In hard times, miners need to partner — and it has to be done right. On Tuesday, Vale of Brazil and Fortescue of Australia — respectively the largest and fourth-largest iron ore producers — announced plans for a joint venture that will blend their ores for sale into China. Vale may take a stake in Fortescue of up to 15 per cent, to be bought in the open market, and could invest directly in Fortescue’s mines.
The marketing aspect of the deal makes sense. Blending should enable them to provide a more usable product to their customers and help both to realise higher prices. It might also reduce production costs: Fortescue says that the blend could use more of its lower-grade ore, reducing waste at its Chichester mines, for instance. Vale would benefit from gaining access to volumes closer to China. As both have facilities there already, capital expenditure is expected to be minimal.
Vale taking a stake in Fortescue is less logical. The Brazilian miner has been trying to sell assets to reduce its $26bn net debt pile. In January it had to draw on $3bn of emergency financing as those sales have made slower progress than anticipated. The company still looks stretched. CLSA estimates net debt to earnings before interest, tax, depreciation and amortisation could be as high as six times in 2016. The broker forecasts that Vale will realise just $2bn in operating cash flow, against capital expenditure of $6bn. Any pay outs for last year’s dam burst at subsidiary Samarco will not help.