Fortescue Metals Group Australia's third-biggest iron ore miner, missed a self-imposed deadline on Wednesday to obtain up to $6 billion in debt financing from Chinese steel mills, casting doubt over big expansion plans and a related deal to discount its ore.
Fortescue agreed last month to sell the mills 20 million wet tonnes of iron ore at a 3 percent discount to rival miners, provided they arranged $5.5-$6 billion in financing by Sept 30 to fund the firm's ambitious growth in the Pilbara iron belt.
A Fortescue spokesman said the miner was sticking to a blueprint to lift annual output incrementally to 95 million tonnes from the current 38 million tonnes rate by tapping new mines deeper in the Pilbara, but would not comment on how the work would now be funded.
Fortescue's move to sell China cheaper ore was seen as breaking ranks with the industry's traditional price-setting mechanism and aimed at garnering favour with the world's biggest buyer of ore.
The China Iron & Steel Association (CISA) had complained miners wanted too much for their ore given the impact of the world financial crisis on steelmaking, refusing to officially sign off on contracts with Fortescue's larger competitors Rio Tinto (RIO.AX)(RIO.L) and BHP Billiton (BHP.AX)(BLT.L).
In July, Rio Tinto's lead iron ore price negotiator, Stern Hu, and three other employees were detained in Shanghai and accused of espionage and stealing state secrets, further clouding the mills' relationships with mining companies.
Fortescue said in a one-paragraph statement that it would continue to work with Chinese steel maker Baosteel and the China Iron and Steel Association (CISA) on financing.
A CISA official who did not want to be identified said: "CISA and Baosteel have never promised that Fortescue would definitely obtain Chinese funding, but CISA and Baosteel will help the miner to get it."
Fortescue left a question mark over its price discount for Chinese mills, saying it would continue working cooperatively with CISA, "including the provision of attractive iron ore pricing if requested."
Fortescue's chief executive, Andrew Forrest, known for his skills in raising funds to back elaborate mining ventures, was unavailable.
In announcing the deal on Aug. 17, Forrest said the discount hinged on securing the funds, but CISA suggested this week the funding was independent of pricing.
Fortescue stock was down 2.6 percent to A$3.80, outpacing losses in the wider Australian market .AXJO. Fortescue has dropped 20 percent since its mid-August announcement, compared with litte change in Rio Tinto's shares and a modest gain in BHP Billiton shares over the same period.
Sources close to Fortescue said the firm was attempting to find alternative sources of financing, preferably in China, where it sells all its ore. In the meantime, it would probably continue to provisionally price its ore at the deeper discount.
Miners typically price on a provisional basis in the absence of contracts to adhere to shipping schedules and adjust the price if needed once contracts are signed.
"It's important Fortescue stays on friendly terms with its Chinese customers, especially when it's trying to hit them up for $6 billion," said James Wilson, a mining analyst for DJ Carmichael & Co in Perth. "Fortescue is willing to extend it (the price discount offer) to keep the peace."
Chinese officials had hailed the Fortescue deal as a welcome compromise that might help break the deadlock in annual iron ore talks with Rio Tinto and BHP Billiton.
Both companies have declined to meet Chinese steelmakers' initial demands for a 40 percent price cut this year and have instead held out for a smaller reduction of 33 percent agreed with other Asian mills.
Under the China funding deal, Fortescue had said it would sell its ore to China at closer to a 35 percent reduction to last year's price.
Source: Reuters
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