China Said to Plan $3 Billion Investment in Fortescue (Update1)...

China Said to Plan $3 Billion Investment in Fortescue (Update1)


By Cathy Chan and Jesse Riseborough

Feb. 24 (Bloomberg) -- China, the world’s largest metal consumer, may invest about $3 billion in Fortescue Metals Group Ltd., Australia’s third-biggest iron ore exporter, three people familiar with the transaction said.

China Investment Corp., the $200 billion sovereign wealth fund, is in talks with Fortescue, which plans to use some of the proceeds to retire debt, the people said, asking not to be identified before an agreement. Separately, China’s Hunan Valin Iron & Steel Group agreed today to buy a A$1.2 billion ($776 million) stake in Fortescue.

The Fortescue purchases would extend China’s investment in resource producers to $25 billion this month as the nation takes advantage of commodity prices at a seven-year low. CIC is turning to mining investments after losing more than $5 billion on financial companies including Blackstone Group LP and Morgan Stanley.

“China needs to boost its pricing power for iron ore and other raw materials because it’s a big consumer,” said Cherry Chen, a Beijing-based analyst with Core-Pacific Yamaichi International Ltd. “Investing in resource company is a correct step for CIC to shun the financial crisis.”

Fortescue fell 2.4 percent to A$2.83 on Feb. 20, giving it a market value of A$8 billion the last time it traded. The stock has dropped 60 percent in the past year amid a slump in demand.

Chinese state-owned companies agreed this month to invest $21.2 billion into debt-laden mining companies Rio Tinto Group and OZ Minerals Ltd. The Reuters/Jefferies CRB Index of 19 commodities fell to the lowest level since June 2002 on Feb. 17.

Preferred Shares

The proposed CIC deal may be in preferred shares paying a dividend, and the payment rate hasn’t been agreed upon, one person said.

Calls to Wang Shuilin, in charge of CIC’s group public affairs, were unanswered in Beijing. Cameron Morse, a spokesman for Perth-based Fortescue, declined to comment.

Hunan Valin Iron & Steel today also said it agreed to buy 225 million new shares from Fortescue, and 275 million shares from Harbinger Capital funds, giving the Hunan-province steelmaker a total stake of 16.5 percent.

“Iron ore will be a hot spot this year in acquisitions and IPOs because China’s steel industry is expanding into raw material supply,” said Helen Wang, a Shanghai-based analyst with DBS Vickers.

The Australian producer is facing a funding shortfall of A$731 million for an expansion, Macquarie Group Ltd. said today in a report.

CIC said Dec. 3 it would avoid investing in foreign financial firms after losing billions on stakes in Morgan Stanley and Blackstone Group LP.