Fortescue Metals Group (FMG.AX), the world’s fourth-largest iron ore producer, has signed a deal with Taiwan’s largest private company to develop a new iron ore project.
Formosa Plastics Group has agreed to invest US1.15 billion in the FMG Iron Bridge Joint Venture, to develop the FMG Iron Bridge Project. FMG Iron Bridge is jointly owned by Fortescue (88%) and a subsidiary of China?s Baosteel (12%), and consists of two world class iron ore deposits, North Star and Glacier Valley. Combined, the two deposits have around 5.2 billion tonnes of iron ore resources.
Importantly, Formosa will commit US$527 million to develop the first stage of FMG Iron Bridge, which should see production of 1.5 million tonnes of iron ore in early 2015. As part of the deal, Formosa will also contribute US$500 million upfront to Fortescue subsidiary The Pilbara Infrastructure to access Fortescue?s port facilities at Herb Elliot Port, and has agreed to purchase up to 3 million tonnes of iron ore per annum.
Formosa wants to secure a substantial long-term resource to supply its Ha Tinh steel mill in Vietnam, which is currently under construction. Ha Tinh is expected to produce 22 million tonnes of steel each year, once completed, with first production in 2015. The Taiwanese company will also contribute additional funds to the second stage development of the FMG Iron Bridge Project, which is expected to produce 9.5 million tonnes per annum when it becomes operational.
Despite comments by some analysts that the iron ore price could hit US$70 a tonne in the near future, Fortescue CEO Nev Power is upbeat about continued demand for the commodity. Rio Tinto (RIO.AX) and BHP Billiton (BHP.AX) certainly haven?t backed away from iron ore, with both companies expecting to produce record amounts in future, rather than less.
With around US$10 billion of debt on its books, this transaction should see Fortescue strengthen its balance sheet, while allowing it to proceed with the development of a new iron ore region.
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Motley Fool writer/analyst Mike King owns shares in BHP.