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Merafe Ferrochrome and Mining (Pty) Ltd / Xstrata South Africa (Pty) Ltd and Xstrata (Samancor Production Joint Venture) / Samancor Ltd (56/LM/Jun05) [2006] ZACT 9 (13 February 2006)
.RTF of original document
COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no: 56/LM/Jun05
In The Large Merger Between:
Merafe Ferrochrome and Mining (Pty) Ltd
Xstrata South Africa (Pty) Ltd
and
The Xstrata – Samancor Production Joint Venture
Samancor Ltd
Reasons for Decision
Approval
1.
On 8 September 2005, the Competition Tribunal issued a Merger Clearance Certificate approving the transaction between Merafe Ferrochrome
and Mining (Pty) Ltd, Xstrata South Africa (Pty) Ltd, the Xstrata – Samancor Production Joint Venture and Samancor Ltd Ltd.
The reasons for this decision follow.
The Transaction
2.
The parties to the transaction are Merafe Ferrochrome & Mining (Pty) Ltd (“Merafe Ferrochrome”), Xstrata South Africa
(Pty) Ltd (“Xstrata”), Samancor Ltd (“Samancor”) and the Xstrata-Samancor Production joint venture also known as “Gemini”.
3.
Merafe Ferrochrome is a wholly owned subsidiary of Merafe Chrome and Alloys (Pty) Ltd, which in turn is controlled by Merafe Resources
Ltd. Merafe Resources’ majority shareholders are the Royal Bafokeng Resources (Pty) Ltd, a wholly owned subsidiary of the Royal Bafokeng Nation, holds 32,09%, the Industrial Development Corporation (“IDC”) holds 24,36% and various institutions, stakeholders and individuals
hold the remaining 56,45%.
4.
Xstrata is a wholly owned subsidiary of Xstrata (Schweiz) AG. Xstrata Plc holds the entire issued share capital of Xstrata (Schweiz)
AG. Samancor is a wholly owned subsidiary of Samancor Holdings (Pty) Ltd which is controlled by BHP Billiton Plc (60%) and Anglo American
Plc (40%).
5.
The proposed transaction involves a number of composite parts:
5.1.
Merafe Ferrochrome will acquire the 50% participation interest held by Samancor in Gemini;
5.2.
Thereafter the assets and business of Gemini will effectively be placed under the control of an existing pooling and sharing venture
(“PSV”) between Xstrata, Merafe Ferrochrome and Merafe Resources.
5.3.
In addition, Xstrata and Merafe Ferrochrome are acquiring certain chrome mineral rights known as the “Kroondal Resources”
and the “Marikana Resources” from Samancor. Xstrata has also entered into a letter of intent with Samancor relating to
certain chrome mineral resources held by each of Xstrata and Samancor on the Kroondal and Waterval Farms. The resources held by Samancor,
which form the subject of the letter of intent (“exchange resources”), as well as the Kroondal and Marikana Resources
will be placed under the control of the PSV.
6.
In short, Merafe and Xstrata will contribute to the existing PSV their respective interests in:
6.1.
The Gemini joint venture;
6.2.
The Kroondal resources (of which Xstrata holds 50% and is acquiring the remaining
50% from Samancor); and
6.3.
The Marikana resources (of which Xstrata holds 26% and is acquiring the remaining
74% from Samancor);
7.
According to the parties, the additional resources will inter alia provide the PSV with an increased reserve base, increased quality chrome ore production and will reduce operating costs.
The merging parties’ activities
8.
The Royal Bafokeng Nation is an indigenous community that owns approximately 2000 square kilometres of land and certain mineral reserves on the land in the
greater Rustenburg area. The IDC, a quasi-public corporation, is a self-financing state-owned development finance institution, which provides finance to entrepreneurs in competitive industries through
loans and other financial instruments including equity.
9.
Merafe owns a ferrochrome smelter in Boshoek (North West Province), chromite mineral rights in the immediate vicinity of the smelter, a
UG2 gravity concentrator plant some 12 km from the smelter and Horizon chrome mine situated 40km northwest of the smelter. The feedstock
for the Boshoek facility is provided by the Horizon mine and the concentrator plant. All these assets have been contributed to, and
fall under the control of the joint board of the PSV. According to the parties the Merafe group currently has no business other than
that which it has contributed to the PSV.
10.
Xstrata operates as a vertically integrated ferrochrome producer, involved in the mining and sale of coal, zinc, copper, ferrochrome and
vanadium. Xstrata has various subsidiaries which are relevant for purposes of evaluating the transaction, viz:
10.1.
CharTech produces char/gas coke, electrode paste as well as tar, char fines and coke fines (by-products of char/gas coke);
10.2.
Kwa-Ndebele Coal is a dormant company, which owns mineral rights in respect of coal deposits;
10.3.
Complex Chrome is a dormant mineral rights holding company;
10.4.
The Duiker group mines and sells steam coal, as well as supplies small amounts of low phosphorus and low sulphur bituminous coal to the metallurgical
industry;
10.5.
Egalite and ICH are holding companies of subsidiaries involved in the production of char/gas coke as well as their by-products, tar, coke fines and
coal fines.
11.
The pooled assets of the existing PSV between Xstrata and Merafe Ferrochrome comprised the ferrochrome and chrome mining assets, infrastructure, contracts, arrangements, operations chrome businesses of the
parties as well as the parties’ chrome mining rights and land and certain ferrochrome assets and mining authorisations and
rights belonging to the Royal Bafokeng Nation.
12.
The pre-merger Gemini joint venture made use of inter alia the Kroondal resources to produce ferrochrome at a ferrochrome facility situated near Wonderkop in the North West province.
13.
Samancor is the common law holder of the mineral rights at Kroondal and the resources were mined as part of Gemini’s acitivities. Samancor
is vertically integrated into the mining of chrome ore and the production of ferrochrome.
14.
The parties aver that the Gemini JV neither markets, sells nor distributes ferrochrome as Xstrata and Samancor carry out these activities
separately and independently of the joint venture.
Competition analysis
15.
The transaction has both horizontal and vertical effects. The horizontal effects arise from the overlapping activities of the merging
parties for the production of ferrochrome as well as the mining and production of chrome ore. The vertical effects result from the
parties’ involvement in the production of various inputs in the production process of ferrochrome. To produce ferrochrome,
chrome ore is used together with various reductants (char, gas coke, coke, metallurgical grade coal and anthracite) and other materials,
such as quartz and dolomite in furnaces. According to the parties, the Gemini JV purchases certain of its inputs from firms in the
Xstrata group viz. electrode casings, char, electrode paste, coal, chrome ore and quartz). The Xstrata group also sells these inputs (with the exception of coal) to firms outside of the Xstrata group.
A:
Horizontal Effects
16.
The Commission identified the following relevant markets:
16.1.
National market for the mining and production of chrome ore; and
16.2.
Global market for the production of ferrochrome.
17.
An examination of the market share accretions in the above markets reveals the following:
17.1.
The Gemini JV constitutes approximately 5% of the national production market of chrome ore of which Xstrata and Samancor have 50%
ownership each. Therefore 2,5% (i.e. Samancor’s 50% share of 5%) of the national chrome ore market is being transferred to
the PSV between Xstrata and Merafe.
17.2.
The combined market share for the merging parties in the market for the production and supply of ferrochrome is approximately 24%.
The market share accretion is approximately 1% which is relatively insignificant.
B:
Vertical Effects
18.
The Commission identified the following relevant product markets:
18.1.
the supply of chrome ore to ferrochrome producers;
18.2.
