Fortescue Metals Group Ltd. (FMG.AU) said Wednesday its iron ore
pricing and funding deal with China has lapsed after a deadline
passed but that it continues to hold talks with the Chinese.
Failure to finalize the US$6 billion financing deal by the Sep.
30 deadline puts Fortescue's expansion plans in question, although
market participants say a deal may still be possible as China seeks
to promote new sources of iron ore supply for its key steel
industry.
It also adds even more uncertainty to China's 2009 iron ore term
settlement, which remains in limbo, at a time when spot prices are
again on the rise, reaching $92 a metric ton Wednesday, according
to Metal Bulletin data.
The miner said Aug. 17 it had struck a deal with the China Iron
& Steel Association, or CISA, to sell iron ore to Chinese steel
mills at a 3% discount to prices agreed between other miners and
their Asian customers.
The agreement was conditional on the arrangement of finance from
Chinese lenders to underpin Fortescue's plans to boost output from
its iron ore operations in the Pilbara region of Western
Australia.
A spokesman for Fortescue said the deal had lapsed as the
condition of funding had not been met but that the company
continues to hold talks with CISA, and that FMG remains open to all
funding options.
"There was never any pretense that any financial organizations
had agreed to a set deadline," he said. "There is no change
whatsoever to FMG's (expansion) plans and FMG and CISA are
continuing discussions," he said, adding there is no deadline
attached to the new discussions.
Fortescue has been selling ore to Chinese mills at the
discounted price since July 1 and the miner said it would be up to
the Chinese to request a continuation of this pricing regime.
"Fortescue intends to continue working cooperatively with CISA
including the provision of attractive iron ore pricing if
requested," the company said in a statement.
Comment from CISA wasn't immediately available Wednesday,
however several of FMG's Chinese steel clients said they were not
aware the Aug. 17 iron ore contract carried a funding
condition.
"We know that CISA and Baosteel will help Fortescue to get some
financing from China, but we've never linked this with the iron ore
contract," a major state-owned steel company executive told Dow
Jones Newswires Wednesday on the condition of anonymity.
Meanwhile, the local-language Caijing Magazine reported on its
Web site Wednesday that Chinese sovereign-wealth fund China
Investment Corp. has halted funding talks with Fortescue due to
risk issues.
"It's unlikely to reach any financing deal (with Fortescue) in
the near term," an unnamed CIC executive told the magazine, saying
the two sides couldn't reach an agreement on some risk-related
issues.
When asked if funding negotiations are with CIC, the Fortescue
spokesman declined to comment Wednesday, saying that negotiations
remain confidential.
Fortescue had hoped that striking a deal to sell iron ore to
China at a discount to its other major producers would help secure
$6 billion in funding for the junior miner.
The bulk of the funding Fortescue is hoping to get from China
comes in the form of loans from Export-Import Bank of China, a
policy lender.
CIC, the country's $300 billion sovereign wealth fund, has held
talks with Fortescue about potentially buying debt securities on a
much smaller scale than the loans from China Exim Bank. Those talks
started before Fortescue struck the deal with CISA, according to
earlier Fortescue statements and a person close to CIC.
Fortescue said in a filing Feb. 24 that it had entered
negotiations with CIC for a hybrid funding package.
According to the person close to CIC, the Chinese wealth fund
and FMG aren't close to a deal and CIC is maintaining its
independence in striking deals from other parts of the Chinese
government.
Unlike CIC, whose mandate is focused on earning returns from its
investments, China Exim Bank has an explicit policy function in
supporting the central government's policy aims.
CIC officials weren't immediately available for comment. China
is observing an eight-day holiday break starting Thursday for its
National Day and the Mid-Autumn Festival, with many government
offices and companies this week dismissing employees early.
The Fortescue pricing agreement had been a face-saving deal for
CISA, which failed to extract the price cut it was seeking in a
tense stand off with the world's biggest iron ore miners.
Fortescue's annual capacity currently is equivalent to about 7.5%
of China's estimated iron ore import volume for this year.
While Fortescue's output is growing, its production is still
dwarfed by the big three iron ore producers - Anglo-Australian
miners Rio Tinto Ltd. and BHP Billiton Ltd. and Brazil's Vale - and
its pricing deal with CISA was dismissed by the majors as
irrelevant to their contract price negotiations.
Those talks stalled after CISA refused to accept the 33% price
cut Rio Tinto agreed with steelmakers in Japan, Korea and Taiwan,
although Chinese mills are still paying this price for their ore
under provisional pricing arrangements.
Spot prices had slid steeply from mid-August to early September,
briefly lending support to CISA's argument for a deeper term
discount.
The failure to ink a financing deal weighed on FMG's shares,
which closed down 2.1% to A$3.82, with the broader Australian
market down 0.2% Wednesday.
But some of the disappointment was already factored into the
share price, with the departure of the company's chief financial
officer, Michael Minosora, last week prompting market speculation
the miner would struggle to bed down the giant financing package on
time.
-By Alex Wilson and Juan Chen, Dow Jones Newswires;
61-3-9292-2094; alex.wilson@dowjones.com
(Ross Kelly in Sydney, Juan Chen and Chuin-Wei Yap in Beijing,
and Rick Carew in Hong Kong contributed to this article.)