Fortescue Stock Up 7% as Chinese Investors Circle

Loading of iron ore

Fortescue [ASX:FMG] enjoyed a good start in early trade this morning. The stock price is up 7.61% as of 11:48 AEST, trading at $1.91.

That caps off a solid two weeks for the fourth biggest iron ore exporter. The share price is up $0.20 since July 23 alone. And it comes as some respite after months of falling stock prices.

But this latest upsurge has nothing to do with market conditions.

There is growing speculation Chinese buyers are circling around infrastructure assets. They’re weighing up moves for Fortescue’s ports, railroads and mine.

The buyers in question are both Chinese companies. The first of these is Hebei Iron & Steel Group. It’s the largest Chinese steelmaker by production capacity. Last year’s earnings amounted to AU$61.3 billion.

The other party is the state-owned Tewoo Group, with assets of AU$25 billion.

Both are interested in acquiring infrastructure stakes in the Pilbara region. And they could bid for stakes in Fortescue’s mines too.

Whether any of this comes to fruition is uncertain. Sources close to the discussions suggest that talks remain at an early stage.

Fortescue held talks with Japanese firms in June about offloading stakes in some mines. No concrete developments have come from that as of yet.

But Fortescue is clearly interested in selling assets, providing offers meet their expectations. Fortescue’s chairman, Andrew Forrest, said as much in March.

As the third largest iron ore producer in Australia, Fortescue needs all the help it can get.

Rio Tinto [ASX:RIO] and BHP [ASX:BHP] have continued to expand production. They’ve done so to maintain market share, driving smaller producers out of the market. This strategy is keeping global supply high, while suppressing prices. And it’s also squeezing Fortescue’s profit margins.

Fortescue struggles to compete with the other three major global low-cost producers. That’s because it has a breakeven cost higher than its competitors.

As earnings from iron ore exports tumble, Fortescue’s position comes under increasing pressure. The company already sold US$2.3 billion of bonds in March this year as prices fell.

Investors will no doubt welcome capital rich Chinese buyers with open arms. At this point, it’s the only silver lining for Fortescue’s stock outlook.

Mat Spasic,

Contributor, The Daily Reckoning

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