Australia Approves China’s Investment in Fortescue

March 31 -- China’s Hunan Valin Iron & Steel Group’s A$1.3 billion ($893 million) investment in Fortescue Metals Group Ltd. was approved by Australia with conditions to avoid conflicts of interest over prices, sales and marketing.

The investment, a 17.6 percent stake acquired through new stock and from shareholder Harbinger Capital Partners, is subject to “formal and strict undertakings,” Treasurer Wayne Swan said today in an e-mailed statement.

Chinese investments face increasing attention in Australia as the biggest metals consumer speeds up takeovers amid a global recession. China Minmetals Group today made a revised bid for OZ Minerals Ltd. after an initial offer was rejected because of security concerns. Swan has yet to approve Aluminum Corp. of China’s proposed $19.5 billion investment in Rio Tinto Group.

“It shows the door isn’t shut to Chinese investment in Australia but all deals are being closely scrutinized,” Alex Passmore, head of metals and mining research at Patersons Securities Ltd. in Perth, said today by phone. “Just because this deal has been approved doesn’t mean the other two in front of the regulators will go ahead.”

Fortescue, Australia’s third-biggest iron ore exporter, rose 2.4 percent to A$2.55 at the 4:10 p.m. Sydney time close on the Australian stock exchange. State-owned Valin is China’s ninth-largest steelmaker.

The conditions apply to Valin board nominations and cover potential conflicts of interest with sales and marketing, Treasurer Swan said. They require the company to report to Australia’s Foreign Investment Review on its compliance, he said.

“These undertakings ensure consistency with Australia’s national interest principles for investments by foreign government entities,” Swan said. “They ensure the appropriate separation of Fortescue’s commercial operations and customer interests, and support the market-based development of Australia’s resources.”

The requirements aren’t a “special arrangement” and are in line with Australian laws and the normal practices of such deals, Valin Group said in a faxed statement today. “We have complied with the commitment as we submit the application to the FIRB.”

Fortescue last month agreed to increase sales to a unit of Valin and will boost shipments from 2010. It’s seeking to boost exports from its iron ore mine in Western Australia and is facing a A$731 million funding shortfall for the expansion, Macquarie Group Ltd. analysts said in a Feb. 24 report. China is the world’s biggest buyer of iron ore.

“I have no intention of seeking any more direct equity investment,” Fortescue Chief Executive Officer Andrew Forrest said on a conference call after the announcement. “I will continue to grow Fortescue within the Chinese economic system. If there’s a requirement for any further capital then we’ll let you know about the need for Chinese participation.”

Fortescue may seek funding from China’s debt markets and capital providers, Forrest said. The company is talking to “organizations which lead the Hubei steel industry,” he said, without giving details.

Fortescue on March 24 said investment talks are still continuing with China Investment Corp., or CIC, the $200 billion sovereign wealth fund.

China may spend more than $500 billion on overseas resources investments over the next eight years to secure supplies, Eric Lilford, head of Australia mining for Deloitte Touche Tohmatsu, said March 23.

Fortescue started shipping to Chinese customers from its A$2.8 billion Pilbara iron ore project in May. It wants to expand production of the steelmaking ingredient from its mines in Western Australia that supply Chinese steel mills.

The company sold shares in December to pay bills. An expansion to boost capacity at its Cloud Break mine to 80 million metric tons from 55 million tons may cost A$2.5 billion, JPMorgan & Chase Co. said in a Jan. 30 report.

“It’s a positive for the company as its funding requirements over the next half are now met after looking fairly precarious,” Paterson’s Passmore said.

(Bloomberg)