Vale May Take 15% Stake in Fortescue as Iron Ore Rebounds

  • Stake could be worth $1.1 billion based on Monday's close
  • Two companies could jointly develop new mines under accord

Amid a record gain in iron ore prices, Vale SA, the world’s biggest producer, has signed an accord with Fortescue Metals Group Ltd. that could see the Brazilian company take a minority stake in the Australian miner owned by billionaire Andrew Forrest.

The agreement gives Brazil’s Vale the option to buy as much as 15 percent of Fortescue, the Perth-based company’s Chief Executive Officer Neville Power said Tuesday on a conference call. That would be worth about A$1.3 billion ($965 million) based on Tuesday’s close, according to Bloomberg calculations. The accord also allows the companies to to form joint ventures and develop new mines.

Iron ore soared the most ever Monday after China’s policy makers signaled their willingness to buttress economic growth, boosting the outlook for steel consumption in the top consumer. A joint venture between Vale and Fortescue to blend iron ore at Chinese ports may begin within six months and deliver about 80 million to 100 million metric tons of the steel-making ingredient, Power told reporters.

“Vale was already offering probably what could be considered the cheapest iron ore shipment price, and it streamlines their offering into China,” Evan Lucas, a market strategist in Melbourne at IG Ltd., said by phone. “It gives Vale entry into the Australian market that it didn’t have.” Fortescue is the fourth-ranked iron ore supplier.

Fortescue’s shares fell 9.4 percent in Sydney to close at A$2.79, while Vale slumped 7.4 percent at 10.23 a.m. in Sao Paulo. Rival iron ore supplier BHP Billiton Ltd. fell 1.8 percent. Power told reporters that Fortescue’s 24 percent advance on Monday was in line with other producers and reflected the rise in iron ore prices.

Fortescue has surged 49 percent this year, boosted by efforts to cut costs and plans to make further reductions to its $6.1 billion debt pile. Talks with Vale have been ongoing for about a year, Power said, and Fortescue has held initial talks with regulators over their accord.

The pact will allow the companies “to work together to deliver long term value to our customers, through the efficient supply of an attractive and competitive new iron ore blend in China,” Power said Tuesday in a statement. Vale said in December it forecasts iron ore production in 2016 of 340 million to 350 million tons, while Fortescue expects to hold exports at an annual rate of about 165 million tons.

Vale Timing

Vale last month flagged it planned more dramatic actionto cut $10 billion of debt, including the possible sale of some of the company’s key assets. It had previously been focused on cost cutting, moving to higher-quality deposits and selling less-important assets to withstand lower commodities prices.

David Wang, a Chicago-based analyst with Morningstar Investment, struck a note of caution on the timing of any Vale purchase.

“Any stake is unlikely to happen in the next couple of years since Vale doesn’t really have the capital to do so at this point,” he said. “In fact, the company is selling assets in order to be able to fund its expansion project. If there is an agreement to buy a stake it would be a couple years out.”

For Wang, the benefit of the tie-up lies in blending Vale’s higher grade product with Fortescue’s lower grade. “Vale’s premium product isn’t really getting the extra value they would be expecting right now, so this helps them avoid selling a premium product when they aren’t getting the full value,” he said.

Samarco Venture

The producer’s Samarco joint venture with BHP Billiton this month sealed an accord with Brazilian authorities over a tailings dam spill in November that killed at least 17 people. Samarco will pay at least $1.1 billion over the next three years under the deal.

Iron ore has powered higher in 2016 and jumped 19 percent Monday, the biggest one-day surge in daily data since 2009, to defy forecasts that it would post further losses as mounting low-cost supply from Australia and Brazil collides with weakening demand for steel in China. Investors are expecting further monetary easing by Chinese authorities, according to China Merchants Futures Co. Signs of property-price growth in Chinese cities is viewed as positive for metals prices, according to Sanford C. Bernstein. & Co.

“My strongest view would be that this deal could be to allow them to better control prices,” Gordon Johnson, a New York-based analyst at Axiom Capital Management Inc. said by phone. “The second reaction would be for Fortescue, they are doing this as they see the need for cash later down the line.”

Hebei Iron & Steel Group Co. and Tewoo Group Co. had approached Fortescue about acquiring a stake in its infrastructure assets and also considered buying stakes in some mines, people with knowledge of the matter said in August. Fortescue won’t now contemplate any sales of stakes in its infrastructure, Power said.

Fortescue also held talks with Baosteel Group Corp. and Japanese firms about the sale of stakes in some of its mines, people familiar with matter said in June. The producer acknowledged in March that it would consider selling minority stakes in mines, railroads and ports.

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