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Legacy Iron Ore closes placement to NMDC and plans for asset spin off

Legacy Iron Ore has completed the first step in an evolution with India largest iron ore producer with cash reserves in excess of USD 4 billion to build a major mining house.

This is a first for an Australian company with the financial backing of a major Indian government entity and is NMDC first ever foreign acquisition.

Legacy will receive AUD 18.89 million cash injection after a binding share agreement was executed with India National Mineral Development Corporation to subscribe for 50% of the issued equity of Legacy which is now subject to shareholder regulatory and FIRB approval.

The deal is a first step in NMDC’s vision of using the company a vehicle to acquire large scale bulk commodity projects in Australia with the NMDC already indicating an intention to spend USD 500 million on overseas acquisitions.

An Independent Experts Report and Notice of Meeting on the transaction is well advanced with an Annual General Meeting scheduled for the end of November 2011 to allow Legacy shareholders to vote on the Placement to NMDC. The agreement provides for placement funds to be deposited into a trust account for immediate release and use following the completion of the key items.

1. NMDC seeks to expand

The proposed investment in Legacy will not be a passive one for NMDC, with NMDC chairman, Mr Rana Som confirming its commitment to develop and increase the value of their investment in Legacy through further acquisitions.

Mr Rana Som talking about Legacy, NMDC’s first ever foreign acquisition said this would be used as a foothold in Australia not only to develop the mines under Legacy but also for acquiring other mines in the country. He added that "Ultimately, Legacy will be our Australian arm."

Explaining that NMDC aim was to grow both vertically and horizontally, he said the company was setting up steel plants for vertical growth and acquiring mines for horizontal growth.

Discussions between Legacy and NMDC on the future acquisition and funding of resource projects in Australia using Legacy as the vehicle, have been for

1. The enlarged Legacy/NMDC company to acquire a minimum of 50% and up to 100% of a project using Legacy as the vehicle to hold that interest

2. NMDC to sole have responsibility for arranging project finance for the full development of the project through debt financing

3. The enlarged Legacy/NMDC company agreeing to repay the vendors of the projects certain development costs incurred to date.

The proposed acquisition model will see Legacy used to acquire a significant interest in resource projects through the reimbursement of development costs incurred by project vendors to date typically in the range of USD 20 to USD 40 million to begin and NMDC charged with arranging 100% project financing through debt funding.

Mr S Thiagarajan NMDC director said that the project will be developed on 70:30 debt and equity ratio and the investment will start pumping in once formalities for acquiring 50% stake in Legacy by NMDC are completed.

He said that "Mt Bevan may need at least USD 1.3 billion CAPEX investment. Equity part of NMDC and Legacy will be 30%. As soon we complete the acquisition part we will take that up. As it is they are doing some exploration there. Once we pump in the money the work will be stepped up."

Whilst debt financing will be used to reduce the dilutionary effects on shareholders for financing 70% of any CAPEX requirements, it is envisaged the 30% equity component of such project finance could include a rights issue for all shareholders to participate in, including NMDC.

He also said "In addition, loan facilities can be arranged by the newly enlarged Legacy/NMDC entity. Any debt finance arranged through NMDC will also have the added benefit of attractive project finance interest rates and conditions, given NMDC’s financial strength and international status, in its capacity as an Indian government owned enterprise."

2. Spin off of assets

The Board of Legacy has been investigating the potential for extracting greater value from these assets for shareholders via a spin off the company gold and iron ore assets. This is part of a wider Legacy strategy likely to be devolved by Legacy Iron Ore managing director Ms Sharon Heng.

This would create a suite of projects capable of achieving attractive Initial Public offerings. Significantly for Legacy holders, any shares would be returned to Legacy shareholders via an in-specie distribution.

A decision is likely to be announced on the spin-off by first quarter 2012.

By then, Legacy would have sufficient cash backing to warrant potential underwriting of those Initial Public Offerings, yet still allowing Legacy shareholders to have a priority entitlement.

Legacy is also reviewing opportunities for the purchase of metallurgical and coking coal projects in Queensland where the development of projects by many companies has been hindered by the ability to find substantial financial backing. It is proposed that should shareholders approve the Placement by NMDC, Legacy will seek to acquire a substantial interest in such projects through the partial payment of incurred exploration costs and NMDC providing 100% of project financing.