretary-general of the China Iron and Steel Association based in Beijing, yesterday declined to comment on the price issue. But he said earlier this year that Chinese steel makers cannot afford further price rises.

 

Commenting on the Shougang-MGI deal, Qi said: "It is a bold move which should be encouraged.

 

"It is a more reliable way to ensure our long-term iron ore supply (than bargaining with foreign providers in global trade)."

 

Iron ore is in short supply for China, the world's biggest steel producer and consumer.

 

The steel association predicted earlier this year that China will import 300 million tons of iron ore this year, up from 275 million tons in 2005.

 

The nation's iron ore imports jumped by 27.7 percent year-on-year to 80.9 million tons in the first quarter of this year with 32 million tons coming from Australia.

 

Meanwhile, crude steel production in China rose by 17.6 percent to 92.2 million tons.

 

The steel association anticipated the nation's total crude steel output would grow by 10 percent to 384 million tons this year from 2005.

 

Shougang is building a 15-million-ton plant in Caofeidian, a small peninsula in North China's Bohai Bay, with another Chinese steel maker, Tangshan Iron and Steel Corp of Hebei Province.

 

(China Daily June 8, 2006)