UPDATE:Kumba To Supply ArcelorMittal S Africa Iron Ore On New Terms

16th Jul 2010 10:59

(Adds analyst comment, pricing deal details.) By Devon Maylie Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Kumba Iron Ore Ltd. (KIO.JO) said Friday that from Aug. 1 ArcelorMittal South Africa (ACL.JO) can only purchase iron ore from the company on a pay-and-take basis following its refusal to agree on an interim pricing deal while a dispute between the two is in arbitration. The dispute is over a contract where Kumba supplied a set amount of iron ore to ArcelorMittal at a price of 3% above cost of production. Following ArcelorMittal's loss of rights to part of the Sishen mine jointly owned with Kumba due to a missed government deadline for renewing it, Kumba said that it wanted to break from the contract set in 2001 and sell at market prices. ArcelorMittal has been paying cost plus 3% for the iron ore during the disagreement. It also added a "Sishen surcharge" to its steel price due to the disagreement, even though it wasn't yet paying more for the iron ore. "There is considerable commercial risk to SIOC and its shareholders if it continues to supply iron ore to Mittal without agreement on terms of supply," Kumba said, which is 63% owned by Anglo American PLC (AAL.LN). From Aug. 1, ArcelorMittal South Africa, a subsidiary of the world's largest steelmaker ArcelorMittal (MT), can purchase iron ore at $50 a metric ton for delivery to its Saldanha steel plant or $80/ton for delivery to inland plants. That is up from $30/ton at cost plus 3% at present. The company can purchase up to 520,000 tons of lump iron ore from the Sishen mine, Kumba said, adding that ArcelorMittal can order the ore in advance but won't get delivery until it is paid for at the above prices. The company said it had given ArcelorMittal an ultimatium that expired Thursday to accept either the "pay-and-take basis" or to paying the cost plus 3% directly to Kumba and the difference to the market price into an interest bearing escrow fund that would go to the party who wins the arbitration at the end. Both were rejected. ArcelorMittal wasn't immediately available to comment. "SIOC's internal analysis shows that Mittal's operations, including Saldanha Steel, should still be significantly profitable at SIOC's proposed market-based prices for iron ore," Kumba said. Credit Suisse analysts estimate that by charging market prices Kumba would add an additional earnings before interest, taxes, depreciation and amortization of $420 million a year based on an average iron ore price of $100/ton. "An outcome in favor of Kumba should be a strong positive catalyst for Kumba and also positive for its parent company Anglo. However, a quick resolution now appears unlikely," Credit Suisse said. -By Devon Maylie, Dow Jones Newswires; +44 (0)20 7842 9483; [email protected] (END) Dow Jones Newswires July 16, 2010 05:59 ET (09:59 GMT)