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Fortescue leads charge as iron ore stocks surge on BHP-Rio fallout - Barry Fitzgerald

June 12, 2009
IRON ore companies outside the proposed Pilbara iron ore combine of BHP Billiton and Rio Tinto continue to run hot in response to political fallout from the BHP-Rio deal and renewed hopes the worst of the global economic crisis has passed.

Andrew Forrest's Fortescue Metals has led the charge, soaring to its highest level in eight months. The 76¢, or 21.1 per cent, price surge for Fortescue yesterday coincided with the group holding a board meeting in Beijing.

Goldman Sachs JBWere and other analysts have suggested China's disgust at state-owned Chinalco missing out on its Rio deal because of the Pilbara link-up by Rio and BHP could prompt Chinese steel makers to look to smaller iron ore groups for future supplies.

Mount Gibson rose 10¢, or 10.2 per cent, to $1.08 and Gindalbie jumped 11.5¢, or 14.3 per cent, to 91.5¢.

Like Fortescue, the companies' projects rely on the support of Chinese customers.

The market bounce for the smaller iron miners follows confirmation from Brazil's Vale that its contract price with Japanese and Korean steel makers would fall by 28.2 per cent.

That is less severe than Rio's recent settlement for a 33 per cent reduction, also for iron ore "fines".

Deutsche Bank's equity desk said the price settlement by Vale, the world's biggest producer, clawed back most of the premium the Australian producers achieved over the Brazilians on fines last year. Settlements in Europe and the key Chinese market, the world's biggest, remain to be secured.

Meanwhile, the strength of Fortescue's rise in recent days — it's up by 57 per cent in four trading days — has prompted some talk of a Chinese takeover. But the Chinese mill Hunan Valin Iron and Steel already owns 17.3 per cent of Fortescue following a cash injection priced at $2.48 a share two months ago. Mr Forrest holds a 31.5 per cent stake and has said previously he wants it to remain independent.

Analysts said Fortescue could be the main beneficiary of China's anger and effort to secure other non-BHP-Rio sources of iron ore, given that it is the next biggest Pilbara producer, with plans to lift annual output to 50 million tonnes by next year.

Mr Forrest has also been talking up Fortescue's prospects during an investor roadshow in London organised by the miner's favourite broker, Southern Cross Equities, before heading to Beijing for yesterday's board meeting.

The meeting will be the first since Valin chairman Li Xiaowei joined the Fortescue board as a non-executive director.

Fortescue is also due to hold meetings with Valin representatives today.

Fortescue told the Australian Securities Exchange yesterday it could not explain the sudden share price spike, declaring it was not sitting on price-sensitive information.