Building materials give Amsa a boost

2011-02-12 12:56

Improved demand for building materials early last year helped ArcelorMittal SA (Amsa) to ­minimise the impact of the higher prices it paid to Kumba for iron ore and boosted both companies’ ­performances last year.

In its annual results released this week, Amsa said it paid 119% more for iron ore, a key ingredient in manufacturing steel, while ­generating an operating profit of R2.2 billion, higher than the R229 million the previous year.

A key contributor to this ­was a 13% increase in sales volumes to five million tons.

Operating profit is earned from a firm’s normal core business ­operations.

Kumba benefited from Amsa’s higher sales because it had to sell more iron ore to the steel maker at better prices.

Kumba said in its annual results that domestic sales volumes ­added R257 million, while better prices from Amsa added R1.2 billion to the company’s operating profit of R25.1 billion.

A research note published last year by ­analysts predicted that Amsa’s profit could drop by 50% if Kumba charged the full market price for its iron ore, while ­Kumba’s earnings could ­receive a 15% boost.

Analysts said this was because Amsa was paying R200 a ton for the 6.25 million tons of iron ore it received from Kumba yearly ­instead of the market price of around R700 a ton this time last year.

Last year, Kumba sold its iron ore to Amsa at a special price that is governed by an interim ­agreement, which is scheduled to expire in July this year.

Under the agreement, iron ore was sold to the Saldanha works at a fixed price of $50 a ton and a fixed price of $70 a ton to ­Mittal’s inland facilities.

Before last year, the two giants had a sales agreement for iron ore that comes from the Sishen mine.

The ­contract, dating back to 2001, allowed Amsa to get iron ore from Kumba at cost plus 3%. It was linked to Amsa having a 21.4% stake in the mine.

Amsa failed to convert this stake into new order mineral rights as ­required by law. Kumba then pushed Amsa to pay market-related prices because it no longer owned the stake in Sishen.

That right has since been ­awarded to another company, ­Imperial Crown Trading, which includes business people close to ­President Jacob Zuma, including his son, Duduzane.

All three companies are headed to court to confirm the lawful owner of the disputed Sishen rights.

Before the matter went to court, Amsa announced plans to acquire ICT as part of its black economic empowerment (BEE) transaction.

That transaction is awaiting ­approval from shareholders and the outcomes of the court process.

Members of the Ayigobi Consortium, the proposed beneficiaries of Amsa’s empowerment transaction, were absent at this week’s ­results presentation.

Ayigobi – led by Zuma’s friend and member of the state’s BEE council, Sandile Zungu – is set to ­become a 26% shareholder in ­Amsa at a value of R9.8 billion.

Amsa chief executive Nku Nyembezi-Heita said the company had not yet asked the shareholders to vote for the transaction.

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