Shougang's second wind

Chinese steel maker Shougang Concord and its Hong Kong based metal trading offshoot APAC Resources are having a second crack at WA iron miner Mt Gibson, which has been badly weakened by the cancellation of off-take agreements caused by the slump in demand from China steel producers.

Shougang had sought to buy a 19.8 per cent stake in Mt Gibson earlier this year from Russian billionaire Alisher Usmanov, but in a ground-breaking decision the Takeovers Panel ordered the transaction to be reversed because of the association between Shougang and APAC, which already owned a stake in Mt Gibson of more than 20 per cent.

Now that Mt Gibson finds itself without three key clients and short of cash to develop its iron ore deposits at Koolan Island and Extension Hill, it has returned to Shougang and APAC, who will buy $66 million of shares in a placement and jointly underwrite a rights issue of $96.5 million.

In return, Shougang has agreed to take up some of the slack in the off-take agreements, but Mt Gibson now expects to ship just 5 million tones of ore, down from earlier predictions of 7.2 million tones.

The deal is subject to shareholder approval, with Usmanov on board, but it is unclear whether the Russian will take up his share of the rights. APAC and Shougang will lift their stake to between 28.56 per cent and 40.46 per cent, depending on the take-up of the rights issue.

If the take-up is poor, which is highly likely considering the purchase price is pitched at a 50 per cent premium to the last trading price, Shougang and APAC will arrive at nearly the level under the reversed Usmanov deal, but at a considerable discount.

That deal had been struck when Mt Gibson shares were trading at more than $2.75 The shares peaked at more than $3.50 in March but since September have slumped from $2.50 to 40c last week. The placement and rights issue were struck at 60c each.

Mt Gibson says the loss of three key clients is disappointing. Apparently, the off-take agreements were cancelled because the traders simply had no more demand from their Chinese steel-making customers. That is a bad sign for Australian iron ore producers.

Interestingly, Mt Gibson has turned to advice from Azure Capital for this transaction. When seeking to fend off the advances of Shougang and APAC earlier this year, it had used UBS.