African MineralsGREENSHOOTS 447831519217
The signing of a $1.5-billion (U.S.) agreement between African Minerals and China's state-owned Shandong Iron & Steel Group should end some of the skepticism about the deal and broader reservations over the Aim market's biggest company by market capitalization.
The long-awaited deal would see Shandong acquire a 25 per cent stake in African Minerals' Tonkolili iron ore project in Sierra Leone. With 12.8 billion tonnes of estimated resources, it is one of the biggest iron ore prospects on the African continent. Its discovery and resulting announcements over the course of 2009 has triggered a more than 16-fold rise in African Minerals' shares, although it is yet to start production.
The deal underlines China's continuing appetite for African commodities. As well as the direct stake, Shandong also has the right to buy 25 per cent of Tonkolili's future production at market value plus a guaranteed annual off-take of iron ore - eventually reaching 10 million tonnes - at a market discount of as much as 15 per cent.
It is a far cry from the uncertainty that followed a memorandum of understanding the two companies signed last summer. Delays to the deal were a significant factor in African Minerals going to the market last November to raise $307-million through a share placement amid funding concerns.
African Minerals said it would use the proceeds of the $1.5-billion to "accelerate the expansion and further development" of Tonkolili, including a railway and port from where the ore will be shipped to Asian markets. It added that a $417-million loan facility would also be repaid.
Beijing still needs to give its official approval for the deal - and for the money to be disbursed - which African Minerals expects to happen by the end of the year.
Nevertheless, Robert Clifford, an analyst at Deutsche Bank, said the indications were "pretty positive". African Minerals shares closed up 4.4 per cent, at 647p, giving it a market capitalization of $3.3-billion.
"Whilst I don't think Chinese government approval is a complete formality, it has taken more than 12 months to get here and Shandong would have spoken to the Chinese government before signing," said Mr. Clifford.
Shandong is the second China-backed company African Minerals has done business with. Last year it completed a similar deal with Chinese parastatal group China Railway Materials Commercial - the supplier of steel products to China's rail industry.
The Shandong agreement represents a degree of personal vindication for African Minerals' chairman Frank Timis, who holds a 12.4 per cent stake in the company. Mr Timis is a businessman whose controversial past seemingly doesn't affect his reputation as an entrepreneurial go-getter in the resource sector, something to which the company's significant retail following and institutional investors such as BlackRock and JPMorgan attest.
In 2009 the London Stock Exchange issued a £600,000 fine to Regal Petroleum, another Aim-quoted group, over statements it issued between June 2003 and May 2005, when Mr Timis was its executive chairman. The LSE found that Regal had committed "numerous, serious breaches" of Aim rules, although Mr. Timis was not specifically criticized.
It was not the first run-in with market regulators for a company associated with Mr Timis.
Last year it emerged that African Minerals was privately censured and fined £75,000 by the LSE in 2008 for putting out misleading and unrealistically optimistic information when it was known as the Sierra Leone Diamond Company.
Investor focus is now on whether African Minerals will meet its target date for production to start at Tonkolili in the fourth quarter and whether it has outgrown its Aim quotation.
A person close to the company said that while "it is becoming very large for Aim" it does not have any plans to apply for a move to the main market.