London-listed Xstrata and South African Chrome & Alloys on Tuesday announced that they would merge their South African chrome and ferrochrome assets. The merger will create the world’s leading ferrochrome producer.
From the third year of the commencement of the agreement, SA Chrome and Xstrata will hold 17,5% and 82,5%, respectively, in the Xstrata SA Chrome venture.
SA Chrome is 33,2% held by Royal Bafokeng Resources Holdings and the Industrial Development Corporation of South Africa (25,2%).
Xstrata is a diversified mining company with interests in copper, coking coal, thermal coal, ferrochrome, vanadium and zinc as well as exposures to gold, lead and silver.
The group is headquartered in Switzerland and employs 18 000 people worldwide with operations across six countries: Australia, South Africa, Spain, Germany, Argentina and the UK. Xstrata Alloys, is the world’s largest producer of ferrochrome, with current annual production capacity of 1,3-million tons from its three chrome mines and 16 smelters in South Africa — representing some 25% of global ferrochrome production.
Based on the SA Chrome share price at the close of business on 20 February 2004, the Xstrata — SA Chrome venture will have an imputed enterprise value of R8,2-billion and pro-forma annual ferrochrome capacity of 1,45-million tons — representing around 26% of current global output.
The transaction enables SA Chrome and Xstrata to participate jointly in the world’s leading ferrochrome producer and to realise significant operational efficiencies for both parties through the transfer of best operational practice, the optimisation of ore feed from the reserves of the two parties, and the introduction of new technology.
For shareholders in SA Chrome, the establishment of the Xstrata — SA Chrome venture represents a unique opportunity to participate in significant future growth and to increase their exposure from one mine and two furnaces to the output of six mines and sixteen furnaces, significantly reducing operational risk.
For Xstrata, the transaction represents a strategic opportunity to introduce meaningful and sustainable empowerment ownership and involvement in its ferrochrome assets, while participating in the benefits of future synergies between the two parties. The venture’s position as the world’s leading ferrochrome producer, its exceptional growth profile and its industry-leading technology provides SA Chrome with meaningful participation in the high-growth global ferrochrome industry.
The venture will continue the progress made by both SA Chrome and Xstrata in initiatives that facilitate further broad-based empowerment in the mining industry, including skills transfer, social upliftment, the employment and advancement of the communities surrounding the venture’s operations and application of preferential procurement practices.
SA Chrome and Xstrata will pool the risks and rewards associated with beneficial ownership of their ferrochrome businesses in the Xstrata — SA Chrome venture, in exchange for agreed participation interests in the venture.
Both parties will share in the earnings before interest, tax, depreciation and amortisation (ebitda) of the Xstrata — SA Chrome venture in proportion to their respective participation interests. SA Chrome has the option to acquire an additional 2,5% in the Xstrata — SA Chrome venture.
This option is available for one year following the commencement of the agreement at a value of $11-million for each percentage point acquired. If exercised, this will increase SA Chrome’s interest in the venture to 20% from the third year onwards, with Xstrata holding the remaining 80%.
SA Chrome and Xstrata will retain ownership of their respective assets, mining rights and land, with both parties undertaking to contribute to the Xstrata — SA Chrome venture the right to use all such assets.
Following the conclusion of the transaction, overall responsibility for the Xstrata — SA Chrome venture will rest with a board comprising six members, with SA Chrome and Xstrata each appointing three members. The parties have agreed that Peet Nienaber, CE of Xstrata Alloys, will chair the joint board.
In the case of certain defined major matters, decisions will be made unanimously, thereby protecting SA Chrome’s interests in the venture.
In the event of a deadlock on other matters, the Xstrata appointed members collectively would have one additional vote. The Xstrata — SA Chrome venture’s day-to-day operations will be managed by an executive committee appointed by the joint board, with members drawn from both SA Chrome and Xstrata. SA Chrome and Xstrata undertake to offer all ferrochrome and chrome opportunities in Africa, south of the equator, to the Xstrata — SA Chrome venture.
SA Chrome has the right to increase its effective interest in the venture over time to 26%, with any further increase by mutual consent, by contributing proportionately more than its pro rata venture share of the cost of any growth project/acquisition.
Should the joint board fail to reach consensus in regard to the exploitation of a particular ferrochrome or chrome opportunity, either party may exploit such opportunity outside of the venture.
In addition, SA Chrome is free to pursue other activities outside the Xstrata — SA Chrome venture, provided such activities do not compete with the venture.
The Xstrata — SA Chrome venture will therefore participate in Phase One of Xstrata’s recently announced Lion Project, a one million ton per annum ferrochrome complex, located in Mpumalanga Province, which will be constructed in three phases, each comprising 330 000 tons of annual smelting capacity. The Lion Plant will utilise Xstrata’s exclusive Premus Technology, which has been developed and successfully implemented at its Lydenburg facility.
The Premus process, which is a substantial modification of the highly efficient closed furnace and pelletising technology, is expected to deliver operating costs around 20% below alternative technologies due to significant substitution of anthracite for coke and power costs that are between 25% and 45% lower per ton of ferrochrome produced than the industry’s prevailing processes.
Phase One comprises two 63MVA closed submerged arc furnaces with a capital cost of R1,25-billion, which will be funded by Xstrata and SA Chrome in proportion to their participation in the Xstrata — SA Chrome venture.
The project is progressing on schedule, with design work on track for completion by mid 2004 and production expected early in 2006. – I-Net Bridge