The Wall Street Journal-20080118-Anglo American May Buy Brazil Projects
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Anglo American May Buy Brazil Projects
Anglo American PLC is in talks to buy control of two Brazilian mining projects for about $5.5 billion, a deal that would boost the United Kingdom mining company's exposure to the booming iron-ore market and gain a bigger stake in mineral-rich Brazil.
With this acquisition, analysts said Anglo in several years could become Brazil's No. 2 producer of iron ore, a crucial steelmaking ingredient that has seen its price soar due to strong demand. Anglo's growing size also could make the company a less-tempting takeover target at a time of increasing industry deal making.
About 75% of international trade in iron ore is controlled by three mining companies -- Anglo-Australian firms BHP Billiton and Rio Tinto as well as Brazil's Companhia Vale do Rio Doce, the world's No. 1 iron-ore producer. Contract prices for iron ore have nearly tripled since 2003.
Anglo said it is in exclusive discussions with Eike Batista, the controlling shareholder of MMX Mineracao & Metalicos SA, to buy his 63.6% stake in a new company that will be spun off from MMX. That company will own MMX's 51% interest in the Minas-Rio iron-ore project and 70% interest in the Amapa iron-ore project.
Anglo acquired 49% of the Minas-Rio project as part of its original $1.15 billion investment in 2007 that included a 49% stake in LLX Minas-Rio, a logistics company that transports iron ore.
"It is a coup that Anglo American is doing this deal," said John Tumazos, an analyst with Very Independent Research LLC. "All the iron- ore producers of the world envy Vale's spectacular resources in Brazil and would like to have something like it." He said the price is justified, given the entry into a rich market.
Under the proposal, Anglo will pay about $5.5 billion for all of the shares of the new company, or $361.12 per share, as well as royalty payments to MMX on the two projects, the first of which begins in 2023, the company said. The deal is subject to regulatory approvals and completion of the reorganization of MMX.
The deal would help bolster Anglo's annual output of seaborne iron ore to 150 million tons by 2017, said Cynthia Carroll, Anglo's chief executive. "Anglo American will continue to evaluate the substantial expansion potential of these projects, particularly given the extremely positive long-term prospects for the iron-ore industry," she said.
Iron-ore prices are expected to continue rising in light of rising demand and limited supply as well as a shortage of ships and congested ports to transport the ore. In their annual negotiations with steel companies, some of the biggest consumers of iron ore, miners are seeking increases of 75% or more.
"The price increases that we've seen over the past three or four years are likely to grow over the next several years," said John Mothersole, a nonferrous metals analyst with Global Insight.
Demand for iron ore is strong in China and India, which rely mainly on iron ore imported from Australia, in large part because shipping costs are lower. Some analysts expect a portion of Anglo's Brazilian ore would first be marketed to Brazilian steelmakers and eventually to others, including the expanding steel industry in the Middle East and to China.
