In its first significant overseas investment, Hebei Iron & Steel, China’s biggest steelmaker, is set to spend $194 million on a deal with Alderon Iron Ore that will help to secure supplies of its main raw material.
Hebei said on Friday that it had agreed to pay $88.3 million for a 19.9% equity stake in Alderon and that it would invest $105.7 million in Alderon’s iron ore project, which will earn the Chinese company the right to buy a 25% stake in the project.
Alderon is a junior developer listed in Canada. The Kami project, which is located in Canada’s leading iron ore region, on the border of Quebec and Labrador, is Alderon’s principal asset and is expected to start producing in 2015.
After buying into the project, Hebei will also secure 60% of the project’s annual production for the first 15 years of its life, up to a maximum of 4.8 million tonnes of iron ore concentrate. It will pay a 5% discount to the Platts Iron Ore Index up to this limit but will also have the option to buy additional ore at the Platts price.
Hebei will also help to secure debt financing to help pay for the completion of the project.
Alderon had been keen to secure a strategic investor that would be able to answer all of its needs in one go: equity investment into the listed company, capital investment into the project, access to further debt finance and a long-term off-take agreement for the end product.
With Hebei, the world’s second-biggest steelmaker, it has found a backer that ticks all the boxes. But the Chinese company is also hoping to do well from the deal.
“In addition to the potentially attractive investment returns, Hebei is able to lock up a long-term supply of high-quality iron ores to help improve our operational performance and ensure our long-term, sustainable growth,” said Wang Yifang, chairman of Hebei, in a statement.
The deal secures just a small amount of the company’s annual 30-40 million tonnes of steel imports, but China’s slowing economy has some analysts worrying about the opposite problem: that a slowdown in demand and weaker steel prices could be on the horizon.
A source close to the company said that such concerns do not affect its outlook. “Nobody is expecting that China will need to cut steel production next year,” said the source, who also noted that Canadian projects were also much lower risk than greenfield developments in African countries, where many Chinese industrial companies have been active recently.
Hebei is paying C$3.42 a share for its stake in Alderon. The price represents a 0.6% discount to the share price during the previous five days, though as a strategic buyer with plenty of cash it is likely that Hebei was not be too focused on price. Even so, the deal compares well with the 15.8% premium paid by Wisco in 2009 for a similar investment into Consolidated Thompson.
The private placement is subject to various approvals from Chinese government entities, the Toronto Stock Exchange and the NYSE Amex. Bank of America Merrill Lynch acted as financial adviser to Hebei. Davies Ward Phillips & Wineberg and Haiwen & Partners acted as legal advisers to Hebei. Alderon’s financial adviser is GMP Securities and its legal adviser is Cassels Brock & Blackwell.
