China to Speed Australian Investment After Rio Rebuff

By Jesse Riseborough

June 10 (Bloomberg) -- China is set to accelerate investment in iron ore projects in Australia, the world’s biggest exporter, after the collapse of its deal to buy stakes in mines owned by Rio Tinto Group.

“The opportunities for Chinese groups to come in and facilitate development of some of the smaller players are definitely going to start picking up pace,” said Eric Lilford, head of Australia mining at Deloitte Corporate Finance. Australia has A$26 billion ($21 billion) of proposed new iron ore mines, according to government estimates.

Rio last week scrapped a planned $19.5 billion deal with Aluminum Corp. of China, known as Chinalco, in favor of a share sale and iron ore venture with BHP Billiton Ltd., dashing Chinese expectations of locking in more supplies. Aurox Resources Ltd., Grange Resources Ltd. and Atlas Iron Ltd. may attract increased investment from China, according to Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co.

“We won’t see this trend stopping or being deterred by Chinalco’s rejection because these companies are trying to get sustained supplies with stable prices,” said Zhou Xizeng, a Beijing-based analyst at Citic Securities Co. “Chinese companies have been successful in forming alliances with Australian junior miners.”

Fortescue Metals Group Ltd., Australia’s third-largest iron ore exporter, surged 15 percent to A$3.59 at the 4:10 p.m. Sydney time close on the Australian stock exchange, the highest in eight months. Aurox jumped 20 percent to 27.5 cents and Murchison Metals Ltd. rose 11 percent to a nine-month high.

Billionaire Forrest

Fortescue, controlled by billionaire Andrew Forrest, may be a target of Chinese investment with Baoshan Iron & Steel Co. and China Minmetals Group among companies seeking acquisitions of overseas mining projects as the nation opens its purse strings, Citigroup Inc. said last month. China may spend more than $500 billion on foreign resource investments over the next eight years, according to Deloitte Touche Tohmatsu.

“It will refocus interest on the junior iron ore sector in the Pilbara” region of Western Australia, said Mike Young, managing director of Perth-based iron-ore explorer BC Iron Ltd. “The Chinese want to have a more personal level of involvement with their suppliers. The private mills in China will start looking at other players.”

Rio, BHP and Brazil’s Vale SA, the world’s biggest exporter, control about 75 percent of the global iron ore exports. Steelmakers in China, Europe and Japan have said the planned venture between Rio and BHP, the world’s second- and third- largest producers, would limit competition.

Monopoly Hints

The China Iron & Steel Association has rejected an agreement reached by Rio Tinto and Japanese and Korean mills for a 33 percent cut in annual contract prices, still at the second- highest level on record. The BHP-Rio venture “hints heavily of monopoly,” the Chinese group said in a statement yesterday.

China, the biggest buyer of iron ore, needs supplies to boost economic growth. The nation’s 4 trillion yuan ($585 billion) stimulus package has already helped manufacturing expand, sparked record vehicle sales and boosted monthly imports of iron ore, copper and aluminum to records in April.

A total of 33 “less advanced” iron ore projects, with an estimated cost of A$26 billion, are planned, the Australian Bureau of Resources and Agricultural Economics said in a report last month. Many are lower-grade, magnetite ore projects including Atlas Iron’s A$3 billion Ridley project and Grange’s $1.6 billion Southdown project.

Magnetite Ore

Magnetite needs greater processing than higher-grade hematite ore, which accounts for about 96 percent of Australia’s output, according to Gindalbie Metals Ltd.

“The Chinese love magnetite so I’m sure they are going to push into the magnetite space big time,” Peter Arden, a resource analyst at Ord Minnett, said in an interview in Melbourne. “You are going to see at this stage multiple stakes being taken all over the place, to put their foot on it and keep others out.”

Aquila Resources Ltd. is seeking to develop a A$4.1 billion direct shipping iron ore mine, port and rail project in Western Australia. The company may seek partners to develop infrastructure for the project, Russell Tipper, general manager of iron ore for Aquila, said today by phone from Perth.

“That’s really where the funding could be of greatest assistance,” Tipper said. “We are discussing with parties the prospect of being able to share the development of infrastructure.”

Outside Australia

To be sure, China may also invest in projects outside of Australia, said Alan Heap, managing director of global commodities for Citigroup in Sydney. “There is high grade ore in West Africa, there is high grade ore in India,” he said.

Rio’s decision “aroused great repercussions among China’s enterprises and people,” Chinese foreign ministry’s spokesman Qin Gang said in an e-mailed statement yesterday. “However, we still believe China’s enterprises will continue” to carry out international investments and cooperation, he said.

The trend toward overseas investment “won’t be changed just because of one or two cases of failure,” said Li Kejie, a spokesman at Sinosteel Corp., China’s second-largest iron-ore trader, which last year acquired Australian producer Midwest Corp. for A$1.4 billion in cash.

Hunan Valin Iron & Steel Group, China’s ninth-largest steelmaker, this year bought a 17.3 percent stake in Fortescue for A$1.3 billion. Fortescue may need as much as $4 billion to proceed with plans to almost double output, Valin said last month.

To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net