The collapsing China iron and steel boom story has badly hurt small Australian producer, Mount Gibson, to the point where it will be forced to sack staff and sell iron ore at a loss because of defaults by Chinese buyers.
Mount Gibson’ shock news yesterday also involves the company raising $162 million from the market and two big shareholders/prospective customers, just as big property players like Stockland, Mirvac, Goodman and GPT have sought to raise money to try and repair damaged balance sheets.
The company’s shares bounced all over the place yesterday after the news was released, but settled off 1c at 39.5c, after dropping sharply last month when news of the problems with China sales first became known.
The news came two days after Vale, the big Brazilian minerals group, cut its iron ore, nickel, ferroalloy and aluminium output. Vale blamed a 20% plus drop in steel production around the world, especially in Europe, the US and China.
Mount Gibson is getting first hand knowledge of that slowdown referred to by Vale.
The company yesterday indicated it has been forced to cut a third of its workforce after a number of its customers defaulted on binding sales agreements.
Mount Gibson managing director Luke Tonkin said in a statement that a total of 190 people would be temporarily laid off from its two operations in Western Australia.
The company has been forced to modify its mine plans and will ship less ore this financial year after three customers defaulted on the purchase deals.
The company operates the Tallering Peak iron ore mine (where some 40 of 220 employees will be stood down until next July), while at Koolan Island; a further 150 of 340 employees will be laid off temporarily.
APAC Resources Ltd, Mount Gibson’s largest shareholder, and Shougang Concord International Enterprises have agreed to purchase the immediate available iron ore output from the company and have signed long-term agreements, which come into effect from July 1, 2009.
Mount Gibson Iron will be forced to sell its iron ore at just $US40 a tonne – a 60% discount to the benchmark price – until the end of the year to move the ore after the Chinese buyers defaulted.
(They are not the first defaults reported: Indian iron ore companies have reported similar failures to buy in September and October, according to trade reports.)
Mt Gibson will sell half of its discounted ore to Shougang Concord – a company associated with Shougang Holdings.
Mt Gibson will raise up to $162.5 million through a $96.5 million one-for-five at 60c a share underwritten by APAC and Shougang and a separate $66 million placement to Shougang.
Mount Gibson said:
"The impact of some of its customers defaulting on Mount Gibson’s near term cash flows together with the desire of Mount Gibson to continue priority development at Koolan Island and Extension Hill requires the raising of additional equity finance.
"The Rights Issue and Placement will together raise gross proceeds of A$162.5 million.
"Together with existing cash reserves, the additional funds raised will ensure that Mount Gibson is adequately funded to continue priority development activities and mitigate the impact on Mount Gibson of any near term volatility in the iron ore market and financial markets."
That means Shougang and APAC could end up with a combined holding of 28.5% to 40.5% of the company, depending on the number of other shareholders who participate in the rights issue.
Mount Gibson now expects to produce 5 million tonnes this year, and not 7.2 million tonnes.
Shareholders will be asked to approve medium and long-term purchase agreements with APAC and Shougang, beyond the short-term sales at $US40 a tonne.
The medium-term agreement would allow Shougang to purchase ore for Mt Gibson’s cash production costs per tonne plus a 10% margin.
Mount Gibson said in yesterday’s statement that it will be pursuing those customers who materially breached their offtake agreements to recover from them any losses arising from volume and price differences between the customers’ existing offtake agreements and the new offtake agreements.
"Mount Gibson believes it will recover any such losses from those customers in due course."
Chairman, Neil Hamilton said in the statement: "We are very disappointed that a number of our customers have defaulted on their binding obligations given the substantial investment Mount Gibson has made in the business based on executed legally binding long term ore purchase contracts and further representations made by these customers."
"Having said that, we acknowledge the support of our major shareholder, APAC, and Shougang Concord during this difficult time which allows Mount Gibson the opportunity to present a viable solution to shareholders that provides long term security for their company during the current volatility in the iron ore and financial markets."
