Forrest’s Great Expectations May Deter Potential Asset Deals

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Billionaire Andrew Forrest calculates that the mines, ports and railroads owned by his Fortescue Metals Group Ltd. are worth in the tens of billions of dollars. It remains to be seen whether potential buyers agree.

Fortescue confirmed Monday it’s still open to approaches from suitors interested in stakes in its assets, though said it hasn’t yet struck a deal. The company may raise $1 to $2 billion by selling a 10 percent to 15 percent stake in its main Chichester and Solomon mining hubs, Macquarie Group Ltd. analysts said in an Aug. 14 note. They valued the company’s total operations at about A$16 billion ($12 billion).

“These are very, very valuable assets, with long lives and in the best iron ore province in the world,” Chief Financial Officer Stephen Pearce said in a phone interview. “They are a very rare commodity and if we were to complete any transaction then naturally, we would expect that they reflect the appropriate long-term value.”

Valuation could be a sticking point as deal premiums in the iron and steel sector are falling as commodity prices, including iron ore, tumble. Completed and pending transactions have an average premium of 14 percent this year, compared to 113 percent in 2013, according to data compiled by Bloomberg.

Aspiration Disparity

“There’s a disparity between the aspirations of the company and the aspirations of the buyers,” Morgans Financial Ltd. analyst James Wilson said by phone from Perth. “There’s a big gray area in the middle at the moment.”

Hebei Iron & Steel Group Co. and Tewoo Group Co. approached Perth-based Fortescue about acquiring a stake in its infrastructure assets, people with knowledge of the matter said this month. They may also consider buying stakes in some of Fortescue’s mines, for a total investment of about $1 billion to $2 billion in the firm’s assets, two of the people said, asking not to be identified as the information is private.

The company’s “world class assets are worth in the tens of billions,” Forrest, Fortescue’s founder, chairman and largest shareholder, said Monday in a statement. Fortescue had a market valuation of A$5.1 billion at Monday’s close in Sydney trading.

Selling stakes in assets would help Fortescue to cut net debt of $7.2 billion and ease the need to refinance a $4.8 billion term loan maturing in 2019, according to Macquarie. The producer has “plenty of options, plenty of time and plenty of cash,” to repay or refinance debt, Pearce said Monday in the interview. “We don’t need to do any transaction.”

‘Appropriate Terms’

Iron ore with 62 percent content delivered to China fell 5 percent Monday to $53.28 a dry metric ton, according to Metal Bulletin Ltd. data. Benchmark iron ore has slumped 25 percent this year.

To be successful, any approaches for stakes in Fortescue’s mining hubs, ports or 620 kilometers (385 miles) of heavy haul railroads, must offer “appropriate terms and conditions and with an appropriate counter-party,” along with value, Pearce said. “We are going to need to be happy on all fronts for a long-term basis,” he said in the interview.

Fortescue abandoned a previous plan to sell a stake in its infrastructure assets in 2013 after saying the offers it got didn’t meet its objectives for value and terms.

Current approaches may also not be “palatable,” to the producer, according to Morgans’ Wilson. “It means it’s better that they operate them themselves with 100 percent ownership, rather than selling them off at the prices they are potentially being offered.”

(An earlier version of this story was corrected because it incorrectly stated the value of Fortescue’s net debt in the eighth paragraph.)

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