Hunan Valin Iron and Steel Group
State-owned iron and steel producer with China's tenth largest steel production.
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Hunan Valin buys 16.5 percent stake in Fortescue Metals
Hunan Valin (SZ:000932), the state-owned steel maker, has agreed to pay A$1.2bn (US$770m) for a 16.5 percent stake in debt-strapped Australian mining company Fortescue Metals Group (ASX:FMG).
Fortescue, Australia's third-largest iron ore miner, also agreed today to quadruple its iron ore sales to Hunan Valin, which is now set to become its second-largest shareholder. Subject to production expansions, Fortescue will increase annual supply to Hunan Valin’s subsidiary Xiangtan Steel, from one to four million tonnes from 2010.
Fortescue will sell A$558m (US$361.4m) in new shares to Valin, with Valin buying 225m new shares at A$2.48 each. Valin will also buy 275m existing shares from American shareholder Harbinger Capital. Valin will hold a total 16.5 percent stake when the purchases are complete. Andrew Forrest, CEO and founder, remains the largest shareholder with 35 percent, while Hunan Valin chairman Li Xiaowei will join Fortescue’s board. A ‘standstill agreement’ now prevents Valin raising its stake above 17.5 percent.
The purchase is an example of Chinese companies gaining access to Australian minerals in an environment of falling stock prices and debt difficulties. However, like Chinese investments in Oz Minerals and Rio Tinto, the stake will need approval from Canberra’s Foreign Investment Review Board.
With high operating expenses and slumping iron ore prices, Fortescue has been in need of capital to compensate for disrupted cash flow and to keep operations running. Fortescue’s shares have slid 60 percent in the last year amidst the downturn in commodities and concern over its debt financing.
Hunan Valin shares slid 0.03 percent on the news of the purchase. Shares in Fortescue, suspended on Monday before the announcement, last traded at A$2.38, giving a market value for the company of A$7.95bn. In December 2008, the company held A$440m in cash, with a debt of A$3.14bn. Company assets were A$5.18bn in June last year.
Fortescue said it was also negotiating a hybrid funding package with the sovereign wealth fund China Investment Corporation (CIC). CIC is believed to be considering an even larger investment to help the miner reduce its debt.
