Fortescue yesterday stunned markets with news of a share and product tie up with Vale, the huge Brazilian iron ore miner, and in doing so, sunk the local market’s strong rebound, sending it lower and ending a six day rally.
Monday’s 19% surge in global iron ore prices was seen as explaining the odd 24% leap in the price of Fortescue Metals shares to $3.08, and the 48% rally in the past week.
But yesterday morning another reason emerged which raised questions of a leak to of that stunning news into the markets ahead of yesterday’s shock statement to the ASX.
Fortescue revealed that it was joining up with Vale – a move which raised in the market’s mind of a merger down the track or takeover. The move and the way it was announced is being investigated in Australia and in China.
That was confirmed with suggestions in the statement of a share link, comments in a media briefing suggesting that the tie up could be closer, and a second statement yesterday afternoon which revealed that Vale could buy between 5% and 15% of Fortescue on market.
Fortescue shares had opened strongly, rising more than nearly 7% in a matter of minutes, hitting a high of $3.29 after the 10 am get go (the first statement was issued at 8.26 am and the media briefing kicked off at 8.30 am).
But very quickly news of the equity tie up spread and the shares turned lower, taking the ASX 200 with it.
By the close yesterday afternoon, Fortescue shares had plunged more than 9% and the ASX 200 over 30 points as investors realised the Vale tie up had taken any takeover premium out of the shares of Fortescue. The shares were down close to 11% at one stage.
Some argued the market fell on the weak Chinese trade data, but that wasn’t out to well after midday and the Fortescue market turned tail within a few minutes of the opening as investors realised the negative detail in the Fortescue announcement.
The reasoned that with Twiggy Forrest’s one third stake and Vale owning up to 15%, control of the company had passed from the current shareholders, including Mr Forrest, to two groups, himself and Vale.
Fortescue attributed Monday’s surge to short sellers being forced to cover their positions in the company’s shares as they rose – but apart from the much smaller capitalised Arrium, no other big miner’s shares saw a similar rise and BHP and Rio have had plenty of short sellers sitting in their registers in recent months who have been forced to cover and buy shares because of the rapid rise in iron oil, oil and copper prices.
But there are reports that the ASX has formally written to FMG to ask for clarification on the circumstances surrounding the company’s announcement, and what it knew when.
The deal invites Vale into the Australian iron ore industry after several failures. It has also some dud investments in the local coal industry, especially in Queensland where it has taken big losses.
But the deal also underlines the hypocrisy of Fortescue and chairman Forrest – a year ago he was attacking BHP and Rio Tinto for selling out the industry, urging the Federal government to ‘do something’ and complaining about the policy of the two companies to produce as much ore as possible while driving down costs – which is what Fortescue was doing.
A year on and the company and Mr Forrest propose to climb into bed with the biggest non-Australian producer in Vale – which was also producing as much ore as possible as it could last year.
Fortescue announced yesterday morning that it was entering into of a non-binding Memorandum of Understanding with Vale S.A.
"The Memorandum of Understanding sets out the principles on which Vale and Fortescue have agreed to pursue long term opportunities to create additional value for customers in the Chinese steel industry and enhance the competitiveness of their operations.
"The agreement proposes the formation of one or more Joint Ventures for the blending of selected volumes of iron ore from both companies. This new blended product will be developed to suit the long term needs of our customers and improve the efficiency of the supply chain to the steel industry. The agreement also provides a framework for potential investment by Vale in Fortescue through a minority acquisition of shares on market and/or investment in current or future mining assets.
"The Memorandum of Understanding is non-binding and subject to agreement on the final terms of any resulting Transaction Documents, any other required approvals including Board approval of each of Vale S.A and Fortescue and relevant regulatory approvals.”
Be that as it may, investors will take this as the first step in a possible combination of the two companies. Vale is a loss making, struggling giant trapped in a high cost, economy deep in recession.
It is also a giant iron ore miner and exporter from Brazil – much larger than Fortescue.
But it is also poorly run and indirectly controlled by the Brazilian government. Vale lost more than $US12 billion last year because of high costs, low prices and impairments of some of its mining assets (mostly in nickel). It cut its 2016 iron ore export target from around 370 million tonnes to around 345 million.
Fortescue is still profitable (it has been slashing costs, laying off thousands of workers and contractors and sacking some of its big corporate partners) producing at the rate of 155 million tonnes a year and has been trying to find a way of sneaking that higher to 180 million or more – so don’t be surprised if it lifts production for the ‘blending’ project with Vale – there’s talk of an extra 100 million tonnes of product from the two companies to be sold into world markets (read China).
It is clear from yesterday’s news from Fortescue and the market reaction (and BHP shares only rose 3.5% overnight on news of the surge in iron ore prices, and Rio Tinto 5%) that there was some well-informed buying on Monday and those selling out will be very angry that they have lost value in their transactions when there was such an important deal in the offing.
Yesterday afternoon’s statement from Fortescue read:
"Fortescue Metals Group Ltd (ASX: FMG, Fortescue) notes media commentary regarding Fortescue’s ASX release issued to the market this morning, 8 March 2016, regarding a non-binding Memorandum of Understanding (MOU) with Vale. "Media reports have stated that Vale may buy up to 15 per cent of Fortescue’s capital on-market and potentially invest in its existing and prospective mines.
"As stated in Fortescue’s ASX release, the MOU 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 would like to clarify that the MOU contemplates an acquisition of its listed shares of between 5% and 15%, as agreed between the parties.
"Fortescue is aware of its continuous disclosure obligations to the ASX and the ongoing commitment to update the market, if and when, there are matters to disclose.”
Why didn’t Fortescue include the equity detail in the morning press release, where they would have sat naturally with the other information?
