Shares in Fortescue Metal Group rose 5 per cent on Monday on a report that Canadian metals and coal miner Teck Resources may be building a stake in Australia's third-largest iron ore producer.
Vancouver -based Teck, a large copper, zinc and metallurgical-coal miner, has long expressed an interest in adding iron ore assets to its portfolio, but analysts doubt that the company would make a play for the Australian miner, which is worth more than $17-billion.
"We believe an outright acquisition of Fortescue to be too large for Teck, despite obvious synergies to their metallurgical coal portfolio," said Deutsche Bank analyst David Martin in a note to clients.
A spokeswoman for Teck said the company does not comment on market speculation.
Teck has a market capitalization of more than $23-billion and it ended 2011 with roughly $4.4-billion in cash. But it has spent much of the past three years restructuring its debt and shedding non-core assets after its ill-timed $14.1-billion (Canadian) buyout of Fording Canadian Coal in 2008, just months before the onset of the global economic crisis.
Talk of Teck positioning itself in Fortescue comes amid speculation that the proposed $90-billion marriage of Glencore and Xstrata may lead to a new force pushing into iron ore.
Teck is one of the world's top exporters of metallurgical coal, one of the key ingredients in steelmaking, but it has no iron ore, the other key raw material in steel. The iron ore market is largely controlled by Brazil's Vale, Rio Tinto and BHP Billiton .
Xstrata has an open desire to mine iron ore, underlined in 2009 by its attempt to buy mining giant AngloAmerican. But a scarcity of major discoveries lately and a near-oligopoly among mining giants Vale, Rio Tinto and BHP Billiton has so far kept iron ore out of its reach.
Iron ore sells for around $142 (U.S.) a tonne to China, the world's top buyer of the steelmaking commodity due to the mass urbanization underway there, and it only costs about $20-$30 a tonne to mine. Australia alone caters to almost half of China's iron ore imports, with BHP Billiton, Rio Tinto and Fortescue being the main suppliers.
Shares of Fortescue have risen roughly 10 per cent since the beginning of February on market talk of a strategic stake build-up by an overseas entity. Its shares jumped 5.7 per cent on Feb 6 after a mystery buyer snapped up around 3 per cent of the stock, believed to have been previously held by U.S. holding group Leucadia.
Speculation about Teck's involvement gained traction after Teck said last week it had made $324-million (Canadian) in investments in publicly traded companies in the fourth quarter. It declined to provide details.
"If you look back over our history, from time to time we have taken positions for investment purposes. Sometimes they turn out to be strategic, other times we just sell to make a profit. That's all we are doing now," said Teck chief executive Don Lindsay in response to a query about the investments during the company's quarterly analyst conference call.
Billionaire Andrew Forrest, who founded Fortescue in April 2003, is the largest shareholder, holding about 30 per cent of the company. Hunan, a Chinese state-owned steelmaker is second-ranked, with 14.72 per cent, making it a difficult target unless one of the top two sell out. Chinese sovereign wealth fund China Investment Corp holds 17 per cent of Teck.
Fortescue shares ended the day up 5 per cent at $5 (Australian). Shares of Teck were down 1.7 per cent at $39.51 in afternoon trading on the New York Stock Exchange on Monday, while its Toronto-listed shares were down 1.9 per cent at $39.46 (Canadian).