Australia's Fortescue seeks debt relief, shares tumble

SYDNEY Thu Sep 13, 2012 5:29am EDT

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SYDNEY (Reuters) - The world's no.4 iron ore miner Fortescue Metals Group Ltd (FMG.AX) has asked lenders to waive debt covenants if iron ore prices remain under pressure, the firm said on Thursday, after its shares suffered their worst loss in almost four years.

Like other Australian miners, Fortescue's earnings have come under pressure from a plunge in commodity prices caused by weak demand in top consumer China. This has squeezed its ability to service its long-term debt, which stands at $11.3 billion.

Fortescue is particularly exposed to the Chinese iron ore market because its sole product is the steelmaking material - the worst performing major mineral in the past year - and it sells the vast majority of its output to China.

Earlier this month the debt-laden firm, which competes against BHP Billiton Ltd (BHP.AX), Rio Tinto Ltd (RIO.AX) and Vale SA (VALE5.SA) for Chinese customers, announced it was slamming the brakes on plans to triple its iron ore capacity, cutting hundreds of jobs and selling non-core assets to preserve cash.

On Thursday, Fortescue shares sank on a report by the Australian Financial Review that said it had asked its lenders to waive all its debt covenants for the next 12 months, citing unidentified sources.

In response, the company said it was in full compliance with all of its banking covenants, which are next due to be reviewed by December 31, and continues to have full access to all of its funding facilities.

"Fortescue is in the process of talking to its lenders about potential waivers in the event that covenants are put under pressure by extended volatility in the iron ore market," the company said in a statement released to the Australian stock exchange after the market closed.

Since early September, it has shed 12 percent of its value on concerns that it will have to raise equity to shore up its funding, a move that its founder and one-third shareholder, Andrew "Twiggy" Forrest, has resisted.

"This is a big deal because Fortescue is in a position where in order to actually invest more for the business and to grow the business they actually need to raise capital," said Damien Boey, equity strategist at Credit Suisse.

"But the thing is Andrew Forrest doesn't want to dilute himself by raising equity capital. He's kind of been hoping that commodity prices might rise so that maybe his profits would grow and that he wouldn't have to worry about it. But that hasn't happened."

Were Fortescue to obtain covenant waivers it would ease the pressure on its debt rating outlook, said Standard & Poor's analytical manager Suzanne Smith, but the company remains vulnerable as long as iron ore prices stay below $110.

"It's not only about covenant pressure. They're so exposed to the level of iron ore prices. That's also important," she said.

Benchmark 62-percent grade iron ore .IO62-CNI=SI tumbled to a three-year low below $90 a tonne last week, less than half its level a year ago.

Fortescue shares dived as much as 53 Australian cents to A$2.95 and closed down 13.8 percent at A$2.99. The stock hit a three-year low of A$2.81 earlier this month.

RESOURCES BOOM ENDING?

Demand for Australian minerals has shielded the country's $1.4 trillion economy from the worst of the global financial crisis and its aftermath, boosting investment, jobs, and earnings as the rest of the world struggles.

But in the past three months, tumbling commodity prices, mine closures, shelved expansion plans and concerns about the global outlook have prompted questions about whether Australia's resources boom is ending.

Other big miners, including BHP Billiton and Xstrata PLC XTA.L, have curtailed production and scaled back expansion plans.

The Australian dollar dipped on the Fortescue news, sliding as much as a quarter of a cent against the U.S. dollar before steadying.

Ratings agencies, which have cut their outlooks on Fortescue in recent days, have flagged concerns about the impact of the plunge in iron ore prices on the company and its debt position.

Fortescue was "considering a number of other measures to provide headroom in its covenants and liquidity, namely seeking covenant relief; customer pre-payments and sale of other non-core assets," Fitch said last week. Fitch, Standard & Poor's and Moody's Investors Services all have reviews on their ratings for Fortescue, already at junk levels.

Fortescue secured a $1.5 billion loan facility in August fully underwritten by Bank of America Merrill Lynch (BAC.N), but sources said attempts since to syndicate the loan among a wider pool of lenders were struggling amid concerns about the outlook.

Bank of America Merrill Lynch declined to comment on the covenant waiver talks.

(Reporting by Lincoln Feast, Sharon Klyne and Thuy Ong in SYDNEY, and Sonali Paul in MELBOURNE; Editing by Daniel Magnowski)

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