China Looks At Fortescue Alliance

Sydney Morning Herald

Tuesday November 18, 2008

John Garnaut in Beijing

CHINESE steel mills are considering injecting cash into Fortescue Metals Group in exchange for a sizeable stake in the company.

The interest follows last week's visit to China by Fortescue's major shareholder, Andrew Forrest, during which he met most of his major customers, including his most likely suitor, Baosteel.

Fortescue maintains it does not need additional funding and is not seeking new investors.

Mr Forrest was "on site" yesterday and could not be contacted.

His spokesman, Paul Downie, said: "As Andrew said on Thursday, there have been no discussions with any parties to raise fresh equity or capital in China."

However, sources in China say steel makers were left with a different impression and are considering major investment plans.

"Almost all of China's top 10 mills have been talking with Andrew Forrest," said a Chinese adviser.

"They are all customers of Fortescue and know Andrew well," he said. "They want to invest in a friendly manner."

Baosteel is considered the logical candidate to invest in Fortescue because it enjoys vast capital reserves and is most likely to receive the required Chinese Government approval.

Chinese investments overseas exceeding $US200 million ($307 million) require approval from the State Council, China's cabinet, and departments such as the National Development & Reform Commission are likely to become involved.

Sources close to the Chinese steel industry expect Fortescue to issue new shares to raise more than $1 billion in capital to fund future expansions.

But some of the mills are concerned that the company's share price has further to fall.

The Herald understands that some major customers, including Baosteel, have so far only accepted about half the maximum volume of iron ore contemplated under their Fortescue supply contracts.

Steel mills are extremely wary of falling foul of what they see as the Rudd Government's more restrictive investment policies towards state-owned Chinese companies.

This means the likely buyer is contemplating a "friendly" off-market negotiation with the company to receive new shares rather than any on-market raid.

It also means China's sovereign wealth funds, including China Investment Corporation, are unlikely to get involved, contrary to reports in Hong Kong yesterday.

It is not the first time a Chinese company has begun talks with Fortescue. Baosteel nearly negotiated a deal with Mr Forrest earlier this year but talks fell down over price.

Previously, other Chinese companies, including Sinosteel and China Minmetals, have entered and abandoned talks.

Fortescue's share price fell to $1.855 yesterday, down 2c on the day and 19c since Friday's open. The shares peaked at $13.15 in June.

China's steel mills and Australia's iron ore miners are hoping that China's huge new fiscal stimulus package will spark a new rush of steel-intensive building projects, particularly in housing and railways.

© 2008 Sydney Morning Herald

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