The granting of access to key supplies to its steelmaking rivals is evidence of the pressure on ArcelorMittal to reduce borrowing after its credit rating was cut last year to one notch below investment grade on expectations that the global market leader could breach debt covenants in 2013.
South Korea's Posco and Taiwan-based China Steel will gain a share of the output of ArcelorMittal Mines Canada Inc., which produces about 15 million tons of iron ore concentrate annually, or about 40% of Canada's total output, according to ArcelorMittal. Luxembourg-based ArcelorMittal said the deal was part of its plan to expand its mining business and included a long-term off-take agreement that would help finance further expansion of the operation.
ArcelorMittal was considering selling as much as 30% of the operation, a source with knowledge of the company's thinking said late last year.
It is unlikely that much of the cash from the sale will find its way back into the mining operation in the short term. ArcelorMittal has been told to reduce its debt or risk the possibility of a second debt downgrade in less than a year. Moody's Investors Service in November cut the rating on ArcelorMittal's $24 billion of unsecured notes to Ba1 from Baa3 and placed the company on negative watch. Fitch Ratings Ltd. and Standard & Poor's have also cut ArcelorMittal's debt rating in the past six months.
The rating agencies warned of several quarters of tough conditions for steelmakers, with Moody's predicting that the operating environment was "likely to get worse before it gets better."
ArcelorMittal must keep net debt below 3.5 times Ebitda to avoid breaching the terms of its revolving credit facilities. Moody's in November warned that it could breach that covenant in June "unless the company repays a considerable amount of debt or receives an amendment from its lenders."
ArcelorMittal raised about $447 million in November when it sold its 50% stake in South Africa's Kalagadi Manganese (Pty) Ltd. to Daphne Mashile-Nkosi, head of Kalahari Resources (Pty) Ltd., a South African manganese mining and investment company.
Details of how much Posco and China Steel are contributing to the joint venture were undisclosed, though a report appearing on Korean newswire Yonhap Infomax claimed they would pay a combined $540 million.
The deal is subject to approval by the Taiwanese government and is expected to close in the second quarter.
ArcelorMittal took financial advice from Goldman Sachs Group Inc. and RBC Capital Markets, with legal advice from a Shearman & Sterling LLP team including George Casey, George Karafotias, Rory O'Halloran, David Plattner and Cecelia Ferreira. The buyers were advised by Morgan Stanley and by Jason Lee at law firm Kim & Chang.
French mergers and acquisitions lawyer Laurent Faugerolas joined Dechert LLP. For other updates launch today's Movers & shakers slideshow.
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