bold spirit - ArcelorMittal South Africa

38
ArcelorMittal South Africa
Annual Report 2010
Commercial matters continued
to the supply of iron ore at cost plus
3% had fallen away. We rejected
SIOC’s notification and asserted that
the supply agreement remains valid
notwithstanding the mining rights
issue, which is now subject to a High
Court review.
The parties agreed to a dispute
resolution process and agreement
was eventually reached whereby SIOC
would continue to supply iron ore to
us under an interim supply agreement.
Arbitrators have been appointed and
the hearing is expected to take place
in the first half of 2012.
We remain of the firm opinion that
the long term supply agreement
with SIOC remains valid and binding.
We are taking all steps necessary
to protect our shareholders in this
regard. We intend to vigorously
defend our rights in this matter and
take all necessary steps to minimise
the financial impact on the business.
Interim pricing agreement
On 21 July 2010, following
negotiations between Kumba and us,
an interim iron ore supply and pricing
agreement, effective from 1 March
2010 to 31 July 2011, was concluded.
In terms of this agreement:
• iron ore will be supplied to
Saldanha Works at a fixed price of
USD 50 per tonne free-on-rail (FOR);
• the inland plants will receive iron
ore at a fixed price of USD 70 per
tonne FOR for both lump and fine
material;
• the total volumes to be received
on this basis will not exceed
6.25 million tonnes per annum as
per the contract; and
• the ratio between lump and fine ore
will be set at 73% and 27%.
When the dispute first arose, we
imposed a surcharge on its domestic
sales to compensate for the iron ore
cost increase. In view of the interim
agreement, the company, with effect
from 1 August 2010, charged a single
all-in price, reflecting the higher cost
of iron ore. The surcharge was also
discontinued
This interim agreement has no
bearing on the arbitration process
currently under way, nor on our
conviction that the existing cost plus
3% supply agreement remains legally
valid and binding on the parties.
Financial effects of the dispute
The financial effects of the dispute for
the group are significant. Comparing the
current interim agreement against the
cost plus 3% model, the cost impact for
the year under review is R990 million.
The production cost for liquid steel
produced increased by R240 per ton.
Imperial Crown Trading transaction
On 10 August, 2010, we announced
our intention to acquire 100% of the
shares of Imperial Crown Trading (ICT)
for R800 million. The Department
of Minerals and Resources (DMR)
has awarded ICT a prospecting
right in relation to the 21.4% share
of the Sishen mining rights. It was
announced in January 2011 that
ICT has applied for a mining right in
respect of the same portion and this
application share and was accepted by
the DMR. This transaction to acquire
ICT is still subject to the fulfilment of
the conditions precedent, including
completion of a due-diligence exercise
to our satisfaction.
Alternative supply sources
The supply of ore from Thabazimbi
will be maintained and alternative
methods to upgrade the low-quality