Vast Iron-Ore Resources Could Be Real Prize in Essar's Zimbabwe Steel Takeover

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Essar Group (BSE:500630) (Mumbai), which agreed to acquire Zimbabwe's moribund Zimbabwe Iron and Steel Company (Zisco) (Harare and Redcliff) in a $750 million transaction last week, is reported to be planning to restart steel production in Zimbabwe within the next 12 months.

The $750 million will entail covering debts in excess of $340 million and $20 million of wages that are still owing from when the steelmaker shut down in 2008. With an annual production capacity of 1 million tons per year, Zisco had been one of Africa's major steel producers. The actual cash paid for Essar's purchase of Zisco will amount to something less than $65 million.

Essar Africa Holdings (Mauritius) and the Zimbabwe government will form two joint venture companies that will hold all of Zisco's steel and mining assets and liabilities, with the stakes split between 60% for Essar and 40% for the government in the steel venture, and 80% for Essar and 20% for the government in the mining operation.

Zisco owns iron ore and limestone mining rights in Zimbabwe and other mineral claims that will need considerable investment to develop. Essar will explore iron ore resources in Zimbabwe in the next year and make final investment decisions once the overall implications of the takeover are clarified. The prospect of developing local ore and coal resources has added appeal to Essar, beyond feeding the steel plant.

Like many Indian companies, the ability to secure long-term coal and iron ore supplies overseas is a central plank in the strategy for industrial supply security. Zisco's Buchwa Iron Mining Company has inferred iron ore reserves of 20 billion to 25 billion tons, which will need further investment to verify. As a group, Essar will produce 14 million tons of steel in 2011 and needs 23 million tons of iron ore. Zimbabwe could become a key resource supplier to the group in the future.

Official approvals and a settlement for the transfer of the government's guaranteed debt obligations must be completed before the deal is finally closed. Refurbishment and maintenance will also be a priority concern after the plant.

Essar won the bidding for Zisco after bids from ArcelorMittal (NYSE:MT) (Luxembourg) and Jindal Steel & Power Company (Mumbai) were rejected by the Zimbabwean government.

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