Swan approves $645m FMG-Chinese deal

31/03/2009 - 14:40

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The federal government has approved Chinese company Hunan Valin Iron and Steel Group to take up to a 17.55 per cent stake in Fortescue Metals Group.

Swan approves $645m FMG-Chinese deal

The federal government has approved Chinese company Hunan Valin Iron and Steel Group to take up to a 17.55 per cent stake in Fortescue Metals Group.

In a statement today, Treasurer Wayne Swan said the deal will be subject to formal and strict undertakings sought from Hunan Valin, and agreed to by Fortescue.

These undertakings include any person nominated by Hunan Valin to Fortescue's board will comply with the Directors Code of Conduct maintained by Fortescue.

A nominated person must submit any potential conflict of interest relating to Fortescue's marketing, sales, customer profiles, price setting and cost structures for pricing and shipping.

Hunan Valin and any person nominated to Fortescue's board will comply with the information segregation arrangements agreed between Fortescue and Hunan Valin.

At a media briefing today and before the government's decision, Fortescue Metals executive director Graeme Rowley said he was confident of receiving FIRB approval and was not shaken up by the government's decision to veto the OZ Minerals takeover by China's Minmetals.

Mr Rowley said the deal between FMG and Hunan Valin was quite clear cut and the subscription of shares was already capped at 17.55 per cent, as agreed to by both companies.

The total placement deal, which will see Hunan Valin take a 17.4 per cent stake, is valued at $645 million with shares priced at $2.48 each. Shares in FMG closed up six cents at $2.55 today.

Funds from the placement are for the next expansion phase of its iron ore mining operations in the Pilbara.

Under the deal only the chairman of Hunan Valin will be able to join the FMG board, Mr Rowley said.

He added that the deal also needed approval from the Chinese government but indications are that the investment will go ahead.

Hunan Valin will report to Foreign Investment Review Board (FIRB) on its compliance with these undertakings.

"These undertakings ensure consistency with Australia's national interest principles for investments by foreign government entities, which I set out in February 2008," Mr Swan said.

"They ensure the appropriate separation of Fortescue's commercial operations and customer interests, and support the market-based development of Australia's resources."

Non-compliance with these undertakings can lead to the directors removal from the company board.

Fortescue was involved in negotiating these arrangements.

Hunan Valin also intends to acquire some shares from other shareholders.

"Consistent with this approval and with its agreement with Fortescue, Hunan Valin will not hold above 17.55 per cent in total," Mr Swan said.

"It is on these bases that I have approved the acquisition under the Foreign Acquisitions and Takeovers Act 1975," Mr Swan said.

Meantime, Fortescue says it will continue to work towards deals with Chinese entities including a sovereign wealth fund and financial institution.

Mr Rowley's comments came moments before the federal government approved the Hunan deal.

Mr Rowley told a media briefing that Fortescue remained open to further deals with Chinese entities, including China Investment Corporation (CIC) and EXIM Bank, and discussions continued.

"Because we've been so long at working out the best commercial relationship with China ... it opens the door for further discussions with China.

"I'm very positive about that.

"Whether we do something with CIC, EXIM Bank or other entities ... we have a relationship with a major steelmaker and province in China, (which) will stand us in good stead for other future deals."

Fortescue was expected to announce a hybrid security raising with CIC in late February but instead said its coffers would be bolstered by the $645 million Hunan Valin deal.

Mr Rowley said he was not aware whether Hunan Valin, which last year took an 11.3 per cent interest in iron ore hopeful Golden West Resources, planned further investment in Fortescue or other WA miners.

"They haven't indicated to us, but I think that most of China is searching."

Mr Rowley said he did not expect the iron ore benchmark pricing system would be abandoned this year as mooted by some speculators, but an indexed pricing system may be favoured in the long term.

"I don't know if China is ready for an indexing process.

"We don't understand enough about what you would index it to.

"I think you will find that people opt for a benchmark again.

"I believe the benchmark system is sound if everyone is prepared to follow it and play according to gentlemens' rules, but in the end some form of index pricing will probably prevail."

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