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CIC, Fortescue Metals in talks for $1b bond issue

(China Daily/Agencies)
Updated: 2009-08-12 10:04

China Investment Corporation is planning a $1 billion investment in the Australian iron ore miner. [Agencies]

Fortescue Metals Group Ltd and China Investment Corp (CIC), China's $200-billion sovereign wealth fund, are in advanced talks on a $1-billion-plus convertible bond investment to help the Australian iron ore miner fund its expansion, two sources said yesterday.

The talks follow news on Monday that China's Yanzhou Coal agreed to buy Australian coal miner Felix Resources in a deal worth up to $3.3 billion.

"Fortescue needs fairly significant funds to expand," said James Wilson, an analyst at DJ Carmichael, noting Australia's third-largest iron ore miner after Rio Tinto and BHP Billiton aims to treble its annual production over the long term from 30-40 million tons now.

"They have what, about $500 million in profits? That's not going to cut it if they want to expand," he said.

Earlier in the year, Rio Tinto walked away from a $19.5-billion deal with China's State-owned Chinalco in favour of a tie up with rival BHP Billiton.

Still, analysts and bankers expect Chinese companies to pursue other Australian resource firms. So far this year, Chinese firms have invested about $2.2 billion in Australian energy and resource companies.

Related readings:  Yanzhou may net Oz's Felix Resources   Cautious stance reaps rich dividends for CIC  CIC to offer $159m loan to Aussie firm  CIC to increase investment in all classifications

CIC's top officials paid a low-profile visit to Australia in July and had closed-door meetings with Fortescue to discuss the potential funding, one of the sources said.

"Investment is investment," said the source with knowledge of CIC's overseas strategy. "Australia is still very important to China in terms of the bilateral trade relationship."

"Plus, a convertible bond is safe as an investment tool in this case," the source said.

Spokesmen for CIC and Fortescue declined to comment. Shares in Fortescue ended 1.2 percent higher yesterday.

In recent months, CIC has shifted its strategy toward investments in natural resources. Last month, CIC bought a 17.2-percent equity stake in Canada's Teck Resources.

That deal did not require government approval under Canada's foreign investment rules, which only review transactions when a foreign company takes control of a domestic firm.

Fortescue is also talking to different parties about other funding options, an investment banker with direct knowledge of Fortescue's strategy said.

Reuters