ArcelorMittal Finalizes Investment Agreement For Algerian Unit
ArcelorMittal (NYSE:MT) has finalized an investment agreement with Algerian state-owned company Sider. Under the deal, an investment plan of $763 million has been approved for the steel complex at Annaba and the mines in Ouenza and Boukhadra. Right now, ArcelorMittal owns a 70% stake in these units while Sider holds 30%. After the agreement is implemented, ArcelorMittal’s stake will go down to 49% while Sider will hold the rest. The two parties intend to fund the investment through equity contributions from shareholders and bank financing. [1]
The amount of $763 million includes the sale price of ArcelorMittal’s stake as well as additional amount to be pumped in as investment. The sale price of the stake was not disclosed separately by the two parties, but we think that the transfer of equity took place at a negligible price and the rest is meant as capital investment. Our speculation is based on the pronouncement by an Algerian minister earlier this month about nationalization of Annaba at a symbolic price of one dinar.
The investment aims to modernize the production facilities at Annaba and increase mining activity at Ouenza and Boukhadra, keeping in view the increasing demand for steel in Algeria. The Algerian government is keen to meet this demand through domestic production in order to promote self-sufficiency, which explains Sider’s role in the deal.
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The Annaba Plant And The Ouenza and Boukhadra Mines
ArcelorMittal’s El Hadjar plant at Annaba is the only integrated steel plant in Algeria. ArcelorMittal Annaba also owns port facilities at Annaba, which are located approximately 12 kms from its steel-producing operations, where exports of steel products and imports of raw materials are handled. The production facilities consist of two sinter plants, two blast furnaces, two basic oxygen converters, five continuous casters, a hot-strip mill, a flat cold rolling mill, a hot dip galvanizing mill, a rebar and wire rod mill and a seamless tube mill.
The Annaba plant produces both long and flat products which are sold primarily to the domestic Algerian market. Buyers mostly comprise of companies in the construction, engineering, packaging and petrochemical industries.
The iron ore mines at Ouenza and Boukhadra are part of ArcelorMittal Tebessa which holds mining rights in these areas. While Ouenza is an open pit mine located 150 kms from the Annaba plant, Boukhadra is an underground mine located 180 km from Annaba. The two mines produced 1.44 million metric tonnes of iron ore lumps and sinter fines in 2012 which was consumed by the Annaba steel plant. The latest data for iron ore reserves at these mines was not reported in 2012 due to deficiencies in recording the drilling data and archiving progress. [2]
The New Agreement
The investment under the latest agreement aims to more than double the Annaba steel plant’s production capacity from 1 million tons per year to 2.2 million tons by 2017. This would also require greater production of iron ore at the Ouenza and Boukhadra mines and part of the investment will go towards ensuring the same.
The detailed plan for the Annaba includes modernization of the production unit through relining of the blast furnace, modernization of the sinter plant, the steel plant and the rolling mills. Also proposed to be built are an electric steel plant and a rolling mill for production of 1 million tons of rebar and wire rod. While electric steel is used in the manufacturing of electric appliances, rebar and wore rod are used in the construction industry.
Besides meeting the strategic objective of self-sufficiency, the Algerian government’s decision to invest money in this deal seems motivated by a desire to maintain social stability through gainful employment of people. The agreement includes a human resources development plan under which intensive training will be provided to employees to adapt to the technologies. This plan is backed by a social stability pact that has been agreed upon with the unions. ArcelorMittal made it a point to mention in its official statement that the plan will ensure a long term future for steelmaking in Annaba and mining in Tebessa.
The social objective is not surprising, considering the recent history of the plant. In January 2012, former Algerian prime minister Ahmed Ouyahi had promised to save the El Hadjar plant which was making losses for ArcelorMittal. In 2012, ArcelorMittal Annaba announced a loss of $33 million, with production standing at 580,000 tons against a planned target of 700,000 tons in 2011 and far short of 1 million tons which was achieved in 2001. ArcelorMittal may have shut down the plant in absence of government intervention. The additional investment by Sider may result in a turnaround for the plant and generate profits for ArcelorMittal. [3]
We have a price estimate for ArcelorMittal of $16.
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Notes:- Strategic Agreement between ArcelorMittal and Sider finalized for US$763m investment in Algeria, ArcelorMittal News Release [↩]
- ArcelorMittal 2012 20-F, SEC [↩]
- ArcelorMittal Confirms Renationalization of ArcelorMittal Annaba, SteelOrbis [↩]