While MGX sp is driven down, Shougang's investment of $66 million through a placement at 60c(40%) and also the underwritten $96.5 million renounceable rights issue may give Shougang about 70-80% of MGX stake (if people didn't excercise their right due to a lower sp then 60c). Shougang will entrench itself in MGX register and become both: MGX important decision-maker and its biggest customer .
The conclusion, Chinese are happy with the current share price because they will get higher stake (%) in MGX.
Iron ore minnow Mount Gibson Iron is still swimming | November 04, 2008
STUFFED but satisfied, Luke Tonkin yesterday drew a line under the China crisis that has, for the past month, threatened the existence of his minnow, Mount Gibson Iron.
Mount Gibson's chief executive reckons he hasn't had a whole lot of sleep since revealing on October 8 that "a number of its customers" had asked for delays to their contracted December shipments.
By October's end the fearfully rapid dislocation of the global iron ore market had left Mount Gibson with three Chinese customers in default on "binding offtake agreements", with a further two customers needing a mitigating agreement on shipment delays and another in discussion over its contractual arrangements.
The result of the defaults will see Mount Gibson ship 5 million tonnes this financial year rather than the 7.2 million tonnes it planned to sell. That and the lower-than-planned received price will have a material impact on Tonkin's profit.
Nonetheless, Tonkin insists he has won a good deal for his company and its owners and says Mount Gibson will pursue the three defaulters for compensation.
Things were looking deadly when along came Shougang Corporation, China's fourth-biggest steelmaker. I don't know what carpe diem is in Mandarin, but that is exactly what has happened here. Shougang has seized its moment.
For a maximum investment of $162.5 million, Shougang will further entrench itself in Mount Gibson's register and become its biggest customer.
Shougang, through a pair of Hong Kong-based affiliates, APAC Resources and Shougang Concord, will emerge speaking for up to 40.46 per cent of Mount Gibson.
But there is more. Not only does Shougang's contract position progressively build to 70 per cent of Mount Gibson's company's future output, it will get the iron ore at discount to market.
Shougang owns 19 per cent of APAC and APAC, in turn, is already Mount Gibson's biggest shareholder, with 28 per cent of Tonkin's business.
APAC and Shougang have agreed to underwrite a $96.5 million renounceable rights issue, while Shougang will invest a further $66 million through a placement.
Both the rights issue and the placement are being done at 60c a share. And, based on yesterday's close of 39.5c a share, that is likely to be a price that would deliver a whole heap of Mount Gibson's scrip to Shougang's pair of underwriters.
Then again, Mount Gibson was trading above $1.15 just before October's nasty news and it traded as high as $3.65 back in March.
That China Inc was both the source of Mount Gibson's near-death experience and its saviour says much about the forces now driving global commodities markets.
There is a lot of talk that the resources boom has come to a close. That, on one level, is certainly right. It will be a long time, for example, before hedge funds and other speculators drive into the terminal traded metals with the enthusiasm they showed just four or five months ago.
But it is worth remembering that the bulks market is not driven by speculative capital. It isbased on far more vanilla fundamentals.
The markets for iron ore, manganese and hard and soft coal are a product of the customers' medium and long-term projections of their real demand, while the contract pricing, over recent years, has reflected the highest marginal cost of production in China.
And remember, the producers, big and small, have not talked about the "resources boom" as much as they have about the lasting increase in overall global demand for raw materials driven by China's economic development and the need to feed that progress with imported product.
Now, just as the GFC has wrought reformation of international capital markets, so the on-set of recession in pivotal OECD consumer markets seems to be triggering a major shake-out of China's steel industry.
There are reports, for example, that 60 per cent of China's steel mills lost money in October and that 50 per cent of mills around the industrial centre of Tangshan have stopped production.
While the life is being squeezed out of China's highest marginal cost producers by falling steel prices and iron ore, manganese and coking coal prices will remain at record levels at least until April.
Whether this current crisis triggers the long expected consolidation of China's massively diverse steel industry, only time will tell. But it would seem likely that commercial life in China will run as it does in most places: the toughest times tend to deliver disproportionate advantage to the biggest players.
Over the weekend, the China Iron & Steel Association sent a five-point stablisation plan around to its domestic steel producers.
Among other things, the plan called for the acceleration of "obsolete capacity elimination" to restore market balance;, an end to "vicious" discounting to clear stock; a slowdown in stock accumulation; and the suspension of mills whose prices fall below operating costs.
This explains why Tonkin has not been alone on his wakeful journey through October. Tonkin says he doesn't expect any sort of recovery in demand momentum in China until well into 2009. This view is shared by most resources houses, big and small, and many have started resetting their business plans for the prospect of a sustained slowdown.
On Friday, Vale announced cuts in iron ore production equivalent to 30 million tonnes annually, through the suspension of a suite of high cost, lower quality Brazilian mines. Vale also seems to have bought forward maintenance on two iron ore pellet operations (which feed the distressed European markets); "paralysed" 600,000 tonnes of manganese production; and pulled the pin on some high cost Brazilian aluminium output.
Now Vale has its very own problems with China, having played hard ball since September on a push for a mid-year price iron ore price rise of 11-11.5 per cent. While some Chinese mills were forced to accept the increase, others refused. Depending on who you talk to, either the customers have stopped taking Vale shipments or Vale has stopped sending them.
But a cut equivalent to 10 per cent of Vale's 2008 output says something more important about the underlying demand outlook for iron ore and other steel inputs like coking coal and manganese.
Mind you, it is important to appreciate that Vale is effectively the European steel industry's raw materials producer, while the Australian producers sell pretty much exclusively into the Asian markets of Japan, Korea, Taiwan and China.
This explains why, except for Mount Gibson's near-death experience, the impact here so far has not been immediately dire.
While the bulk miners' share prices have been hammered in anticipation of future price pressures and lower earnings, export volumes appear to be holding. At the moment, there is no talk among the big three iron ore producers, Rio Tinto, BHP Billiton or Fortescue of production cuts nor lost volumes.
But expansion time lines are being pushed out by some, with Fortescue, most notably, delaying plans to hit 80 million tonnes by the end of 2009.
While Rio has signalled a review of capital programs, that review is unlikely to cut into its iron ore plans, while BHP says spending remains on track, although iron ore boss Ian Ashby noted in a briefing last week that risk to volumes was real and present.
Not that Luke Tonkin needed to be told that.
MGX Price at posting:
46.9¢ Sentiment: Buy Disclosure: Held
(20min delay)