Xstrata Plc, the world’s largest exporter of thermal coal, is seeking more acquisitions to create an iron ore division after making a A$514 million （$520 million） bid for Sphere Minerals Ltd.
“We would like to grow our business so it ultimately becomes its own business unit within the Xstrata group when we get to critical mass,” Peter Freyberg, chief executive officer of the Zug, Switzerland-based company’s coal business, said today in an interview in Sydney.
Establishing an iron ore unit will help Xstrata compete against larger rivals BHP Billiton Ltd. and Rio Tinto Group, whose ore divisions generate their biggest sales by value. BHP, Rio and Vale SA, the world’s biggest iron ore producer, control about three quarters of the global export market.
“It’s an industry which offers greater returns because of its concentrated nature,” said Ric Ronge, who helps manage the equivalent of $1.3 billion at Pengana Global Resources Fund in Melbourne. “You’ve got three top players, Rio, BHP and Vale - that all conspires to offer pretty good margins.”
Xstrata fell 1.4 percent to close at 1,365 pence yesterday in London trading. Sphere, which has three projects in Mauritania, including half of the $1.65 billion Guelb el Aouj development, gained 0.7 percent to A$2.97 in Sydney today.
Mauritania Projects
BHP’s carbon steel materials unit, which includes iron ore, had an earnings before interest and taxation margin of 57 percent last year compared with 22 percent for its energy coal unit, according to a Oct. 21 Deutsche Bank AG report.
Freyberg wants to buy Sphere for its three iron ore projects in Mauritania and has agreed to spend as much as $106 million on an initial study of the Zanaga project in the Republic of Congo.
“These two iron ore opportunities present us with a very interesting entry into the sector and we’ll continue to look for further opportunities elsewhere,” Freyberg said.
Xstrata on Nov. 3 raised its cash offer for Sphere by 20 percent to A$3.00 a share as prices for the steelmaking ingredient climb. The ore business is at present part of Xstrata’s coal unit, Freyberg said.
Less Attractive
The average price for ore delivered to China was $145 a metric ton in the first half, according to The Steel Index. That’s more than double the average $69 a ton for the same period last year.
Chinese companies have been buying overseas mines and projects to reduce costs and their dependency on the three big suppliers.
“We have some fears that the iron ore market is going to look a little less attractive in the long run than what it is now,” said Pengana’s Ronge. “China being a major consumer is doing everything it can to support fragmentation and diversification of supply and security supply longer run.”
Xstrata’s offer for Sphere lapses on Nov. 12 and carries a 50 percent minimum acceptance condition. The acceptance level was above 30 percent today, Freyberg said.
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