Harare — A SOUTH African steel analyst has tipped Arcelor Mittal SA to secure a controlling stake in the Zimbabwe Iron and Steel Company (ZISCO), saying the company was best suited for the purchase.

But the Zimbabwe government needed to make a commitment to take over ZISCO's debt if the acquisition was to be viable, or add an additional asset like Hwange Colliery Company, in which government holds a key stake, Anwaar Wagner, a steel analyst and portfolio manager with Old Mutual Investment Group South Africa (OMIGSA), told The Financial Gazette from South Africa.

ArcelorMittal SA has been short-listed alongside India's Jindal Steel & Power for the acquisition of ZISCO, the second largest integrated steelmaker in sub-Saharan Africa after ArcelorMittal South Africa.

Jindal Steel director Sushil Maroo confirmed on Friday in an interview in New Delhi that his firm had been shortlisted for the acquisition after fending off competition from over four other bidders.

Jindal's bid is backed by South Africa's Industrial Development Corporation (IDC), with the Development Bank of South Africa (DBSA) said to be on the wings as a financing associate.

Although Jindal had come in as a dark horse, its chances have brightened and the company is equally tipped to stage an upset against the steel giant as it has what is being viewed as a technical leverage due to a working relationship between South Africa's IDC, DBSA, the Zimbabwe government and its agents.

Government had included a provision related to the management of a US$300 million debt owed by ZISCO to several domestic and offshore creditors as part of its assessment for the selection of a winning bidder.

The DBSA is expected to be the financial partner while the IDC has a massive pipeline of possible investments in Zimbabwe, with particular interest in industries like steel.

But Wagner said an investment by ArcelorMittal SA would act as a catalyst for huge investment projects by foreign investors as it would signal that Zimbabwe was open for investment.

He said the government of Zimbabwe had to make the investment both viable and attractive enough to compare with returns of comparable projects locally or regionally.

Securing rawter materials such as coal from Hwange would increase the attractiveness for Mittal SA compared with an investment in ZISCO as an alternative to expanding its capacity at Newcastle in South Africa.

Wagner said ArcelorMittal SA's stated strategy for sub-Saharan Africa as its key target market, with South Africa accounting for 67 percent of sales and the rest of Africa 20 percent, made Africa key to the group's operations.

"I think persuading ArcelorMittal SA to expand at ZISCO rather than Newcastle by providing the necessary incentives, would mean other large potential South African investors like Implats (Zimplats), Tongaat (Hippo and Triangle) and PPC could follow quite soon," said Wagner, whose group is the largest resources mutual fund in South Africa, with investments in a large spectrum of Johannesburg Securities Exchange-listed firms, including a seven percent stake in ArcelorMittal SA. "(With) the strongest balance sheet amongst global steel companies (and) a debt free balance sheet, ArcelorMittal SA would have no trouble accessing the funds from its own resources or debt funding necessary to return ZISCO to peak performance," Wagner said.

He said the company has an enviable track record of operating efficiencies.

Since the ArcelorMittal Group took a majority stake a few years ago, there had been a substantial improvement in operating effciencies at Arcelor Mittal SA, with the group producing record volumes at its plants, productivity per employee had improved, the company had invested nearly US$2 billion since 2003 to maintain and expand in steel and related activities such as coke production, he said.

He said access to the expertise of the largest steel group in the world would ensure that if there was a problem with the furnace or market intelligence was needed, ZISCO would be able to call on the best global expertise within 48 hours, securing parts and "supplies can be done at competitive prices under global procurement.ter

"As an example, at a certain stage when the local group could not supply enough steel to the local market (South Africa), it could access additional supplies from the parent. This has seen a near 15x increase in the local share price, or around 40 percent return per annum from 2001," said Wagner.