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No big deal: Fortescue denies Vale agreement price sensitive
Wednesday, 9 Mar 2016 07:22:53 | Michael Janda
Fortescue CEO Nev Power said the company's price rise on Monday can be totally explained by the surging iron ore price. (ABC News)
Fortescue has responded to a query from the ASX about Monday's share price spike by denying that its deal with Vale was price sensitive.
On Monday, Fortescue's shares surged as much as 26.3 per cent from Friday's close, to an intra-day high of $3.145.
While iron ore prices surged almost 20 per cent on key Chinese spot markets on Monday, other large, low-cost iron ore producers such as BHP Billiton and Rio Tinto experienced much smaller 5 and 3.5 per cent gains respectively.
On Tuesday morning, before the local share market opened, Fortescue put out a release on the ASX revealing it had signed a memorandum of understanding (MoU) with Brazilian mining giant Vale to pursue joint ventures.
The non-binding deal envisages the blending of some of the two firms' iron ore for sale into China, as well as the potential acquisition by Vale of a 5-15 per cent minority shareholding in Fortescue.
Fortescue shares initially rose further on Tuesday morning, but ended up closing down more than 9 per cent at $2.79.
The ASX sent Fortescue an "aware letter" - basically a please explain - enquiring whether the company considered that "a reasonable person" would expect the information to be price sensitive and, if so, when FMG became aware of it and why it did not make an earlier announcement or ask for a trading halt.
In response, Fortescue has denied that its MoU with Vale - the world's biggest iron ore producer - was a price sensitive announcement, emphasising that the agreements are non-binding and subject to final negotiations, agreement, board and regulatory approval.
"Any future transaction is incomplete and subject to negotiation," the company noted in its response to the ASX.
Fortescue also denied that the possibility of Vale buying a 5-15 per cent stake in the company was a price sensitive piece of information.
Echoing the comments of Fortescue chief executive Nev Power on the ABC's The World Today program yesterday, FMG attributed Monday's price surge to the near 20 per cent jump in iron ore spot prices and gains in futures markets.
The company said that left many investors shorting the stock - those betting against it - in a position where they had to "cover" their shorts by buying back Fortescue shares, thus pushing up the price.
Fortescue also pointed out that other small iron ore companies had even larger gains on Monday, with Atlas up almost 47 per cent and Arrium gaining around a third.
However, rising iron ore prices from current levels are a matter of immediate survival for those firms, while Fortescue said it has lowered production costs to close to the levels reported by larger rivals BHP Billiton and Rio Tinto.
Brokers that the ABC spoke to on Tuesday said it was unlikely that short covering alone would explain Fortescue's dramatic share price rise and volumes more than two-and-a-half times average levels.
Fortescue shares have continued retreating from Monday's spectacular rally, falling another 5.7 per cent to $2.63 by 10:30am (AEDT) amid fairly steep falls across the resources sector.
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