Valin inks $798 million Fortescue deal

Hunan Valin Iron and Steel Group Company (Valin) will acquire a 16.5% stake in Australia's Fortescue Metals Group through a combination of new equity and a sell-down by an existing shareholder. The total outlay is A$1.24 billion ($798 million).

Valin will buy 225 million new shares of Fortescue at a price of A$2.48 per share, providing A$558 million of funding for the iron ore company. It will also purchase 275 million shares from investment firm Harbinger Capital at the same price. Harbinger currently owns around 16% of Fortescue, but its stake will drop to less than half this level after the sell-down.

Fortescue last traded at A$2.83 a share on February 20 before it was placed in a trading halt pending an announcement. Valin has been able to negotiate a 12.4% discount to the last traded price for its strategic investment.

The deal is subject to approval by the Australian Foreign Investment Review Board (FIRB) and Chinese regulators.

Fortescue is a young iron ore mining firm. It was started by Andrew Forrest in 2003 and began shipping ore as recently as May 2008. It raised A$3.7 billion of capital, including A$1 billion of equity between August 2006 and July 2007. Fortescue's August 2006 fund-raising was the largest single high-yield transaction in Asia-Pacific and the largest high-yield bond project financing at the time. Forrest has a controlling interest in Fortescue with a stake of around 35%.

Fortescue's share price has been falling recently, on account of the commodities downturn and concerns about its debt servicing obligations. Speculation was rife earlier this month that Chinese state-owned-enterprise China Baosteel would buy select Fortescue assets or that the country's sovereign wealth fund China Investment Corporation (CIC) would make a strategic investment in the firm. But Valin seems to have pipped the other interested Chinese buyers to the post.

Valin has also entered business agreements with Fortescue. The Chinese firm has agreed to a further offtake of ore in addition to existing iron ore supply agreements between the two parties. The agreement also sets out a framework for an iron ore processing joint venture in either Australia or China, a low-grade hematite ore processing joint venture in Australia, and the potential for joint participation in future iron ore and coking coal projects. Valin will get one seat on the board of Fortescue as long as it owns more than 10% of the Australian company.

Fortescue advised in an Australian Securities Exchange filing yesterday that it is also in discussions with CIC with respect to raising some hybrid funding. It added that it has commenced mining at its Pilbara project and expects that mined ore will be available for transporting by May 2009.
 
Deutsche Bank advised Valin, while Fortescue was advised by J.P. Morgan and Grant Samuel.

Valin is one of the leading steel manufacturers in China, with its main production facilities located in Hunan Province. Its products include steel pipes, bars, wires, sectional products, hot rolled steel plates, copper plate pipes and inner-twisted pipes. Valin exports about 20% of its production. The company owns a 33.9% stake of Hunan Valin Steel Company, in which ArcelorMittal also has a 33% equity interest.

The deal is the third China outbound investment in Australia in a period of a few weeks. Earlier this month Aluminum Corporation of China (Chinalco) announced it would invest $19.5 billion in Australian diversified metals and mining company Rio Tinto through direct equity and joint ventures. Then a few days later China Minmetals Corporation made an offer to buy Oz Minerals for an equity value of $1.7 billion. Both deals have yet to secure FIRB approval.