FMGCD Fortescue Metals Group Ltd

By Rhiannon Hoyle 

SYDNEY-- Fortescue Metals Group Ltd. has been snapping up bundles of its debt from the U.S. bond market, and executives say they may acquire more for as long as the Australian miner can buy it back cheaply.

An aggressive push to pay down its multibillion-dollar debt pile ahead of schedule stalled this year after a sharp downturn in the price of iron ore, the only commodity it sells and the value of which has plunged 60% since the start of 2014. However, the miner says sharp reductions in its operating costs have bolstered margins and helped it resume that endeavor to reduce its indebtedness.

On Thursday, Fortescue said it had bought back US$384 million of debt on-market since June, at an average price of 80 cents on the dollar.

"If the market is going to price our debt at those levels, then we are going to buy it," said Chief Executive Nev Power. Fortescue shares closed more than 6% higher on Thursday.

In its decadelong quest to break the dominance of Vale SA, Rio Tinto PLC and BHP Billiton Ltd. in iron-ore production, Fortescue borrowed to build a vast network of landholdings, power and water infrastructure, and railway and port facilities in Australia's iron-rich Pilbara region.

Fortescue nearly came apart as iron-ore prices tumbled from their 2011 record of above US$190 a metric ton, squeezing margins just as it was ramping up production. It began speeding up bond repayments two years ago as investors fretted about the miner's huge debt burden, although a fall in ore prices to a decade low this year put the brakes on that strategy.

Earlier this year, Fortescue refinanced some of its debt, accepting an eye-watering 9.75% interest rate on its newest bonds to push out its earliest maturity to 2019 from 2017.

Chief Financial Officer Stephen Pearce said substantial cuts to operating costs had given the miner enough spare cash to buy back debt in recent months. Fortescue plans to cut costs in the year through June by nearly as much as the two prior fiscal years combined, as the miner steps up its defense against the slumping iron-ore price.

The miner said its net debt stood at US$6.6 billion at the end of September, from a peak of US$11.3 billion in 2013.

The latest US$384-million cut to its debt pile will also result in annual interest savings of US$33 million, said Fortescue, now the world's fourth-biggest exporter of the steelmaking commodity.

Any reduction in costs is a positive for the miner, as analysts predict the price of iron ore may fall further later this year--largely on rising supplies, including from billionaire Gina Rinehart's new 55-million-ton-a-year Roy Hill mine in Pilbara. BHP and Rio Tinto are also producing more.

Fortescue's goal is to reduce its gearing, a measure of debt to equity, to 40%, from about 56% as of the middle of this year. Mr. Pearce said that would take another US$2 billion in repayments to achieve.

He stopped short of setting a timeline for that target. "Whether it takes 12 months or 18 months...what is important is our commitment to do it," he said.

Iron-ore prices have slumped amid fears that rising supply of the raw material would overwhelm demand as China's economy slows.

Fortescue has tripled its own production of the commodity in recent years, although on Thursday the company said it shipped 41.9 million tons in the three months through September, marginally below the 42.4 million tons it exported the quarter immediately prior. The company said demand for its iron ore "remains strong, despite the softening of steel markets in China."

Speaking at a forum in Sydney, also on Thursday, Rio Tinto technology and innovation executive Greg Lilleyman also expressed confidence in the outlook for iron ore and steel, saying the miner expects "slower but higher-quality growth" in China to drive demand. He forecast economic growth in China, the world's top steelmaker, to decline to between 4-5% on average until 2030, from roughly 7% now.

"But let's keep this in mind: in the next 15 years China will go from being the second largest economy in the world to the largest, effectively doubling its economy from its current base," Mr. Lilleyman said in prepared remarks, adding that the country would continue to need steel as more of its population shifts to urban centers.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

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(END) Dow Jones Newswires

October 15, 2015 02:15 ET (06:15 GMT)

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