By BRETT COLE
March 8, 2016
SYDNEY, Australia — Vale of Brazil, the world’s largest iron ore mining company, said on Tuesday that it could take a stake of as much as 25 percent, worth $965 million, in its erstwhile Australian rival Fortescue Metals Group, as both companies seek to carve out more market share in China.
The agreement comes as iron ore prices have been recovering. Iron prices slipped on Tuesday after surging 19 percent, to $63.74 a dry metric ton, on Monday.
“The memorandum of understanding provides a framework for potential investment by Vale in Fortescue through a minority acquisition of shares on market in addition to investment in current or future mining assets,” Fortescue said in a statement.
In a call with reporters, Fortescue’s chief executive, Nev Power, said there was “no requirement on Vale” to take a stake of 5 percent to 16 percent in Fortescue “in any sort of time frame.”
Rio de Janeiro-based Vale and Perth-based Fortescue have been in discussions for 12 months. Each is struggling with debt.
Vale has $10 billion in debt, while Fortescue has $6.1 billion, according to Bloomberg data. Both companies are hostage to the volatile iron ore price that is driven by expectations over China’s economic growth and subsequent steel demand.
Despite the recent rebound, some analysts see the price of iron ore falling sharply. Citigroup analysts predict iron ore prices declining to $40 a ton by year-end while Goldman Sachs’s price target for the metal is $35 a ton sometime in the fourth quarter.
In an effort to bolster the price they get for their iron ore from Chinese steel mills, Vale and Fortescue also said Tuesday that they would sell some of their iron ore together in China by blending their respective products.
“Short-term, this deal is about maximizing the price realization of Vale’s high-grade and Fortescue’s low grade product,” said Citigroup in a research note.
Long-term, this could be viewed as the first step of a more disciplined approach to iron ore supply by aligning two of the world’s “big four” iron ore mining companies.
