By Rhiannon Hoyle
SYDNEY-- Fortescue Metals Group Ltd. built up billions of
dollars of debt in a decadelong quest to become what it called the
'New Force in Iron Ore'.
But after a sharp slump in iron-ore prices, those loans have
left the industry's fourth-largest exporter facing a cash crunch
that risks crippling the company, some analysts and investors
say.
Fortescue's top ranks are now racing to reverse the fortunes of
the company founded in 2003 by billionaire Andrew Forrest, one of
Australia's best-known businessmen. Its market value has tumbled by
nearly 65% to 5.58 billion Australian dollars (US$4.23 billion) in
the past year.
Fortescue is even considering selling stakes in some of its
mining assets--ending a proud policy of wholly owning the mines it
operates, in contrast to rivals like BHP Billiton PLC and Rio Tinto
PLC that have sold parts of their Australian mines to Asian
investors in the past.
That would represent a sharp turnaround for Mr. Forrest, who
launched Fortescue dreaming of breaking the dominance of BHP, Rio
and Brazil's Vale SA over global exports of iron ore, a key input
to steelmaking.
Mr. Forrest quickly snapped up vast tracts of rusty red land in
the Pilbara region of Western Australia, iron-ore mining's
heartland, and built the first railway line of its scale in the
area for four decades. The company rode the commodities boom after
the turn of the century and now produces at an annualized rate of
165,000 tons.
But a parallel push by BHP and Rio to increase production is
pushing their younger rival to the brink. Their bet is that even if
prices fall further, their low-cost operations that produce
high-quality ores will remain profitable, while margins for rivals
like Fortescue dwindle to the point where it makes no sense to keep
operating.
Iron ore's fall is claiming casualties around the world after a
30% year-to-date fall, following a near-halving in value in 2014.
Excess supply, mainly from Australia, and weaker demand growth in
China, iron ore's key consumer, has caused the slide.
In Australia, Atlas Iron Ltd.--once a nearly A$4-billion
company-- is shuttering all its mines while, in North America,
Cliffs Natural Resources Inc. has suspended a Canadian
operation.
On Tuesday, Fortescue said it would restructure the rosters of
its mine workers in an effort to further reduce operating costs.
The total workforce may also be reduced, it said.
The company, which carries $7.5 billion of net debt, equivalent
to nearly 100% of its equity, last month scrapped a $2.5 billion
refinancing, saying it couldn't agree on terms with investors.
For sure, the miner had US$1.6 billion in the bank at the end of
December and its next deadline for repayment of current loans isn't
until 2017. At current prices, though, Fortescue may not be able to
generate enough cash to pay down its debts without a rebound in
prices, analysts say. Standard & Poor's Ratings Services on
Monday put the miner on negative credit watch.
The company sells its lower-quality iron ore on average at a 15%
discount to benchmark iron ore prices, which stood at $48.8 a ton
on Monday. It costs Fortescue about $44-$45 to ship a ton of iron
ore to China, Chief Executive Nev Power said in a recent interview,
though he said the company was hoping to reduce costs by $5-$6 a
ton.
"[Fortescue] should have taken debt when it could as the window
may have now closed, leaving either the sale of infrastructure,
operating assets or equity raising as options to fund debt
repayments," Citigroup said in a note.
Mr. Forrest has criticized BHP and Rio Tinto's strategy to keep
churning out more ore, even suggesting recently that Australian
iron ore miners should cap production to help boost prices.
Executives at BHP and Rio have pointed the finger back at
Fortescue, saying its rapid expansion is more responsible for the
market glut.
Investors hope to learn more when Fortescue publishes its latest
quarterly operational report on Thursday. Its lead option appears
to be a selldown of its mines.
"Now is the perfect time for investors who want to have
certainty around production and cash flows and an operating history
for those assets," Mr. Power said.
Fortescue could pocket about US$3 billion from selling 20% of
its business to a joint-venture partner, according to Morgan
Stanley analyst Brendan Fitzpatrick. Or it could entice an investor
solely for its port-and-rail infrastructure assets, which it
previously considered selling in 2013 when iron-ore prices were
well above US$100 a metric ton.
Mine closures would be a last resort. Fortescue has promised not
to pump any more ore into the market. Shuttering mines, though, is
costly, and reducing output would increase operating costs as it
forgoes efficiencies of scale.
Its hand may ultimately be forced.
"You're an above-average-cost miner, you have a poor balance
sheet and you expanded at the top of the cycle. They are not in the
driving seat at all," said Morningstar Inc. analyst Mathew
Hodge.
"If [its larger rivals] decide to press on, the first big chunk
of supply that could come out of the market is Fortescue's," he
said.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
Access Investor Kit for Atlas Iron Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=AU000000AGO1
Access Investor Kit for Fortescue Metals Group Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=AU000000FMG4
Access Investor Kit for Rio Tinto Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=AU000000RIO1
Access Investor Kit for Vale SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=BRVALEACNOR0
Access Investor Kit for Vale SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=BRVALEACNPA3
Access Investor Kit for BHP Billiton Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0000566504
Access Investor Kit for BHP Billiton Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US05545E2090
Access Investor Kit for Cliffs Natural Resources, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US18683K1016
Access Investor Kit for Fortescue Metals Group Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US34959A2069
Access Investor Kit for Vale SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US91912E1055
Access Investor Kit for Vale SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US91912E2046
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
