• If iron ore price rises, co. can repurchase more debt: CEO
  • NAB says producer likely to have a high cash balance

Fortescue Metals Group Ltd., the fourth largest iron-ore supplier, will seek to repurchase more debt before the year’s end to cut interest costs amid weaker prices for the steelmaking raw material.

“Our strategy has been to accumulate cash and then to use that to repay debt,” Chief Executive Officer Nev Power said in an interview in Melbourne. “While ever the market’s trading with our debt at a discount, we are going to pin our ears back. For us it represents phenomenal buying.”

Fortescue, which had net debt of $6.6 billion at the end of September, this week said it is offering to repurchase $750 million in debt. That’s in addition to the $384 million of on-market debt repurchases it made in the September quarter.

The company’s November 2019 U.S. currency notes were at 85 cents in the dollar Tuesday, according to Trace pricing, and the firm has called for tenders in the range of 88 to 93 cents.

Even with an additional early participation payment of 3 cents in the dollar, Fortescue’s top potential price is still less than par. For the April 2022, securities they’re seeking tenders from 75 to 80 cents and the market had them at 76.75 on Tuesday, according to Trace pricing.

Discounted Debt

“The discounted debt repurchase would appear as good a use as any to deploy what is likely a still high cash balance,” National Australia Bank Ltd. credit strategist Michael Bush wrote in a note on Thursday, referring to the announced plan to buy back $750 million in debt. “The tender, if successful, will be positive to net debt, interest rate costs and, at the margins, profitability.”

Ore with 62 percent content rose 0.7 percent Wednesday to $48.58 a metric dry ton, according to Metal Bulletin Ltd. data. “The higher the iron ore price, then the more debt we will be able to repay,” Power said in the interview.

Fortescue has responded to weaker prices by halting further expansions to output and is focused on lowering production costs to below $15 a wet ton by July 2016. The producer’s breakeven price, including interest payments, is $40 a dry ton, compared with $29 a ton for rivals Rio Tinto Group and BHP Billiton Ltd., according to UBS Group AG.

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