Chinese baulk at Forrest's 'premium goodwill'John Garnaut December 22, 2008
ANDREW Forrest has built a mountain of goodwill in China with his promise of breaking Australia's iron ore duopoly of Rio Tinto and BHP Billiton. He has carefully cultivated most of China's top steel mills and the two most relevant government agencies, the National Development Reform Commission and the state-owned Assets Supervision and Administration Commission.
But somehow, despite years of talking, he has never cut a substantial equity deal with a Chinese investor.
Chinese investors acknowledge that the fault has often lain with NDRC, the old state planning commission, that insisted on selecting the Chinese buyer and that the buyer take a controlling stake.
But recently, Chinese investors have begun to wonder whether Forrest and his company, Fortescue Metals Group, are serious. Two leading advisers to different Chinese steel mills have said they only realised last month how busy Forrest has been.
"For a long time, none of them knew Andrew was dealing with anyone else," says a Chinese investment banker, who acted for a Chinese steel mill in talks with Fortescue this year. "He always makes you feel that you, and only you, are the one."
The investment banker reeled off a long list of Chinese mills that have all been discussing purchasing equity in Fortescue, including Baosteel, Shougang and Wuhan Iron & Steel. There is an equally long list of previously failed suitors including Sinosteel and China Metallurgical Construction Corp.
Whenever it came to the crunch, it seemed Forrest was asking for a premium that no buyer would be prepared to give.
"In May and June he was in negotiations with a number of these mills and Andrew was insisting on a premium of 100 per cent," says the investment banker.
"The share price is now at $2 and he still wants a premium of 100 per cent. There's no way Chinese mills are going to pay that. And there is no way, it seems, that Andrew is ever going to settle for less unless he is forced to and the company is desperately short of cash."
On Friday, Fortescue announced it would pay a contractor $3.7 million in shares rather than cash. It is issuing shares to cover operating costs, let alone expansion plans.
Last week, we learnt Greek shipping billionaire John Angelicoussis was suing Fortescue for $130 million in broken freight contracts.
Whoever wins, it seems Fortescue might be getting closer to the point where it is desperately short of cash.
A Fortescue spokesman confirmed yesterday that there was plenty of equity-raising talk, but no sign of an imminent deal.
"There have been a lot of approaches, but at this stage we're not able to make any comment," the spokesman said.
A problem for Fortescue is that the potential capital investors that are showing the most interest, such as Baosteel, are also the iron-ore customers causing Fortescue the most problems.
BusinessDay believes that Baosteel is accepting only about half its contracted shipments from Fortescue.
So far, Baosteel isn't targeting Fortescue. It has given Chinese trader Sinosteel a similarly bad deal as it digs through its mountain of iron-ore stocks and slashes steel production because of feeble demand. But it wouldn't be hard to imagine how a company such as Baosteel could apply more pressure to the Fortescue share price before stepping in with an offer for equity.
If Fortescue reaches the point where it desperately needs cash and Forrest can no longer insist on unrealistic premiums, what will Chinese steel mills want?
Chinese investors are wary of the Rudd Government's foreign investment restrictions and their advisers are steering them away from seeking control of major Australian mining companies.
Australian miners might be forced to save themselves by offering long-term off-take agreements at a discount to the benchmark price.
"Chinese companies are moving away from the need to control," says the Chinese investment banker.
"They're making strategic investments, not financial investments. What they want is a set price off-take agreement in return for a minority stake and that way there will be no problem with the Foreign Investment Review Board."
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