Fortescue Metals Group pays off $931m more in debt
Fat margins — and growing confidence in the iron ore price — has prompted Fortescue’s $931m early loan repayment.
Fat margins — and growing confidence that doomsayer predictions of a collapse in iron ore prices are wrong — has prompted Fortescue to make an early $US700 million ($931m) loan repayment.
The repayment brings closer the day Fortescue Metals Group can boast investment grade-rated debt, as well as unleashing dividends from the current self-imposed restriction of limiting payouts to between 30 per cent and 40 per cent of earnings while gearing is more than 40 per cent.
The latest repayment is on the group’s 2019 secured-term loan and follows repayment of the $US2.9 billion in the 2016 financial year, leaving FMG at June 30 with net debt of $US5.2bn (after counting $US1.6bn cash).
It is estimated Fortescue’s gearing is now within a whisker of 40 per cent — a far cry from the elevated levels when net debt stood at $US10.5bn three years ago.
The repayment comes as most in the market have been surprised by the iron ore price rally this year from a low of $US39.30 a tonne in mid-January to more than $US57 this week. However, many analysts expect the price to weaken to $US40, if not lower.
Fortescue chief executive Nev Power disagrees, telling The Australian yesterday the current price reflected a market where supply and demand were in balance.
He said the new supply that underpinned the gloomy price forecasts had come to the market, and there was still a reasonable balance.
“We still have some more tonnes to come on stream from South America (Vale) and the Pilbara (Gina Rinehart’s Roy Hill) but I think that those have been well and truly factored in to the market,’’ Mr Power said. “So it is hard to see where these forecasts of significantly lower prices are coming from because the market seems to be in balance.’’
He said Fortescue was a “very low-cost producer’’ and, more importantly, a very high-margin producer at current prices. “Our margins (about 45 per cent in the June year) allows us to generate the cash to repay the debt.’’
The relative youthfulness of Fortescue’s operations also helped. “We are not having to spend capital to replace mines, and likewise all of our equipment is modern and there is low sustaining capital expenditure on that, and there will be for quite some years to come,’’ Mr Power said.
“So we are in a very strong position to generate cash flow and use that to repay debt.”
The $US700m term loan repayment will save Fortescue about $US26m in annual interest savings.
Mr Power said that while Fortescue was “fast approaching’’ its 40 per cent gearing target, the company would not necessarily stop there.
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