Mount Gibson signs deals, to raise $162m
Mount Gibson Iron Ltd has entered into several offtake deals with two Hong Kong listed companies, one a major shareholder, as it plans a $162 million capital raising that is fully underwritten.
Shares in the company, which have been in a trading halt since October 23, fell 4.5 cents or 11 per cent to 36c at 10:43 AEDT.
The iron ore miner said it was still pursuing customers which had requested delays to iron ore shipments, with three of those customers now having defaulted on their binding offtake agreements.
Meanwhile, Mount Gibson said it had entered into a binding heads of agreement with its major shareholders APAC Resources Ltd and a separate deal with Shougang Concord International Enterprises Company Ltd.
Under those agreements, both Hong Kong companies have agreed to purchase available iron ore production from Mount Gibson in a short-term, medium-term and long-term off-take deals.
Additionally, APAC and Shougang have agreed to underwrite a one for five renounceable rights issue at 60 cents per share to raise $96.5 million.
Shougang will subscribe to a further placement of 110 million shares at 60c each to raise an additional $66 million.
Mount Gibson said the $162.5 million raising was necessary given the default payments and the company's aim to continue priority development at its Koolan Island and Extension Hill operations.
"Together with existing cash reserves, the additional funds raised will ensure that Mount Gibson is adequately funded to continue priority development activities and mitigate the impact on Mount Gibson of any near term volatility in the iron ore market and financial markets," Mount Gibson said.
The placement and underwriting deals are subject to Foreign Investment Board approval.
Once the short term off-take contract has been executed Mount Gibson will appoint an additional APAC nominee to the board, while a Shougang nominee will be appointed once all off-take deals are executed.
On completion, APAC will have two nominees on Mount Gibson's board and Shougang will have one nominee out of a total of seven directors.
The two Chinese groups have an intricate relationship, with one of APAC's major shareholders, Shougang Holding Ltd, also owning a major stake in Shougang Concord.
Earlier this year, the Takeovers Panel blocked the sale of a large stake in Mount Gibson to Shougang Concord ruling there would be an "unacceptable effect on the control or potential control" of the company due to Shoungang's relationship with APAC.
Should shareholders approve the placement and off-take deals, APAC and Shougang Concord will collectively own between 28.56 per cent and 40.46 per cent of Mount Gibson depending on the uptake of the rights issue.
Meantime, Mount Gibson said it has made material operational changes at its Koolan Island and Tallering Peak mine sites to optimise product specification and to manage cash expenditure.
"The changes also have the effect of reducing current production from those sites," the company said.
Some construction and development activities have been deferred at both operations, however priority activities will go ahead, funded by the $162.5 million capital raising.
As a result of the shipping delays and the modification to mine plans, Mount Gibson has revised its iron ore shipment forecast for fiscal 2009 to 5 million tonnes, down from the original 7.2mt.
"Mount Gibson advises that this, together with ore prices received for the remainder of the financial year at a discount to benchmark, will have a material impact on the company's profitability in the current financial year," the company said.
The announcement is pasted below:
Mount Gibson Iron Limited (Mount Gibson) advised ASX on 9 October 2008 that it was in discussions with a number of its customers in relation to requested delays to iron ore shipments scheduled for the quarter commencing October 2008. Three of those customers have now defaulted on their binding offtake agreements.
Acceptable accommodation has been reached with a further two customers and discussions will be ongoing with a further existing customer until 9 November 2008. In response to those events, Mount Gibson has carefully reviewed all of its available options and has taken steps which mitigate the risk of further defaults and deferments while preserving its rights against its defaulting customers.
Mount Gibson is pleased to announce that it has signed a binding Heads of Agreement with its major shareholder, APAC Resources Limited (APAC), and a further binding Heads of Agreement with Shougang Concord International Enterprises Company Limited (Shougang Concord).
As detailed in the attachments, these agreements provide for:
APAC and Shougang Concord to purchase available production from Mount Gibson's operations:
- During November and December, 2008 (Short Term Offtake);
- Between January and June 2009 (Medium Term Offtake); and
- From 1 July 2009 (Long Term Offtake).
APAC and Shougang Concord to underwrite a 1 for 5 renounceable rights issue at A$0.60 per share to raise gross proceeds of A$96.5 million (Rights Issue & Underwriting); and
Shougang Concord to subscribe for a placement of 110 million ordinary shares at A$0.60 per share to raise an additional A$66 million (Placement).
The offtake, subscription and underwriting agreements to effect the above transactions are expected to be executed by mid-November 2008. The Placement and the Underwriting are conditional upon approval by the Foreign Investment Review Board. The Medium Term Offtake and Long Term Offtake, together with the Underwriting and the Placement, will be subject to Mount Gibson shareholder approval at an extraordinary general meeting planned for late December 2008.
The Short Term Offtake does not require Mount Gibson shareholder approval and is expected to commence immediately on completion of a definitive Short Term Offtake Agreement. Key terms for the offtake agreements are summarised in the Attachments below.
The Short and Medium Term Offtake Agreements serve to contribute to pro-rata production costs during the next eight months. The Long Term Offtake will provide Mount Gibson with Hamersley benchmark prices less a discount to reflect product specification and relative freight differential particularly from the Geraldton Port. Based on current discussions with customers, 100% of future production from existing operations will be sold under long term contract of which 55%, 58% and 70% will be covered by the Short Term, Medium Term and Long Term Offtake agreements respectively with APAC and Shougang Concord.
The impact of some of its customers defaulting on Mount Gibson's near term cash flows together with the desire of Mount Gibson to continue priority development at Koolan Island and Extension Hill requires the raising of additional equity finance.
The Rights Issue and Placement will together raise gross proceeds of A$162.5 million. Together with existing cash reserves, the additional funds raised will ensure that Mount Gibson is adequately funded to continue priority development activities and mitigate the impact on Mount Gibson of any near term volatility in the iron ore market and financial markets.
APAC and Shougang Concord are both Hong Kong Stock Exchange listed entities. One of APAC's substantial shareholders is Shougang Holding (Hong Kong) Limited (SHHKL) which own approximately 18.95% of the shares in APAC. SHHKL also owns approximately 41.14% of Shougang Concord. SHHKL is a wholly owned subsidiary of the state owned Shougang Corporation, based in the People's Republic of China. Should Mount Gibson shareholders approve the placement and offtake agreements, APAC and Shougang Concord will collectively own between 28.56% and 40.46% of Mount Gibson depending on the uptake of the Rights Issue.
Upon execution of the Short Term Offtake agreement with APAC, Mount Gibson will appoint an additional APAC nominee as a non-executive director. Following execution of all offtake agreements and completion of the Placement and Rights Issue, Mount Gibson will also appoint a Shougang Concord nominee as a non-executive director.
Following these appointments, APAC will have two nominees on the Mount Gibson board and Shougang Concord will have one nominee, out of a total of seven directors.
Mount Gibson will be pursuing those customers who materially breached their offtake agreements to recover from them any losses arising from volume and price differences between the customers' existing offtake agreements and the new offtake agreements.
Mount Gibson believes it will recover any such losses from those customers in due course.
Mount Gibson Chairman, Neil Hamilton, commented "We are very disappointed that a number of our customers have defaulted on their binding obligations given the substantial investment Mount Gibson has made in the business based on executed legally binding long term ore purchase contracts and further representations made by these customers. Having said that, we acknowledge the support of our major shareholder, APAC, and Shougang Concord during this difficult time which allows Mount Gibson the opportunity to present a viable solution to shareholders that provides long term security for their company during the current volatility in the iron ore and financial markets."
Operations and Development Activities
Mount Gibson is continuing to mine ore at Koolan Island and Tallering Peak. At both sites, material operational changes have been made to optimise product specification in the near term and to appropriately manage cash expenditure. These changes also have the effect of reducing current production from those sites.
Mount Gibson has temporarily suspended development activities at the main pit of Koolan Island and expects to recommence these in July 2009. This will defer the commencement of ore mining from Main Pit for a minimum of 6 months.
However, sufficient ore is available within Mount Gibson's satellite deposits at Koolan Island to continue producing saleable product during this delay. Mount Gibson has also deferred the T6B2 cut back at Tallering Peak until July 2009. Some construction activities at Extension Hill will be deferred, whilst commencement of ore production is rescheduled to the March quarter, 2010.
All contracts with key suppliers have been retained and no material delay penalties will be incurred.
The Rights Issue and Placement, together with ongoing cash flows, will ensure that Mount Gibson is adequately funded to continue priority development activities at both Koolan Island and Extension Hill, which mitigates the impact of the current events on Mount Gibson's medium and longer term operational objectives.
As a result of shipping delays to date, the new offtake arrangements and the need to modify mine plans at both Koolan Island and Tallering Peak, Mount Gibson has revised its iron ore shipment forecast for the 2008/2009 financial year to 5.0 million tonnes from the original 7.2 million tonnes. Mount Gibson advises that this, together with ore prices received for the remainder of the financial year at a discount to benchmark, will have a material impact on the company's profitability in the current financial year.
Mount Gibson Balance Sheet and Hedging Position
Consistent with both company policies and minimum bank mandated hedging requirements, Mount Gibson has entered into foreign exchange forward contracts to cover approximately 60% of its budgeted US Dollar exposure for the 2008/2009 and 2009/2010 financial years.
As at 1 November 2008, Mount Gibson has outstanding forward contracts for:
US$375 million at a average rate of 0.8824 per US$ due to expire in the 2008/2009 financial year; and
US$185 million at an average rate of 0.8109 per US$ due to expire in the 2009/2010 financial year.
Mount Gibson's lenders have expressed a willingness to consider rolling forward excess foreign exchange forward contracts once new offtake arrangements are in place and the Rights Issue and Placement have been completed. This will prevent Mount Gibson from having to cash settle any forward contracts not needed for coverage of monthly operational US dollar income. Although Mount Gibson anticipates the ongoing support of its lenders there is no commitment at this stage from them to roll existing foreign exchange hedges forward, however the proceeds from the Rights Issue and Placement will adequately cover any cash required.
