MELBOURNE Fortescue Metals Group (FMG.AX), one-third owned by billionaire founder Andrew "Twiggy" Forrest, has lined up $4.5 billion in debt and is in talks to sell stakes in some of its assets, as the world's No.4 iron ore miner moves swiftly to shore up funding to cope with a slump in prices.
The debt facility, fully underwritten by Credit Suisse CSGN.VX and JPMorgan (JPM.N), will be used to pay off $3.6 billion in existing bank facilities, a lease facility and export credit facility - giving Fortescue some $900 million extra headroom as the first repayment is not due until November 2015.
The deal also waives earnings-based covenants, a key factor for the company whose earnings have been squeezed by weak iron ore prices.
Fortescue shares, halted last week after reports that the company was seeking waivers on its debt covenants, jumped as much as 21 percent on Tuesday on relief the Perth-based miner won't have to sell new shares or sell assets at knockdown prices to raise cash.
"This has been a sledgehammer to crush an ant," Chief Executive Nev Power told reporters. "But we wanted to do that to provide absolute certainty about the state of our financial facilities and our balance sheet."
Analysts said the deal was good news for shareholders as it simplifies Fortescue's debt, provides breathing space in a weak iron ore market, and lowers the overall cost of funding as the bank facilities are now secured by Fortescue's assets.
"It is a sledgehammer approach and should be regarded as a very positive development for this company," said Ben Lyons, an investment analyst at ATI Asset Management, which owns Fortescue shares. "We have comprehensively ruled out the prospect of an equity raising today, which is a significant positive for equity holders."
Fortescue shares jumped to a 2-week high of A$3.62 - on course for their biggest one-day gain in more than three years.
Fortescue said it was evaluating approaches from a range of firms to partner in its assets, but said it was under no pressure from lenders to sell any stakes. "We are not under any time pressure or, as you can see, any liquidity pressure to be forced into these asset sales," Power told reporters.
He declined to say which assets the company had received interest in or identify the interested parties, but said Fortescue was not in talks to sell its key infrastructure assets, which include a rail line and port worth more than $2 billion combined.
The company said it was not talking to Chinese steelmaker Baoshan Iron & Steel Co (Baosteel) (600019.SS) about selling any asset stakes. Baosteel is a partner in Fortescue's magnetite iron ore assets, one of the "non-core" assets in which Fortescue has said it may sell a stake.
Fortescue did not disclose the interest rate on its new facility, but said it would probably be less than the 7 percent margin it pays on its notes. It also said the fees charged by JPMorgan and Credit Suisse were "incredibly competitive".
Earlier this month, Fortescue slammed the brakes on plans to triple its iron ore capacity, cutting $1.6 billion in planned capital spending this year, axing hundreds of jobs and selling a power station to preserve cash.
The moves shocked investors, coming less than a week after Power had said the company was comfortable with its funding, was on track with its expansion, and was confident iron ore prices recovering.
Forrest has been fighting not to have his stake diluted in a company he built from scratch. He has spent close to $180 million in recent months to take his holding to 32.8 percent.
Asked repeatedly if Forrest had pressured the company to avoid a share sale to raise funds, Power said only that Fortescue would never take any option off the table, but that it saw no need for an equity raising at this point.
The price of iron ore .IO62-CNI=SI traded as high as $180 a metric ton a year ago, but plummeted to a 3-year low of $86 earlier this month as demand in China shrinks. On Monday, benchmark iron ore with 62 percent iron content had rallied to $105.10 a metric ton, according to data provider Steel Index.
Fortescue, which produces only iron ore and effectively has a single customer, China, said on Tuesday it expected iron ore prices to continue edging higher toward $120 a metric ton, as Chinese steel mills step up production.
Australia, the world's biggest exporter of iron ore, revised down its revenue forecasts for the steelmaking ingredient by a fifth on Tuesday, adding to signs that the industry is losing steam as China's slowdown drives down prices.
($1 = 0.9521 Australian dollars)
(Reporting by Sonali Paul and Lincoln Feast; Editing by Eric Meijer and Ian Geoghegan)