Fortescue Metals is in talks with larger rival Vale to strike a deal that could give the Brazilian iron ore giant a stake in the Australian miner, and help the two companies boost their combined market share in China.
The announcement comes a day after iron ore prices rebounded sharply on hopes of a short term steel production boost in China, but follows a prolonged downturn in the sector that has wiped out smaller producers and hurt the balance sheets of the largest miners.
Under the memorandum of understanding signed by the two companies, Vale could buy up to 15 per cent of Fortescue's shares on market, and would also have the option of taking stakes in its existing or future mining assets.
Both companies will also form a joint venture for blending their iron ore at key Chinese ports, which could help them match the benchmark quality in the largest iron ore market, and help take share away from rivals BHP Billiton and Rio Tinto.
"This agreement is about creating a long-term relationship between the two companies, and also ensuring long-term iron ore supplies for our customers," Fortescue chief executive Envy Power told reporters.
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Fortescue, the world's fourth biggest iron ore miner, produces a lower grade of iron ore, which it sells at a discount to the benchmark price.
Vale, the biggest iron ore miner, produces some of the world's highest grade iron ore, but has a cost disadvantage because of Brazil's distance from its main market China.
The two miners could blend up to 100 million tonnes of iron ore annually, Mr Power said. The agreements are likely to be finalised over the next few months, with blending expected to start within six months.
"Vale has always wanted to get its foot in the Pilbara door. This price seems to be as good as any for doing that without building a new asset," Fat Prophets resources analyst David Lennox said.
"It is also a win from Fortescue's point of view because it helps them boost margins, and also provides them a long term equity investor," he added.
Fortescue has been racing to cut costs as it looks for ways to trim its high debt levels.
The company in February unveiled a faster-than-expected reduction in its cash costs, that has helped its beaten down share price recover somewhat.
Vale, which last month posted its worst loss in 20 years, has also struggled with debt as it develops a massive new iron ore mine in Brazil.
The agreements between the two miners will be subject to various regulatory approvals, but Mr Power said he expects the process to be completed smoothly as the deal would not lead to reduced competition.
Fortescue shares closed nearly 10 per cent lower on Tuesday, ending at $2.79 each. Shares in the company had surged 24 per cent on Monday, ahead of the announcement, taking the stock more than 50 per cent higher from an all-time low of $1.44 in January.
