Fortescue Vows to Reward Shareholders While Cutting Debt

  • Iron ore producer says will consider repurchasing more debt
  • Supplier sees iron ore market in supply-and-demand balance

Fortescue Metals Group Ltd., Australia’s third-largest iron ore producer, is vowing to continue to reward shareholders with dividends even while it seeks to trim debt and rivals slash payouts.

While the producer will consider further on-market debt repurchases after buying back $384 million in the September quarter, that won’t halt the Perth-based company’s ability to reward equity investors, Chief Financial Officer Stephen Pearce said in a phone interview.

“We’ve got that balance right,” Pearce said Thursday in the interview after the company reported first-quarter production costs fell 24 percent. “Obviously, debt is the highest priority for us, but I also like our ability to keep an appropriate return to shareholders as well.”

Fortescue paid out a final dividend of 2 Australian cents a share in fiscal 2015, and is forecast to increase that to 3 cents in the first half this fiscal year, according to Bloomberg estimates.

The supplier’s shares rose 4.8 percent in Sydney to A$2.40, cutting its decline this year to 12 percent. An index of 31 metals to energy producers was little changed.

Debt Reduction

Some commodity producers are halting payments to shareholders as weaker growth in China, the biggest consumer of metals to grains, curbs demand and weighs on prices. Glencore Plc has suspended dividend payments as it seeks to reduce its $30 billion in debt. Vale SA, the world’s largest iron ore producer, last month cut to $500 million a second tranche of its 2015 dividend, from $1 billion it proposed in January.

BHP Billiton Ltd. and Rio Tinto Group have faced criticism from investors over their plans to reward shareholders with about $10 billion in full-year dividend payments in the depths of a rout in raw materials. The two largest miners should scrap their progressive dividend policies, Jefferies LLC analysts said last week.

“We’ve held the view for a while that FMG should not be paying a dividend until balance sheet debt is reduced to a more acceptable level,” Credit Suisse Group AG analysts including Paul McTaggart wrote in a note Friday. “That said, there’s no denying the group’s good cost performance.” The bank forecasts a dividend payment this fiscal year, but not in fiscal 2017 as the benchmark iron ore price declines to a forecast $45 a ton, the analysts said.

Fortescue is targeting a reduction of at least a further $2 billion from its net debt after reducing the total to $6.6 billion at the end of last month, Pearce said.

Expansions Halted

How quickly the producer hits the target “depends ultimately on the iron ore price and on cashflow, and then on opportunity,” Pearce said. “If that takes 12 months or 18 months, it doesn’t really matter. What’s important is that we’re committed to doing the debt reduction.”

Fortescue is likely to repurchase more debt on market, if the producer can “continue to generate strong cash flow and its high cost debt continue to trade at a discount to face value,” Macquarie Group Ltd. analysts wrote in an Oct. 15 note

The producer has halted new expansions after raising shipments to 165 million tons, judging that the market can’t currently accommodate additional supply.

While Fortescue sees the market as in supply-and-demand balance, keeping the equilibrium will “depend on the demand outlook and some of the emerging economies, but particularly on Chinese domestic policy,” he said.

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