(Agency corrects the version published earlier today, where the benchmark iron ore price and period in the last sentence of the second paragraph under the Rationale section were misstated. A corrected version is as follows.) (The following statement was released by the rating agency)
Sept 12 -
-- Iron ore prices have recently declined sharply to levels below our original expectation of US$120 per ton for the benchmark price of Fe 62% CFR (cost and freight). The timing and magnitude of the recovery on pricing is uncertain.
-- As a result, we consider that Fortescue Metals Group is likely to generate lower-than-expected cash flows, which will pressure its liquidity when its expansion project is at the peak capital-expenditure stage.
-- It will also exert financial covenant pressure regarding its debt documents in the near term.
-- We therefore have placed our ‘BB-’ corporate credit and issue ratings on Fortescue on CreditWatch with negative implications.
-- To resolve the CreditWatch, we will assess the company’s actions to address the financial covenant pressure.
-- In addition, we will review our forecasts of iron ore prices for the near and medium terms, and how they would affect Fortescue’s financial performance.
On Sept. 12, 2012, Standard & Poor’s Ratings Services placed its ‘BB-’ corporate credit and issue ratings on Australia-based mining company Fortescue Metals Group Ltd. (Fortescue) on CreditWatch with negative implications. The recovery rating is affirmed at ‘4’.
The CreditWatch placement reflects our view that Fortescue’s earnings for year ending June 30, 2013 would be much weaker than expected due to the steep fall in iron ore prices since late July 2012. Weaker earnings will erode its financial metrics and exert financial covenant pressure regarding its debt documents in the near term. The level of pressure is to a large degree dependent on near-term iron ore prices; however, we think it is unlikely that prices will recover sufficiently to alleviate covenant pressure. We expect that Fortescue will take steps to mitigate the risks concerning the covenants, and consider the timeliness of those actions to be important.
Compared to its iron ore peers, Fortescue is more vulnerable to a decline in iron ore prices due to its single-commodity exposure. In addition, the drop in iron ore prices coincides with the peak capital expenditure of its expansion to 115 metric tons per annum (mtpa) of production capacity. In our opinion, a successful execution of its expansion depends on continuing strong iron ore prices, in particular for the next 18 to 24 months, in part because the company is partially reliant on cash from operations to fund the expansion. Should benchmark iron ore prices persist at less than US$110 per ton for a period longer than to the end of calendar year 2012, we believe this will place significant financial covenant pressure in 2013. This level will also push its credit metrics to fall to below levels commensurate for the ‘BB-’ rating. Nonetheless, should benchmark iron ore prices recover to, and sustain at, about US$130 per ton over the quarter ending Dec. 31, 2012, it will alleviate the pressure on its financial risk profile.
To resolve the CreditWatch, we will assess the company’s actions to address the financial covenant pressure under its bank documents, and their implications on Fortescue’s access to funding to complete the 115mtpa expansion. In addition, we will review our forecasts of iron ore prices for the near and medium terms, and how they would affect Fortescue’s financial performance. If the risks around covenant pressures or low iron ore prices are not mitigated, the rating could go down by one notch or more. We expect to resolve the credit watch within the next 90 days.
Related Criteria And Research
2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Fortescue Metals Group Ltd.
Corporate Credit Rating BB-/Watch Neg/-- BB-/Stable/--
FMG Resources (August 2006) Pty Ltd.
Senior Unsecured BB-/Watch Neg BB-
Recovery Rating 4 4