chinese circling fortescue

The chinese could be circling FDL too.
I can smell it, next door.


"..Although FMG will only load its first commercial-sized shipment of ore this Thursday, it plans to quickly go to 55 million tonnes per annum, then 100mta.

As FMG's boast of being the third force in iron ore becomes a reality, China is aware of the company's further potential, given its dominant landholdings in the most important iron ore region of Australia.""


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The Australian-12MAy08

Chinese circling Fortescue

Jennifer Hewett | May 12, 2008

AUSTRALIA'S new iron ore giant, Fortescue Metals Group, is set to be the next big testing ground for increased Chinese investment in Australian resources.

Three Chinese companies, Sinosteel, Baosteel and Chinalco, are understood to be vying for a stake in the miner.

Long-term FMG investor Harbinger Capital Partners, a US boutique fund, has a 16 per cent share but is keen to at least partly cash in on the massive rise in FMG shares.

Harbinger chief executive Philip Falcone has been regularly contacted by many Chinese and European companies, particularly in recent weeks.

But because of federal Government concerns about the level of foreign investment, any sale to the Chinese will probably be for only about half of the Harbinger stake.

FMG has always welcomed Chinese investment, but it will now be much harder for a strategic Chinese investor to take up to 20 per cent of the company, which previous proposals envisaged.

The Chinese are very sensitive to the new caution in Canberra, which is reflected in the delays faced by many Chinese companies in obtaining Foreign Investment Review Board (FIRB) approvals.

But this has not reduced their interest in FMG. They have continued discussions with Canberra in order to extend the time for consideration of the issues involved, including the size of their investment. FMG also has other options. The company's market position has strengthened, as has the interest of alternative investors.

FMG is now expected to look to US capital markets as the primary source of funds for future expansion plans, to be discussed in July.

While there has been much speculation about Baosteel's discussions with FMG, as well as possible interest by Sinosteel, the news from Chinese sources that Chinalco is also considering a investment will sound more alarm bells in Canberra.

Sinosteel is clearly focused on taking a large position in the Mid West iron ore region of Western Australia, with a bid for the Midwest mining company on the table and a separate FIRB application for a stake in Murchison Metals revealed by The Australian last month.

Any further moves on the iron ore majors of the Pilbara will be of much greater concern to Canberra.

It was Chinalco's swoop on 9 per cent of Rio Tinto in February that alerted the Rudd Government to the rapidly increasing Chinese interest in Australian resources.

Although FMG will only load its first commercial-sized shipment of ore this Thursday, it plans to quickly go to 55 million tonnes per annum, then 100mta.

As FMG's boast of being the third force in iron ore becomes a reality, China is aware of the company's further potential, given its dominant landholdings in the most important iron ore region of Australia.

This is of even greater appeal to the Chinese, given their antagonism to the idea of a BHP Billiton-Rio Tinto merger.

For years, the production plans of chief executive Andrew Forrest were dismissed, particularly by Australian institutions, most of which were uninterested in covering or recommending the stock.

But Mr Forrest has had the last laugh as FMG's mine, rail and port facilities have steadily progressed while his 36 per cent stake in FMG has grown to be now worth about $9 billion.

The FMG board will hold a meeting in Beijing in a few weeks, to coincide with the arrival of its first shipment of ore to China.

This has been sold to Baosteel, its largest steel mill customer as well as possible strategic investor.

Canberra is clearly alarmed by the potential conflict of interest in having Chinese companies control Australian assets as well as being the main customers for resources such as iron ore.

As well as making Mr Forrest Australia's wealthiest man, the size of his holding has made FMG virtually invulnerable to takeover.

But Mr Forrest has previously had to strongly resist earlier attempts by the Chinese to use Fortescue's need for investment or signed contracts to take control of the company.

China's top business magazine, Caijing, recently took the unusual step of detailing Beijing's determined attempt in 2005 to ensure its steel mills could acquire a controlling interest in FMG.

The headline made an extraordinary reference to "How China missed the boat for equity investment".

While it is understood Mr Forrest was happy at the time for the Chinese steel mills to take a 20 per cent stake, the Chinese side, led by a newly installed chief executive at China Metallurgical Construction, demanded 85 per cent.

When FMG rejected this, MCC denied that the company had binding contracts with Fortescue to finance infrastructure or to take iron ore supplies over 20 years -- in contrast to Fortescue's statements to the ASX.

According to the Caijing article, the reason for this was to drive down the Fortescue share price and make FMG more accepting of takeover overtures from China.

Although the share price did fall sharply for a while, Mr Forrest did not succumb and was able to raise funds in the US.

Despite the rationale for the Chinese moves now being conceded in China, the issue of Fortescue's statements is still being pursued by the Australian Securities and Investments Commission.

Since then, Fortescue has also continued negotiations with a range of other Chinese companies such as Baosteel interested in becoming investors.

This included concurrent negotiations with the Bank of China over the prospect of financing a multi-billion-dollar deal in order to fund further expansion of Fortescue's operations as quickly as possible.

These talks bogged down, most recently in February, over Chinese insistence on getting a sizeable discount to the market for Fortescue shares.

But the steady rise in the share price has led to a growing view in Beijing that this attitude has been counterproductive and meant Chinese companies have missed an increasingly valuable opportunity.

The additional complication now is that Canberra's attitude to large-scale Chinese acquisitions has hardened considerably, even though it continues to say it welcomes foreign investment.

After the move by Chinalco in February, for example, the Government officially announced factors it would take into account when considering foreign investment applications.

It focused particularly on additional issues with investments from sovereign wealth funds or companies not operating commercially at arm's length from government. In these cases, the investments need not be over 15 per cent to require approval from Canberra to proceed.

The Chinese will be aware of the need to tread cautiously given the stakes involved.