CIC, Shenhua in talks for 15.8pc of Fortescue

PUBLISHED : Monday, 04 February, 2008, 12:00am
UPDATED : Monday, 04 February, 2008, 12:00am

Potential deal will see state fund diversifying from financials

China Investment Corp, the mainland's US$200 billion sovereign wealth fund, and China Shenhua Group, the mainland's largest coal mining firm, have been in informal talks to buy a 15.85 per cent stake in Fortescue Metals, Australia's third-largest iron ore miner, in a deal worth US$2 billion, sources said.

The possible deal, which is still in the preliminary stages where neither party has made a decision, reflects the mainland's continued search for overseas natural resources to supply fuel for its economic growth.

Aluminum Corp of China announced last Friday that it and partner US aluminium company Alcoa had paid US$14 billion for a 12 per cent stake in mining giant Rio Tinto.

It was the largest overseas acquisition by a mainland company to date.

China Development Bank is among several interested parties from Asia, Europe and South America who are considering buying a stake in Switzerland-based mining group Xstrata in a deal which could derail a tie-up between Xstrata and Brazil's Vale, the Daily Telegraph reported yesterday.

The Fortescue deal is 'really early so let's see if a memorandum of understanding materialises', one source said.

If the sale proceeds, Harbinger Capital Partners would sell its stake - currently valued at US$2 billion - to the Chinese fund and coal miner.

Harbinger Capital is a US-based event driven and special situations fund.

Such funds seek to profit from corporate events such as mergers and acquisitions. Harbinger is a unit of Harbert Management Corp.

Harbinger picked up an additional 6.89 million shares in Fortescue on January 22, making it the second-largest shareholder with a 15.85 per cent stake.

Fortescue founder John Andrew Forrest is the largest shareholder in the firm with 35.97 per cent.

'Shenhua is the second-largest coal mining company in the world so it's a natural move to extend its core competence overseas as well as the fact that the company is keen to secure coking coal supplies given their relative shortage in China,' said Donovan Huang, an energy analyst with Nomura Securities.

'It is also looking to expand stocks of thermal coal to enhance energy security and support economic development in China.'

The potential purchase comes after Baosteel and Minmetals Resources tried to secure a stake in the company in talks with other shareholders including Mr Forrest, other sources said.

'They were within a whisker of a deal but it fell apart on price,' said one source familiar with the Baosteel bid.

Minmetals, the largest alumina importer in the mainland, had been looking at a deal involving anywhere from 30 per cent to 70 per cent in a price range of between US$3 billion and US$7 billion financed through a mixture of debt and equity.

'It's all gone very quiet,' said one source familiar with Minmetals.

While such a deal makes a lot of sense for resource needy China, many market observers were sceptical of a sale involving a significant part of the stake owned by Mr Forrest at this time.

'Why now? The company is well capitalised and Forrest is a person that with all his heart believes he is the next Rio Tinto so I would be pretty surprised if he was willing to sell out,' said the head of one Australian fund.

The potential acquisition is a diversification from the financial sector where CIC has made its other initial investments.

The fund paid US$5 billion for bonds convertible into shares that if fully exercised would see CIC take a 9.9 per cent stake in US investment bank Morgan Stanley. CIC paid US$3 billion for about 10 per cent of US private equity giant Blackstone Group before its initial public offering in June last year.

Blackstone's shares have fallen 41 per cent since their sale price.