Chinese state-owned enterprise Wuhan Iron and Steel Corporation (Wisco) has tabled a non-binding offer to Brazilian mining and metals company MMX. The offer follows a stock exchange filing by MMX in May, in which the Brazilian firm flagged that it was in discussion with the Chinese SOE for a business combination.
Wisco will subscribe to new shares in MMX, representing a 9.09% equity ownership in the company, for an outlay of $120 million. The agreed price values MMX at an equity value of $1.3 billion. Wisco will simultaneously acquire a 23% equity interest in an MMX subsidiary, MMX Sudeste, also by subscribing to new shares at a cost of $280 million. This translates into an equity value for MMX Sudeste of $1.2 billion. The companies said they envisage entering into a long-term off-take agreement for the supply of iron ore by MMX Sudeste to Wisco.
Wisco has been in operation for more than 50 years with an annual production capacity of 20 million tonnes of steel, making it the third-largest steel manufacturer in China and the 16th largest in the world.
In May, MMX said the two firms were considering potential business arrangements including (a) the construction and subsequent operation by Wisco of an integrated steel plant at a Brazilian port, with an estimated capacity of 5 million tonnes per annum; (b) an off-take, under a long-term contract and at benchmark prices, by Wisco of most of MMX Sudeste's export capacity; (c) a long-term port services agreement between the Brazilian and Chinese parties (d) Wisco acquiring an equity interest in MMX and/or MMX Sudeste; and (e) the supply of steel products by Wisco to an MMX affiliate.
MMX is a relatively young Brazilian mining and metals company, incorporated in 2005. Between MMX and its subsidiaries it has an installed capacity of 10.8 million tonnes per year of iron ore and the potential to expand up to 40 million tonnes per year. It also has mining rights in Chile through its subsidiary Minera MMX de Chile.
MMX declared first quarter results on May 18, posting revenues of R$92 million ($45 million), which was down significantly versus both the fourth quarter 2008 and the corresponding quarter of the previous year. This resulted in a negative Ebitda of R$166 million for the quarter.
MMX said at the time that steel production had dropped 40% in developed countries, particularly in Europe and Japan, which had "virtually paralysed Brazilian iron ore exports to these countries". It added that the slowdown was partly mitigated by the growth of exports to China during the first quarter, which was driven by falls in Brazil-China maritime freight costs and increased availability of ore. MMX said that it did not expect demand from China to compensate for the fall from other countries, as the infrastructure projects announced in China would only be able to compensate for the drop in steel consumption by export-oriented companies in China.
"This business combination, once consummated, will likely represent the single most important Chinese investment in Brazil, and one of the most relevant commercial joint ventures between a Brazilian group and a Chinese company," Eike Batista, chairman of MMX, said in a written statement at the time. "This beginning of negotiations towards the completion of such a grandiose task is initiated at a uniquely auspicious moment, when China becomes Brazil's largest trade partner, and counts [on] the blessing of both the Brazilian and Chinese governments."
China's hunger to secure supplies of natural resources has been evident in the deals Chinese companies have been seeking to close in Australia. South America may be further away geographically, but it is still a fairly obvious hunting ground for Chinese firms. And as has been the experience in Australia, companies that are loss-making may actually welcome Chinese saviours, without worrying too much about the colour of their money.