By John Helmer, Moscow
The junior Australian iron-ore miner, Flinders Mines, announced a halt to trading in its shares today amid market speculation that Magnitogorsk Metallurgical Combine (MMK), the Russian steelmaker owned by Victor Rashnikov (image, right), is preparing a bid to buy part or all of the Flinders Mines shares, adding up to a billion dollars to MMK’s debt.
MMK has made no announcement, following a board meeting last week which, according to Moscow press leaks, approved a bid. Rashnikov and his daughter Olga Rashnikova control the company, and Rashnikov chairs the 10-member MMK board. Four of the board members are listed as independents – Sir David Logan, a former British diplomat in Turkey; David Herman, an automobile industry veteran from General Motors; Peter Charow, an oil man from BP, and Bernard Sucher, an investment banker formerly at Merrill Lynch. If they voted against the new deal at the board meeting, confidentiality agreements prevent their disclosing it. Asked why MMK is considering buying a costly iron-ore project far from Russia, Yelena Yevstigneva said the company is refusing to answer.
Details and terms have not yet leaked into the press, or been disclosed by either Flinders Mines or MMK. Rashnikov appears to have decided to move very recently. According to a statement by the company auditor in the Flinders Mines annual report, dated September 27, “No matter or circumstance has occurred subsequent to the end of the financial year that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent financial years.”
According to the Flinders Mines statement to the Australian Stock Exchange today, the company has requested a halt to share trading for two days “pending the release of an announcement by the company.” The announcement is anticipated before “the commencement of normal trading on Friday, November 25.”
At this point, it is unclear what size stake MMK intends to acquire — more than 5% requires Australian government approval for a foreign-domiciled investor. MMK reports that as of June 30, its non-current liabilities amount to US$4.2 billion, including $2.6 billion in loans and $1.5 billion in deferred tax; both have been rising since the start of this year. MMK also owes $3.2 billion in current liabilities, including $1.5 billion in loans due to be repaid in the short term, and $1.6 billion in trade debts. These liabilities are up 53% since January 1. The financial data suggest that ahead of the Russian elections and the downturn in steel trade, Rashnikov is increasing the leveraging of MMK’s Russian assets to buy safe haven for the control shareholder’s future wealth abroad.
Earlier reports suggest that Rashnikov has been moving assets and capital expenditure offshore to new steelmaking mills in Turkey [1]. In the past, he has held small shareholdings in Australian iron-ore companies, and turned them over at a profit [2]. Those investments were in Australian miners closer to mining and shipping iron-ore than Flinders Mines.
Flinders Mines reported to shareholders this week that a feasibility study for its proposed mine in the Pilbara area of Western Australia will not be available until the second quarter of 2012; environmental and native title approvals required before the project can start have yet to be finalized; and production will not commence for at least three years. The company claims a potential mineable resource of 917 million tonnes of iron-ore, with a 55% iron (Fe) grade; a planned mining schedule of 15 million tonnes per annum; operating cost of A$35 per tonne; and capital requirement of A$1.1 billion. The Australian dollar is falling and is currently worth 98 US cents.
According to a company presentation to shareholders this week, Flinders Mines has been negotiating finance and equity deals “with a range of domestic and international strategic partners”, with the option to sell the entire project. The company also says it must build its own rail line to a new port at Point Anketell, on the Indian Ocean, where Fortescue, a competing iron-ore exporter, already has constructed loading facilities. Australian iron-ore is plentiful in the Pilbara region, but the dominant miners, including BHP, Rio Tinto, and Fortescue limit the market and enhance the cost of new mine projects, by controlling rail and port transportation for their own cargoes.
A report today by Alfa Bank steel analyst Barry Ehrlich warns that at a current market capitalization of just over A$301 million ($295 million) , the MMK deal would be “neutral” if Rashnikov has decided to pay the going price of about A$30 million ($29 million) for a stake of 10% or less.
However, the Alfa Bank report warns that the deal could be financially damaging “if MMK’s plans are to gain full control of the company. According to the Flinders Mines annual report, there are more share options outstanding than current shares, thus the effective acquisition cost could exceed the market cap of $305m by more than two times, prior to the acquisition premium. As a result, a full acquisition of Flinders would probably cost almost A$1bn or possibly more, we believe… in the current economic turmoil that the market is unlikely to welcome any large-scale acquisitions.”
Speculation in Australia that the control shareholders who run Flinders Mines, led by Managing Director Gary Sutherland, intend to sell out, has driven the share price on the Sydney exchange from 12 Australian cents in October to 16.5 cents this week.