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KIO - Kumba Iron Ore Limited - Sishen Supply Agreement
Kumba Iron Ore Limited
A member of the Anglo American plc group
(Incorporated in the Republic of South Africa)
(Registration number 2005/015852/06)
JSE Share code: KIO
ISIN: ZAE000085346
SISHEN SUPPLY AGREEMENT
As indicated to shareholders in previous SENS announcements, Sishen Iron Ore
Company (Pty) Ltd ("SIOC") notified ArcelorMittal South Africa Limited
("Mittal") on 5 February 2010 that it was no longer entitled to receive 6,25
mtpa iron ore contract mined by SIOC at cost plus 3% from the Sishen mine, as a
result of the fact that Mittal had failed to convert its old order mining
rights. This arrangement (in relation to the supply of iron ore from Sishen mine
which was concluded in 2001 and which was premised on Mittal owning an undivided
21.4% interest in the mineral rights to iron ore) lapsed as a result of Mittal`s
failure to convert its old order mining right and, accordingly, became
inoperative in its entirety as of 1 May 2009.
Consequently, a dispute arose between SIOC and Mittal, which SIOC has referred
to arbitration. SIOC has served its statement of claim in the arbitration
proceedings. Mittal is yet to file its answering papers.
In the interim, pending the conclusion of the arbitration process, SIOC has
continued to supply Mittal with iron ore from the Sishen mine and has invoiced
Mittal for the deliveries made since 1 March 2010 at a commercial price. SIOC
has delivered 337 402 tonnes to Mittal`s Saldanha plant in the period 1 March
2010 to 30 June 2010 and 1,115,180 tonnes to Mittal`s inland plants in this
period. SIOC initially requested Mittal to pay the "cost-plus" portion of the
price directly to SIOC and to pay the difference between the "cost-plus price"
portion and the market related price into an escrow account (with a registered
financial institution) or provide a financial guarantee for this amount, pending
the resolution of the dispute resolution process. This offer still remains open
for acceptance by Mittal. Up to now Mittal has only paid the cost plus 3%.
As previously advised, SIOC has been engaged in extensive negotiations with
Mittal with a view to agreeing on an interim pricing arrangement pending the
outcome of the arbitration.
The negotiations between the parties have not resulted in any agreement after
five months of deliberations, and Mittal has, to date, unfortunately rejected
all of the various alternative interim arrangements proposed by SIOC, despite
SIOC`s reasonable proposals in this regard. There remains considerable
commercial risk to SIOC and its shareholders, if it continues to supply iron ore
to Mittal without agreement as to the terms of supply.
As a result, on 5 July 2010, in order to protect the interests of its
shareholders, SIOC delivered a final offer to Mittal which required Mittal, by
close of business on 15 July 2010 to accept one of the following proposals to
govern the supply of iron ore for the interim period (being the period from 1
March 2010 to the conclusion of the arbitration between the parties):
Proposal 1: Mittal will pay the "cost plus 3%" portion of the price directly to
SIOC, with the differential between the cost plus price and the actual market
price ("the differential") being paid into an interest bearing escrow account.
Alternatively, Mittal will provide a suitable guarantee for the differential.
The money in escrow would be paid across to the successful party at the
conclusion of the arbitration. In the event that a guarantee is provided, the
differential would be paid to SIOC should it succeed in the arbitration.
Proposal 2: Mittal will pay to SIOC a price of $50 FOR (free-on-rail) per ton of
iron ore deliverable to Mittal`s Saldanha Steel plant, and $80 FOR (free-on-
rail) per ton of iron ore, deliverable to Mittal`s inland plants. This price
will apply from 1 March 2010 and will escalate by 10% (on a compounded basis)
every 6 months until 1 September 2011, whereafter Mittal will pay to SIOC the
prevailing market price. In terms of this proposal Mittal will be entitled to
purchase a maximum of 520 000 tons of iron ore from the Sishen Mine per month
(including a maximum of 125 000 tons per month to be delivered to Saldanha) on
the basis of a ratio of 73% / 27% as between lump and fine ore. This regime
will remain in place until 30 days after the final determination of the
arbitration between the parties. This arrangement will be determinative of the
parties` rights during the interim period, meaning that the agreed prices will
apply in relation to iron ore delivered in the interim period, irrespective of
the outcome of the arbitration. This provides both parties with certainty as to
the price at which iron ore will be supplied in this interim period.
Either of these proposals is still open for acceptance by Mittal.
SIOC`s offer of $50 FOR (free-on-rail) per ton of iron ore to Mittal`s Saldanha
plant and $80 per ton FOR (free-on-rail) of iron ore deliverable to Mittal`s
inland plants represents a significant discount to the current iron ore prices
quoted on the Platts Steel Market Daily Index for iron ore. SIOC has been
prepared to offer a significant discount to Mittal in relation to the interim
period in the interests of reaching an interim agreement, in circumstances where
the ultimate outcome of the arbitration is not yet known. However, SIOC does not
intend that the interim pricing arrangement should form the basis of, or
reference point for, future pricing of iron ore to Mittal should SIOC be
successful in the arbitration.
SIOC advised Mittal further that, failing acceptance of either of the proposals
set out above by close of business on 15 July 2010, SIOC would only be prepared
to load trains destined for Mittal`s plants on the condition that payment, in
accordance with Proposal 2, is made at least 48 hours in advance, together with
accumulated amounts due for the iron ore delivered between 1 March 2010 and 31
July 2010 ("pay and take basis"). On 15 July 2010, Mittal advised SIOC that
neither of these proposals had been accepted. Accordingly, SIOC will adopt this
pay and take basis in relation to the supply of iron ore to Mittal from the
Sishen Mine from 1 August 2010.
SIOC does not anticipate the proposed interim pricing would have any impact on
the domestic steel price as Mittal has consistently stated that it does not
determine the price of its steel products on the basis of its input prices. In
addition, Mittal has continued to set its domestic prices in line with global
steel prices. SIOC`s internal analysis also indicates that Mittal`s operations
should still be significantly profitable on the basis of SIOC`s proposed iron
ore prices (and, indeed, at market prices).
Pretoria
16 July 2010
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 16/07/2010 08:00:01 Supplied by www.sharenet.co.za
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