Fortescue Seeking to Cut Debt Amid Commodity Market Turmoil

  • Fourth-biggest iron ore supplier can withstand rout: CEO
  • Fortescue says can attract new investment if it's needed

Fortescue Metals Group Ltd., the iron ore miner that’s seeking to cut its debt, is confident it can ride out turmoil in commodity markets even as larger competitors like Glencore Plc battle to withstand the rout.

“Over the last 12 months we generated over $2 billion of cash from operations and we have around $2.4 billion in the bank, so we are in a very different situation to them,” Chief Executive Officer Nev Power said in an interview. “We have finished our capital expenditure and we are in a fantastic position to be able to weather out any volatility.”

Glencore, which plunged 73 percent this year, was meeting with debt investors Wednesday amid questions about the strength of its balance sheet and a $10 billion debt-reduction plan announced earlier this month. Fortescue, which has $7.2 billion net debt, cut its cash costs by 21 percent in fiscal 2015.

“If Fortescue hadn’t moved down the cost curve, there’s no doubt that they’d be getting similar questions," Jeremy Sussman, an analyst at Clarksons Platou Securities in New York, said by phone Wednesday. "Management has done a phenomenal job of taking costs out of the business.”

Shares Jump

Fortescue advanced 9 percent, the best performer in Sydney trading Wednesday among an index of Australia’s 100 biggest companies, to close at A$1.82. Rio Tinto Group jumped 4.5 percent, as BHP Billiton Ltd. rose 2.8 percent and Atlas Iron Ltd. declined 6.7 percent.

The yield premium over Treasuries on the $2.3 billion of March 2022 notes, the company’s largest outstanding bond, rose 48 basis points to 1022 basis points on Monday, Trace pricing shows. That was the biggest increase since Aug. 11 and the widest spread since it touched a record 1035 on Aug. 25, up from 851 basis points at issuance in April.

Fortescue carries a rating of BB at Standard & Poor’s, two steps below investment grade, and the equivalent score of Ba2 at Moody’s Investors Service. Both credit assessors have a negative outlook on the company. A Bloomberg model of default-risk that considers factors such as share performance and debt indicates the firm should be rated an additional step lower.

Supply Glut

Iron ore has tumbled 71 percent from a 2011 peak as weaker demand growth in China collides with a growing supply glut as the largest and lowest cost suppliers raise output, seeking to win savings by fully utilizing their mines, railroads and ports. Fortescue’s full-year earning’s for fiscal 2015 demonstrated its improving cost position amid challenging trading conditions, S&P said last month. 

Fortescue has flexibility to make early debt repayments ahead of its next scheduled maturity in 2019, Power said in the phone interview Tuesday. The miner also retains an option to sell stakes in its assets and use the proceeds for repayments, he said.

Hebei Iron & Steel Group Co. and Tewoo Group Co. approached Fortescue about acquiring a stake in its infrastructure assets, people with knowledge of the matter said last month. They may also consider buying stakes in some of Fortescue’s mines, for a total investment of about $1 billion to $2 billion in the firm’s assets, two of the people said, asking not to be identified as the information is private.

Our Priority

"Paying down debt is our priority, and we will continue that," Power said. "If there was an opportunity, as we have talked about, to accelerate that through introducing an investor into the business then we would also do that, but we don’t need to, so we are in a pretty good position."

Iron ore with 62 percent content delivered to Qingdao declined 1.4 percent to $56.05 a dry ton on Tuesday, according to Metal Bulletin Ltd. It sank to $44.59 on July 8, a record low for daily price data dating back to May 2009.

“Obviously, if iron ore prices move lower then companies with debt in general will be more heavily scrutinized," Sussman said. "However, at around $50 a ton for iron ore, it’s unlikely investors will be asking Fortescue those questions.”

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