Fortescue on track to hit healthy gearing target

Fortescue Metals Group is on track to hit its long-held gearing target, according to chief financial officer Steve Pearce.

Andrew Forrest’s Fortescue Metals Group is on track to hit its long-held gearing target and could have a healthier balance sheet than rivals Rio Tinto and BHP Billiton in the next 12 months, according to chief financial officer Steve Pearce.

Fortescue yesterday announced it had repaid another $US500 million ($663.4m) of debt ahead of schedule, taking its total debt repayments this financial year to $US2.9 billion.

While Fortescue was once seen as dangerously over-leveraged, Mr Pearce told The Australian that the miner was on track to have lower gearing than BHP and Rio.

“We’ve been running on sustaining capex cash flows for a couple of years so we’re actually well ahead of the pack in terms of getting control of our cash flows and resetting the balance sheet,” Mr Pearce said.

“You’ve seen that we’ve caught and passed them on costs, and I think you should expect to see us catch them quickly on the balance sheet front.”

He said that with the company continuing to reduce its operating costs, Fortescue was on track to break through its targeted 40 per cent gearing level during the 2017 financial year.

“We would still like to bring that gearing down by another couple of billion dollars,” Mr Pearce said.

“With iron ore prices staying at these levels we could do that very quickly over the next 12 months.”

The early debt repayments made in the past year will save Fortescue around $US186m a year in interest.

The miner’s ability to continue paying back debt suggests healthy profitability over the past few months. Fortescue had $US2.5bn in cash at the end of March and has since paid back more than $US1.7bn in debt, yet Mr Pearce said it still had well over the $1bn in minimum working capital it requires.

He said the company still had the capacity to pay a dividend at its coming full-year result but stressed that early debt repayments remained Fortescue’s top priority.

Fortescue has overhauled its Pilbara iron ore operations in recent years by adding new processing capacity that allows it to convert what was formerly regarded as waste into ore. The changes have helped the miner narrow the production cost difference between it and rivals Rio and BHP, with the latest analysis by consultants Metalytics actually placing Fortescue ahead of BHP on its cost curve.

However, the latest cost curve from Credit Suisse, which unlike the Metalytics analysis is adjusted to reflect differences in ore quality, had Fortescue continuing to lag Rio and BHP.

The news of the debt repayment helped make Fortescue the best performed of the big iron ore miners yesterday, with its shares jumping 8.3 per cent to $3.53. BHP gained 1.8 per cent and Rio rose 2.7 per cent.