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SCENARIOS-Australia's Fortescue in race for Chinese funds
Tue Sep 29, 2009 4:27am EDT

SYDNEY, Sept 29 (Reuters) - Australian miner Fortescue Metals Group Ltd (FMG) (FMG.AX) has agreed to sell Chinese steel mills 20 million wet tonnes of iron ore at a 3 percent discount to its competitors -- as long as they provide $5.5-$6 billion in debt financing by Wednesday to fund a big expansion programme deeper into the Pilbara iron belt.

The deal was announced on Aug. 17, leading the China Iron & Steel Association and others to doubt the financing could be completed in time.

Following are possible outcomes:

FINANCING DEADLINE EXTENDED

FMG agrees to extend the deadline, keeping the terms intact.

FORTESCUE SECURES ITS FINANCING

Fortescue gets its $5.5-$6 billion by way of debt, ships the ore by end-December as promised and proceeds with expansion work to lift annual output incrementally to 95 million tonnes from 38 million tonnes now. At the higher rate, Fortescue would be a more formidable competitor to Australia's two larger iron ore miners, Rio Tinto (RIO.AX)(RIO.L) and BHP Billiton (BHP.AX)(BLT.L).

An expansion could bring so-called "nearology" benefits to as-yet undeveloped deposits owned by prospecting firms, who might suddenly find themselves near a Fortescue mine. This means they could negotiate transport sharing deals with FMG, similar to those struck by BC Iron (BCI.AX) and Atlas Iron (AGO.AX), making their projects viable.

FORTESCUE EXTENDS DEADLINE, RAISES ITS IRON ORE PRICE

FMG extends the deadline, but renegotiates the terms, making them less favourable to the steel mills. This would likely price Fortescue ore in line with reductions of around 33 percent offered by Rio Tinto and BHP Billiton. Sources close to Fortescue discount this outcome, saying it would jeopardise Fortescue's relationship with China, its sole customer base, long-nurtured by FMG's founder and CEO, Andrew Forrest.

FORTESCUE FINDS ALTERNATIVE FINANCING

There is a remote chance that Fortescue calls off the deal, unveils alternative financing and insists the mills pay the going rate for ore. This would bring the risk of it having its shipping contracts terminated and alienating key customers. Banking sources suggest Fortescue may find it tough to obtain that funding outside China at such short notice. There could also be serious implications for Fortescue's prospects from any delay or revision to its growth timetable. (Reporting by James Regan) (Editing by Ian Geoghegan)