BHP, others eyeing partnership with Ferrous - sources


* Ferrous aims for annual 62 mln tonnes by 2016By Clara Ferreira-MarquesLONDON, Oct 18 (Reuters) - BHP Billiton , the world’s biggest miner, is one of several parties in talks over a strategic partnership with fast-growing Brazilian iron ore miner Ferrous Resources, sources familiar with the deal said.Options being considered by BHP include a joint venture or an equity stake in Ferrous, which is seeking cash and expertise to develop huge deposits in Brazil’s “iron quadrangle”, the sources said on Tuesday.The sources said Chinese buyers have also expressed an interest in Ferrous, worth around $3.5-$4.0 billion, according to the expected valuation from shelved 2010 float plans and the implied value from shares sold in 2008.Ferrous, which aims to become one of the world’s top five iron ore miners, wants funding to develop its assets but has twice pulled IPO plans, most recently last year when it cited difficult market conditions.It has since hired Deutsche Bank assess its options, help find a strategic partner and secure funding.An all-out acquisition of Ferrous is less likely than a partnership that would bring BHP in as a strategic investor, the sources said.A sale remains an option, given most Ferrous shareholders are financial investors, including hedge fund Harbinger Capital Partners and private equity firm TPG.In the run-up to the planned float last year, Harbinger was reported to have considered a sale of its stake. However, most funds bought in around 2007 and 2008, making it hard to recover their investment at current levels.”The shareholders at Ferrous … know that today, if they were to sell, no one is going to pay them the full value,” one of the sources said. “There is a lot of flexibility on what type of deal the company would consider.”BHP, along with other miners, has been using the drop in valuations — currently close to 2008 levels — to search for opportunities in key commodities. Miners seeking funding to develop substantial assets are seen as prime targets.Ferrous’s size has put off smaller players, given any buyer or strategic investor will have to stump up an initial payment and then considerable investment as the project grows, making it an $8-$10 billion investment, the sources said. That would be a modest target for cash-rich BHP.BHP and Ferrous declined to comment.PILBARA MARK TWO?Analysts said they could see logic in BHP, the world’s no.3 iron miner, looking to diversify production from Australian region Pilbara through a deal with Ferrous, which has assets in Brazil’s key iron ore producing region, Minas Gerais.”I can see BHP seeing merit in having some production out of Brazil,” said Peter Chilton, an analyst at Constellation Capital Management.A takeover of Ferrous would be unlikely to arouse competition issues, as the company is producing modest quantities and aiming to produce more than 60 million tonnes by 2016, which would still leave BHP behind the top two global producers, Vale and Rio Tinto .”The infrastructure situation with Ferrous, although it is not currently in place, it does give a fair amount of flexibility,” another one of the sources said.”In terms of being able to create an export hub, you certainly have the resource there, and you certainly have the potential to create some (heavy duty) infrastructure and get some serious tonnage to market.”Analysts at Liberum said this week a purchase could offer synergies with Samarco, BHP’s venture with iron ore giant Vale, but also an improved product offering.”With declining grades in the Pilbara, BHP could elevate its product offering with high grade Brazilian concentrate or pellets,” the analysts said.”The key sticking point is still likely to be price with a number of key shareholders buying in at punchy valuations before the 2008 downturn — Ferrous’s reported valuation expectation is $3 billion.”Ferrous started production in this year, with initial output expected to reach 2.5 million tons by end of 2011.