ArcelorMittal South Africa, a subsidiary of the world's largest steel maker, ArcelorMittal Group, has bought a 16.3-per cent stake in Coal of Africa (CoAL) for 404.5 million rand ($44 million) on Tuesday, in an all-cash deal.

The price is based on the previous 15-day volume weighted average share price of CoAL on the Johannesburg Stock Exchange (JSE). ArcelorMittal SA purchased the shares from CoAL's parent company.

The deal would secure part of ArcelorMittal SA's future coal needs, which is one of the primary raw materials for steel production and a key variable in input costs. The company has an option to enter into an off-take agreement with CoAL for the supply of 2.5 million tones of coking coal annually which at present is close to half of the company's requirement of 5.2 million tones, apart from ensuring adequate quality of the raw material.

Nku Nyembezi-Heita, ArcelorMittal South Africa CEO said, ''This transaction ensures secure supplies of a key input material for the steelmaking process and is an important step in our strategy to pursue raw material backward integration''.

CoAL is a leading mining company engaged in acquisition, exploration and development of thermal and metallurgical coal projects in South Africa apart from owning NiMag a special alloy processing company.

CoAL (formerly GVM Metals Ltd) was incorporated in Australia and listed on the Australian Stock Exchange (ASX), London's Alternative Investment Market (AIM) apart from JSE.

The acquisition makes ArcelorMittal SA CoAL's second largest shareholder after the 17.3 per cent owned by Africa Management Limited, a black economic empowerment company associated with the Mvelaphanda Group.

ArcelorMittal SA, the Vanderbijlpark-based company is the largest steel producer on the African continent, with a capacity of 6.4 million tonnes of liquid steel per annum and supplying a variety of steel products for the automotive, construction, household appliances and packaging industries.

Further to fall in demand due to global recession, the company resorted to over 30 per cent cutback in production in last November. The sales were down by 13 per cent to 5.8 million tonnes in 2008.

However, revenues soared by 36 per cent to 40 billion rand as a result of high global steel prices during the first three quarters of the year. The company achieved 65 per cent headline earnings to a record 9.5 billion rand in 2008.

Production costs shot up dramatically during the year with hot rolled coil-a bench mark product-went up by 59 per cent on year-on-year due to higher input costs.

Cost of coking coal, one of the primary raw materials, were up by 102 per cent year-on-year.

On the news of acquisition, shares of CoAL surged and closed at 7.00 rand, 10 per cent higher on Tuesday while ArcelorMittal SA's shares dropped 3.7 per cent to 79.50 rand.

ArcelorMittal Group had bought the 16 per cent stake at a much higher value of $98 million in April last year.