Fortescue Metals Group will make an upfront payment of $32 million and restructure a shipping arrangement as part of a settlement to a dispute with a shipping company.
Fortescue Metals Group will make an upfront payment of $32 million and restructure a shipping arrangement as part of a settlement to a dispute with a shipping company.
The settlement is the second with a shipping contractor after FMG last year cancelled 10 contracts on the back of a slump in ship charter rates. The cancellation sparked a number of arbitration claims against the iron ore miner.
Under the settlement deal with Classic Maritime, FMG will restructure the number of iron ore shipments per month and extend the current contract from five years to 11 years, ending in 2020.
FMG has also agreed to pay Classic an upfront amount of $US23.35 million ($A32 million) and then US99 cents for each tonne, up to 21.93 million tonnes, shipped with Classic over a two-and-a-half year period.
In addition, the freight rate under the restructured deals will be aligned to the accepted market index for trips between Australia and China plus a top up mechanism, or variable rate, if freight rates were to fall below an agreed base of between $US23,000 and $US30,000 per shipment.
However, if freight rates were to climb above the agreed base, the variable rate will be lowered.
FMG has estimated it will save around $US66.7 million ($A84.8 million) using the current daily charter rate of $US45,000.
Classic has agreed to drop its arbitration, which was due to start next month in London.
Earlier this year, FMG settled a dispute with Belgium shipping company Bocimar with the issue of $US22 million worth of shares and the establishment of a shipping joint venture.
The settlement with Classic and Bocimar leaves FMG with five contractual disputes with four companies.
Earlier this year, FMG warned that it could take a $US171 million ($A217 million) hit from the shipping disputes, a figure the miner has reaffirmed.
The announcement is below:
Fortescue Metals Group ("ASX:FMG" "Fortescue") is pleased to announce it has reached agreement to settle its shipping dispute with Classic Maritime ("Classic") over its three suspended Contracts of Affreightment.
Under the agreement, Classic will discontinue its arbitration action which was to commence next month in London.
Following previous announcements regarding Fortescue's shipping contracts, including the announced settlement with Bocimar International NV ("Bocimar"), Fortescue continued to review its remaining 8 disputed contracts. After Bocimar, Classic was the next largest dispute involving three contracts with an average tenure of 5 years.
The key terms of the settlement agreement with Classic are as follows:
- Fortescue will restructure its future cargo obligations and extend the contracted term with Classic from 5 years out to 11 years ending in 2020. The number of contracted shipments with Classic will increase progressively over the term from 4 per month in 2010 rising to 8 per month over the last 3 years out to 2020;
- Fortescue is to pay to Classic an upfront amount of US$25.35 million and then US$0.99 per tonne over 21.93 million tonnes to be shipped with Classic over a period of 2 ½ years under the abovementioned monthly chartering arrangements.
- The freight rate under the restructured arrangements will be aligned to the accepted market index for voyages between Australia and China. This mitigates the risks of fixed price contracts in a volatile market. In moving from a fixed rate under the old contracts to a variable rate, Fortescue has agreed to a participation structure whereby a per tonne margin over the index rate may apply depending where future rates trend out to 2020. If average rates move above an agreed base of between US$23,000 - US$30,000 Fortescue is able to claw back this margin and should they fall below a top up mechanism will be activated. While noting the current daily charter rate is ~US$45,000, Fortescue has estimated a net present value of US$66.7 million on these future payments based on a discount rate of 15%.
With Classic now settled, there are 5 suspended shipping contracts remaining with tenures ranging from 3 to 5 years. One of the remaining contract counterparties has proposed a scheme of arrangement with its creditors which we believe is a default under the contract.
The other 4 contracts are with 3 separate companies and proceedings are continuing in the UK with the next arbitration scheduled for
September 2009.
Fortescue continues to vigorously defend these actions.
In the announcement of 24 February 2009 following the Bocimar settlement, Fortescue provided market guidance of an estimate of the potential exposure at US$171 million, whilst noting the inherent uncertainty of variables relating to any such estimation.
As an update to this guidance, the settlement of the Classic dispute is consistent with the original estimate.
This takes due regard of currently available information, the settlement terms of previously resolved contract disputes and the time value of money.
