Canadian exploration company Alderon Iron Ore Corp. said on Friday it agreed to sell a stake in itself and its Kami iron ore project in eastern Canada to Chinese steel producer Hebei Iron & Steel Group for $194-million.
The deal will give Hebei a 19.9-per-cent stake in Alderon, which is headquartered in Vancouver. Hebei will also get a 25-per-cent interest in a new partnership that will be established to own the Kami project.
The deal puts a spotlight on efforts by Chinese steel producers to gain more control over foreign iron ore supplies, a market dominated by a handful of global miners.
It is the latest in a string of joint-venture deals between Canadian iron ore exploration companies and Asian steel producers. Iron ore is an essential ingredient in steel making.
India's Tata Steel signed an agreement last year with Canadian miner New Millennium Capital to develop the taconite iron ore deposit in Canada. Just months before that, No. 3 Chinese steel producer Wuhan Iron and Steel Co. agreed to a joint venture with Canada's Adriana Resources.
Alderon said it plans to use the proceeds of the Hebei deal to further explore and develop the Kami project, which is located in iron ore-rich Labrador Trough along the border between the provinces of Quebec and Newfoundland and Labrador.
"This transaction with Hebei is a major catalyst for Alderon as it further validates and materially de-risks the Kami project," said Alderon chief executive officer Tayfun Eldem.
Hebei, in a separate statement, said this was an ideal time to invest in upstream assets as the broader market is taking a more cautious approach to iron ore demand.
Hebei's investment also reflects the company's optimistic outlook about China's iron ore demand and comes at a time when iron miners, including BHP Billiton , Rio Tinto and Vale, continue to bet on long-term demand growth in China, the world's top buyer.
The Chinese steel maker will initially buy a near 20-per-cent stake in the Canadian company for $88.3 million at $3.42 a share, or a 0.6-per-cent discount to Thursday's closing price. Following that, Hebei will invest $105.7-million, giving it the right to a 25-per-cent interest in Kami.
The deal will also give Hebei the right to buy 60 per cent of the iron ore produced annually from Kami, once it goes into production.
"Alderon now has both the capital and the China market access to build a world-class company," chairman Mark Morabito said in a statement.
Hebei has agreed to assist in obtaining debt financing for the Kami project from financial institutions, including Chinese banks. Upon the closing of the private placement, Hebei will be entitled to nominate two directors to Alderon's board.
Alderon and Hebei will be required to contribute to development costs not covered by initial capital contributions and project debt financing, in accordance with their respective interests.
GMP Securities was Alderon's financial adviser on the deal and its legal counsel was Cassels Brock & Blackwell LLP. Bank of America Merrill Lynch acted as Hebei's financial adviser and Davies Ward Phillips & Vineberg acted as its legal adviser.