Fortescue Metal Group has failed to get it hands on an estimated $A5.7 billion-$6.9 billion ($US5 billion-$US6 billion)  in cheap financing from China and it has also failed to fully and completely keep the Australian market informed as to just what is happening with its iron ore pricing on sales to China and its quest for new funds.

In a short statement to the ASX this morning, the company said:

“Fortescue Metals Group Ltd advises, with regard to its agreement announced on August 17 2009 with the Baosteel Group and China Iron & Steel Association, that the condition subsequent relating to the completion of finance by September 30, 2009 will not be met in time. Fortescue intends to continue working co-operatively with CISA including the provision of attractive iron ore pricing if requested.”

But not a word about the details contained in the August 17 statement, such as whether there will be a price discount on the 20 million tonnes of ore shipped to Chinese mills from July 1 to the end of the year. Nor was there any confirmation that 20 million tonnes would be shipped.

No explanation was given about the future financing request revealed in the August statement such as; has Fortescue halted plans to obtain the money, is it still talking to Chinese banks and CISA, plus Baosteel about the proposal, is there a plan to seek the money elsewhere (very unlikely)?

There have been many media reports since February that Fortescue was hunting for new money: figures of $US1 billion or more were mentioned, as well as new equity. Hunan Valin, a major Chinese steelmaker, took a 15% stake in Fortescue in February. It in turn has the world’s biggest steel group, ArcelorMittal as a minority investor.

Despite that deal, the stories of Fortescue’s hunt for more money resurfaced in April-May and culminated in the statement on August 17, which for the first time put a figure on the company’s desired amount.

The August deal was seen as an attempt by Fortescue to curry favour with the Chinese mills and exploit the poor relations between them and the likes of BHP Billiton and especially Rio Tinto. It came during the tensions over the detention of several Rio executives in Shanghai by the Chinese government.

It would seem Fortescue has failed in its attempt to exploit the stand off between the Chinese mills and BHP and Rio.

Since then, not a world until this morning’s brief statement. Comparing it with the August 17 statement is an exercise in futility.

“Fortescue Metals Group Ltd has achieved a landmark agreement with Baosteel Group Corporation and China Iron and Steel Association for an agreed China price for all Fortescue iron ore sold to Chinese mills for the period July 1 to December 31, 2009.

The agreement, signed by Baosteel and CISA, commits Chinese steel mills to acquire approximately 20 million wet metric tonnes from Fortescue between  July 1 and December 31, 2009.

The agreed price is $US0.94/dry metric tonne unit for Fortescue’s Rocket Fines (on an FOB basis) and is about 3% under the price agreed by other Australian producers with non-Chinese  mills. This price equates to approximately $US55.50 per dry tonne for Fortescue grade iron ore. Fortescue has also agreed a lump price of $US1.00/dmtu for high grade lump, which is equivalent to approximately $US61 per dry tonne FOB.

A condition subsequent to this agreement is the completion of finance by September 30, 2009, by Chinese financiers on terms acceptable to Fortescue. This is estimated by Fortescue to be an amount of $US5.5 billion to $US6 billion.

Under the Agreement, CISA has guaranteed that a priority will be given to FMG to negotiate iron ore prices for 2010 if the annual pricing negotiation is conducted.

Fortescue chief executive officer Andrew Forrest said the agreement breaks the market impasse that has enveloped the Chinese iron ore industry in uncertainty and added risk for the past 12 months.

“This groundbreaking agreement cements the strength of the bilateral relationship between Australia and China in which mutual issues can be resolved and future opportunities identified. It also creates a realistic and agreed iron ore price that delivers value for all parties and provides strong support for Fortescue’s continued growth,” Forrest said.

“The ongoing market speculation has promoted unprecedented iron ore and steel price volatility, which in turn has created extreme production uncertainties for Chinese steel mills and for suppliers setting individual contracts with those mills.

Forrest’s comments were notably absent from this morning’s brief missive to the ASX, which should sling the company a please explain/more information please notice.

The company’s shares fell nine cents to $3.81 after 30 minutes’ trading.

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Peter Fray
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