Chinese Whispers Point To Stake In Fortescue

The Age

Tuesday November 18, 2008

JOHN GARNAUT, BEIJING

CHINESE steel mills are considering injecting cash into Fortescue Metals Group in exchange for a sizeable stake in the company.

The interest follows last week's China tour by Fortescue's major shareholder, Andrew Forrest, when he met with most of his big customers, including his most likely suitor, Baosteel.

Fortescue maintains it does not need additional funding and is not seeking new investors.

Mr Forrest was "on site" yesterday and could not be contacted. His spokesman, Paul Downie, said: "As Andrew said on Thursday, there have been no discussions with any parties to raise fresh equity or capital in China."

Sources in China say steel makers were left with a different impression and are considering major investment plans.

"Almost all of China's top 10 mills have been talking with Andrew Forrest," said a Chinese adviser. "They are all customers of Fortescue and know Andrew well. They want to invest in a friendly manner."

Baosteel is considered the logical candidate to invest in Fortescue because it enjoys vast capital reserves and is most likely to receive the required Chinese Government approval.

Outward Chinese investments above $US200 million ($A309 million) require approval from the State Council, China's cabinet, and departments such as the National Development and Reform Commission are likely to become involved.

Sources close to the Chinese steel industry expect Fortescue to issue new shares to raise more than $1 billion in capital to fund expansion.

But some of the mills are concerned that the company's share price has further to fall. BusinessDay believes that some big customers, including Baosteel, have so far only accepted about half the maximum volume of iron ore contemplated under their Fortescue supply contracts.

Steel mills are acutely wary of falling foul of what they see as the Federal Government's more restrictive investment policies towards state-owned Chinese companies.

This means the likely buyer is contemplating a "friendly" off-market negotiation with the company to receive new shares rather than any on-market raid.

It also means that China's sovereign wealth funds, including China Investment Corporation, are unlikely to get involved.

It is not the first time a Chinese company has begun talks with Fortescue. Baosteel nearly negotiated a deal with Mr Forrest earlier this year but talks failed over price.

Previously, other Chinese companies, including Sinosteel and China Minmetals, have also entered and abandoned talks.

Fortescue's share price fell to $1.86 yesterday, down 2 on the day and 19 since Friday's open.

The shares peaked at $13.15 in June.

China's steel mills and Australia's iron ore miners are hoping that China's large new fiscal stimulus package will spark a rush of steel-intensive building projects, particularly in housing and railways.

© 2008 The Age

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