FMG iron ore deal

Iron ore hopeful Fortescue Metals Group has signed its first binding contract to supply ore from its developing iron ore and infrastructure project in the Pilbara.

Under the terms of the contract, signed last week with Chinese steel mill Hebei Wengfeng & Steel Co Ltd, Fortescue will supply a total of 40 million tonnes of iron ore over 20 years at a rate of 2 million tonnes a year.

Fortescue says the contract is worth more than $1 billion based on today’s general pricing levels for sea-borne traded iron ore.

Hebei Wengfeng & Steel Co has also agreed to make a prepayment to Fortescue of $10 million, payable after financial close of the project.

Wengfeng is a subsidiary of private Chinese enterprise Hebei Wenfeng Industry Group, which is involved in steel-making and rolling, beer-making and commerce and is based principally in the Hebei province near Beijing.

The group’s steel making operations produce about 400,000 tons of pig iron a year, 400,000 tons of steel a year, 600,000 tons of rolled material a year and 100,000 tons of soldered pipe a year.

Fortescue says the contract is a breakthrough and will encourage other potential buyers to sign purchase contracts, further underpinning the development of the project.

“This binding contract with Wenfeng we believe will be the catalyst for many of our Memoranda of Understanding (MOU) with other steel mills to make similar conversions from MOUs to a binding contract,” Fortescue Metals chief executive officer Andrew Forrest said.

Fortescue is planning to develop a 45,000-tonne-a-year iron mining operation as well as a rail and port operation in the Pilbara.

And while Wenfeng is the first to sign a binding contract with Fortescue, most of the company’s planned production has already been contracted under MOUs.

The Wenfeng contract also follows the recent release of Fortescue’s industry compliant (JORC) resource definition of 744 million tonnes of Pilbara Marra Mamba mineralisation.

Until this announcement Fortescue’s resource had been somewhat of an unknown.

But Mr Forrest said the Hebei contract indicated clear support for Fortescue’s product.

“Significantly, the Hebei Wenfeng contract is a firm endorsement of the quality of our calcined product specifications, and the strong market desire for supply diversity,” Mr Forrest said.

The contract also indicates Asian iron ore demand, particularly that from China, is continuing strongly.

Chinese demand has been a major driving force behind many major long-term iron ore contracts implemented with WA mining operations in the past 12 months.

Recently, iron ore giant BHP Billiton signed two long-term sales commitments involving the supply of a total of 24mt of iron ore from WA to its Japanese joint venture partners, as well four Chinese steel mills over the next 10 and 25 years.

In June, global miner Rio Tinto Iron Ore entered into long-term sales contracts to supply an additional 40mt a year of iron ore from its WA operations to leading Chinese steel mills.

This was in addition to a long-term contract signed in April 2004 between Rio Tinto Iron Ore and Shanghai Baosteel Group Corporation for the supply of 7mt a year of WA product over 10 years.