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January 28, 2007 11:03 pm

CSN steels itself for the Corus finale

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There is tension in the air at the São Paulo offices of Companhia Siderúrgica Nacional, the Brazilian steelmaker locked for the past few months in a bidding war with Tata Steel of India for control of Corus, the Anglo-Dutch steel group.

Interviews and a field trip are scheduled and unscheduled at short notice. When they happen, they are preceded by the setting of strict limits on what may be discussed. CSN, although it has made modest acquisitions overseas, has never fought for anything as big as Corus and the rigour of UK regulation is a new experience.

The tension will peak Tuesday evening when, following a decision by the UK’s Takeover Panel last week, the contest will be decided at auction.

Central to its outcome will be Casa de Pedra, CSN’s enormous iron ore mine in the high hills of Minas Gerais state. Its cheap, abundant, top quality ore gives CSN a clear edge over Tata and is one reason bankers have been eager to back it and why, as the bidding approached $9.8bn (£5bn, €7.6bn) last month, CSN’s share price held steady while Tata’s fell with each new offer.

But CSN’s ability to supply Corus if it wins came under scrutiny last week, ratcheting up the tensions. Whether it wins or not, CSN has embarked on an ambitious expansion plan at Casa de Pedra that is open to threat from the same source. At the mine itself, however, Juarez Salipa, CSN’s director of mining – having laid out the ground rules again – is quickly caught up in enthusiasm for the task he has at hand.

“Casa de Pedra is almost unknown outside Brazil,” he says. “We’re building our team now to get ready for the export push. We’ve got a real jewel coming to market.”

That Casa de Pedra is an asset of enormous quality is not in doubt. Its proven reserves are the biggest of any mine in the world and its ore is of exceptional quality. It has abundant transport to its own steel mill and nearby port and CSN is investing in more. The mine’s output will expand from 16m tons a year at present to more than 50m by 2011, in a $1.5bn investment programme that includes building port facilities to export 7m tons a year from this year and 50m from 2011.

Much of the export volume is earmarked for Corus. And therein lies a potential problem, whether CSN buys it or not.

CSN formerly owned Companhia Vale do Rio Doce, the world’s biggest producer of iron ore. The two separated in 2001 and agreed that CVRD should have right of first refusal on any ore produced at Casa de Pedra beyond CSN’s own requirements and offered for sale, a right CVRD has exercised selectively.

CVRD – currently Corus’s main source of iron ore – told the Financial Times last week it would question CSN’s right to supply Corus from Casa de Pedra if it buys it. Mr Salipa says this is “pure malevolence” and the contract is absolutely clear: CVRD’s right does not apply to iron ore “used in the production of steel by CSN at [its existing steel mill] or at other units owned by CSN or by companies controlled by CSN.”

This seems clear enough. But what would happen to CSN’s plans to export iron ore from Casa de Pedra if it did not win Corus? Then, CVRD’s right clearly would apply. And, while it has not exercised it when CSN has sold to other Brazilian steelmakers, it could be expected to intervene if CSN were to start building an international clientele.

On the one occasion when CSN had a major offer from an overseas customer – from Mitsubishi Materials, for 5m tons a year over 10.5 years from 2005 – CVRD stepped in and bought the ore for itself.

Mr Salipa says there is more than enough demand for Brazilian iron ore, especially from China, for both CVRD and Casa de Pedra. “In the past, the limit was the market,” he says. “Now, selling is easy. The limit is your production capacity.”

Casa de Pedra is not CSN’s only source of iron ore. It buys from other mines and is looking for acquisitions in the same region. “We will be an 80m ton player from 2011,” Mr Salipa says. Over ore not from Casa de Pedra, CVRD has and will have no rights at all. In any event, he says: “This iron ore is going to leave Brazil, and in the near future, whatever happens.”

Any doubts he may harbour about that will be largely cleared up on Tuesday night.

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