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Vale Ties Up With Fortescue Possibly To Develop Mixed Blend Iron Ore Plant In China

March 8
6:26 AM 2016

Vale SA, the world's largest iron ore producer, has signed an initial agreement with Fortescue Metals Group Ltd. Under the agreement, Brazilian company acquires a minority stake in the Australian miner owned by billionaire Andrew Forrest.

The accord also aims creating new iron-ore blending joint ventures for customers in China, the top consumer around the globe. It empowers the Brazilian company to acquire as much as 15% of Forestcue. The stake values around A$1.4 billion ($1.1 billion), calculated on the basis of Monday's closing prices, reports Bloomberg quoting Neville Power, chief executive officer for the Perth based miner while covering a conference call with the latter on Tuesday.

Fortescue shares have been witnessed to surge 65% this year in Sydney trading following efforts to cut costs, plans making further reductions to its $6.1 billion net debt. Furthermore, prices of iron oars have started to soar in 2016 which also contributed to the upsurge in share prices. Prices of the steel making ingredient has jumped 19% up on Monday, the biggest one day gain in daily data since 2009, according to a report published in Daily News.

Prices of the iron ores have been soared since China's policy makers have signaled their willingness to buttress economic growth. This has boosted the outlook for steel consumption in the Chinese market, the world's top consumer. Under the agreement, a joint venture between Vale and Forestcue to blend iron ore at Chinese ports is expected to begin within six months, reports Yahoo Finance quoting the Forestcue CEO.

The pact is expected to allow the companies working together to deliver long term value to the customers offering efficient supply of new iron ore blend in China. Vale has forecast in December for 340 million to 350 million tons of iron ore production during 2016. Meanwhile, Forestcue expects for exporting at an annual rate of about 165 million tons.

However, David Wang, a Chicago based analyst with Morningstar Investment has also struck a note of caution on the timing of any Vale purchase. Vale has announced planning to cut $10 billion debt possibly through selling some of its key assets in addition to previously adopted cost cutting measures during last month.

Wang interprets the tie up aiming to blend Vale's higher grade product with Fortescue's lower grade. Vale's premium quality iron ore is not getting the expected extra value. The joint venture will allow them to avoid selling premium quality product when they are not getting the full value, cites Wang.

Vale, the Brazilian miner produces the premium quality iron ore. Though iron ore prices have been witnessed to soar in 2016, but the premium quality iron ore is not getting its full value. So Vale ties up with Australian miner Fortescue possibly aiming to produce a mixed blend for the Chinese market.

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