By Rhiannon Hoyle 

SYDNEY--Brazil's Vale SA may buy shares in Fortescue Metals Group Ltd. and invest in new or existing mines with the Australian company, under a broad alliance that ties two of the world's largest producers of iron ore.

After roughly a year of talks, the companies said they have signed a pact that will open the door to Vale buying a minority stake of up to 15% in Fortescue on market and will include negotiations on new joint mining projects or investments by Vale in Fortescue's existing pits in remote northwest Australia.

The companies said they will also look at setting up ventures to blend the ore they each produce to sell to customers in China, the world's biggest buyer of iron ore. Iron ore is the main ingredient in steelmaking.

Vale said the tie-up is designed "to pursue long-term opportunities to enhance competitiveness" of the companies operations.

The iron-ore sector has been grappling with a sharp downturn in iron-ore prices over the past few years, with a decade low below US$40 a ton hit in December versus a high above US$190 a ton in early 2011. Spot prices did spike on Monday, however, rising a record 20% as confidence in China's economic outlook improved.

Vale and Fortescue are two of the world's largest iron-ore exporters, along with Anglo-Australian miners BHP Billiton Ltd. and Rio Tinto PLC.

Fortescue Chief Executive Nev Power on Tuesday denied the deal was about wresting customers away from BHP and Rio, the most profitable producers in the sector.

"This is about creating a long-term constructive relationship between the two companies," said Mr. Power. "This is not any strategy to try and exert control over the market."

He said the alliance would help Fortescue reduce its operating costs and "provide value to Vale and allow them to start diversifying their investments outside of Brazil."

Plans for Vale to buy up to a 15% stake in Fortescue, which has a market value of roughly 9.59 billion Australian dollars (US$7.15 billion), has no time frame and isn't viewed as a precursor to a full takeover, Mr. Power said.

The companies hope to start blending their ores within the next six months, said Mr. Power, who estimated the pair could blend up to 80 to 100 million metric tons of ore combined to sell to Chinese steel mills. The timing for other proposed investments in mines or new projects is uncertain, he said.

The agreement is a nonbinding memorandum of understanding that still needs to be approved by both boards and regulators, the companies said.

"The memorandum of understanding is one more important step towards optimizing Vale's supply-chain, creating new platforms for future mine development and offering a new world-class alternative product to the Chinese steel industry," Peter Poppinga, Vale's executive director for ferrous minerals, said in a statement. "We are looking more than 10 years ahead."

Mr. Power, who said he couldn't recall which company initiated the talks, said that details of the various components of the pact are still being worked out.

The companies have held some early discussions with regulators about their plans, he said. "We wanted to announce this to the market to ensure there was full transparency," Mr. Power said on a call with reporters.

Shares in Fortescue jumped by 24% on Monday, their biggest daily rise since 2008, to a 16-month high.

Mr. Power said he didn't think news of the agreement had been leaked, attributing the spike to a rally in iron-ore prices, which surged roughly 20% on Monday.

 

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

(END) Dow Jones Newswires

March 07, 2016 18:55 ET (23:55 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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