By Alexis Flynn
LONDON--Spiraling iron-ore prices are causing distress for
mining companies that invested in a risky corner of West Africa
when Chinese demand for the steelmaking ingredient soared, but
which are now facing critical funding shortfalls.
Iron-ore prices have plunged almost 40% this year, squeezing
margins for high-cost producers. The Ebola outbreak devastating the
region has meantime pushed up costs for companies operating in
Guinea, Sierra Leone and Liberia.
London Mining PLC, whose Marapa mine has helped transform Sierra
Leone's war-shattered economy, on Monday said Glencore PLC had
stopped, since Sept. 1, advancing it cash for future iron-ore
deliveries.
A spokeswoman for London Mining declined to offer an explanation
for Glencore's action. Glencore declined to comment.
Glencore might be seeking to renegotiate a more favorable
cash-for-ore deal, analysts have said. Analysts with Liberum
Capital said Glencore's move bore the hallmarks of previous
episodes when the company has stepped in to rescue--and then take
control of--distressed companies. For example, in 2009 Glencore
provided Katanga Mining with $100 million of financing "at heavily
dilutive terms for Katanga shareholders," said Liberum.
Compared with other major mining companies, Glencore has
relatively little exposure to iron-ore mining. Instead, its trading
division makes money by buying and selling the commodity, and then
managing the logistics involved in shipping it from West Africa to
China.
The company's half-year earnings showed that it traded more than
double the amount of iron ore than in the same period a year
earlier.
London Mining's deal with Glencore, known in the industry as an
off-take deal, is one of its few sources of working capital, though
the company said it has separately agreed a two-year, $30 million,
financing plan with the Afreximbank export credit agency. It said
it could secure additional funding from other trading firms.
The fall in iron prices to $80 per ton has been harmful to
high-cost companies, like London Mining, operating in challenging
environments. London Mining spends around $89 producing and
shipping each ton of ore. The company, valued at over $300 million
just three years ago, has seen its shares plummet nearly 80% this
year.
Also on Monday, Bellzone Mining PLC, another London-listed
mining company with big prospects in West Africa, suspended its
shares as it struggles to conclude a loan agreement for around $2.5
million with principal shareholder China Sonangol International Pte
Ltd.
In a statement, Bellzone said it needed the funds in the next
few days if it were to continue operations. Without the funding,
Bellzone would also be unable to service a previous loan to China
Sonangol and would have to hand over the control of the company's
key asset, the Kalia mine in Guinea, which it signed over as
collateral.
"Glencore and China Sonangol are acting in the same way. They're
the guys with the cash and they have the upper hand," said a person
who has advised both London Mining and Bellzone.
China Sonangol didn't immediately respond to requests for
comment.
Write to Alexis Flynn at alexis.flynn@wsj.com