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Fortescue May Need $10 Billion Debt to Fund Iron Ore Expansion, RBS Says

Fortescue Metals Group Ltd., Australia’s third-biggest iron ore producer, may need to raise as much as $10 billion in debt by 2017 to fund “aggressive” expansion plans, Royal Bank of Scotland Group Plc said.

“The additional debt could be comfortably serviced,” RBS analysts led by Lyndon Fagan said yesterday in a report. Fortescue, controlled by billionaire founder Andrew Forrest, had borrowings of almost $3 billion as of June 30, including senior secured notes and a subordinated loan note, according to its financial statements.

Fortescue may need to spend more than $31 billion to meet its output expansion targets, which could make the Perth-based company the nation’s biggest producer, RBS said. The company last year failed to agree terms for as much as $6 billion in funding from China and said last month it’s examining options “both within existing debt structures and beyond that.”

Management “has noted an equity raising is not desirable due to the dilution it would create,” Fagan said. “This leaves further debt combined with internal cash flow as the way forward to increase production.”

Fortescue outlined earlier this year a “medium term” annual production target of 355 million metric tons of ore, from 40 million metric tons currently. It could “self fund” an expansion to 155 million tons by fiscal 2014 and would need to raise an additional $9 billion to $10 billion of debt over the next six years, RBS said.

Net Income

The company potentially needs to spend more than $31 billion to meet its production targets based on a capital intensity rate of $100 a ton, the report said. Even under a $80 a ton rate, it estimated $25 billion would need to be spent.

“Fortescue doesn’t comment on analyst reports,” Cameron Morse, a spokesman for the company, said by phone today. Its expansions are broadly based around $80 a ton capital intensity, Chief Financial Officer Stephen Pearce said on Aug. 26.

Net income rose 14 percent to $581 million in the 12 months to June 30, the company reported last month. It had a cash position of $1.23 billion at the end of fiscal 2010, from $655 million the previous year.

The spot price for iron ore delivered to the port of Tianjin in China has risen 17 percent to $139.30 a ton this year according to the Steel Index Ltd.

Fortescue shares rose 1 percent to A$5.02 at the 4:10 p.m. market close in Sydney trading, adding to this year’s gain of 13 percent.

To contact the reporters on this story: Lisa Pham in Sydney at lpham14@bloomberg.net; Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net.

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