By Rhiannon Hoyle and Chuin-Wei Yap
SYDNEY--Baosteel Group Corp. plans to bid for Aquila Resources
Ltd., a tie-up that would unlock new iron-ore supply for its steel
kilns and represent China's biggest acquisition of an Australian
mining company in more than two years.
Baosteel, China's third-largest steel mill by volume, said it is
working with Aurizon Holdings Ltd., Australia's largest
rail-freight hauler, on a joint offer that would value Perth-based
Aquila at 1.4 billion Australian dollars (US$1.3 billion). The
proposal, worth A$3.40 a share, sent Aquila's stock up 36% Monday
as investors bet the deal would encounter little opposition from
regulators, which have been spooked by a recent sharp downturn in
mining investment in Australia.
China has long relied on Australia for the bulk of its iron-ore
imports, which are used to make steel for everything from
skyscrapers in major cities to the limousines favored by the
country's elite. Most of this iron ore is shipped to order from
major miners such as BHP Billiton Ltd. and Rio Tinto PLC, although
a small-yet-growing supply line comes from Australian mines that
were bought by state-run Chinese companies in an earlier wave of
deals.
Baosteel, which owns China's largest-listed steel mill, bought
15% of Aquila in 2009 when iron-ore prices were rising and later
increased its stake to 20%. It was attracted by Aquila's plans for
a new mine, which was expected to produce more than 30 million
metric tons of iron ore a year and ship through a new rail line and
port that bypassed infrastructure owned by Rio Tinto and other
major miners in Western Australia's Pilbara region.
But the West Pilbara Iron Ore Project soon became mired by
delays and cost blowouts, mirroring other investments by Chinese
companies in the region. Aquila's most recent estimate to build the
project was A$7.4 billion, which dwarfed the Australian company's
market value. It also cemented lenders' reluctance to provide
billions of dollars in debt financing.
Wu Yiming, vice president of Baosteel Resources International
Co., the Chinese steelmaker's overseas development unit, said
repeated delays to the West Pilbara Iron Ore Project following a
funding dispute among joint venture partners had sparked the move
to take control. Shanghai-based Baosteel Resources International's
Australian unit is handling the Aquila deal.
"Our original investment was to support Aquila to develop its
projects, but after five years we haven't seen any projects
started," Ms. Wu said on a call with journalists. "We have been
very patient, but we have become frustrated. We are going to get
this started."
Aurizon's involvement in the bid is significant as the
Australian company has made little secret of its desire to expand
in iron ore and gain a foothold in Western Australia, where
companies are under no obligation to open their rail lines to
rivals. Aurizon is Australia's largest coal hauler, but its
existing operations are mostly in eastern Australia's Queensland
state. The West Pilbara Iron Ore Project requires construction of a
282-kilometer (175.2-mile) rail line to connect the mine with a new
port at Anketell Point.
Under the proposal made Monday, Baosteel would own as much as
85% of Aquila, with Aurizon acquiring the remaining interest.
The deal underlines Baosteel's re-emerging leadership in China's
steel industry. It is the first state-owned mill to take up
Beijing's call, issued in January, for its big resource companies
to acquire more iron-ore assets abroad.
The National Development and Reform Commission, the government's
economic planning agency, told steelmakers to keep building up
stakes in foreign iron-ore assets in the interests of China's
strategic security and "speaking rights," or influence, in global
trade.
The proposal also signals Baosteel's willingness to spend on new
investments despite weak steel prices and a gloomy outlook for the
industry at home. Baosteel President He Wenbo said last week the
company isn't considering any domestic consolidation because of the
poor market outlook, which he described as the worst ever.
Iron-ore prices recently fell to their lowest level since late
2012, partly due to concerns about China's steel demand. Traders
have also cited concerns about an emerging oversupply of iron ore
at a time when companies such as Rio Tinto are continuing to expand
their Australian mines.
However, Baosteel's Ms. Wu said even if the iron-ore price fell
to US$80 a ton from around US$106 now, management would feel
confident the West Pilbara Iron Ore Project could be competitive.
Half of the iron-ore used by Baosteel, which relies entirely on
imports to make steel, comes from Australia.
Still, analysts said the proposed deal is unlikely to herald a
new wave of Chinese iron-ore asset purchases, similar to the frenzy
that began about seven years ago. Mining costs globally remain
high, especially in Australia where new gas-export facilities
compete for labor and the local currency is strong.
"Baosteel's bid doesn't mean a return to large-scale iron-ore
purchases, " said Frank Tang, analyst at investment bank North
Square Blue Oak. "Foreign iron-ore asset acquisitions have been
relatively scattered in recent years, and I don't think we will be
seeing many more this year."
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Chuin-Wei
Yap at chuin-wei.yap@wsj.com
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