Magnitogorsk agrees to buy Flinders Mines for A$554 million

OAO Magnitogorsk Iron & Steel agreed to buy Flinders Mines Ltd for about A$554 million (US$537 million) in cash, giving the Russian steelmaker control of a proposed iron-ore project in Australia.

MMK, as the company (controlled by Russian billionaire Victor Rashnikov) is known, is offering 30c for each of Flinders’ shares, the companies said in statements today, 96% above the stock’s 20-day average.

The acquisition will give MMK ownership of the Pilbara Iron Ore Project in Western Australia with a resource of 917.3Mt, according to Flinders’ estimates. Iron-ore consumption in China, the biggest buyer, will double by 2020 from 2008 levels, according to Rio Tinto, the world’s second-biggest producer.

“This deal may be very positive for MMK, which is not self-sufficient in iron ore, and it can use sales from Flinders as an economic hedge for iron-ore price increases,” according to Marat Gabitov, a UniCredit analyst in Moscow.

MMK is offering 6.12 times the book value of Flinders’
assets, compared with a multiple of 2.5 for 10 similar deals, according to data compiled by Bloomberg. The premium compares with a 34% average premium for global diversified minerals deals of more than US$100 million announced in the past 12 months, Bloomberg data shows.

MMK, which had about US$400 million of cash at the end of the first half and has agreed on a US$100 million bank loan, will have “no problem for raising funds for the deal,” Alfa Bank analysts said in a note.

The Russian company may need to invest about US$1 billion in developing the project, Dmitry Smolin, a Uralsib Capital analyst, said in a note. MMK may use its 5% stake in Fortescue Metals Group, worth about US$700 million, to fund the acquisition, he said.

“I am confident that Flinders will develop into a leading iron-ore producer in Australia,” Rashnikov said. The deal is “another important step forward for MMK to become highly efficient vertically integrated international metals and mining company.”

“A transaction with MMK enables Flinders’ shareholders to avoid the significant development risks, which would need to be overcome in order to bring the Pilbara Iron Ore Project into production,” Flinders Chairman Robert Kennedy said.

Nov 25 (Bloomberg)