From CLSA:
Yesterday markets were abuzz with FMG and Vale announced a non-binding MOU, proposing the formation of a joint venture for the select blending and marketing of ore. Conceived to blend high-grade ore from Vale with lower-grade ore from FMG; creating a blend that challenges the Pilbara Blends of (Rio and BHP) in Asia. The joint venture would essentially purchase the iron ore from each partner at the prevailing spot rate, adjusted for impurities, and sell the blended product, at a higher price after adjusting for value in use.
The JV plans to utilise a China portside blending facility owned / operated by a third party, with capacity of 80-100mt p.a. We estimate that this would allow the JV to capture an additional 1-5% in margin as a result of the higher achieved price. The revenue benefit generated from the higher pricing (@3%) would only be cUS$350M (at JV level) and on our modelling the NPV turns negative if the JV were only to achieve a 2% increase in realised prices, so on our estimates the economics of the proposed processing facility appear marginal.
