Fortescue to Reduce Debt Funding on Strong Cash Flow, CFO Says

Apr 13, 2011 By Elisabeth Behrmann

Fortescue Metals Group Ltd. (FMG), Australia’s third-biggest producer of iron ore, said cash flow from high prices will reduce the amount of debt funding the company needs for its $8.4 billion expansion.

Fortescue in November approved the expansion of its operations in the Pilbara region to triple output to 155 million metric tons as demand from China grows, adding mines, rail and port facilities. It had planned to raise about $4 billion in debt and the remainder through cash flow and reserves.

“Cash flows have continued to remain very strong given the high iron ore price, so we’re likely to raise less than those $4 billion,” Chief Financial Officer Stephen Pearce of the Perth- based company said on a media call.

Fortescue was the seventh-biggest issuer of high-yield bonds in the U.S. last year, raising $2.04 billion to repay debt and $1.5 billion to fund the expansion. The total bond sale of $3.54 billion made the fundraising the biggest sale of high- yield dollar bonds by an Australian company, according to data compiled by Bloomberg.

Fortescue said Jan. 21 it may sell a further $2.5 billion in bonds this year. Strong cash flows are likely to reduce this amount, Pearce said.
Alternative Opportunities

“In terms of alternatives and timing, we have a number of varying initiatives, opportunities out of Asia, the U.S., Australia and out of Europe,” said Pearce. “Given that we have such a large amount of cash on hand, we can crystallize a time when we think it’s right.”

Fortescue’s cash balance stood at $2.14 billion at the end of March, according to its third-quarter production statement filed with the Australian stock exchange.

Ore shipped fell 11.5 percent to 8.36 million tons in the three months ended March 31, from 9.45 million tons a year earlier because of heavy rain.

Fortescue fell 3.1 percent to A$6.58 at 1:57 p.m. in Sydney trading, trimming gains since the start of the year to 0.6 percent.

Steel consumption is forecast to jump 5.3 percent to a record this year, according to the World Steel Association. The price of 62 percent iron ore arriving at China’s Tianjin port hit $191.90 a ton on Feb. 16, the Steel Index said, the highest level since data became available in November 2008. It was $183 a ton on April 11, the Steel Index said.

Growth in global steel output and China’s increasing dependence on imported ore will underpin iron ore demand to 2014, Royal Bank of Scotland Group Plc analysts led by Head of Commodity Strategy Nick Moore said in a March 17 note. (sourced Bloomberg)