Fortescue Begins $750 Million Bond Buyback as Costs Decline

  • Offer will be held as a modified Dutch auction cash tender
  • Fortescue had net debt of $6.6 billion at the end of September

Fortescue Metals Group Ltd., Australia’s third-largest iron-ore supplier, is offering to repurchase $750 million in debt as it looks to reduce costs.

The offer to buy back bonds due in November 2019 and April 2022 will be held as a modified Dutch auction cash tender offer, the Perth-based producer said in a statement Tuesday.

Fortescue, which had net debt of $6.6 billion at the end of September, flagged last month it will continue to seek to cut liabilities even as it upholds dividend payments. The company, which has responded to weaker prices by halting plans to expand output, said last month it’s seeking to trim production costs to below $15 a wet metric ton by July 2016.

“They’re working hard on the cost side of the business and they’re getting good traction there, I don’t think anyone’s been anything but impressed with how they’ve worked on the costs side,” said Brendon Cooper, a credit strategist at Westpac Banking Corp. in Sydney. Taking the opportunity to pay down debt early is “a positive thing,” he said.

More Formal

Fortescue rose 3 percent to A$2.37 in Sydney trading Wednesday, as an index of 31 energy and mining companies slid 1 percent.

The miner said last month it had an extra $1.5 billion available for further debt repayment after cost cutting boosted cashflow. That’s in addition to the $384 million of on-market debt repurchases it made in the September quarter.

“What they’ve been trying to do is do it on market and they’ve been picking up scraps in different areas,” said Cooper. “Perhaps the liquidity that they were finding has dried up a little bit so they’ve decided to go with this exchange, make it a little bit more formal.”

Fortescue is seeking to reduce its debt burden as the price of iron ore comes under pressure from increased global supply and an economic slowdown in China, the world’s largest consumer of the steelmaking material. Iron ore with 62 percent content has fallen by about 75 percent from its 2011 peak and was at $48.24 a ton on Monday, according to Metal Bulletin Ltd. data.

Bondholders will be able to tender 2019 notes within a range of 88 to 93 U.S. cents per dollar of principal, and between 75 cents and 80 cents for the 2022 securities. The company is also offering an early participation payment of 3 cents for tenders made by Nov. 24.

“Accelerating Fortescue’s debt repayment program through this tender will further reduce our interest costs while ensuring that we remain on track to achieve our initial gearing target of 40 percent,” Fortescue Chief Executive Officer Nev Power said in a separate statement.

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