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Kumba Iron Ore Ltd. (KIO.JO) said Thursday that it settled on an interim price agreement with ArcelorMittal South Africa Ltd. (ACL.JO) for the delivery of iron ore while a dispute over a contract between the two goes through arbitration.

The decision allows operations to continue as normal during the arbitration process that is expected to last up to 18 months. The agreement will cover the period between March 2010 and July 2011.

ArcelorMittal said as a result of the agreement it will keep operating its Saldanha plant after threatening to close it last week in an apparent escalation of tension between the two parties, forcing the South African government to publicly call for a resolution.

The two companies are locked in a dispute over a contract in which Kumba supplied a set amount of iron ore to ArcelorMittal each year at a price of 3% above cost of production.

Following ArcelorMittal's loss of rights to part of the Sishen mine--jointly owned with Kumba--due to a missed government deadline for renewing it earlier in the year, Kumba said that it wanted to break from the contract set in 2001 and sell at market prices.

While that arbitration proceeds ArcelorMittal South Africa, a unit of world's largest steelmaker ArcelorMittal (MT), will pay Kumba, which is 63% owned by Anglo American PLC (AAL.LN), a fixed price of $50 a metric ton for iron ore deliverable to its Saldanha plant and $70/ton for inland plant deliveries.

That is up from around $30/ton that was being paid at production cost plus 3%.

"The interim agreement is broadly in line with that suggested by Kumba last week," Credit Suisse analysts said. "Success for Kumba--in pricing all ore to AMSA on international prices--would result in additional EBITDA [earnings before interest, taxes, depreciation and amortization] of $420 million per annum based on an average iron ore price of $100/ton and 6.25 million tons per year."

ArcelorMittal said it will continue to purchase the annual 6.25 million tons of iron ore. Additional iron ore purchases will be paid for at the prevailing spot price.

"As a result of the conclusion of an interim agreement, we are pleased that we will be in a position to continue the Saldanha plant operations with the current employee complement that is in place," said ArcelorMittal South Africa chief executive Nonkululeko Nyembezi-Heita.

"Our current export order program will continue, but the viability thereof will depend largely on steel prices and exchange rate variations, which will be monitored on a continuous basis," she added.

-By Devon Maylie, Dow Jones Newswires; +44 (0)20 7842 9483; devon.maylie@dowjones.com

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