UPDATE 3-Sumitomo buys stake in Usiminas unit for $1.93 bln

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)

TEXT-S&PBULLETIN: rtgs on Sumitomo unaffected by mine investment

July 1 – Standard & Poor’s Ratings Services said today that its ratings on Sumitomo Corp. (A/Stable/A-1) are unaffected by the company’s announcement that it would purchase a 30% stake in an iron ore mining business owned by Brazil-based steelmaker, Usinas Siderurgicas de Minas Gerais S.A. (Usiminas; BBB-/Stable/–). Sumitomo expects to invest up to $1.929 billion or about JPY170 billion, which is equivalent to approximately 11% of the company’s consolidated capital as of March 31, 2010. Sumitomo’s risk assets are likely to increase substantially with this investment, which is likely to be one of the biggest in Sumitomo’s investment portfolio, and concentration risk may also increase. However, any increase in risk volume is likely to be offset when Sumitomo carries out its planned replacement of existing investments assets. Given this, Standard & Poor’s expects Sumitomo’s total risk volume, relative to its profitability and equity capital, to remain within the range assumed in the current rating.

Amid a recent rally in iron ore prices, the breakeven point for Sumitomo’s investment in Usiminas’ mine may be high compared with the existing iron ore-related investments of other domestic major general trading companies. Consequently, Sumitomo faces the market risk of a fall in iron ore prices. Nevertheless, it is Standard & Poor’s opinion that the investment risk pertaining to the deal is unlikely to substantially weaken the balance between Sumitomo’s risk volume and equity capital. This is based on our view that Sumitomo is likely to secure considerable profits even if iron ore prices drop from the current levels. In addition, we believe that business and market risks pertaining to iron ore investments are relatively low compared with investments in other resources.

In recent years, Sumitomo has made large-scale investments, including investments in Jupiter Telecommunications Co. Ltd. (J:COM; NR) and the San Cristobal mine in Bolivia. As a result, the company’s investment portfolio faces increased concentration risk. Although the amount of the investment in Usiminas’ mine is within its plan for new investments, the net risk volume assumed by Sumitomo may grow significantly due to a delay in scheduled asset replacements or larger-than-expected investments that the company may make in the future. This may drastically weaken the balance between the company’s risk volume and profitability and equity capital, and in turn, negatively affect the ratings on Sumitomo.