02/05/2006 - 22:00

Rise in joint venture deals

02/05/2006 - 22:00

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The rapid expansion of Western Australia’s iron ore industry and the emergence of several aspiring producers have prompted the negotiation of an increasing number of joint venture agreements.

The rapid expansion of Western Australia’s iron ore industry and the emergence of several aspiring producers have prompted the negotiation of an increasing number of joint venture agreements.

While joint ventures are not new to the mining industry, deals signed over the past year illustrate the increasingly wide range of partners that Australian firms are dealing with to try and progress their projects.

This includes Rio Tinto partnering with private Australian company Hancock Prospecting, BHP Billiton partnering with Japanese steel producer JFE Steel, Midwest Corporation partnering with China’s Sinosteel, and Gindalbie Metals partnering with South Korean giant Ansteel.

“The trend that is happening now is that we are seeing different kinds of participants in these joint ventures,” said Freehills partner Rob Merrick, who represented JFE Steel in negotiation of last year’s Western 4 joint venture.

“With JFE Steel, for example, they are not a mining company, they are a steel company, which is seeking to build relationships with suppliers and position itself as a preferred customer.

“The other participants are the financial investors who in the past may have invested in infrastructure assets but haven’t invested in mining production.”

The JFE Western 4 joint venture was one of the biggest mining deals negotiated in 2005, securing long-term sales contracts worth $A5.2 billion.

It involved the joint technical development and commercialisation of 169 million tonnes of ‘pisolite’ iron ore at the Yandi deposit not previously considered marketable.

Under the joint venture, JFE Steel acquired a 20 per cent interest in a sub-lease over part of the Yandi mine.

BHP (advised by Mallesons) retained a 68 per cent interest and BHP’s existing Yandi partners, Itochu and Mitsui (advised by Minter Ellison partners Duncan Maclean and Laurie Shervington respectively) retained 6.4 per cent and 5.6 per cent interests.

The deal involved an initial round of negotiations between BHP and its Yandi joint venturers to ensure their interests were aligned, and a second round of negotiations between BHP, Itochu and Mitsui with JFE.

The complexity of the deal was indicated by the 11-month gap between the partners announcing their intention to form a joint venture and the signing of the final deal in July 2005.

“The more parties involved in negotiating a joint venture, the more difficult it is,” Mr Merrick said.

“It is incumbent upon the party leading the negotiations and drafting the documentation to have a clear strategy to manage that.

“BHP had that role and it was something they did very well.”

The Mallesons team, led by former partner Robert Cole, provided strategic advice to BHP about how to structure the joint venture and selling arrangements and worked with BHP’s in-house legal team, led by Lian Davies, on the preparation and review of project documents in Australia, Tokyo and Singapore. 

Mallesons and Minter had also been closely involved in negotiation of the 2004 Wheelarra iron ore joint venture, a 25-year deal involving BHP, Itochu and Mitsui teaming up with four of China’s biggest steel mills.

Mr Merrick said JFE was a long-standing customer of BHP since the 1960s and the joint venture built on that relationship.

He said this kind of relationship typified most of the joint venture agreements negotiated to date.

“The challenge for the new transactions that are coming forward will be to replicate the relationships seen in the earlier transactions,” Mr Merrick said.

“These things take, in some cases, a number of years to get to a point where an investment decision is made.”

The joint venture deals being signed by emerging iron ore producers have presented opportunities for other law firms.

Hardy Bowen partner Michael Bowen represented Midwest Corporation when it negotiated a joint venture with China’s Sinosteel.

Deacons acted for China’s second largest steel producer, AnSteel, in its joint venture negotiations with local company Gindalbie Metals.

Deacons’ team was led by Melbourne partner Ian McCubbin with Perth partners John Chandler and Liz Allnut.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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