BlueScope Steel May Buy First Iron Mine as Costs Gain (Update2)...

BlueScope Steel May Buy First Iron Mine as Costs Gain (Update2)

By Tan Hwee Ann

Nov. 20 (Bloomberg) -- BlueScope Steel Ltd., Australia's largest steelmaker, may buy its first iron ore mine after prices of the raw material rose for four straight years.

Stemcor Holdings Ltd. wants to sell the Savage River mine in Tasmania state, which needs to be expanded after 2009, Noel Cornish, president of industrial markets at Melbourne-based BlueScope Steel, said in an interview. Dave Sandy, who runs the mine, confirmed Stemcor is in talks with potential investors.

Iron ore prices are expected to rise for a fifth year and BlueScope joins global rivals including Arcelor Mittal, the largest steelmaker, in seeking to secure supplies of raw materials as nickel and zinc prices also reached records.

``It would give them increased flexibility in their planning,'' said Atul Lele, who helps manage the equivalent of $307 million at White Funds Management, in Sydney. ``The only question is whether iron ore prices may start to get contained after the next year.''

Shares of BlueScope have risen 14 percent this year, compared with an 18 percent gain on the MSCI World/Materials Index. The stock rose as much as 16 cents, or 2 percent, to A$8.03 on the Australian Stock Exchange and traded at A$7.86 at 1:49 p.m. Sydney time.

Due Diligence

``There's a lot of attraction to us in purchasing Savage River, but we need to do our due diligence correctly and we need to understand what is a significant expansion,'' said Cornish in a Nov. 16 interview at BlueScope's steel plant near Sydney. BlueScope may also consider just investing in the expansion, and could reach a decision in six months, he said.

Raw materials costs slashed BlueScope's income by A$261 million last year, and contributed to a 66 percent decline in profit. Steelmakers also are investing in mines to try and break the hold of iron ore suppliers. China's Shougang Corp. and Anshan Iron & Steel Group Corp. are spending A$1.7 billion ($1.3 billion) on Australian projects, and South Korea's Posco is planning a $12 billion project in India.

Cia. Vale do Rio Doce, Rio Tinto Group and BHP Billiton Ltd. account for three quarters of global seaborne iron ore supplies. Their bargaining power over prices strengthened as Chinese demand outpaced new supplies.

Expansion Costs

The Savage River mine produced 2.2 million tons of iron ore pellets last year. The processing plant was damaged by a fire in June, disrupting supplies to customers including BlueScope, as well as Posco, Japan's Nippon Steel Corp. and China's Shougang.

The mine's life could be extended to last till 2022, at a cost of A$140 million, said Sandy of Australian Bulk Minerals, a unit of Stemcor, in an interview today.

``The resources are huge and you're talking about spending A$140 million for 2.5 million tons of pellet production, compared with new projects in Western Australia that could cost A$1 billion for 4 million tons,'' Sandy said.

The mine, a processing plant and expansion may cost as much as A$500 million ($385 million), Peter Arden of Intersuisse Ltd. said. Cornish didn't say what the investment could cost.

Stemcor, a private U.K.-based distributor of steel and raw materials, bought Savage River from Ivanhoe Mines Ltd. in 2005.

OneSteel Ltd., Australia's second-largest steelmaker, has its own magnetite iron ore project and is spending A$325 million modifying a steel plant, which will allow it to export iron ore pellets.

Steelmakers have been hurt by zinc's surge to record prices as well as by rising iron ore and coking coal prices. Zinc, used to make galvanized steel which resists corrosion, rose to a record $4,515 a ton, or $2.05 a pound, on Nov. 9 on the London Metals Exchange. Its gain dwarfed the 15 percent rise for aluminum and 55 percent advance for copper