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Business Deals

Australian miners Fortescue and Hancock battle for Atlas Iron

Uncertainty over Chinese ore demand throws value of acquisition into doubt

Fortescue Metals Group Chairman Andrew Forrest and his counterpart at Hancock Prospecting, Gina Rinehart, are locked in a battle to acquire Australian iron ore miner Atlas Iron.   © Reuters

SYDNEY -- A bidding war for midsize Australian iron ore miner Atlas Iron is raging between two of the country's mining tycoons, Gina Rinehart and Andrew Forrest.

After many twists and turns, Rinehart's Hancock Prospecting has gained the upper hand over Fortescue Metals Group, headed by Forrest, after Atlas expressed support for Hancock's takeover bid. It is unclear how Fortescue, which holds a 19.9% stake in Atlas, will respond.

Whichever contestant emerges victorious, the winner will have to wrestle with how to make a combination with Atlas profitable amid weak iron ore prices and darkening prospects for the Chinese economy.

Hancock and Fortescue are important players in Australia's iron ore business. Though smaller than Anglo-Australian miners BHP Billiton and Rio Tinto, the two companies are known for their strong leaders.

Rinehart, Hancock's executive chairperson, took over the top spot from her father, company founder Lang Hancock, after his death in 1992. Riding high on the resource boom, Australia's "iron ore queen" has lifted Hancock's corporate value, becoming one of the world's richest people in the process.

According to the Australian Financial Review, a newspaper, Rinehart is Australia's third-richest person, with total assets of 12.6 billion Australian dollars ($9.3 billion).

Fortescue Chairman Forrest founded the company in 2003. In the iron ore business, where barriers to entry are high, he took advantage of China's rapidly growing economy to transform Fortescue into the world's fourth-largest iron ore producer. He is Australia's eighth-richest person, with total assets of AU$6.1 billion.

The contest to acquire Atlas began in April. Weaker iron ore prices and cuts in steel production pushed by the Chinese government have undermined Atlas' business. China is its main customer.

Atlas Iron's ores are said to be of relatively low quality. (Courtesy of Atlas Iron)

On April 9, Atlas said it had agreed to an AU$280 million takeover by Australian mining service company Mineral Resources. The proposed acquisition used a method called a scheme of arrangement -- a court-approved deal between a company's shareholders or creditors and the company -- to effect a friendly takeover. The arrangement requires the approval of at least three quarters of the target company's shareholders.

The low-profile takeover plan was thrust into the spotlight when Fortescue announced on June 7 that it had built up a 19.9% stake in Atlas, and that it was opposed the deal with Mineral Resources. Some market watchers believe Fortescue's comments were meant to thwart the takeover, but Fortescue has not said why it bought the Atlas shares.

Then Hancock entered the fray. On June 18, it offered to buy all Atlas shares through its wholly owned subsidiary Redstone for AU$390 million, well above the offer by Mineral. Fortescue responded on June 26, complaining to government regulators that Redstone's proposal failed to meet disclosure requirements.

The dispute took another turn on June 29, when Atlas announced its support for Hancock's bid. On July 2, the agency screening the takeover dismissed the Fortescue's complaint, tipping the battle in favor of Hancock.

However the tussle plays out, the iron ore market looks volatile. China, the biggest importer of Australian iron ore, is locked in an escalating trade dispute with the U.S., sparking fears that the Chinese economy will slow. Prices for Australian iron ore are sluggish, hovering around $60 per ton, and Atlas' ores are said to be of relatively low quality. Hancock may end up owning Atlas, but it will have to be clever to make its prize valuable.

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