CITIC Pacific, a state-backed property- to-telecom conglomerate, said it will buy and develop two iron ore projects in Australia for almost US$3 billion (HK$23.4 billion) as it aims to shift more focus on the steel industry. CITIC Pacific said it agreed to buy the Sino Iron and Balmoral Iron in the western Pilbara region of Australia for US$415 million.
Estimated capital expenditure for the two projects over a 10-year period is US$2.5 billion.
After the acquisitions are completed, CITIC Pacific will transfer half of its interests to a Chinese state-owned steel group for the same price level it pays for the deals, hopefully in the first half of this year, the firm's managing director Henry Fan said.
He declined to name the steel group.
"This investment is a new core business for CITIC Pacific, and they will be long-term projects to import resources from Australia," Fan said Friday.
CITIC Pacific's chairman Larry Yung last week identified special steel, property and utilities operations in China as the company's core businesses, while aviation has become non- core.
Special steel business, in which CITIC Pacific owns a 30 percent market share in China, generated HK$1.08 billion in profit last year, up from HK$872 million in 2004, and accounted for 21 percent of its profit before net finance charges and taxation.
By buying iron ore mines, CITIC Pacific could reduce raw material costs for steel production as imported prices are set to be lifted by global major producers such as Australia's Rio Tinto and BHP Billiton, and Brazil's Vale do Rio Doce, who together account for three quarters of the world's iron ore trade.
"Price increases in iron ore will be a long-term trend," said Fan.
"China will have a shortage of ore so it wants to have a stable supply for the long run, while the import cost from Australia is about half of that from Brazil."
Fan said China imported 270 million tonnes of iron ores in 2005, and produced 150 million tonnes itself.
The ore produced by the newly acquired projects will be used by the company to produce special steel and will not be for re-sale, he added.
CITIC Pacific said Sino Iron and Balmoral Iron each holds the mining rights for extracting one billion tonnes of magnetite ore resources.
The company has the option to buy a mining right to boost total extract to up to six billion tonnes, it said.
The projects are estimated to be able to produce 24 million tonnes a year, increasing to 72 million tonnes when the optional mining right is acquired, CITIC Pacific said.
The project companies will pay royalty to the vendor, Mineralory, every quarter -A$0.30 (HK$1.65) for every tonne of magnetite ore mined, plus 6-10 percent of the production volume, CITIC added.
Fan said a state-owned lender will provide funding for the acquisitions, and CITIC Pacific is also financially well-prepared for the investment.
The company has cash of HK$5 billion, as well as bank loans totaling about HK$32 billion, including a HK$25 billion bank facility and a HK$7 billion syndicated loan, he said.
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