Labrador Iron Ore Royalty Corp today said that it has hired advisors to consider strategic alternatives following media reports that Rio Tinto may sell its controlling stake in Iron Ore Company of Canada (IOC), its only revenue generating asset.
Labrador Iron Ore has hired Scotiabank as its financial advisor, and Davies Ward Phillips & Vineberg LLP and other legal advisors, to assist the board in considering the implications of a potential sale by Rio Tinto of its interest in IOC and the strategic alternatives available to Labrador Iron Ore under the circumstances.
Labrador Iron Ore said that the strategic alternatives include a potential sale of the company or all or part of its assets, the separation of its 7 per cent royalty interest in IOC from its other assets, and the maintenance of the status quo.
Labrador Iron Ore holds a 15.1-per cent stake in IOC and receives a 7-per cent royalty and a 10-cent per-tonne commission on all iron ore products produced, sold and shipped by IOC.
Other stake holders in IOC are Japan's Mitsubishi Corp with 26.2 per cent and Rio Tinto with 59.7-per cent.
Early last month, Reuters reported that Rio Tinto has hired investment banks Credit Suisse and Canadian Imperial Bank of Commerce to sell its entire majority stake in IOC, the country's largest iron ore producer. (See: Rio Tinto mulls majority stake sale in Iron Ore Company of Canada for $1.8 bn: report)
The report added that a potential sale could value IOC at $3 billion to $4 billion, putting the value of Rio Tinto's stake at over $1.8 billion.
Toronto-based hedge fund Waratah Investors, a major shareholder in Labrador Iron Ore, has urged the company to separate its 15.1-per cent stake in IOC from its 7 per cent royalty on IOC sales as it would boost the stock's value.
IOC is the largest manufacturer of iron ore pellets in Canada and its customer are North American, European and Asian steel producers.
The company operates a mine, concentrator and a pellet plant in Labrador City, Newfoundland and Labrador, as well as port facilities located in Quebec. It also operates a 418km railroad that links the mine to the port
IOC has recently spent $800 million in expansion in order to increase annual iron-ore output capacity to 26 million tons.
Production at IOC has averaged 14.4 million tonnes over the past five years, well below the 18 million tonnes of capacity and potential capacity of 26 million tonnes.
After the Reuters report, the Business Standard reported that Aditya Birla Group and London-based Vedanta Group are in talks with bankers to evaluate a bid for Rio Tinto's stake in IOC. (See: Aditya Birla, Vedanta may bid for Rio Tinto's stake in Iron Ore Company of Canada: report)
According to a Bloomberg report, Teck Resources Ltd, Canada's largest diversified mining company may emerge as the lead bidder for IOC.