Another 1-2 billion tonnes in the back paddock would help influence discussions!
SMH
FORTESCUE METALS, which could sign an investment deal with China's Hunan Valin Iron & Steel as early as next week, is expecting to participate in annual benchmark iron ore price negotiations once it completes a staged expansion to 120 million tonnes of annual production.
"When you become big enough, you are in a position to influence those discussions," an executive director of Fortescue, Graeme Rowley, said.
Fortescue had initially hoped to finance a $2 billion expansion to 80 million tonnes of annual production from its own cashflows, but the economic downturn has forced it to look for other funding sources.
Mr Rowley said Fortescue was examining a staged expansion to 120 million tonnes, with help from outside investors. The Herald understands this could include Valin and the China Investment Corporation.
He said the miner's first priority was reaching its initial targeted rate of 45 million tonnes and then 55 million tonnes - a goal that has yet to be achieved.
"That doesn't mean we've lost sight of the need to expand if the opportunity presents itself - and there are two parts to that opportunity: the marketplace and the comfort the market can absorb our expansion and secondly that we can finance it," he said.
The Herald understands Fortescue is considering issuing equity to Valin in a proposal that could be combined with an institutional placement or a rights issue to allow Australian investors access to new Fortescue shares. Valin and CIC would also participate in a separate note issue.
Mr Rowley said the iron ore market had improved since late last year, and Fortescue would be producing lump ore within the next month. It had earlier postponed lump production due to a lack of demand for the higher-priced product, but he said it now expected to sell lump, and at a higher price than it received for its fines.
Most analysts expect the benchmark iron ore price will fall about 20 to 30 per cent this year. Brazil's Vale - the world's largest iron ore producer - has reportedly offered to cut its prices by 10 per cent as an opening gambit in negotiations with Chinese steelmakers, but they are holding out for a larger cut.
Rio Tinto and BHP Billiton are likely to see prices for their ore fall at a steeper rate than Vale because they received a freight premium last year which is expected to be less valuable this year due to lower shipping costs.
Vale, which yesterday reported a record $US13.2 billion annual profit, said its iron ore sales fell 36.1 per cent in the fourth quarter compared with the third quarter as steelmills cut production.
Its sales to China fell 21.3 per cent during that period.
The Brazilian miner said there were indications the steel de-stocking cycle had almost concluded, and noted steel prices were recovering, iron ore inventories were dwindling and iron ore spot prices were rising.
FMS Price at posting:
6.1¢ Sentiment: Buy Disclosure: Held
