Valin and FMG End of Honeymoon: Most Contracts Become Empty Papers

The honeymoon period of Hunan Valin Iron and Steel Group (hereinafter referred to as Hualing) and Australia's third-largest iron ore producer FMG has quietly ended and entered a period of contradictory growth.

Recently, an Australian mining person who is currently negotiating with FMG about this matter told this reporter that many of the agreements between Hualing and FMG have not been implemented as planned, and many of the cooperation plans have become a piece of paper. “Undertakes such as iron ore supply agreements and cooperative development of mines have not been honored.”

In 2009, Valin stakes in A$1.2718 billion in FMG, gaining a 17.34% stake in the latter, becoming the second largest shareholder of FMG CEO Andrew Forrest.

An insider of Hualing told this reporter that due to the agreement mine that Valin obtained from FMG (Note: the contract mine refers to the cooperation between the parties in accordance with the agreed price for trading iron ore within a period of time) far lower than the original planned 10 million T/year, a FMG non-executive board seat in exchange for 17.34% of the equity did not bring substantial benefits to Valin, and other strategic cooperation agreements could not be implemented. The management of Valin began to consider selling FMG at the right time. Part of the equity.

Unrealized resource guarantee

Originally asked FMG to provide 10 million tons of iron ore to Hualing, actually only providing 2 million tons

After joining FMG, Li Xiaowei, the then-chairman of Hualing, told the outside that the biggest motivation of Hualing's shareholding in GMG was to "solve the bottleneck problem that restricts the development of Hualing."

Li Xiaowei also believes that Valin's shareholding in FMG will contribute to the Chinese steel industry's breaking of the monopoly of Rio Tinto, BHP Billiton, and Vale's three largest iron ore giants. "Who made a contribution to breaking the iron ore negotiation deadlock? Valin contributed."

Pursuant to the business cooperation agreement signed by Valin and FMG, Valin will further purchase long-term contracts for iron ore from FMG. The new iron ore supply contract will require FMG to guarantee the supply of 10 million tons of iron ore to Valin Steel every year.

Two years later, with the actual cooperation between Valin and FMG, the marriage was not as good as Valin had imagined. Valin's hope of becoming a shareholder of FMG's "a source of stable, competitively priced raw materials" shattered.

Informed sources told this reporter that as FMG began supplying iron ore to Valin, Valin gradually discovered that the quality of FMG's iron ore did not meet the “taste” of its blast furnace. “In other words, Valin cannot use too much. FMG's mine."

According to our reporter, different types of blast furnaces have different requirements for iron ore quality. In general, the key to large blast furnaces is fine material technology, and the iron ore grade (iron content) requirements are high.

The person familiar with the matter told this reporter that FMG's iron ore quality is worse than the three major mines, mainly because of many impurities and low grades. “In the beginning, Baosteel and FMG also discussed cooperation, but considering the quality of FMG ore, Baosteel abandoned the cooperation. ".

The informed source further stated that only 2 million tons of long-term coal mines were obtained from FMG each year. The two sides negotiated several times to increase the agreement ore, and eventually FMG refused to supply iron ore to Hualing at preferential prices. FMG's iron ore quality problems, negotiations ended without results.

In 2010, Valin Steel (000932.SZ), a listed company of Valin, suffered a huge loss of RMB 2.644 billion. When Valin Steel explained a huge loss, it pointed out that it failed to properly handle the long-term supply relationship with overseas iron ore suppliers, resulting in Since the beginning of this year, the proportion of long-term mines has been reduced from 70% to 40%. The original management expects that the price of iron ore will continue to rise, and is concerned that the supply of iron ore is difficult to guarantee. The large purchase of iron ore from the spot market has pushed up its cost.

Or sell further equity

Valin has sold 1% of FMG equity and does not rule out continuing to reduce holdings

The identity of FMG's second-largest shareholder not only did not enable Hualing to obtain any additional resource guarantees and price concessions from FMG, and other cooperation agreements failed to make substantial progress.

Valin and FMG discussed the development of a magnetite project and signed a strategic cooperation agreement on low-grade iron ore development and raw ore processing. The above-mentioned sources said that at present, there is almost no possibility of other cooperation between the two parties.

On May 27th this year, Valin held the "FMG Project Management Experts' Argumentation". In the background of this argumentation, it was the management of Valin began to pay attention to the risk of the FMG project.

According to Valin, “The chairman of Hualing, Li Xiaowei, is the director of FMG who has sent out FMG. In the past two years, FMG has provided professional opinions on major issues such as development planning, development, engineering construction, and sales strategy.”

In fact, Li Xiaowei obtained a non-executive board seat at FMG. When FMG opened the board of directors, Li Xiaowei must evade the core issues related to iron ore sales and pricing. Even starting from the second year of his shareholding, Li Xiaowei started to absent from FMG's board meeting, which is almost the lowest among FMG directors.

Fortunately, when Valin shares, FMG's share price is 2.37 Australian dollars / share, as of December 28, 2011, FMG's share price was 4.35 Australian dollars / share, an increase of 83.5%. However, compared to nearly 170% of the increase in May this year has fallen a lot, at that time, Valin realized a 1% stake in FMG held.

The person familiar with the matter said that Hualing’s 1% equity interest in FMG has had little impact on its relationship with FMG. Therefore, the speculation on the whitewash report on the outside world has also released a signal that Valin's investment focus on FMG has been basically Go to value investment instead of strategic investment.

An internal management of Valin revealed to the reporter that the possibility of continuing to sell a small amount of equity in FMG was not ruled out.

FMG reputation blemishes

The interests of FMG have basically been realized. Valin is only a shareholder.

A person from Baosteel who had contacted FMG told this reporter bluntly that FMG's reputation in the mining industry is not good.

The above-mentioned insiders also stated that when Hualing shares in FMG, it appears that the interests of FMG have basically been realized and Hualing is only a shareholder.

The above-mentioned industry insiders who discussed cooperation with FMG told this reporter that cooperation with FMG is indeed risking being destroyed. "If there is no maximum benefit to FMG, FMG will not implement the agreement with Hualing."

In fact, FMG is a reputable tainted miner. In 2009, the Australian Securities Regulatory Agency (ASIC) issued an announcement on April 3 stating that FMG and its CEO were suspected of misusing the trading information of Chinese-funded enterprises to mislead the market and will investigate the case. This alleged that it published misleading and deceptive information in its announcements published from August 23 to November 9, 2004, and exaggerated the contents and influence of its contracts with three Chinese companies.

Coincidentally. As early as 2005, when MCC Group negotiated cooperation with FMG Corporation, it had questioned its reserves and thought it was too exaggerated. At that time, the National Development and Reform Commission had provided guidance to the FMG iron ore project and stated that “Since the exploration work of the FMG iron ore project was still underway and did not meet the requirements of the feasibility study, Chinese companies should adopt a sound attitude to intervene in the FMG iron ore project. Investment and construction."

An industry insider who had contacted FMG described FMG as "a Greek" and "the Greeks rarely implement the contract 15 to 10 times.