Coal and base metals miner Xstrata (XTA.L) pushed deeper into the iron ore sector on Tuesday with a $381 million agreed takeover of Australian-listed Sphere Minerals (SPH.AX), which hold magnetite iron ore deposits in Mauritania.

  London-listed Xstrata is exploring for iron ore in the Republic of Congo and in December said it would construct an iron ore extraction plant in Australia, but to date holds no producing assets.

 “This will give Xstrata a footprint in a reasonably established iron ore province, with a lot of development potential and resource upside,” said RBC Capital Markets analyst Chris Drew.

  Xstrata said it was offering A$2.50 a share cash for Sphere, valuing Sphere at A$428 million ($381 million), sending Sphere shares soaring 61 percent to $2.50.

 “Xstrata’s acquisition of Sphere will add a range of organic growth projects in iron ore to our portfolio,” Peter Freyberg, chief executive of Xstrata’s coal division said in a statement.

 Iron ore has become a highly sought commodity as the booming economies of China and India have created insatiable appetite for the key steel making commodity.

 International mining firms have earmarked billions of dollars for digging iron ore mines in West and Central Africa, a politically unstable region but one that is home to some of the world’s last great unexploited deposits of the steel-making raw material.

Rio Tinto (RIO.AX) RIO.L in July entered into a $1.35 billion deal with Aluminum Corp of China to develop the Simandou iron ore project in Guinea. Sundance Resources (SDL.AX) is due to begin construction on Cameroon’s giant Mbalam iron ore project next year.

 Only Mauritania exports iron ore so far, but if major projects elsewhere in the region are realised, countries on Africa’s western coast hold the potential to produce just under 10 percent of the world’s supply, up from less than 1 percent last year, according to the United States Geological Survey.

  Sphere in July unveiled plans to speed up development of its Askaf deposit over the next 18 months to yield 2 million tonnes per year before increasing production by 2015 to 6 million tonnes annually. The initial development would cost around $220 million and stage two $320 million, Sphere said at the time

 The production targets are small versus established iron ore Miners Vale (VALE5.SA), Rio Tinto, BHP Billiton (BHP.AX) (BLT.L) and Fortescue Metals Group (FMG.AX), which are expected to mine more than 700 million tonnes of iron ore in total this year.

 RBC’s Drew said Xstrata could look for a bigger a foothold in the burgeoning west African iron ore sector.

 Under Xstrata, the Askaf project could be modified to increase the initial yield and two other deposits, Guelb el Aouj and Lebtheinia developed over a shorter time scale, he said.

 “One of the problems Sphere has is inability to fund its projects, and if you bring on Xstrata’s balance sheet you can start looking at faster development,” Drew said.

 By acquiring assets in Mauritania, Xstrata sidesteps competition of Australian magnetite deposits, which are increasingly attracting Chinese ownership.

 “Xstrata has the financial and technical capabilities to expedite the development of Sphere’s greenfield growth projects and manage the inherent risks involved,” Xstrata’s Freyberg said.

 Iron ore is one of the biggest export earners for desert nation Mauritania, with state-owned miner Societe Nationale Industrielle et Miniere (SNIM) producing 10.2 million tonnes in 2009.

 SNIM is developing the $700 million Guleb II project, whichit expects to add 4 million tonnes to its annual output.

Construction, which could take around three years, is scheduled to start this year.

Deutsche Bank (DBKGn.DE) is advising Xstrata.

 (Editing by Balazs Koranyi)




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