Plans to roll out a $175-million iron ore mine income trust, plus takeover speculation, lifted shares in steel maker Dofasco Inc. by 14 per cent yesterday.
Dofasco, Canada's biggest steel maker, announced late Thursday that it will sell a stake in its recently acquired Quebec Cartier Mining Co. unit as a trust, to be called QCM Income Fund. While the Hamilton-based company had been expected to spin out the division, the recent weakness of the trust sector had many analysts predicting a common stock initial public offering of the mine. That would have meant a lower value on the IPO for Dofasco.
As a trust, QCM Income Fund will be worth up to $2-billion, according to UBS Securities analyst Peter Rozenberg. A team of investment dealers led by RBC Dominion Securities Inc. is expected to sell 17.5 million units of QCM at $10 each. The investment dealers have an option to sell an additional 2.6 million units if there is strong investor demand for the company.
After the IPO, which is expected to close in mid-December, Dofasco expects to still hold between 80 and 90 per cent of the trust, according to investment banking sources. Mr. Rozenberg estimates the units will offer investors a yield of up to 12.5 per cent.
In June, Dofasco was able to buy the two-thirds of Quebec Cartier it did not own for $306-million. The sellers were Caemi Mineracao e Metalurgia SA (Caemi) of Brazil and Investissement Quebec, a provincial agency.
Dofasco's stock soared on the news, closing up $5.47 at $43.72 on the Toronto Stock Exchange. Trading volumes were seven times what's normally seen, feeding speculation that there is more than just a trust in the works. In a steel industry that's consolidating around the world, Dofasco is seen a possible takeover candidate.
"There's talk that Dofasco moved quickly on QCM because it was hearing footsteps," said one institutional investor who owns stock in the steel maker.
"Nucor took at look at a bid prior to 9/11, and is rumoured to be looking again."
Nucor Corp. of Charlotte, N.C., is among the biggest steel producers in the United States, and boasts a $10.1-billion (U.S.) market capitalization. Dofasco sports a $3.4-billion (Canadian) capitalization.
This is only the second income trust IPO launched since Sept. 19, when the federal Finance Department began a review a review of the sector and stopped giving advance rulings to companies considering converting to the tax-efficient structure. Last week, Duke Energy Corp. announced plans to spin out a $150-million trust based on its Canadian natural gas assets. Prior to Ottawa's move, which kicked off a slump in the sector, there was an average of more than one trust financing every week.
The QCM trust follows a trail blazed by one of Canada's oldest trusts, the 10-year-old Labrador Iron Ore Royalty Income Fund. The Labrador trust has been a strong performer in the face of soaring prices for iron.
"With the combination of strong global demand for iron ore and QCM's record of reliable production, QCM Income Fund presents a good opportunity for investors to participate in the strong fundamentals of the iron ore industry," said Guy Dufresne, chief executive officer at Quebec Cartier.
Montreal-based Quebec Cartier sells iron ore to most of North America's steel makers. The company's Mont-Wright mine in Quebec has enough proved reserves to keep the mine operating beyond 2026.
© The Globe and Mail
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