Mt. Gibson Iron Cuts Jobs and Faces Sales Defaults

Australia's fourth-largest iron ore miner, Mount Gibson Iron Ltd, facing defaults on iron ore purchases from Chinese buyers, said it will temporarily cut a third of its workforce and issue shares to raise more capital.

Contracts in default were being replaced with new discounted long-term supply pacts with Chinese shareholders, Mount Gibson said, the latest sign that China's appetite for imported ore to run its steel mills is easing.

"Obviously issues in China are very difficult at the moment, with respect to stockpiles and steel production declines, and there is no question steel prices have also declined," managing director Luke Tonkin told Reuters.

"All this has brought about a fairly significant softening in demand."

Major shareholders APAC Resources and China's Shougang Concord International Enterprises had agreed to subscribe for new Mount Gibson shares and underwrite a further rights issue to raise a total of A$162.5m, the company said.

Mount Gibson joins other miners feeling the effects of China's sagging requirements for imported raw material as it confronts slower economic growth and more credit restraints.

Target sales cut

Mount Gibson has already cut its targeted sales in the 2008/09 business year to 5 million tons from 7.2 million tons, according to Tonkin.

Brazil's Vale, the world's No.1 iron ore miner, said on Friday it was trimming ore output by 10%, while smaller Australian producer Fortescue Metals Group Ltd, is deferring some expansion plans.

Australia's newest entrant, Atlas Iron, has sold only one shipment of ore to China via the deeply discounted spot market while it pursues longer term pacts to guarantee a home for the 1 million tons it plans to mine in the next year.

Atlas managing director David Flanagan said an unidentified customer in China had "expressed a very strong interest in a long term offtake agreement," though no buyer has been named yet.

China's production of finished steel is forecast to drop by around a tenth, according to newsletter Steel Business Briefing.

"Iron ore consumption will probably drop 10-20% as a result," said DJ Carmichael & Co analyst James Wilson.

China's hunger for iron ore led it into the embrace of Australian miners, who swiftly pocked the world's single biggest iron belt of west Australia with new lodes.

Miners last year won up to 85% price hikes from steelmakers in China and elsewhere, a bonanza unlikely to be repeated next year, according to UBS analyst Glyn Lawcock.

"While the large suppliers are likely to cut back on production in order to mitigate some of the loss in demand, we expect they will need to cut pricing, effectively giving up the price increase achieved in 2008," Lawcock said in a report.

Australia's two largest iron ore miners Rio Tinto Ltd/Plc and BHP Billiton Ltd, together accounting for about 300 million tons in exports, have not announced any changes to production runs.

Tonkin said 190 jobs, mostly at the company's Koolan mine, which is still under development, will go, though they could be reinstated in July. Mount Gibson employs about 340 people at Koolan Island and 220 at its Tallering Peak mine.

Chinese increase stakes

Shareholders APAC Resources and Shougang Concord had agreed to step in and purchase all its available ore caused by the breaches at discounts of up to 10%.

They also agreed to underwrite a one-for-five renounceable rights issue at A$0.60 per share to raise A$96.5m.

The two companies will additionally subscribe for a placement of 110 million ordinary shares at A$0.60 to raise a further A$66m, the company said.

APAC and Shougang will collectively own between 28.56% and 40.46% of Mount Gibson depending on the uptake of the rights issue.

Shares in Mount Gibson touched their lowest since early 2005 and closed down 2.5% at A$0.395. ($1=A$1.49)

By James Regan; editing by Lincoln Feast.