DBRS Comments on Xstrata African Iron Ore Acquisition

DBRS notes that Xstrata plc (Xstrata or the Company) today announced that a wholly-owned subsidiary has entered into an agreement with Australian-based iron ore property holder Sphere Minerals Limited (Sphere) for an approximately $383 million, all-cash offer by Xstrata to acquire all of the issued and outstanding shares of Sphere. DBRS views the transaction as being well within the Company’s financial means, and notable because it represents a further step in Xstrata in developing an iron ore mining business to expand and diversify its existing asset portfolio. Xstrata’s product base is somewhat narrower than many of the other major diversified mining companies, and iron ore production would represent a welcome further diversification, if done with economics and balance-sheet health in mind. Given Sphere’s iron ore properties are undeveloped, significant time, effort and money will be required to make them cash flow contributors to Xstrata, accordingly DBRS does not contemplate any rating action at this time.

Sphere is a West-Africa focused iron ore company, with interests in three major iron ore projects in Mauritania, West Africa: (1) the large-scale Guelb el Aouj project through a 50/50 joint venture with Société Nationale Industrielle et Minière (SNIM), Mauritania’s state-owned iron ore producer (429 million tonnes measured and indicated resources 100% basis); (2) the Askaf project, located 35 kilometres south of Guelb el Aouj (inferred resources only, but as a magnetite-quartzite deposit amenable to a simple dry magnetic separation process and near infrastructure it may be the first subject to development); and (3) the Lebtheinia project, located 90 kilometres from the coast (2,179 million tonnes indicated resources). Mauritania is an established iron ore producing country shipping into the European steel industry with competitive freight to those and other strategic markets, including China.

The proposed transaction is subject to a number of conditions including acceptance of the deal by shareholders owning not less than 90% of Sphere shares, approval by Australia’s Foreign Investment Review Board and the absence of a material adverse change with respect to Sphere.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.