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Dec 05, 2012 05:02 PM IST | Source: ft.com

Posco seeks stake in Canada iron ore mine

Posco, the world's fourth-largest steelmaker by output, has secured exclusive negotiating rights for a 15 percent stake in a Canadian iron ore mine operated by ArcelorMittal, according to people close to the deal.

Posco seeks stake in Canada iron ore mine

Posco, the world's fourth-largest steelmaker by output, has secured exclusive negotiating rights for a 15 percent stake in a Canadian iron ore mine operated by ArcelorMittal, according to people close to the deal.

The South Korean company has been named the preferred bidder for the stake, worth more than USD1bn, in ArcelorMittal Mines Canada. It plans the purchase as part of a consortium that includes the country's public pension fund.

Posco has been actively acquiring overseas mines in recent years as it seeks greater control over supply of raw materials. It has made investments in Australia, Brazil, Canada and Africa as it works to boost its self-sufficiency in raw materials to 50 percent by 2014, from the current 34 percent.

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The company bought a 70 percent stake in Australia's Sutton Forest coal mine from UK mining group Anglo American in 2010 and has increased its stake in Roy Hill Holdings, an iron ore mining venture in Western Australia, from 3.75 percent to 12.5 percent.

Last year, Posco and South Korea's state-run National Pension Service set up a Won800bn (USD738m) fund for overseas acquisitions. The two joined forces with a consortium of Japanese steelmakers to buy a 15 percent stake in a Brazilian rare metal miner for about USD1.8bn. Posco is also eyeing Arrium, Australia's second-largest steelmaker, but Arrium has rejected an offer of A USD1bn (US USD1bn) from a Posco-led consortium.

Shares in Posco fell 1.9 percent on Tuesday, reflecting investors' concerns about the potential impact on the company's balance sheet. "It is negative news financially because the acquisition would likely increase its borrowings at a time when the business environment remains tough," said Moon Jung-up, an analyst at Daishin Securities.

Mr Moon warned that an increase in borrowing could prompt international rating agencies to downgrade Posco. Standard & Poor's cut Posco's rating by one notch in October citing the steelmaker's weak performance this year.

Posco cut its sales forecast for the third time this year after operating profit dropped 17.6 percent in the third quarter, hit by lower demand and overcapacity in the industry.

But Mr Moon does not expect Posco to be deterred from acquisitions. "Posco is the most cost competitive steelmaker thanks to its technological knowhow, but its biggest weakness is its lack of control over raw materials. So it will continue buying stakes in overseas mines," he said.

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