African Minerals $1.5 billion deal with Shandong Iron & Steel
â€Ž$1.5bn Strategic Investment by Shandong Iron & Steel values Tonkolili Project at approximately US$6BnÂ
African Minerals Limited (AIM: AMI), the mineral exploration and development company with significant iron ore and base metal interests in Sierra Leone, has announced it has entered into a strategic, binding Memorandum of Understanding (the “MoU”) with Shandong Iron & Steel Group Co Limited (“SISG”) in respect of AML’s flagship iron ore project at Tonkolili and the related infrastructure projects (together the “Project”).
Shandong Iron & Steel Group Co., Ltd (SISG) is one of the largest iron and steel groups in China specialising in the smelting, processing and sale of steel and related commodities. It is currently the world’s ninth largest steel group and plans to increase its steel output to 20mtpa by 2015.
- 3-stage Investment of US$1.5Bn for approximately 25% of the Project values the Project at US$6Bn;
- Investment accompanied by an off-take agreement for a total of up to 10 mtpa of iron ore at discounted prices;
- Funding enables AML to improve its strategic implementation of Phase I and II of the Project:
- allows introduction of an all-rail transport and logistics solution instead of theÂ originally intended combined haul road and rail system, allowing uninterrupted year-Â round shipment, unaffected by the wet season
- improves operational efficiency and speed to completion of Phase II
- reduces overall operating costs
- In return for providing funding, SISG may elect at the closing of each stage of the funding, to receive either iron ore production (paying all allocated production costs, royalties and taxes) or a dividend (if paid), in each case corresponding to SISG’s percentage ownership of the Project;
- Extension of the rail system is expected to be complete by Q3 2011, enabling delivery of first ore to Pepel Port in Q4 2011.
- Investment will enable an overall increase in Phase I hematite production from 8 mtpa to 10 mtpa by Q4 2011;Â
- Will speed up delivery of Phase II implementation (25mtpa hematite production capacity) which, based on internal studies, is now expected by Q4 2012;
Commenting on the investment, Frank Timis, Executive Chairman of African Minerals said:Â
“African Minerals welcomes the investment of SISG, one of the world’s largest steel mills. When completed, this strategic investment will enable us to accelerate the development of Tonkolili. Our partnership provides African Minerals’ shareholders with significant funding for the project, accelerating its delivery, and it provides SISG with a long term supply of iron ore and a 25% interest in what we believe is a world class project that has many opportunities for future expansion. The new partnership will also bring great benefits to our hosts, the people of Sierra Leone.”
Details of the MoU taken from African Minerals press release:
Pursuant to the MoU and subject to due diligence by SISG, the parties expect to execute on or before 6 September 2010 definitive agreements for (i) an investment by SISG in the Project at a subsidiary level and (ii) a long term iron ore off-take agreement relating to the Project containing the following provisions:Â
- SISG will enter into a subscription agreement (the “Subscription Agreement”) having three stages as follows:
- Stage 1 – SISG will subscribe for new shares in AML’s wholly-owned Bermuda subsidiaries of Tonkolili Iron Ore Limited, African Railway & Port Services Limited and African Power Limited (the “Subsidiaries”), representing 13.3% of the enlarged share capital of each Subsidiary, in return for the payment by SISG of US$800 million;
- Stage 2 – SISG will subscribe for new shares representing a further 8.3% of the enlargedÂ share capital of each of the Subsidiaries in return for the payment by SISG of US$500Â million;
- Stage 3 – SISG will subscribe for new shares representing a further 3.4% of the enlargedÂ share capital of each of the Subsidiaries in return for the payment by SISG of US$200Â million.
- The total amount of the consideration for the share subscription will be US$1.5Bn in return for 25% of the enlarged issued share capital of each of the Subsidiaries.
- The proceeds of the Subscription Agreement will be used towards construction of infrastructure and mine operations at the Project, based on an all-rail logistics and transport solution.
- Upon the closing of each stage of the Subscription Agreement, SISG will have the option either:
- to receive iron ore production, equal to the then percentage of SISG’s interest in the share capital of each Subsidiary, provided SISG pays the production costs, tax and royalties in respect of production allocated to SISG; or
- to receive dividends, if any, from the Subsidiaries according to SISG’s interest in each Subsidiary.
- SISG will be entitled to representation on the board of each Subsidiary representing two fifths of each board of directors and will be entitled to appoint one director to the board of African Minerals Limited;
- Simultaneously with the execution of the Subscription Agreement the parties will enter into an off-take agreement for a term to be agreed between the parties, under which SISG will, in addition to the iron ore production allocated under the Subscription Agreement, upon commencement of Phases I and II of the Project (production of hematite) guarantee to take, and which AML will guarantee to supply, iron ore at discounts as follows:Â
- If the benchmark FOB price prevailing at the market then is greater than US$120 per tonne, the discount shall be 15% less than the then benchmark FOB price;
- If the benchmark FOB price prevailing at the market then is greater than US$100 per tonne but equal to or less than US$120 per tonne, the discount shall be 12.5% less than the then benchmark FOB price;
- If the benchmark FOB price prevailing at the market then is greater than US$80 per tonne but equal to or less than US$100 per tonne, the discount shall be 10% less than the then benchmark FOB price;
- If the benchmark FOB price prevailing at the market then is greater than US$60 per tonne but equal to or less than US$80 per tonne, the discount shall be 7.5% less than the then benchmark FOB price;
- If the benchmark FOB price prevailing at the market then is equal to or less than US$60 per tonne, there shall be no discount.
- The extent of the off-take commitment will be 5.32 mtpa at Stage 1 of the Subscription Agreement, rising to 8.64 mtpa for Stage 2 and rising to 10 mtpa by Stage 3.
- The discounts will apply initially only to hematite iron ore produced from the Project; however, upon commencement of production of magnetite iron ore from Phase III of the Project, the discount will apply to the 10 mtpa of guaranteed iron ore, which will then comprise 5 mtpa of magnetite iron ore and 5 mtpa of hematite iron ore.
- SISG will use their best endeavours to complete technical, legal and financial due diligence on AML and the Subsidiaries within 30 calendar days of 8 July 2010; implementation of the Subscription Agreement and Off-take Agreement is conditional upon the results of such due diligence being satisfactory to SISG.
- AML and the Subsidiaries have granted SISG exclusivity during the 30 calendar days due diligence period.
- The closing of Stage 1 of the Subscription Agreement is scheduled to take place on or before 30 September 2010; the closing of Stages 2 and 3 is to be agreed between the Parties after the completion of due diligence, based on the construction schedule and any further funding required for Phase II of the Project. Management anticipate, based on internal studies, that commencement of iron ore production under Phase II of the Project will be achieved by Q4 2012.
- Completion of the Subscription Agreement and the Off-take Agreement is subject to all necessary regulatory and governmental consents being obtained. Before the closing of each funding stage, SISG must demonstrate to AML receipt of all necessary governmental and regulatory consents to the transaction.Â
Background to and rationale for the transaction:
The SISG investment enables the Company to make a strategic change from using a combined haul road and rail system, to an all-rail transport and logistics solution and paves the way for a faster ramp-up of Phase II hematite iron ore production capacity (>25 mtpa) by Q4 2012. With the availability of the SISG funding and the ability to shift to this all rail system, the increased 10 mtpa Phase 1 production capacity target is now expected to be achieved by Q4 2011.
In addition to the refurbishment of the existing 74km Cape gauge rail line between Pepel and Lunsar an extension will be constructed for the remaining 122km to Tonkolili. Resources which are already mobilised and engaged in clearing of the haul road route will be used to enable a rapid migration from haul road construction to the construction of the rail extension. Â
The strategic shift from a haul road to an all rail system has a number of key benefits:
- Reduced operating costs;
- Improved delivery scheduling – ore deliveries to the port using the rail infrastructure will continue throughout the year – unaffected by the influence of the wet season;
- Just three additional train consists will be required to haul the new Phase I target capacity of 10mtpa to a newly refurbished port at Pepel, meaning considerably fewer transport cycles per day than would be required for the haul road operation;
- Production increases beyond the Phase I target of 10 mtpa will be supported by the purchase of additional rolling stock to allow production increases well beyond the initial revised Phase I target of 10 mtpa. By the addition of a short spur line and additional berthing infrastructure at Tagrin Point the rail system will facilitate delivery of the 25mtpa Phase II production capacity target;
- An important logistics conduit will be established by the construction of a rail system between the coastline and Tonkolili. Delivery of fuel and other consumables, equipment, parts and provisions will be achieved at considerably lower cost by rail.
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