Rising iron ore prices could be behind Fortescue Metals Group’s decision to step back from a deal to invest in a small unconventional gas exploration company.
Iron ore producer Fortescue on Tuesday terminated discussions with oil and gas explorer Oil Basins, just two months after announcing it would take an 18 per cent stake in the company.
Fortescue has decided not to take up a $4.2 million share placement in the West Australian company which was announced to the market in November.
It comes as the iron ore price continues to rise above $US150 per tonne.
Morningstar Resource analyst Mathew Hodge said while the flagged investment was minuscule by Fortescue’s standards, there was some apprehension among investors that the company would expand into the oil and gas sector after securing a cornerstone stake in Oil Basins.
“There was some comment that it could be a distraction and I think that was the only concern the market had,” Mr Hodge said.
“You’re supposed to be an iron ore miner. Why would you be getting involved in a speculative energy company?”
The relatively small investment would not be worth the distraction for Fortescue which was looking to reduce its costs, including energy costs, as the iron ore price fell to $US90 per tonne last year.
“This might have been a way to cut costs,” Mr Hodge said.
“With the iron ore price at $US150 a tonne that sort of urgency is not there any more.”
Fortescue’s margins were well behind rivals BHP Billiton and Rio Tinto, mainly due to costs of production.
Oil Basins, which has a portfolio of conventional and unconventional gas, has a project in the Canning Basin in the Kimberley region between Port Hedland and Broome.
Fortescue’s November announcement came as interest intensified over massive unconventional gas reserves in the Canning Basin in Western Australia.
Oil and gas producer Buru Energy and Mitsubishi Corporation recently struck a deal to develop massive unconventional gas reserves and build a pipeline in the Canning Basin.
Oil Basins shares were still in a trading halt on Wednesday, after last trading at 3.4 cents.
Fortescue Metals shares were 1.3 per cent lower at $4.58 at 1533 AEDT.
