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| Fortescue Metals in tie-up with Brazilian rival as iron ore surge continues | |
| (35 minutes later) | |
| Fortescue Metals Group is in talks with its rival Vale to strike a deal that could give the Brazilian miner a stake in Andrew Forrest’s company. | Fortescue Metals Group is in talks with its rival Vale to strike a deal that could give the Brazilian miner a stake in Andrew Forrest’s company. |
| Under the memorandum of understanding announced by the two companies on Tuesday, Vale could buy up to 15% of Fortescue’s shares on market, and would also have the option of taking stakes in its existing or future mining assets. | Under the memorandum of understanding announced by the two companies on Tuesday, Vale could buy up to 15% of Fortescue’s shares on market, and would also have the option of taking stakes in its existing or future mining assets. |
| But Australia’s consumer watchdog has pledged to examine the deal after Fortescue’s share price jumped 24% on Monday. | But Australia’s consumer watchdog has pledged to examine the deal after Fortescue’s share price jumped 24% on Monday. |
| The Australian stock exchange has demanded an explanation for the surge and the chairman of the Australian Competition and Consumer Commission, Rod Sims, said the huge move in the share so close to the announcement was something “we need to have a look at”. | |
| Fortescue on Wednesday said there was no leak of confidential information regarding the tie-up. | Fortescue on Wednesday said there was no leak of confidential information regarding the tie-up. |
| The surge in the share price was consistent with the 23% increase in iron ore prices on that day, it said, on hopes of a short-term steel production boost in China and hints of another wave of infrastructure construction in China from premier Li Keqiang. | |
| Fortescue said the memorandum of understanding with Vale was confidential but both companies had agreed to work together on the terms of separate but complimentary stock exchange releases as they recognised the potential for a leak. | Fortescue said the memorandum of understanding with Vale was confidential but both companies had agreed to work together on the terms of separate but complimentary stock exchange releases as they recognised the potential for a leak. |
| FMG shares were down 5% at $2.63 on Wednesday morning. | FMG shares were down 5% at $2.63 on Wednesday morning. |
| The planned tie-up came as iron ore prices continued to rise overnight on Tuesday on hopes of a short-term steel production boost in China. A tonne of iron ore was selling for $63.30 on Wednesday morning, a rise of 1.1%. | |
| The rise follows a prolonged downturn in the sector that has wiped out smaller producers and hurt the balance sheets of the largest miners. | The rise follows a prolonged downturn in the sector that has wiped out smaller producers and hurt the balance sheets of the largest miners. |
| Both companies will also form a joint venture for blending their iron ore at key Chinese ports, which could help them match the benchmark quality in the largest iron ore market, and help take share away from rivals BHP Billiton and Rio Tinto. | Both companies will also form a joint venture for blending their iron ore at key Chinese ports, which could help them match the benchmark quality in the largest iron ore market, and help take share away from rivals BHP Billiton and Rio Tinto. |
| “This agreement is about creating a long-term relationship between the two companies, and also ensuring long-term iron ore supplies for our customers,” Fortescue chief executive Nev Power told reporters. | “This agreement is about creating a long-term relationship between the two companies, and also ensuring long-term iron ore supplies for our customers,” Fortescue chief executive Nev Power told reporters. |
| Fortescue, the world’s fourth biggest iron ore miner, produces a lower grade of iron ore, which it sells at a discount to the benchmark price. | Fortescue, the world’s fourth biggest iron ore miner, produces a lower grade of iron ore, which it sells at a discount to the benchmark price. |
| Vale, the biggest iron ore miner, produces some of the world’s highest grade iron ore, but has a cost disadvantage because of Brazil’s distance from its main market China. | Vale, the biggest iron ore miner, produces some of the world’s highest grade iron ore, but has a cost disadvantage because of Brazil’s distance from its main market China. |
| Related: Someone needs to go broke in the Australian iron ore industry, says analyst | Related: Someone needs to go broke in the Australian iron ore industry, says analyst |
| The two miners could blend up to 100m tonnes of iron ore annually, Power said, which will bring greater efficiencies to FMG’s operations. The agreements are likely to be finalised over the next few months, with blending expected to start within six months. | The two miners could blend up to 100m tonnes of iron ore annually, Power said, which will bring greater efficiencies to FMG’s operations. The agreements are likely to be finalised over the next few months, with blending expected to start within six months. |
| “Vale has always wanted to get its foot in the Pilbara door. This price seems to be as good as any for doing that without building a new asset,” Fat Prophets resources analyst David Lennox said. | “Vale has always wanted to get its foot in the Pilbara door. This price seems to be as good as any for doing that without building a new asset,” Fat Prophets resources analyst David Lennox said. |
| “It is also a win from Fortescue’s point of view because it helps them boost margins, and also provides them a long-term equity investor,” he added. | |
| Fortescue has been racing to cut costs as it looks for ways to trim its high debt levels. | Fortescue has been racing to cut costs as it looks for ways to trim its high debt levels. |
| The company in February unveiled a faster-than-expected reduction in its cash costs, that has helped its beaten down share price recover somewhat. | The company in February unveiled a faster-than-expected reduction in its cash costs, that has helped its beaten down share price recover somewhat. |
| Vale, which last month posted its worst loss in 20 years, has also struggled with debt as it develops a massive new iron ore mine in Brazil. | Vale, which last month posted its worst loss in 20 years, has also struggled with debt as it develops a massive new iron ore mine in Brazil. |
| The agreements between the two miners will be subject to various regulatory approvals, but Power said he expected the process to be completed smoothly as the deal would not lead to reduced competition. | The agreements between the two miners will be subject to various regulatory approvals, but Power said he expected the process to be completed smoothly as the deal would not lead to reduced competition. |
| The rise in the iron ore price has also helped to boost the Australian dollar which touched seven-month highs this week. It was buying 74.28 US cents on Wednesday morning. |