Fortescue Metals Group Ltd. (FMG.AU) has bought itself more time to ride out slumping iron-ore prices, securing up to US$4.5 billion in debt to refinance its existing loans and free it from any immediate need for a fire sale of assets to raise funds.
The Australian mining company, the world’s fourth-biggest producer of the steelmaking commodity, said Tuesday that a fully underwritten credit facility has pushed out its first debt repayment until November 2015 and comes without banking covenants–limits set out in a loan contract that set out operational restrictions on the borrower, often relating to gearing ratios and working capital. Earlier covenants had come under pressure with the sharp fall in ore prices over the last couple months, sparking fears among investors of a possible breach.
“We have acted decisively and comprehensively, responding to market conditions,” Chief Executive Neville Power said during a media conference call, adding that the new facility would mean Fortescue could refinance all its existing bank facilities and also boost its liquidity. “It is a sledgehammer to crush an ant.”
Concerns over Fortescue’s debt burden have heightened as prices for iron ore and other industrial commodities fell amid waning demand from key consumer China and the debt crisis in Europe. Fortescue’s share price dropped 14% last Thursday before the company, which has already pledged to slash costs and cut its spending plans, released an announcement to say it was discussing with its banks waivers for its debt covenants.
Released from a trading halt imposed Friday, the company’s shares rallied Tuesday. By 0305 GMT, the shares were trading 18% higher at A$3.52.
Ian Preston, an analyst at Goldman Sachs, said the new debt arrangement should secure Fortescue’s expansion in the face of commodity price volatility. “If the iron-ore price stabilizes around current levels, it should remove the need for the company to raise additional capital by way of either additional debt or equity or asset sales,” he said in a research report.
Credit Suisse and JP Morgan have underwritten the senior secured credit facility, which has been secured against Fortescue’s assets. Stephen Pearce, chief financial officer of the Perth-based mining company, declined to disclose the fees for the facility but said the overall cost will be under the roughly 7% that Fortescue’s unsecured bonds trade at.
Mr. Power said the company is evaluating approaches from unnamed parties interested in buying some of Fortescue’s assets or partnering with it, but no deals are required under the terms of the debt facility and would only be agreed upon if they were deemed to add shareholder value.
Fortescue has been one of the most prominent faces of Australia’s mining boom over the last decade.
Formed in 2003 by mining entrepreneur and billionaire Andrew “Twiggy” Forrest, the company leveraged China’s soaring demand and took on high levels of debt to quickly build mines and a rail-and-port network that challenged established rivals Rio Tinto PLC (RIO) and BHP Billiton Ltd. (BHP), which tightly control their own infrastructure.
As iron-ore prices rose, the company set its sights on tripling its production capacity of about 55 million tons a year by the middle of next year on the expectation that higher volumes would drive down operating costs and allow it to swiftly repay debt from its cash flow. But then as China this year acted to cool its property market, demand for steel cooled and mills began working through stockpiles of iron ore, with the spot market price falling sharply over the past two months.
Iron ore sank below $90 a ton late last month, to its lowest level since October 2009, although it has recovered slightly in recent days to regain the US$100-a-ton level.
Mr. Power expressed confidence that prices will continue to rally, back toward about US$120 a ton. Every $10/ton rise in the price stands to add about US$1.2 billion to Fortescue’s cash flow when its capacity reaches 115 million tons a year, the new near-term target the company is aiming for, he said.
Fortescue early this month said it was scaling back its expansion investment by US$1.6 billion for the year through June to US$4.6 billion, and is cutting staff and operating costs to save about US$300 million. The development of its Kings deposit was delayed in the move, although Mr. Power said Tuesday that the company hoped to decide by December to resume the Kings project, which would keep development costs from increasing.
The company this month sold a power station that supplies electricity to one of its mines in Western Australia state for US$300 million, and Mr. Power said the sale of certain other assets is being considered. The company could also bring in partners on its operations or to invest in assets including its infrastructure, but there is no immediate need for an equity raising, he said.
Write to Robb M. Stewart at email@example.com
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