Fortescue Metals Group is set to sell down its stake in a joint venture with Pilbara junior BC Iron, as the company continues efforts to reduce its debt loading and restart the expansion projects that were sensationally stalled in September.
Both companies currently own 50 per cent of the Nullagine iron ore project under a landmark deal that was struck in 2009, but BC Iron has confirmed today that it is poised to buy a further 25 per cent of Fortescue’s stake.
BC Iron shares have been halted all day ahead of the deal being announced. Fortescue shares were not halted this morning, and duly rose by almost 7 per cent to be testing $4.05 around 2pm.
Fortescue’s decision to leave its shares open for trading has already attracted the attention of the ASX regulators, with Fortescue arguing that it is too big a company for the transaction to be considered material.
Under the terms of the deal, BC Iron will pay Fortescue $190 million for the extra 25 per cent of the asset.
The acquisition will increase its annual iron ore export capacity by 80 per cent to 4.5 million tonnes.
Speaking from Sydney this afternoon, BC Iron managing director Mike Young said the deal would be highly accretive to BC Iron shareholders and was about as low risk as an acquisition could get.
“We know the deposit, we know the management and we like the management,” he said.
The original joint venture was struck in August 2009, and saw BC Iron sell 50 per cent of its Nullagine iron ore prospect to Fortescue, in return for using Fortescue’s railway and port infrastructure to sell its product to China.
BC Iron managing director Mike Young was criticised at the time for giving away too much to his bigger neighbour, and has long defended the deal by saying it was ”better to have half of something, rather than all of nothing”.
The deal has since proved to be a masterstroke as a lack of transport infrastructure has left other Pilbara juniors with stranded assets that are unlikely to be developed now that iron ore prices have slumped.
Mr Young joked this afternoon that he would have to update his catchphrase.
”Now i’ve got 75 per cent of something,” he said.
BC Iron has been exporting iron ore since February 2011, and has since exported 5 million tonnes.
The company is one of the few, if not the only Australian iron ore exporter to have a higher share price today than at the same time in 2011.
It paid a dividend in September and Mr Young said today’s deal was likely to be followed by more growth.
BC Iron will take on $130 million in debt to fund the deal, and will look to raise a further $58 million in equity through a share placement and purchase deal which is underwritted by Macquarie.
As well as looking at assets overseas, Mr Young said BC Iron would look to develop other Pilbara assets with Fortescue.
”We are hoping that, going forward, we can do some more business with Fortescue,” he said.
Fortescue boss Nev Power said the deal was good for both parties, but did not say what the money will be used for.
It is expected the money will help Fortescue restart the Kings iron ore asset it halted in September when iron ore prices slumped.
The original release of this article first appeared on the website of Shanghai Night Net.