2nd UPDATE: Fortescue Metals Readies US$2 Billion US/Europe Bond Offer -Sources
October 14 2010 - 6:58PM
Dow Jones News
Australian iron-ore mining company Fortescue Metals Group Ltd.
(FSUMY, FMG.AU) is looking to raise US$2 billion in the U.S. and
European bond markets, according to two people familiar with the
matter, as the miner accelerates its expansion plans to capitalize
on the currently high price of iron ore.
The Perth-based miner, Australia's third-largest listed producer
of iron ore behind global giants BHP Billiton Ltd. (BHP) and Rio
Tinto Ltd. (RTP), refinanced another portion of its debt on Oct. 10
in order to give it flexibility to expand.
A Fortescue representative would not comment on the prospective
offering.
On Thursday, in its quarterly production report, Fortescue
indicated cash costs are on the rise, increasing 8% from the prior
quarter. Fortescue already has higher production costs than rivals
BHP and Rio Tinto. The company is pursuing an aggressive growth
plan while iron ore prices are high.
Analysts expect the price of the commodity to decline in a few
years as the iron ore mining industry becomes more productive
globally. Most analysts expect the price of iron ore to fall to
US$75/ton from the current US$150/ton level by the middle of this
decade, given a large new supply of iron ore coming into the market
due to increased investment in iron ore mining globally.
Fortescue is looking to begin marketing its potential US$2
billion deal to investors in the U.S. and Europe next week,
according to one of the people familiar with the situation. No
further details about how the bonds would be structured were
immediately available. J.P. Morgan and RBS will be involved in
underwriting the deal, according to one of the people. Fortescue
announced earlier this week it entered a US$2.04 billion debt
facility with those very same banks.
The relative health of the U.S. high-yield bond market makes it
an attractive place to raise debt for Fortescue. Fortescue is
currently buying back bonds in the U.S. high-yield market, one
investor said, as it is replacing existing project-based senior
secured notes with its new US$2.04 billion corporate bank
facility.
If it does pursue a deal in the U.S. high-yield market,
Fortescue would be following other Australian corporations heading
offshore for their financing needs.
Supermarket giant Woolworths Ltd. (WOW.AU) recently tapped the
U.S. debt markets for US$1.25 billion of funds, in part to fund a
recent A$700 million share buy back.
And on Friday, Adelaide-based oil and gas explorer Santos Ltd.
(STO.AU) said it increased its funding in the European hybrid
markets to EUR1 billion, potentially reducing the size of a share
issue it may pursue in the Australian equities market.
Fortescue's US$2.04 billion facility announced this week carries
initial interest of 7.5% and is linked to the London interbank
offered rate.
The miner said that refinancing will save it about US$60 million
a year and could grow to more than US$100 million a year in savings
as banking conditions improve globally.
The refinancing helps the miner expand because the notes that it
is replacing with the new US$2.04 billion facility "largely
restricted" the company to its Chichester Hub in Western Australia
during the 10-year life of the notes, whereas the new facility has
no such restrictions.
While freeing Fortescue from these constraints, analysts pointed
out the group's expansion plans still carry execution risk.
"While it releases the shackles, our concerns over project
delivery and potential capex and (operating expenditure) overruns
have not disappeared," Deutsche Bank said in a note in which it
downgraded Fortescue to Sell earlier this week.
Still, Macquarie called the refinancing "a potential game
changer".
"The debt raising illustrates Fortescue's ability to procure
external debt funding, potentially setting up funding of the
Solomon project," the broker said earlier this week, while warning
that expanding the Chichester project at the same time as building
the Solomon greenfield project does carry execution risk for the
group.
-By Michael Aneiro and Cynthia Koons, Dow Jones Newswires; +61 2
8272 4691; cynthia.koons@dowjones.com (David Fickling in Sydney
contributed to this story)