25/02/2009 - 08:50

FMG seeks more capital after Valin deal

25/02/2009 - 08:50


Save articles for future reference.

Fortescue Metals Group remains in a trading halt as it considers more capital raising after agreeing to sell a stake to a Chinese steel maker for $1.2 billion.

FMG seeks more capital after Valin deal

Fortescue Metals Group remains in a trading halt as it considers more capital raising after agreeing to sell a stake to a Chinese steel maker for $1.2 billion.

"Fortescue requests that the current trading halt be extended into a voluntary trading suspension as Fortescue is considering other capital raising initiatives and is not yet in a position to provide full details to the market," the iron ore miner said on Wednesday.

Fortescue on Tuesday confirmed Hunan Valin Iron and Steel would take a strategic stake of up to 16.5 per cent.

Under the terms of the share subscription agreement, Valin will buy 225 million new shares in Fortescue at $2.48 per share.

Valin will also buy 275 million of the 444 million Fortescue shares held by US hedge fund Harbinger Capital, bringing the state-backed steel maker's total investment in the miner to $1.2 billion.

After Fortescue's new shares are issued and Harbinger sells part of its stake to Valin, the US hedge fund will be left with a 5.5 per cent interest.

Fortescue chief executive Andrew Forrest has reportedly said Harbinger would hold on to its remaining interest until a "recommended" takeover of the iron ore miner.

The miner did not provide further details on talks with sovereign wealth fund China Investment Corp regarding a hybrid security raising, reported to be for more than $1 billion.

Fortescue is also in discussions with multinational resources giant Anglo American plc.

Analysts say Fortescue may seek a total of $3 billion from its current capital raising initiatives to fund its ambitious expansion program.

Fortescue said on Wednesday it had formalised a co-operation agreement with Valin after entering into a "strategic cooperative alliance" with the Chinese company last year.

Under the agreement, a Valin subsidiary will buy four million tonnes per annum (Mtpa) of Fortescue's iron ore from 2010 onwards, up from one Mtpa currently.

The companies will also seek to lift Fortescue's supply arrangement with the Valin parent company from an initial base of up to 1.4 Mtpa to a maximum of 6 Mtpa by 2013.

"Pricing under the agreements is to be referenced against the benchmark pricing regime consistent with Fortescue's other agreements," the miner said.

Valin and Fortescue will also jointly research new technologies to process lower grade iron ores.

"Fortescue and Valin have agreed to establish a JV (joint venture) to develop lower grade resources from some of Fortescue's tenements and to give Valin the option to participate in any additional new projects Fortescue undertakes," the miner said.

The allies are already discussing another JV to construct a processing facility if a study proves successful.

A standstill agreement prevents Valin from taking an interest of more than 17.5 per cent in Fortescue.




The announcements are below:



Fortescue Metals Group ("ASX:FMG" "Fortescue) has announced an agreement with one of China's leading steel mills, Hunan Valin Iron and Steel Group Company Ltd ("Valin").

Under the terms of the Share Subscription Agreement signed late yesterday, Valin will subscribe for 225 million new shares issued by Fortescue at $2.48 per share, for a total investment of A$558 million.

Fortescue Metals Group Chief Executive Officer Andrew Forrest said investment from Valin, a top 10 Chinese steel mill with assets of over A$10 billion illustrated the appeal of Fortescue and its importance in the global iron ore industry.

"Valin is one of the great Chinese steel industry success stories. Our ability to establish a long-term partnership with a key participant in China's growing steel industry is compelling," Mr Forrest said.

"This placement provides Fortescue with a cornerstone Chinese equity partner which will only enhance our ability to grow and prosper. The depth of the relationship and the combining of the shared growth interests of the two companies should facilitate enhanced access to China's financial sector which would be of great benefit to Fortescue.

"It will provide a solid base from which to launch Fortescue's expansion from 55 Million Tonnes per Annum (Mta) to 120Mta, when market conditions reach a level we are confident will underpin that expansion," he said.

Valin Chairman Mr Li Xiaowei said the agreement was important to support Fortescue's expansion.

"Valin is pleased to be able to provide Fortescue with the capital necessary to underpin the development of Fortescue's impressive project pipeline, which will create new jobs and accelerate the growth of a world class mining company," Mr Li Xiaowei said.

The share subscription is conditional upon approval from Australia's Foreign Investment Review Board and Chinese regulatory approvals. It is also conditional on "in principle" approval from ASX Ltd that it will grant official quotation to the 225 million new shares. It is expected that all approvals should be received by end March 2009.

In addition to the Share Subscription Agreement, Fortescue has also signed a Cooperation Agreement with Valin (see separate announcement) which secures additional offtake for Valin and Hunan Valin Xiangtan Iron and Steel Co.

Also, in a separate and independent transaction, Valin has informed Fortescue that it has entered into a conditional agreement to purchase 275 million existing shares from a current Fortescue shareholder.

Therefore, if the Share Subscription Agreement gains the required regulatory approvals, Valin's equity in Fortescue will increase to more than 16 per cent of the expanded issued capital.

Reflecting the spirit of the Co-operation Agreement and Valin's new equity stake in Fortescue and subject to the satisfaction of the share subscription agreement and certain other requirements, Valin will be offered a seat on the Fortescue board, conditional on its equity interest in Fortescue being at least 10%.

In consideration of the sensitivities around foreign investment in Australian domiciled companies, the Share Subscription Agreement sets out:

- A standstill agreement which prevents Valin from having a relevant interest in more than 17.5 per cent of Fortescue's shares on issue;

- The one board representative from Valin must be the Valin chairman.

Fortescue also intends to establish appropriate corporate governance protocols in relation to Valin's board representation, which will include that Valin will not have representation on any of Fortescue's board committees or management committees, and will not be involved in marketing arrangements which affect supply or price.

"This agreement has been carefully structured from the outset to satisfy both the requirements and intent of Australia's foreign investment regulations, while providing Fortescue with access to additional capital," Mr Forrest said.

"Valin Chairman Mr Li Xiaowei will be a valuable contributor to the Fortescue board and will provide substantial skill and expertise to enhance the growth of Fortescue and Australia's mining sector."

Mr Forrest said the capital raised under the Share Subscription Agreement together with other funding alternatives options would further strengthen the robustness of Fortescue's balance sheet.



Fortescue Metals Group ("ASX:FMG" "Fortescue") is pleased to announce that it has signed a Co-operation Agreement with one of China's leading steel mills, Hunan Valin Iron and Steel Group Company Ltd ("Valin"), to increase iron ore sales to Valin and to research new technologies to process lower grade iron ores.

Fortescue and Valin have agreed to establish a Joint Venture ("JV") to develop lowergrade resources from some of Fortescue's tenements and to give Valin the option to participate in any additional new projects Fortescue undertakes.

"The Co-operation Agreement creates business opportunities for Valin, supply opportunities for Fortescue and potential product development opportunities for the Pilbara," Fortescue Metals Group Chief Executive Officer Andrew Forrest said.

"The Pilbara is the world's premiere iron ore address and the increased offtake agreements and proposals to study the establishment of a processing facility to further value add various iron ore types including lower-grade deposits, will enable the Pilbara to realise its true potential.

"This agreement cements more than just a close relationship between Fortescue and Valin, it illustrates the developing partnership Australia and China now enjoy.

"It provides Fortescue with a high calibre, cornerstone Chinese partner which will lead to the development of further opportunities for both companies."

Key components of the Co-Operation Agreement are:

Iron Ore Offtake

Xiangtan Steel (a subsidiary of Valin) has an existing offtake arrangement with Fortescue for up to 1 million tonnes per annum ("Mta") and under this agreement and subject to expanded production, Fortescue agrees to increase that supply arrangement to up to 4Mta from 2010 onwards.

In addition, Fortescue and Valin will use reasonable endeavours to negotiate a new supply arrangement with the Valin parent entity which will grow from an initial base of up to 1.4Mta to a maximum of up to 6Mta by 2013. Again this agreement would be dependent on Fortescue expanding current production.

Pricing under the agreements is to be referenced against the benchmark pricing regime consistent with Fortescue's other agreements.

Raw Ore Processing

The companies will seek to progress a feasibility study by 30 June 2009, which will investigate the commercial and technical feasibility of further processing iron ore that comes directly from Fortescue's surface miners onto the run of mine stockpile. The initial studies will look at opportunities in China however if this is considered not feasible, then the study will investigate opportunities of establishing in the Pilbara region of Western Australia.

If the ultimate outcome of the study supports the feasibility of the project, Valin and Fortescue will advance to the formation of a JV (the details of which are to be agreed in due course) with the objective of constructing a processing facility. It is proposed that this facility would be supplied with iron ore by Fortescue on terms yet to be
formally agreed.

Utilisation of lower grade ore

The parties agree to establish a JV with China Central South University "CSU" to review the feasibility of exploiting lower grade hematite ore with an iron grade Fe content at or around 50%. Fortescue has had a broad relationship with CSU for many years and the JV would formalise this relationship in regards to this specific potential processing venture. In recognition of the current adverse economic climate, the feasibility study will not commence until global economic conditions improve.

Development of future new projects

Fortescue has agreed to offer Valin the ability to participate in any future project opportunities.


"The wide scope of this agreement reflects the dynamism of both companies and their drive to grow and prosper," Mr Forrest said.

"It illustrates the commitment of each company to forge a strong future for Fortescue, for Valin and for the Pilbara and the Australian iron ore industry."



Subscription Options