Vale-Fortescue iron ore pact a win-win deal — analysts

Brazil’s Vale (NYSE:VALE) the world’s biggest iron ore miner, and Australia’s Fortescue Metals Group (ASX:FMG) plan to join forces in a deal that analysts believe would boost the companies’ profits and help them develop new projects.

Under the proposed tie-up, about a year in the making, Vale could buy as much as 15% of Fortescue listed shares, giving the Rio de Janeiro-based miner a foothold in in the ore-rich Australian Pilbara region, closer to its key customer, China.

Vale also might choose to invest directly in Fortescue’s existing pits in remote northwest Australia or pursue plans for mining projects with its new partner, the companies said in separate statements, adding the terms of the pact are non-binding and subject to the approval of both company’s boards and regulators.

By blending the different grades of iron ore they mine, the companies could produce a mix that is better suited to use in blast furnaces than the product of a single company’s mines, say analysts.

Fortescue, which is the world’s No. 4 iron ore producer, mines the lowest grade ore, while Vale digs the highest.

Analysts at Banco Itau BBA SA believe that by blending of different grades of iron ore the companies could produce a mix that is better suited to use in blast furnaces than the product of a single company’s mines, Noticias de Mineracao reported (in Portuguese).

Vale was blocked once from exploiting an inroad to the Australian sector when a joint venture partner in coal, Aquila Resources, which also held rights over iron ore acreage, was bought in 2014 by China's Baoshan Iron & Steel Co.

However, Fortescue founder Andrew "Twiggy" Forrest will still hold a controlling one-third stake in the company is the partnership materializes.

Iron ore prices have rallied in recent days but the main trend over the past two years has been a steady fall as lower demand from China has coincided with a big increase in supply from the large Australian producers.

Vale-Fortescue iron ore pact a win-win deal — analysts