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By Firat Kayakiran and Ilya Khrennikov

May 13 (Bloomberg) -- OAO Severstal, Russia’s largest steelmaker, bought 16.5 percent of iron-ore developer Core Mining Ltd. and may add to the stake as the cost of the raw material surges because of rising demand from Asia.

Severstal paid $15 million for the initial holding and has an option to invest another $40 million for an increased share, Sergey Loktionov, a spokesman for the company’s Severstal Resources division, said today in Moscow. He declined to give the size of any future stake.

“They will probably get more than a 16.5 percent stake,” Core Mining’s Chief Executive Officer Socrates Vasiliades said. “The size will depend on the valuation of the company at the time of the investment.” Severstal’s option to invest in Core Mining and its two iron ore projects in the Republic of Congo and Gabon is valid through 2012.

Vale SA, Rio Tinto Group and BHP Billiton Ltd., the biggest iron ore producers, are investing in West Africa as demand from China outpaces supply and as Australia threatens to impose a 40 percent tax on profits from mining in the country. Iron-ore prices, trading near a two-year high, may extend gains, China Iron & Steel Association Chairman Deng Qilin said on May 9.

“West Africa’s revival is due to an insatiable appetite for iron ore in growing economies in Asia, mainly China and India, and there’s also a recent development with the Australia super tax for mining companies,” Vasiliades said. “That’s probably why we see more activity in West and Central Africa.”

Additional Funding

Core Mining needs $100 million to $120 million for each project to bring them to a “bankable feasibility stage,” he said. The Kango plan in Gabon may, after an additional cost of about 40 million euros ($50 million), start annual output of 1 million metric tons within 18 months because the ore is close to the surface and the site of the mine is near the coast, he said.

The site may produce 20 million to 30 million tons of iron ore within five years, Vasiliades said. The Congo project has the potential to produce as much as 30 million tons of “very high grade” ore, he said.

“We could have between 40 and 60 million-ton export operations in five years,” Vasiliades said in an interview. Core Mining will begin talks with railway construction companies as potential partners in building infrastructure, he said.

“In the next six to eight months we’ll probably start looking for some steelmakers, end-users in Asia, to become involved in our projects,” he said. “It would be more of an off-take style arrangement.”

In 2008, Severstal paid $37.5 million for 62 percent of the Putu Range iron ore field with 1.1 billion of iron ore resources in Liberia. The company is preparing to sign a mining agreement with the Liberian government, Loktionov said.

--Editors: Tony Barrett

To contact the reporter on this story: Firat Kayakiran in Istanbul at fkayakiran@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

Sourced from www.businessweek.com