Fortescue May Seek $2 Billion Debt Repayments in Next Year

  • Company likely to ‘blast through’ target to cut gearing: CFO
  • Iron ore supplier likely to cut debt before any refinancing

Fortescue Metals Group Ltd. may reduce its debt pile by about a further $2 billion in the coming year as the world’s fourth-biggest iron ore supplier looks to take advantage of healthy margins to reset its gearing targets.

“At the current iron ore prices we are generating very strong cash flows on every ton,” Chief Financial Officer Stephen Pearce said in an interview, after the producer agreed a $500 million early loan repayment to take its total debt reduction in the past year to $2.9 billion. “There’s no reason we couldn’t continue to do another couple of billion through fiscal 2017.”

The biggest iron ore miners have moved to cut costs and bolster balance sheets as prices tumbled to three straight annual declines. Perth-based Fortescue’s efforts to reduce debt in the past year have cut annual interest expenses by $186 million, helping to lower its break-even price.

“We see the company being able to deliver on its deleveraging statements” as long the iron ore price holds up, Westpac Banking Corp. credit strategists including Brendon Cooper said Friday in a note. Fortescue “continues to be highly cash generative at current iron ore prices and has low capex requirements over the next few years,” they said.

Shares Advance

Fortescue declined 7.4 percent to A$3.27 in Sydney trading Friday, trimming its advance this year to 75 percent, as stocks and other asset classes slumped after U.K. voters opted to leave the European Union. BHP Billiton Ltd. and Rio Tinto Group plunged as much as 7.9 percent and 6.5 percent, respectively.

The price of Fortescue’s largest outstanding bond, its March 2022 U.S. dollar note, climbed to a record 109.75 cents on the dollar on Thursday, according to Trace pricing. It yielded 7.25 percent, or 604.5 basis points, more than Treasuries. The company said last month its net debt stood at $5.9 billion.

Moody’s Investors Service affirmed Fortescue’s corporate family rating at Ba3 and revised the outlook from negative to stable, the credit assessors said Friday in a statement. The decision “reflects the considerable progress that the company has made in reducing its debt levels,” Matthew Moore, a Moody’s vice president and senior credit officer, said in the statement.

Cutting debt further in the coming year would see the company “blast through” its target for a 40 percent gearing ratio, according to Pearce. “We would maybe take it down, potentially to 30 percent gearing,” he said said by phone from Perth. “There’s no reason why we couldn’t do that, and do that in a relatively short space of time.”

Iron ore with 62 percent content was at $51.89 a dry ton on Thursday, according to Metal Bulletin Ltd. data, 19 percent higher this year. Prices are likely to be pressured in the second half with China’s domestic production proving resilient and as the largest exporters add about 10 million tons to the seaborne market in the third quarter, according to Goldman Sachs Group Inc.

Fortescue will continue to prioritize debt repayment, even amid low prices, said Pearce, who was this week appointed to the company’s board in addition to his executive role. The company will also examine opportunities for a refinancing, though it’s likely to continue to reduce debt first, he said.

“Regardless of the price, the strategy remains the same,” Pearce said. “The price will ultimately determine the speed with which we do it, and the amount we can pay in any period.”

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