Fortescue's Debt War Chest Swells to $1.5 Billion

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  • Iron ore producer's options include buybacks, refinancing: CFO
  • Lowering interest charges is key to efforts to lower costs

Fortescue Metals Group Ltd. said it is weighing options from refinancing to fresh bond buybacks as its war chest for reducing debt swells to $1.5 billion and iron ore rallies.

The world’s fourth-largest supplier of the steelmaking material is committed to cutting its $5.9 billion net debt pile and sees a wider range of possibilities as sentiment improves across commodities markets, Chief Financial Officer Stephen Pearce said in an interview.

“We are assessing all options whether that be just straight repayment, repayment and a refi in combination, calling on tenders,” Pearce said by phone from Perth. “You name it, we are looking at all of the things that are available to us.”

Goldman Sachs Group Inc. said commodities are carving out a bottom and the lows may be behind the markets. Oil has climbed from the 13-year low it touched in January, while iron ore has rebounded above $60 a ton after policy makers in China including Premier Li Keqiang signaled that they’d support economic growth in the world’s largest consumer of raw materials.

A stronger outlook “does open up some other avenues and particularly in relation to the term loan,” Pearce said in the interview on Wednesday. “Sometimes it’s good to go big, and sometimes it’s good to do it in steps, and we are assessing which way we might move and exactly when,” he said.

Fortescue has a $4.8 billion credit facility scheduled to mature in 2019, according to a February filing. The company has about $3.2 billion of bonds across three separate dollar-denominated lines, according to data compiled by Bloomberg. Executives will weigh looming maturities against potential coupons it can save and the cost of potential repurchases as they decide on options for debt reduction, Pearce said.

The price of the producer’s largest outstanding bond, its March 2022 note, has climbed to above par from as little as 81 cents in the dollar back on Jan. 15, and was at 103.5 cents on Wednesday in New York, according to Trace prices. It yielded 8.85 percent, or 764 basis points more than equivalent Treasuries.

The yield premium over Treasury rates on Fortescue’s 2019 securities, the miner’s next bond maturity, has halved since early January to just 706 basis points as of Wednesday, based on Trace data.

Lowering interest payments is a key element in Fortescue’s efforts to continue to cut production costs and bolster margins, Pearce said. Interest charges account for about $3.20 a ton of Fortescue’s $28.80 breakeven price, according to a February filing.

While the producer cut its C1 or cash costs -- a measure that includes charges for mining, processing and rail and port transport -- by 43 percent to $14.79 a wet metric ton in the three months to March 31 compared with a year earlier, making further progress will be harder as a strengthening Australian dollar and higher oil price raise expenses.

“Our ability to drive, let’s say, $1 out of that interest charge per ton by smartly using the cash that we have available to pay down down debt is probably easier than getting the next dollar out of the C1 cost,” Pearce said. “So that’s very much the focus right across the cost chain.”

Lower costs and a higher iron ore price have helped raise cash balances and swell funds available for debt reduction from an estimate of about $1 billion in February, he said.

Still, Fortescue is rated BB by Standard & Poor’s, two levels below investment grade, and carries the equivalent score of Ba3 at Moody’s Investors Service, which cut its credit score by one level last month. With iron ore prices around 68 percent lower than their 2011 peak on weaker demand growth and still booming low-cost supplies from Australia and Brazil, both assessors maintain a negative outlook on the company.

Fortescue is likely to deploy all available $1.5 billion in the current quarter on cutting debt and the action would likely act as a further driver to its share price, according to Peter O’Connor, a Sydney-based analyst with Shaw and Partners Ltd.

The stock has advanced 76 percent so far this year and was at A$3.29 as of 10:50 a.m. on Thursday in Sydney. In addition to the rebound in iron ore prices, it’s also been helped by the company’s recently announced tie-up with Brazilian producer Vale SA, the world’s leading exporter.

“That would be a big catalyst to shake up the institutional investors” who previously had held concerns over the size of Fortescue’s debt, O’Connor said. “They are paying down their debt, so what’s the problem now?”

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