Twiggy and Gina: Marriage of convenience?

A tie up between Hancock Prospecting and Fortescue is on the cards

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 11, 2012 10:29 am AEST

Media speculation has suggest that Andrew 'Twiggy' Forrest's Fortescue Metals Group (ASX: FMG) and Gina Rinehart's Hancock Prospecting could do a deal to share infrastructure, which could save the companies more than $1 billion each.

Hancock Prospecting's Roy Hill project backs onto Fortescue's Cloudbreak mine, and needs a 340km railway line to Port Hedland to get its ore to a port. Fortescue already has a railway line from its mine, and the Roy Hill rail line would run alongside Fortescue's. With iron ore prices falling, the pressure is on miners to find ways to cut costs, so it makes sense for the two companies to talk.

Fortescue is already in a 50-50 joint venture with BC Iron Limited (ASX: BCI), with the latter using Fortescue's rail line to deliver ore to Port Hedland.

By agreement with the Western Australian government, Fortescue' rail infrastructure is open to third parties – subject to negotiation and capacity. With the Roy Hill project estimated to cost $9.5 billion, and talk in the industry that Ms Hancock is struggling to get banks to finance the majority of the project, any cost cuts would make it easier to source financing. Removing the cost of building the 340km railway line would certainly help.

For Fortescue, any sharing of its infrastructure could help the company shore up its balance sheet. This comes at a time when Fortescue is under immense pressure to reduce its debt levels, as iron ore prices fall to around their lowest levels in three years. The company has embarked on a sale of assets, and deferred capital expenditure. Fortescue may struggle to meet its debt and interest obligations, at current iron prices.

Speculation is also mounting that some of the larger miners, including BHP Billiton (ASX: BHP) and Brazilian giant, Vale, were running the ruler over Fortescue, which has seen the company's share price rise 15% in the past two trading days, as investors speculate it could become a takeover target.

Investors are also speculating that Atlas Iron Limited (ASX: AGO) could also be a takeover target for Hancock Prospecting, given Atlas has significant free port capacity at Port Hedland.

The Foolish bottom line

With commodity prices falling, finance becoming harder to source and costs remaining high, consolidation and joint-ventures appear the only way for some to survive.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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