Venerable steelmaker
The $306-million deal would see Investissment Qubec, an investment arm of the Quebec government, and CAEMI each receive $153 million.
“It’s a strategic decision by Dofasco to limit its exposure to what has now become, in a historic context, somewhat volatile iron ore prices,” says Randy Cousins, a steel analyst with BMO Nesbitt Burns in Toronto.
Dofasco will likely spin off a significant portion of QCM in an initial public offering or fold it into an income trust with distributions to unit holders.
QCM operates an open-pit mine and facilities, along with a rail line connecting the mine to a seaport on Quebec’s north shore. In 2004, QCM generated $621.4 million in revenue on shipments of 13.6 million tonnes of iron. The company earned $80.9 million last year — a figure it surpassed in the first five months of 2005 on the strength of higher iron prices (and despite a strike by union workers that lasted almost eight weeks). QCM operations contain enough iron to last another 25 years at current production levels.
“Dofasco has, from time to time, engaged investment bankers to look at ways of exploring the sale of [Quebec Cartier],” says Cousins.
Dofasco bought QCM outright in 1989 from New York-based USX Holdings, and later that year sold half of it to CAEMI, which was partially held by Japanese trading company Mitsui & Co. CAEMI is now owned equally by Mitsui and
Dofasco and CAEMI owned equal interests in QCM in the fall of 2003, when low iron prices and aging operations forced the miner to the edge of bankruptcy. QCM underwent financial restructuring with the aid of a $20-million cash infusion from Investissement Qubec. The Quebec government also granted QCM a forgivable loan of $176 million for the period 2004-2010. The assistance was designed to extend the life of QCM’s flagship Mont-Wright mine, near Fermont, Que., thereby ensuring 1,800 jobs. (The $153 million from Dofasco would effectively cancel the $176-million loan, payment of which had not yet begun.)
In the financial rearrangement, Dofasco and CAEMI lost their equity interests in QCM in exchange for preferred shares, which Dofasco would now convert to common shares. Dofasco later wrote off a significant chunk as a result of the restructuring.
“The people of Quebec are happy with this deal,” says Andre Lemay, who follows iron ore mining for the Quebec government. Indeed, if the deal goes through, as expected, the government would earn $133 million on an investment of $20 million, for a return of 665%.
“Timing is everything,” says Cousins. “Last year was the best steel market since the dawn of time, and this year is the best iron-ore market.”
Dofasco feeds its blast furnaces in Hamilton, Ont., with iron ore from QCM and the Wabush mines, in which Dofasco also owns an equity interest, with QCM operations providing the lion’s share of iron pellets. Dofasco supplies steel to automobile manufacturers in Canada and the U.S., which accounts for about half of sales.
Shares in Dofasco jumped $3.58, or more than 10%, to $37.18 on the Toronto Stock Exchange the day after the announcement.
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