For a man who wears the tag of “Australia’s richest man” (depending on how his shares are doing), Andrew “Twiggy” Forrest and his Fortescue Metals Group are reasonably low-profile beyond Australia’s shores. But reports that Chinese interests are pursuing a sizeable stake in the Western Australian iron ore group sent Fortescue’s shares soaring nearly 15 per cent and triggered widespread media interest.
In an eye-catching scoop, the South China Morning Post reported on Monday that China Investment Corp, China’s $200bn sovereign wealth fund, and China Shenhua Group, the country’s largest coal miner, were in informal talks to buy a 15.85 per cent stake in Fortescue for about $2bn.
The FT reports that Fortescue confirmed later on Monday it had held talks with potential equity investors but declined to name the interested parties – though it admitted it had for some time held talks with groups from China and other countries. But, it said coyly, none of the “confidential discussions … could be considered concluded or at a stage requiring specific disclosure”.
Swings in Fortescue’s share price have been particularly volatile because the free float in its shares is only about 25 per cent, with 37 per cent held by Forrest, the group’s founder, and a further 31 per cent held by US and Russian investors, notes the FT. The volatility was particularly marked in the second half of 2007, on rumours of Chinese and Russian investor interest – repeatedly denied by Forrest.
This time, coming on the heels of Friday’s excitement, when China state owned Chinalco teamed up with US aluminium producer Alcoa in a $14bn “dawn raid” to jointly snap up 12 per cent of global miner Rio Tinto, the Fortescue report highlights China’s growing paranoia about prices and access to the iron ore market.
The Chinalco-Alcoa “raid” was clearly designed to derail BHP Billiton’s attempt to take control of Rio. Chinalco’s president Xiao Yaqing is understood to have met Paul Skinner, Rio chairman, on Friday in London, reports the FT. Also on Friday, Chinalco said it did not currently plan to bid for the whole of Rio, but one banker close to the situation said that Chinalco had $120bn of potential funding from the Chinese Development Bank if it did decide to mount a rival bid.
As Reuters noted on Monday:
The white-hot market for iron ore, fuelled by dramatic increases in Chinese steelmaking amid a boom in the world’s fourth-biggest economy, is unlikely to cool before the middle of the next decade, analysts believe.
The Chinese government has been encouraging the use of the country’s huge foreign exchange reserves to secure access to resources overseas and boost China’s global economic clout.
BHP is now weighing its options ahead of Wednesday’s UK Takeover Panel deadline to formalise its Rio bid or walk away for six months, says the FT added.
Preceding the Chinalco-Alcoa move, the FT reminds us, Sinosteel, a state-owned steel maker, last month lifted its stake in Midwest Corporation, an Australian iron explorer, to more than 10 per cent by snapping up shares in the market. That followed Sinosteel’s highly conditional cash takeover proposal for Midwest worth A$1.19bn in December.
And now, Fortescue is in China’s sites. For “Twiggy” Forrest (and no, he’s not skinny), Monday’s report would appear to vindicate his sometimes controversial move into low-grade iron ore, after his highly public failure to launch a massive nickel project through Anaconda Nickel in the 1990s.
That company, described by The Australian newspaper as a “cautionary tale of the 1990s” minerals boom, “scarred” Forrest because of huge startup problems over the lateritic nickel project in central Western Australia, losing more than $1bn for US bondholders before being successfully revived by other owners, the paper added.
Forrest moved on, and is understood to have arranged to peg most of his leases on crown land about five years ago when the big miners had “too much well-located, high-grade ore to bother with [far lower-grade] 55 per cent ore, The Australian noted.
Fortescue now aims to become Australia’s third-largest producer of iron ore after Rio and BHP, the FT added. However, its first shipment of iron ore to China is not due until May. It has an initial target of producing 45m tonnes of ore a year, and already has 35 sales relationships, including China’s top 10 steelmakers. Baosteel agreed to take an initial 20m tonnes of iron ore from the company.
Unsurprisingly, Forrest is now widely regarded as having timed his move into iron ore to perfection, given the huge unmet demand from China that has emerged in the last three years, says The Australian:
Australia’s existing ore producers, almost exclusively BHP Billiton and Rio, have long concentrated on the highest-quality end of the ore market, with an iron (Fe) content of 70 per cent or better. The Pilbara is effectively one huge multi-billion-tonne lump of iron ore of varying grades of which only the very highest have so far been mined.
Most of Fortescue’s iron ore has an Fe content of about 55 per cent, which means it may require beneficiation (crushing and magnetic separation to improve the grade) before being shipped out of Port Hedland, on Australia’s west coast.
But with Chinese steel mills having to process domestically mined ore with an Fe content of less than 30 per cent, it is safe to say, Fortescue’s 55 per cent grade-ore doesn’t – and won’t – faze them.