UPDATE 2-Iron ore miner Fortescue repays debt, aims to leave junk status behind

Wed Nov 13, 2013 3:30am EST

* To pay off $1 bln debt in Dec, further $1 bln to come

* S&P raised credit rating, still junk

* Share price has doubled since June

By Rebekah Kebede

PERTH, Nov 13 (Reuters) - Iron ore miner Fortescue Metals Group, racing to pay down $9.3 billion in net debt as sales to China soar, expects to shake off its junk credit status by 2015 to seal a spot alongside sector behemoths Rio Tinto and BHP Billiton.

Just 15 months ago, as iron ore prices plunged, Fortescue was considering the part-sale of its prized rail and port assets to help pay off the mountain of debt it amassed to build the world's fourth-largest iron ore mine in just five years.

But a price rebound allowed chairman Andrew Forrest to announce on Wednesday the group would pay off $1 billion by Dec. 20 of $2.04 billion in notes that were due to mature in 2015, and expected to redeem the balance in coming months.

"Don't be surprised if in the next several weeks, several months, we do another $1 billion," Forrest told reporters after the company's annual meeting.

Forrest has been Fortescue's largest shareholder from its start a decade ago and last week acquired a further 2 million shares on market, taking his stake to 32.9 percent.

Fund manager BlackRock Group this month acquired just over 5 percent of the stock.

In another sign Fortescue has arrived, it is set to become a "peer" company used by BHP when when it calculates incentive payments for its top managers.

Fortescue has said it will focus on paying down its debt as quickly as possible now that it has passed the peak of its mine expansion program and is nearing its targetted production rate of 155 million tonnes a year.

"We'll be at investment grade metrics I'd say within 18 months," Forrest said.

Fortescue still has a junk corporate credit rating, even after Standard & Poor's last week raised the miner to 'BB' from 'BB-'.

However its senior secured debt rating was revised up to 'BBB-', putting it at investment grade, based on its rising output, competitive cost position and long reserve life.

"Its limited product diversity and high exposure to China's steel industry and volatile commodity prices offset these strengths," S&P said on Nov. 6.

CONFIDENT ON CHINA DEMAND

Forrest is confident that iron ore prices, which at more than $135 a tonne have proved more resilient this quarter than analysts had expected, will stay above $110 a tonne over the long term, underpinned by Chinese demand for the steel-making ingredient.

"We see steel intensity continuing to increase for the next 20-30 years in China," he said.

China makes about 700 million tonnes of steel a year and each tonne requires about 1.6 tonnes of iron ore. That works out at annual iron ore demand of about 1 billion tonnes.

Broker Bell Potter calculates Fortescue's break even price for iron ore production is $69 a tonne, and forecasts net profit will climb 70 percent to $2.98 billion in fiscal 2014.

Fortescue's shares have doubled in value since June, thanks to the surprising strength in the iron ore market and the company's moves to cut debt.

Analysts have suggested Fortescue could lift its output to as high as 180 million tonnes annually. That would bring it even closer to Rio's capacity of 290 million tonnes and BHP's of 212 million.

Fortescue said a push past 155 million tonnes is not on the agenda at the moment but left the door open.

"I wouldn't be surprised if they are able to squeeze more out of the lemon than 155, but let's just get to that fabulous milestone first and then set ourselves a challenge beyond that," said Forrest.

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