KGB INTERROGATION: Paul Kopejtka

Stephen Bartholomeusz: Paul thanks for making the time available to us, and you too Michael. Paul you announced a proposed merger with Midwest this week. You've pursued Midwest for quite some time. Can you explain why you believe it's such a compelling bid?

Paul Kopejtka: Well I guess you know the strategic logic of bringing these two companies together is compelling. I mean it was compelling two years ago. It's compelling now, so when you look at all the various positives that come out of this transaction in terms of the synergy savings, potential to run the feasibility studies under one roof...that was the case two years ago and it's the case now and this is really the last roll of the dice.

SB: Can you elaborate a little bit Paul on the strategic logic as opposed to the synergies and so on. You put these two things together you've got the biggest of the mid-west mining companies.

PK: It's about the scale. It's about achieving critical mass and when you're combining these two companies together, when you're looking at the increase in the size of the company and the increase in the size of the resource, what we're looking at here is the fourth largest independent iron ore company in Australia...and it should be seen by investors large and small as a very good opportunity to get exposure to iron ore.

Robert Gottliebsen: Paul, just elaborating on that question of size, what will a Murchison-Midwest Group look like in, say, five or 10 years' time? What sort of outputs are we talking about and so on?

PK: I can't really talk about the production profile because...we're in a bankable feasibility study, both companies are, and that's due for completion in the first half of next year, so obviously we'll have a better idea as to where the combined entity will be at that time. We'd certainly expect after a merger to be an ASX100 company with a market cap in the order of $3-4 billion.

RG: You mentioned that you'd be the fourth largest iron ore producer in Australia. What would you have to achieve to be the fourth largest?

Michael Ashforth: Sorry to interrupt – the reason that we can't talk about targeted production is that ASIC has released some new rules and basically, in the context of a takeover bid, if Paul starts talking about takeover targeted production we're going to have a major problem.

RG: OK, fair enough.

Alan Kohler: Can I ask, were you surprised that Sinosteel's response was to declare its bid for Midwest final?

PK: Yes, I was surprised. They called it final. We thought they would come back and have another shot at it. And it was so early as well. Three days after launch we sort of saw them coming back with potentially a higher offer but of course that closed it.

AK: Do you think it's possible that once you guys merge with Midwest that Sinosteel would make an offer for the whole group?

PK: Oh look guys, I can't really speculate on what might happen after the event. I mean there are a lot of potential outcomes here. Not necessarily involving Sinosteel I should point out.

SB: Paul there are suggestions that Sinosteel's applied to FIRB for permission to take up a large shareholding in you too. Can you confirm that?

PK: Look I can only tell you what I read in the press. I believe they have. That was about six or seven weeks ago...

SB: Sino's clearly very interested in that mid-west region and you and Midwest in particular. Can you explain what the strategic logic for them might be?

PK: Well you know, Sino's still obviously trying to secure offtake iron ore for the long term. So obviously when you're combining these two entities...satisfies that requirement. You're probably aware they do have a joint venture currently with Midwest Corporation. We've got a joint venture with Mitsubishi and you know, after the Pilbara this iron ore province in the mid-west is certainly attracting the attention of the big guys.

SB: Is it just about security of supply though, or has it got something to do with the market and pricing dynamics?

PK: Well the dynamics are really the fact that the Chinese currently are trying to secure long-term supply. When you take into account the fact that the domestic production out of China currently is on the back of low-grade iron ore – I believe that they're currently processing 20 per cent Fe material – the attraction of the mid-west region is obviously huge for these guys, when we're looking at the relatively high-grade resources that we have in the mid-west region.

AK: The mid-west resource, compared to the production that's possibly coming out of the Pilbara, is fairly small in that context. Is it possible the Chinese are actually after something a little different than just security of supply. They're actually looking to control the spot market?

PK: Well look, just a point there.What I've read in US publications is that when you take into account the magnetite resources in the mid-west region you're looking at a multi-billion tonne resource, or potential, and I think that's what the Chinese are certainly looking at. There's been quite a number of times, in fact, that I've heard a figure of up to 8 billion tonnes, when you take into account the magnetite, so it's not that small scale.

AK: OK, but what about the spot market? What effect could they have on the spot market if they controlled some or all of the mid-west?

PK: You'd really have to ask the Chinese that. I don't wish to speculate as to the effect on the spot market.

RG: Paul, we're seeing the possibility of Rio and BHP coming together. The Brazilians are looking to get a lot bigger. The Russians have now announced a major merger of their resource exercises. Can a medium-sized company, even a merged company that's still only a medium-sized company, can it exist on a world stage dominated by these enormous resource groups?

PK: Look this merger, if this goes through, this would obviously make us more attractive to some of the other players out there… When you're talking about the upside potential of the two companies in terms of what we could end up with in terms of production profile, then obviously we would become potentially a target for the other players.

RG: Do you think that once you've brought these two companies together, you might be attractive to one of those very big players?

PK: I can't speculate on that.

RG: Again we're purely hypothesising, but if you get to a certain size you might even find a competitive bidder if the Chinese made a bid for the whole lot.

PK: Correct.

SB: Paul, both you and Midwest have got interests in competing joint ventures to build the infrastructure for the Midwest region. If you were to acquire Midwest, if this merger happens, does that strengthen the chances of your joint venture winning?

PK: Just a comment on that. There's currently two infrastructure vehicles out there vying for the infrastructure, for building the infrastructure, and that's OPR [Oakajee Port and Rail] which is aligned with Murchison and Yilgarn which is aligned with Midwest. One thing I just want to make clear on this transaction is that the bid for the infrastructure is not affected by this transaction...

SB: Was a factor in your coming back with a bid for Midwest the prospect that if Sinosteel acquired Midwest and won the infrastructure tender that you'd be captive to them?

PK: Yes.

SB: Can you elaborate on that. How threatening a prospect would that have been?

PK: Well you know, the way we see it from here is that if OPR wins the infrastructure bid, then I think everyone is saying that bringing together of the various interests would actually come about by OPR winning. Why do I say that? Well if we're successful in the transaction with Midwest, then you've got the Chinese via Sinosteel who are a joint venture partner. You've go the Japanese who are also a joint venture partner with Mitsubishi, so I think this thing would be a good outcome. I think the state government would also like to see this outcome.

AK: Paul, there's a whisper that Sinosteel will be able to veto the merger of Murchison and Midwest. Are you confident that that's not the case?

PK: Yeah, look, there are a number of novel features to this structure – the deal structure. And one of the things that we needed to cover was the potential that Sinosteel could extend the current offer that they have, which only applies to the existing Midwest shares, to a date beyond the date where the scheme was implemented and new Midwest shares were issued to Murchison that increased the offer – so that it applied only to the existing shares and enticed the Malaysian-controlled block, if they were still there, for example, to sell and transfer control of the merged group to Sinosteel without extending a higher offer to the Murchison shareholders, who would then hold Midwest shares.

So to cover that – what we would have thought was an inequitable and unfair outcome – we designed these things called top-up rights and we said that if Sino increases the offer only for Midwest shares and doesn't extend it to the new Midwest shares issued to Murchison shareholders, then we'll have an issue of new shares with those old Murchison shareholders. There was the risk of creating a separate class of shares, but by declaring their offer final on Wednesday they dealt away the problem, so we've dropped those rights and so their capacity to argue that they're being treated any differently has also been eliminated, so the problem goes away.

RG: Paul do you think that the Chinese are trying to buy resource assets in Australia at low prices?

PK: The move by Sinosteel on Midwest is really driven by the fact that they're trying to secure long-term offtake, long term supply, but not necessarily by the need to secure it at the cheapest possible price.

RG: If they're only after sourcing material cheaply, do you think Australia should block these bids?

PK: No.

RG: Why not?

PK: Because I think there's one thing that the Midwest region needs and that's capital investment. If it's foreign investment, that's a good thing, so we've got Mitsubishi who are in the region. You've go the Chinese who are in the region. And what the region obviously badly needs is the infrastructure, so you need foreign investment.

AK: But the fact is they are customers and they arguably have a different motivation to Australia in this. I mean do you think the national interest of Australia is entirely in line with having Chinese steel mills owning the resources?

PK: I guess our attitude is that the miners should control the assets. And the actual delivery of the iron ore.

MA: Just like we're driven to the fact that the infrastructure should be controlled by the miners.

RG: You see the Chinese secure the iron ore with a contract. That's how they've done it in the past. Once they own the asset, we have all sorts of transfer pricing issues that Australia has to deal with.

PK: Yeah.

RG: Do you think that's a problem?

PK: Not on face value, no.

AK: Are you somewhat constrained by the fact that these are your customers, basically? Sinosteel and all the rest of the Chinese steel mills? You need them to buy your iron ore. Are you constrained in how you behave and what you say so as not to annoy them too much?

PK: Well look the Chinese are certainly the number one buyer of iron ore. We're fully supportive of the Chinese interest in the region. We fully support the fact that we've go the Japanese there too…

RG: Well it sounds a little bit to me as though you want to bring together these two companies to create value and then you really wouldn't be unhappy if an auction took place between the Chinese or anybody else to realise that value with a takeover bid?

PK: I can't really speculate on what's going to happen after the merger, should it go through.

SB: Paul, Midwest's major shareholder group is a bunch of Malaysians who are said to own something like 40 per cent. Since you announced the merger there's been heavy trading. Harbinger, one of your major shareholders, has bought a bit under 10 per cent. Are you aware where the selling's come from? Has the Malaysian block been reduced?

PK: Look I can only repeat what I've seen in the press. We believe that it has come from the Malaysians, but that's just from The Australian.

SB: If once Harbinger stops buying and therefore providing a floor under the price, the price remains above $7. Does that just about guarantee success?

PK: I think so.

AK: Is there a Malaysian block in Midwest?

PK: Well we know that Dato David Law [Midwest's deputy chairman] has got, I think, 13.6 per cent, so that would, I guess, constitute a blocking stake.

AK: No, but there's still 40 per cent held in Malaysia?

PK: I think there's been widespread speculation that the Malaysians...if you look at the Malaysians as one block it probably would approach that level, so in that respect, yes it would be definitely be a blocking stake.

AK: Have you negotiated with them?

PK: We've been talking to the Malaysians for the last two years. I think they're on the record as saying the issue was always the price.

MA: When the [Midwest] directors...recommended the transaction at $6.38 that was the weekend of April 29 –basically since then until Sunday we hadn't had any discussion with the Malaysian directors. What we knew was that they were over the psychological hurdle of selling and that's why there has been continuous speculation that the Malaysian investors, and there are investors behind Dato David Law, that they've acted like a block.

It's quite conceivable that some of them have been going at the $7 mark, but as Paul said, we'll just have to wait and see whether there's any change of substantial shareholders. With the deal that we've structured, the first thing that the Malaysians knew about it was when it was lobbed on them just after lunch on Saturday, because the grave fear that we held was that they would just take that proposal, go down the road and talk to Sino and say 'if you want our continued support, if you want us to reject this, then you know, here's the deal'. So we actually put the deal to them on the basis that it would be automatically withdrawn if it was disclosed to a third party – to try and reduce the risk that they would do that, and they didn't do it in the end, as we saw. So there was no prior discussions at all with them.

SB: Michael you've made no secret that you've used a scheme of arrangement approach to get around the Sinosteel stake and to keep their offer alive so as not to force the Midwest board to make a very difficult decision – a definitive choice between shares and cash. Sinosteel says that that will be an issue when you go to the court of approval for the scheme. Have you a response to that?

MA: We don't see that as an issue at all. We obviously took the appropriate advice and thought through those issues. Shareholders of Murchison will be treated fairly and equally. It's well established that the transaction will be done… that you can use a scheme or a takeover. That's well established and there are other issues incumbent in this that made this the only way that we could do it. One of them, for example, is rollover relief – with Sinosteel saying in their bidder statement that they would oppose any alternative transaction - blanket. We couldn't have got to the 80 per cent level needed for rollover relief, so we're comfortable this is the right way to go.

AK: Paul, Michael, we'll leave it there – thanks for your time today.

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