China cash lining up for Fortescue Metals Group
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Andrew Forrest has had informal discussions about selling a stake in the company's mining assets, and potentially selling down part of his equity holding of about 30 per cent.
Andrew Forrest has had informal discussions about selling a stake in the company's mining assets, and potentially selling down part of his equity holding of about 30 per cent. Tony McDonough
by Matthew Stevens Amanda Saunders Julie-anne Sprague
Chinese-linked companies have applied to the Foreign Investment Review Board seeking permission for an investment involving Fortescue Metals Group.
Australia's third-largest iron ore producer has held discussions with China's largest steel producer, Baosteel, and China's largest conglomerate, CITIC, about a recapitalision to shore up its balance sheet.
It is unclear if the applications to FIRB are from CITIC or Baosteel but sources said there is interest in Fortescue from one or more companies which are Chinese or part-Chinese owned.
There are no moves to take over Fortescue. Instead, the companies are interested in buying a stake or increasing an existing stake, sources said.
A deal could involve the partial selldown by the company's founder, chairman and biggest shareholder, Andrew Forrest.
Fortescue and Baosteel already work closely. In June 2012 the two companies merged their magnetite iron ore assets in the Pilbara into a venture called FMG Iron Ore Bridge, which is 88 per cent controlled by the Perth company and 12 per cent owned by the Chinese steel giant.
Magnetite is a form of ore that requires processing to be used in the steel making process, which makes it more expensive to produce. Baosteel is also behind plans to unlock iron ore in the West Pilbara with the $7.4 billion West Pilbara Iron Ore project.
One source said Fortescue has previously held discussions with CITIC about a potential investment in its rail and port infrastructure.
Fortescue built its business using debt, which has put it under pressure several times when ore prices have weakened.
Mr Forrest has had informal discussions about selling a stake in the company's mining assets, and potentially selling down part of his equity holding of about 30 per cent.
A Fortescue spokesman said the company "doesn't comment on market speculation".
Fortescue chief executive Nev Power previously said: "A strategic investor would probably be the most appropriate partner for us, I think. We have discussions all the time with people who are interested in asset sales. For us, it is really important that we see the right partners and on the right terms and values."
In March, when the miner was under pressure as the price of ore collapsed to its lowest levels since the spot price index was introduced in 2008, Mr Power indicated the miner could sell a stake in one of its Pilbara mines if the iron ore price remained depressed for an extended period. At the time the company's shares were languishing at four-and-a-half-year lows but within a month started to rally as it bought breathing space with partial debt refinancing while Mr Forrest waged a war against his bigger rivals BHP Billiton and Rio Tinto. The public pressure heaped on BHP and Rio coincided with a brief surge in the iron ore price, which rose above $US60 per tonne.
BHP slowed its expansion and Rio deferred a new mine.
Some in the market have questioned whether the ultimate aim of Mr Forrest's campaign against BHP and Rio was to bolster Fortescue's position - and share price - ahead of any potential selldown.
Revelations about pending but unnamed applications were reported by veteran journalist Laurie Oakes on the weekend.
In 2013 a deal between FMG Iron Ore Bridge and Taiwanese group Formosa saw the latter take a 31 per cent interest in FMG Iron Ore Bridge.
The trio have developed a 2-million tonne magnetite pilot plant as part of the first stage of their plans, although there is no date for stage 2, which involves a 20-million tonne plant.
Fortescue is sitting on a $US7.4 billion net debt pile. This year the miner spectacularly twice failed to secure a $US2.5 billion refinancing in March before striking a deal to borrow $US2.3 billion at an interest rate of 9.75 per cent to retire some of its existing debt.
But the miner still faces a massive $US4.9 billion debt repayment in 2019.
The collapse in the iron ore price has put pressure on Fortescue's cash flows, despite the quick work it has made of cutting costs, and its massive debt pile makes it vulnerable.
Amid the price collapse, miners with the deadly mix of high production costs and poor balance sheets have proved the most most vulnerable.
It is understood an equity selldown of Fortescue's Pilbara mines has been on the cards.
Rio and BHP have many equity joint ventures at the asset level – BHP and Rio partnered with the Japanese long ago, and later the Chinese.
UBS values Fortescue's assets – mainly its mine and rail assets – at $US18 billion. Selling a stake of 15 to 25 per cent in Fortescue's mines would help shore up the balance sheet.
The trade-off for Fortescue shareholders selling part of the business and losing part of its cashflow, would be confidence in the balance sheet. Going down this route would allow the miner to keep full ownership of its coveted port and rail assets.
China is Fortescue's main customer so an equity investor would likely come from there too.
with Phillip Coorey and Tess Ingram
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