Get 40% Off
These stocks are up over 10% post earnings. Did you spot the buying opportunity? Our AI did.Read how

DEALTALK-BHP/Rio venture boosts Fortescue fortunes

Published 07/07/2009, 03:20 AM
Updated 07/07/2009, 03:25 AM

* China seen funding Fortescue's expansion

* Asset JVs, convertible bonds likely way to raise funds

* Unlikely to issue equity

* CIC most likely investor to offer funding - sources

By Denny Thomas

SYDNEY, July 7 (Reuters) - As BHP Billiton and Rio Tinto focus on delivering $10 billion in savings from their iron ore venture, Fortescue Metals Group Ltd hopes to get a favourable funding deal for its aggressive growth plans.

BHP-Rio's $116 billion iron ore venture effectively means Chinese and other Asian steel mills have one less major iron ore supplier to deal with, giving steel mills less clout in annual price negotiations.

Fortescue, a distant No.4 iron ore miner, behind Brazil's Vale, Rio and BHP, is seen as an indirect beneficiary of the BHP-Rio deal. Investors have snapped up the stock betting that Fortescue could extract a better bargain from Chinese firms who are keen to lower their reliance on BHP and Rio.

The BHP-Rio deal raises the probability of China financing Fortescue's expansion, with China Investment Corp, a sovereign wealth fund being advised by Deutsche Bank, the most likely investor to offer funding, sources said.

Fortescue would need $5.2 billion to more than double its annual output to 120 million tonnes in a next expansion phase, CLSA estimates. Fortescue is forecast to ship 26 million tonnes in fiscal 2009.

But Fortescue founder and CEO Andrew Forrest is in no mood to issue further equity and dilute his holding, sources close to Forrest told Reuters.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

"To fund major expansion, they would sell down assets in a joint venture structure because that is a preferred option for a buyer as well," said one source familiar with Fortescue's thinking.

Fortescue's spokesman was not available for comment.

Fortescue raised about $826 million by selling a 17.4 percent stake to China's Hunan Valin Iron and Steel earlier this year, but the source said a new equity deal with another Chinese entity was unlikely.

"Andrew (Forrest) hates selling equity... The deal with Valin was done because they had an ongoing expansion to fund," the source added.

"They get far better value by selling down assets, rather than selling down equity. It's almost certain the next lot of capital they raise would be at the asset level," the source said.

SHARE SURGE

In just over a month since BHP and Rio joined hands, Fortescue shares have gained about a quarter, while the benchmark S&P/ASX 200 index is down about 4 percent, giving Fortescue a market value of $8.4 billion.

Fund managers say China's steel mills would do everything possible to end BHP/Rio's dominance on the iron ore market.

Rio's decision to walk away from an agreed but controversial $19.5 billion cash infusion by China's state-owned Chinalco is another reason why China could ink a funding deal with Fortescue.

"Clearly the Chinese are not happy and Andrew (Forrest) will try to take advantage of that. Whether he'll be successful or not is to be seen," the source said.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Prior to selling a stake to Valin, several companies including Anglo American and CIC had held talks with Fortescue about either buying an equity stake or for an asset joint venture. "People are saying there's a business case for other iron ore players in Pilbara. Clearly China is going to want to promote independent iron ore players," said another source, who is close to a potential Chinese investor.

The sources declined to be identified as the discussions were confidential.

But not all agree that an asset joint venture is the only way to go forward.

"Andrew (Forrest) does not mind taking on cheap finance that is available in China to fund his growth. And the Chinese will tend not to go at a straight senior debt level, but they will look at preferred equity or convertible (bonds)," the second source said. ($1=A$1.26) (Editing by Dhara Ranasinghe) ((denny.thomas@reuters.com; +61 2 9373 1812; Reuters Messaging: denny.thomas.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.