SAO PAULO, July 1 (Reuters) – Usiminas (USIM5.SA), Brazil’s largest maker of flat steel, said on Wednesday it is selling 30 percent of its mining unit to Japan’s Sumitomo Corp (8053.T) for $1.93 billion, in a bid to raise cash to develop its fast-growing iron ore assets.
Sumitomo agreed to subscribe for new shares of the unit, called Mineracao Usiminas (MUSA), as part of the deal, Usiminas said in a filing with Brazil’s securities regulator.
Sumitomo will pay $1.35 billion by the end of August and the rest upon confirmation of the mine’s expansion plan and the quality of the ore, Sumitomo told reporters in Tokyo.
By bringing in Japan’s third-biggest trading house as a partner, Usiminas Chief Executive Wilson Brumer, who took over in April, will likely mitigate potential risks in developing iron ore assets, unlocking value for shareholders.
Iron ore prices have more than doubled this year, forcing steelmakers to rely more on their own mining assets to avert violent price swings.
“We are creating the necessary conditions to fund the growth of the mining operations without crowding out potential funding for the steel arm,” Brumer told investors on a conference call on Wednesday.
Usiminas and Sumitomo are expected to seal terms of the transaction by the end of August, the filing added.
Usiminas expects to invest up to 4 billion reais ($2.2 billion) by 2015 to develop its iron ore assets, Brumer said. Recent geology studies indicated that Usiminas mines have potential reserves of 2.6 billion tonnes of the mineral, he noted.
Usiminas is trying to replicate a strategy by rival CSN (CSNA3.SA) (SID.N), which earlier last decade invested heavily in its mines to reduce dependence on third parties for supply of the mineral.
Brazil’s iron ore is globally known for its superior quality, allowing steelmakers based here to charge a premium on some Brazilian-made products or sell the mineral to other customers.
The Belo Horizonte, Brazil-based company will also transfer assets and issue new shares of Mineracao Usiminas and Usiminas Participacoes e Logistica, its logistics unit, as part of a plan to boost their value, the filing said.
Under the project, MUSA’s iron ore output is expected to reach 8 million tonnes next year, up from this year’s 7 million tonnes. Usiminas and Sumitomo aim to expand the output to as much as 29 million tonnes by 2014 or 2015, Sumitomo said.
“Our investment in the project could generate 10 billion yen to 20 billion yen ($110-230 million) profit annually when expansion plans are completed,” Kuniharu Nakamura, Sumitomo’s senior managing executive officer, told a news conference.
Shares of Usiminas fell for a second day, shedding 0.9 percent to 49.28 reais. The stock has risen less than 1 percent this year, compared with a drop of about 4 percent in shares of rival CSN, Brazil’s second-largest maker of flat steel.
The Sumitomo stock inched up by 0.2 percent to 899 yen on Thursday, bucking a 2 percent fall in the broader Tokyo market. ($1=88.38 Yen) (Additional reporting by Yuko Inoue in TOKYO, Brian Ellsworth in SAO PAULO; Editing by Muralikumar Anantharaman)