FinanceAsia 

By Cherie Marriott  |  19 July 2006  

Hong Kong’s Noble Group pulls out of an investment in the Australian iron ore company, leaving the door open for Leucadia.
One of Australia’s most promising iron ore producers, Fortescue Metals Group, has signed a $400 million equity deal with New York company Leucadia National after talks with Hong Kong’s Noble Group fell through.

Noble Group’s bid to become the third force in Australia’s iron ore industry, and thereby securing valuable access to raw commodities, fell through on Monday after the two parties failed to reach an agreement on the right to market the iron ore to steel mills in China.

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Noble Group made a bid for a 10% stake in Fortescue, which is about to kick off one of the largest new mining projects in Western Australia. Drilling in the company’s tenements in the Pilbara region has been turning up sufficient deposits to support a 20-year project life.

The Hong Kong commodity trader had offered between $270 million and $300 million for the stake.

But the deal was conditional on Fortescue agreeing to the establishment of a joint venture marketing company that would sell the iron ore to China. The company would be 51% owned by Noble and 49% by Fortescue.

Noble called off negotiations on Monday with CEO Richard Elman saying: “We had fruitful discussions with the Fortescue team but were unable to reach an agreement with respect to certain elements of the contracts.”

So on Tuesday afternoon, Perth-based Fortescue announced that it had signed a deal with Leucadia that will see the NYSE listed company pay $400 million for just under 10% of the expanded issued shares in the mining company, valuing the shares at A$15.20 ($11.41) each.

Fortescue shares closed at A$9.41 last Friday when the company went into a trading halt pending yesterday’s announcement. In mid-March this year the shares were trading below A$4.95.

Leucadia has also agreed to extend a 13-year loan of $100 million with interest calculated as 4% of revenues, net of government royalties, from the sale of iron ore from the tenements in Cloud Break and Christmas Creek – two of six tenements in which major deposits have been identified.

The interest on the deeply subordinated loan is only payable when Fortescue is in production and comes with accrued interest clauses for missed payments.

The deal with Leucadia is conditional on Fortescue raising a minimum of $2 billion in an international bond placement to finance the rest of the Pilbara project. The debt must be in place by the end of the year.

The equity injection is a significant purchase for Leucadia which at the end of March 2006 had cash and marketable securities for new investments of about $2.1 billion.

Leucadia is a $5.8 billion holding company with investments in mining, manufacturing, telecoms, real estate and agriculture. Last year it reported revenues of $1.04 billion. Its shares have grown at a compound annual rate of 25.1% since inception in 1979.

Fortescue says it will make its first iron ore shipments from the project in the 2006/2007 financial year. The benefaction plant used to process Fortescue’s iron ore is being designed, built and financed by China Metallurgical Construction Corporation, a Chinese government-owned entity.

Noble Group says it hopes the marketing relationship between the two companies can be restarted in the future. “If we can reach an understanding with regard to marketing Fortescue’s iron ore to China we would be extremely pleased,” says Elman.

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