The two iron ore majors have signed a non-binding memorandum of understanding after being in talks for about a year.

The MoU proposes the formation of one or more JVs between FMG and Vale over the blending of iron ore from each.

Speaking to journalists this morning, FMG CEO Nev Power said FMG’s lower grade ore would be blended with Vale’s higher grade ore at Chinese ports to create a product that could sell for a slight premium to the 62% benchmark iron ore price.

Power said FMG’s major shareholder Hunan Valin Iron and Steel Group supported the deal.

“They’re very keen to see this product in the market,” he said.

Power said a blending JV would align the company with the needs of its customers, and could allow FMG to further lower its cut-off grades and strip ratios.

“This would be a minority acquisition on-market,” Power said, adding that the investment could comprise up to 15% of FMG’s shares.

There was no timeframe for a potential investment in the company.

“We don’t see any need to issue stock for liquidity,” Power said.

The MoU also sets out a framework for a potential investment by Vale for a possible investment in any of FMG’s current or future mining operations.

“This MoU is about creating a constructive long-term relationship between two companies,” Power said.

Vale is the world’s largest iron ore producer, while FMG is the fourth-largest behind Rio Tinto and BHP Billiton respectively.

Power denied the deal would reduce competition in the iron ore industry, and said the company didn’t expect to hit any regulatory hurdles.

“If anything, it improves the competitiveness of supply to the Chinese steel industry,” he said.

Power also denied that FMG’s 23% share price jump yesterday had anything to do with today’s announcement, pointing out that it was one of the ASX’s most heavily shorted stocks.

The iron ore price surged by 18.6% or $US9.99 to $63.74 per tonne overnight, which Power also put down to the unwinding of shorts.

Though he expects volatility to remain, Power hinted that he believed the rise was sustainable.

“The iron ore price has been artificially depressed by the backwardation on the futures market,” Power said.

He said the downturn had been caused by the looming threat of oversupply and more recently, fears about Chinese growth.

“What we’ve seen over the past 24 hours is that neither of those things have come to fruition and the market has responded to that.”

Shares in FMG spiked on opening, hitting $A3.29, but eased off to around $3.09. The stock is up by more than 50% in the past two weeks alone.