Brazil's Vale may take 15% stake in Fortescue as iron ore price rebounds

The headquarters of Brazilian company Vale, in Rio de Janeiro, Brazil, on Feb 26, 2016.
The headquarters of Brazilian company Vale, in Rio de Janeiro, Brazil, on Feb 26, 2016. PHOTO: EPA

MELBOURNE (Bloomberg) - 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 may 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 per cent of Fortescue, the Perth-based company's chief executive officer Neville Power said Tuesday on a conference call. That would be worth about A$1.4 billion (US$1.1 billion) based on Monday'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, said by phone. "It gives Vale entry into the Australian market that it didn't have."

Fortescue is the fourth-ranked iron ore supplier.

Power told reporters that the Fortescue's 24 per cent advance on Monday was in line with other producers and reflected the rise in iron ore prices. Vale rose 9 per cent in Brazil on Monday.

Fortescue has surged 72 per cent this year, boosted by efforts to cut costs and plans to make further reductions to its US$6.1 billion net debt.

Talks with Vale have been ongoing for about a year, Power said. Fortescue has held initial talks with regulators, he said. 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.

Iron ore has powered higher in 2016 and jumped 19 per cent 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.

Signs of property-price growth in Chinese cities are being seen as a positive for metals, 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 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 and Tewoo Group had approached Fortescue about acquiring a stake in its infrastructure assets and also consider 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 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.