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KIO - Kumba Iron Ore Limited - Sishen Supply Agreement

Release Date: 16/07/2010 08:00
Code(s): KIO
Wrap Text

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 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.

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