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Iscor - IDC Agreement: Unbundling, Integration, and Rights Issue

This agreement between Iscor and IDC outlines the structure of Kumba's unbundling, integration of Saldanha, and a rights issue in Iscor. The proposal aims to release value for all shareholders and position Iscor and Kumba for future growth in the steel and minerals industries.

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Iscor - IDC Agreement: Unbundling, Integration, and Rights Issue

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  1. Agreement between Iscor and IDC • Structure of Kumba unbundling • Integration of Saldanha • Rights issue in Iscor post unbundling 26 September 2001

  2. Agenda • Introduction • Ownership of iron ore • Integration of Saldanha • Final IDC Holdings • Iscor rights issue • Rationale for the rights issue • Debt allocation • Other issues • Timetable and conditions precedent • Conclusion

  3. Introduction • Iscor’s 1 March 2001 unbundling proposal: a further step in 5 yr programme of releasing value for all shareholders • IDC required as part of unbundling: • ownership of iron ore for Iscor • full recapitalisation of Saldanha • integration of Saldanha into Iscor • Agreement now reached between Iscor and IDC Agreement meets requirements of all stakeholders

  4. Ownership of iron ore • Iscor retains ownership of 6.25 Mtpa of Sishen iron ore from 1 July 2001 (current production – 27 Mtpa) • Total iron ore requirements then received at cost plus 3% • Additional R400 mill p.a. EBITDA for Iscor • Creates a more robust steel operation • Reduced debt allocation ensures no destruction of value in Kumba • Kumba free to: - further expand Sishen (27 Mtpa to 33 Mtpa) and - develop Welgevonden (10 Mtpa) • Iscor retains right to participate in Kumba’s local iron ore expansions only i.r.o. any further domestic requirements • - Iscor remains vertically integrated steel producer • Kumba value remains intact with significant expansion potential

  5. Integration of Saldanha • Saldanha debt R5.8 bn at hedged values (30 June 2001) to be fully refinanced by Iscor and IDC • Iscor to acquire IDC 50% stake in fully refinanced Saldanha • IDC to contribute 50% of Saldanha operating funding requirements to June 2002 - R250m cash to Iscor post unbundling • IDC receives 10 million Kumba shares and 20 million post-unbundled Iscor shares as consideration • If Saldanha funding requirements > R500m can request 50% of excess from IDC in consideration for post unbundled Iscor shares at market price Iscor positioned for integration of SA steel industry

  6. Final IDC holdings • Current IDC holding – 31.5 million shares – 11.5% • Holding post Saldanha integration and unbundling • Kumba – 14.7% • SteelCo – 17.6% (pre rights issue)

  7. Iscor rights issue • Vertically integrated Iscor requires recapitalisation to limit debt • IDC will underwrite R1.67 billion Iscor rights issue post-unbundling • Timing: after interim results announcement in February 2002 • Price at 25% discount to market IDC to underwrite Iscor recapitalisation

  8. Rationale for the rights issue • Unbundling would not be possible without iron ore ownership for Iscor • Leaving debt of R4.3bn in Kumba with reduced R400m EBITDA destroys value in “hard” currency Kumba, with no financial flexibility to develop projects • Debt thus left in “softer” currency Iscor • R3.6bn debt in Iscor not acceptable to lending banks • Hence Iscor debt has to be refinanced Options available to Iscor are: • No unbundling - maximum value release foregone • Kumba overgeared - destroying certain value in the “hard’ currency • Steelco overgeared - not acceptable to lending banks Preferred option is rights issue in Steelco

  9. Iscor Kumba Net debt at 30/6/2001 1 183 2 541 Off-balance sheet debt 95 136 Ticor proceeds (363) - Saldanha Steel recapitalisation Saldanha funding from IDC 2 900 (250) - - (1 670) - Rights issue Effective debt allocation 1 895 2 677 Kumba will hold AST shares: value approximately R400 million. Debt allocation

  10. Other issues • Iscor Board supports IDC’s wish to vote & dispose of Iscor and Kumba shares without restriction • Proposals to shareholders to be voted as one indivisible transaction • Strategic equity partner desirable, but not conditional

  11. Timetable and conditions precedent • Documentation posted to Iscor shareholders 23 Oct • Iscor shareholders’ meeting 15 Nov • Unbundling date 19 Nov • Approvals required • Iscor shareholders • Lending banks (i.r.o. debt allocation) • Competition Commission (only i.r.o. Saldanha integration) • JSE/SRP

  12. Conclusion PROPOSAL MEETS ALL STAKEHOLDER REQUIREMENTS ISCOR • becomes focused integrated steel producer • recapitalised to limit debt • positioned for rationalisation of SA steel industry • favourable procurement creates more robust operation KUMBA • becomes focused metals/minerals producer • value remains intact • positioned for strong growth • significantly stronger balance sheet compared to March proposal Major value release for shareholders

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