Fortescue Metals Group Ltd and China Investment Corp (CIC), China's $200 billion sovereign wealth fund, are in advanced talks on a $1 billion-plus convertible bond investment to help the Australian iron ore miner fund its expansion, two sources said on Tuesday.
The talks follow news on Monday that China's Yanzhou Coal agreed to buy Australian coal miner Felix Resources in a deal worth up to $3.3 billion.
China is increasingly looking to less politically sensitive joint ventures and financing deals, rather than takeovers, to invest in global natural resources to support its economic growth.
“Fortescue needs fairly significant funds to expand,” said James Wilson, an analyst at DJ Carmichael, noting Australia's third-largest iron ore miner after Rio and BHP Billiton aims to treble its annual production over the long term from 30 million-40 million tons now.
“They have what, about $500 million in profits? That's not going to cut it if they want to expand,” he said.
The potential financing deal comes at a sensitive time for Australia-China relations, following China's detention a month ago of four Rio Tinto employees in Shanghai on suspicion of stealing state secrets.
The men, including Australian Stern Hu, remain in detention and have yet to be charged, increasing political pressure on Australia's Mandarin-speaking Prime Minister Kevin Rudd.
Earlier in the year, Rio walked away from a $19.5 billion deal with China's state-owned Chinalco in favor of a tie up with rival BHP Billiton.
Still, analysts and bankers expect Chinese companies to pursue other Australian resource firms. So far this year, Chinese firms have invested about $2.2 billion in Australian energy and resource companies. (Reuters)