April 13, 2012 / 12:52 PM / 6 years ago

UPDATE 3-Canada's Alderon Iron partners with China's Hebei

* Alderon to sell stake in itself, Kami iron ore project

* Hebei to buy 19.9 pct stake in Alderon, 25 pct of Kami

* Deal positive for other iron ore explorers in the region

* Shares of Alderon, Altius close higher on Friday

By Euan Rocha

April 13 (Reuters) - Canadian exploration company Alderon Iron Ore Corp said on Friday it will sell a stake in itself and in its Kami iron ore project in Eastern Canada to China’s biggest steel producer, Hebei Iron & Steel Group, for C$194 million ($194 million).

The deal will give Hebei a 19.9 percent stake in Alderon, which is headquartered in Vancouver, British Columbia. Hebei will also get a 25 percent interest in a new partnership that will be established to own the Kami project.

The deal puts a spotlight on efforts by Chinese steelmakers to gain more control over foreign iron ore supplies - a market dominated by a handful of global miners.

It is the latest in a string of joint-venture deals between Canadian iron ore exploration companies and Asian steelmakers, keen to keep costs of the essential raw material in check.

India’s Tata Steel signed an agreement last year with Canadian miner New Millennium Capital to develop the taconite iron ore deposit in Canada. Just months before that, No. 3 Chinese steel producer Wuhan Iron and Steel Co agreed to a joint venture with Canada’s Adriana Resources.

Alderon said it plans to use the proceeds of the Hebei deal to further explore and develop the Kami project, which is located in iron ore-rich Labrador Trough along the border between the provinces of Quebec and Newfoundland and Labrador.

“We view this announcement as positive for Alderon and other iron ore development companies in the Labrador Trough because it demonstrates that Chinese steel mills are still buyers of iron ore projects, and that the region is competitive as an iron ore district,” said Raymond James analyst Adam Low in a note to clients.

Shares of Alderon, which rose more than 9 percent in early trading on the Toronto Stock Exchange, closed up less than 1 percent at C$3.47 on Friday as concerns about the dilution of the stock caused by the deal weighed on early gains.

“We do believe that the non-tangible benefits of the deal are ultimately going to be the real drivers for future value,” wrote Dundee Capital Markets analyst David Talbot. “Being aligned with China’s largest steel producer brings credibility for Alderon and a stamp of approval for the Kami project.”

The deal boosted shares of Altius Minerals Corp, which owns a substantial stake in Alderon and a 3 percent gross sales royalty on the Kami project. Altius shares closed Friday up 6.1 percent at C$12.08.

DEAL STRUCTURE

“This transaction with Hebei is a major catalyst for Alderon as it further validates and materially de-risks the Kami project,” said Alderon Chief Executive Tayfun Eldem.

Hebei, in a separate statement, said it is an ideal time to invest in upstream assets as the broader market is taking a more cautious approach to iron ore demand.

Hebei’s investment also reflects the company’s optimistic outlook about China’s iron ore demand and comes at a time when iron miners, including BHP Billiton , Rio Tinto and Vale, continue to bet on long-term demand growth in China, the world’s top buyer.

The Chinese steelmaker will initially buy a near 20 percent stake in the Canadian company for C$88.3 million at C$3.42 a share, or a 0.6 percent discount to Thursday’s closing price. Following that, Hebei will invest C$105.7 million, giving it the right to a 25 percent interest in Kami.

The deal will also give Hebei the right to buy 60 percent of the iron ore produced annually from Kami, once it goes into production.

“Alderon now has both the capital and the China market access to build a world-class company,” Chairman Mark Morabito said in a statement.

Hebei has agreed to assist in obtaining debt financing for the Kami project from financial institutions, including Chinese banks. Upon the closing of the private placement, Hebei will be entitled to nominate two directors to Alderon’s board.

Alderon and Hebei will be required to contribute to development costs not covered by initial capital contributions and project debt financing, in accordance with their respective interests.

GMP Securities was Alderon’s financial advisor on the deal and its legal counsel was Cassels Brock & Blackwell LLP. Bank of America Merrill Lynch acted as Hebei’s financial advisor and Davies Ward Phillips & Vineberg acted as its legal advisor.

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