8:44 a.m. | Updated The giant steel maker ArcelorMittal agreed on Wednesday to sell a 15 percent stake in one of its premier iron ore units, ArcelorMittal Mines Canada, for $1.1 billion.
After building up the world’s largest steel company through a series of acquisitions and takeovers in the era before the financial crisis, Lakshmi Mittal, ArcelorMittal’s chief executive and controlling shareholder, is continuing to sell off assets to reduce debt as he struggles to manage a savage downturn in the industry and his own company’s fortunes.
ArcelorMittal says demand for steel in its crucial European market is down about 30 percent from 2007. Including this transaction, the company has disposed of assets worth $4.2 billion since September 2011.
Under the terms of the sale, a consortium – including Posco of South Korea, the world’s fifth-largest steel maker, and China Steel of Taiwan – will gain long-term access to iron ore from the mines proportionate to the new ownership stakes.
The group also includes South Korean financial investors including EQ Partners, a private equity fund, according to a person familiar with the matter. ArcelorMittal will retain an 85 percent stake.
The move was well-received by the markets, partly because ArcelorMittal seems to be receiving good value for the sale without giving up much. Shares in ArcelorMittal rose 3.9 percent in morning trading on Wednesday in Europe.
Jeff Largey, a steel analyst at Macquarie in London, wrote in a research note to clients that the $7.3 billion valuation the transaction implied for the mining operations was “an excellent result” for ArcelorMittal. He said that his valuation had been closer to $4 billion. Mr. Largey also asked whether bringing in partners was a sign the company “believes the iron ore cycle is past its peak.”
The markets also appeared pleased that the deal would help ArcelorMittal, which is based in Luxembourg, with its goal of reducing debt. Last year, the ratings agencies Moody’s Investors Service and Standard Poor’s both cut ArcelorMittal’s credit rating to junk status because of its high debt and anticipation of a worsening environment for the steel industry.
Last month the company took a $4.3 billion impairment charge on its business units in Europe, where it made around 46 percent of its steel in 2011. The company posted a loss of about $49 million on $19.7 billion in revenue in the third quarter of 2012.
ArcelorMittal’s net debt was $23 billion as of Sept. 30, the latest figures available. Michael Shillaker, an analyst at Credit Suisse in London, estimated in a research note that net debt could fall to around $20 billion this year.
The deal is reminiscent of the heavy investments that Asian investors have made in the energy industry. Just as Asian companies are trying to assure themselves of energy supplies for their growing economies, Posco and China Steel are locking up iron ore for future operations.
The stake sale will also help ArcelorMittal cover the cost of a 1.2 billion Canadian dollar expansion of the mines to 24 million tons a year from the present 16 million tons a year. If the company subsequently expands annual ore output to 30 million tons, the new partners would contribute in proportion to their stakes, Mr. Largey of Macquarie said.
ArcelorMittal put all of its growth capital spending, or about $1.5 billion, into its mining operations last year on the belief that mining would bring a better return than the depressed steel industry, according to Giles Read, a company spokesman. The company says its capital spending plans for next year are “under scrutiny.”
The mines in which ArcelorMittal is selling a stake are considered top assets. The mining unit, which does not include activities in Baffinland, produces 40 percent of Canada’s iron ore, according to the company. The ore is trucked by rail from mines near Labrador City to processing facilities in Port-Cartier on the Gulf of Saint Lawrence.
‘‘We are committed to growing ArcelorMittal’s mining business,’’ Peter Kukielski, chief executive of the company’s mining division, said in a statement.
The deal is expected to close in two installments during the first and second quarters of this year.
Article source: http://dealbook.nytimes.com/2013/01/02/arcelormittal-to-sell-stake-in-iron-ore-unit-for-1-1-billion/?partner=rss&emc=rss