Fortescue’s FMG Iron Bridge Project moves forward

Fortescue's FMG Iron Bridge Project moves forward

Fortescue signs deal with Taiwan's largest private company to develop iron ore project

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 August 16, 2013 12:44 pm AEST

Fortescue Metals Group (ASX:FMG), the world's fourth-largest iron ore producer, has signed a deal with Taiwan's largest private company to develop a new iron ore project.

Formosa Plastics Group has agreed to invest US1.15 billion in the FMG Iron Bridge Joint Venture, to develop the FMG Iron Bridge Project. FMG Iron Bridge is jointly owned by Fortescue (88%) and a subsidiary of China's Baosteel (12%), and consists of two world class iron ore deposits, North Star and Glacier Valley. Combined, the two deposits have around 5.2 billion tonnes of iron ore resources.

Importantly, Formosa will commit US$527 million to develop the first stage of FMG Iron Bridge, which should see production of 1.5 million tonnes of iron ore in early 2015. As part of the deal, Formosa will also contribute US$500 million upfront to Fortescue subsidiary The Pilbara Infrastructure to access Fortescue's port facilities at Herb Elliot Port, and has agreed to purchase up to 3 million tonnes of iron ore per annum.

Formosa wants to secure a substantial long-term resource to supply its Ha Tinh steel mill in Vietnam, which is currently under construction. Ha Tinh is expected to produce 22 million tonnes of steel each year, once completed, with first production in 2015. The Taiwanese company will also contribute additional funds to the second stage development of the FMG Iron Bridge Project, which is expected to produce 9.5 million tonnes per annum when it becomes operational.

Despite comments by some analysts that the iron ore price could hit US$70 a tonne in the near future, Fortescue CEO Nev Power is upbeat about continued demand for the commodity. Rio Tinto (ASX:RIO) and BHP Billiton (ASX:BHP) certainly haven't backed away from iron ore, with both companies expecting to produce record amounts in future, rather than less.

Foolish takeaway

With around US$10 billion of debt on its books, this transaction should see Fortescue strengthen its balance sheet, while allowing it to proceed with the development of a new iron ore region.

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Motley Fool writer/analyst Mike King owns shares in BHP.

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