Moody’s rewards Fortescue for debt reduction
Ratings agency Moody’s has upgraded its credit ratings for Fortescue after the iron ore miner slashed debt.
Ratings agency Moody’s has upgraded its credit ratings for Fortescue Metals Group, after the pure play iron ore miner paid down debt aggressively over the past year as it slashed costs and benefited from a surprise bounce in prices.
The miner (FMG) this week tripled its full-year profit and announced it had repaid $US2.9bn in debt during fiscal 2016, pushing its gearing below 40 per cent.
Fortescue received a dual boost from its lower costs and a surprisingly strong iron ore price, which reached a trough below $US40 in December and has spent much of calendar 2016 in the $US50s and $US60s, defying analysts’ warnings of an oversupplied market.
Moody’s lifted Fortescue’s senior unsecured rating to B1 from B2, its senior secured rating to Ba1 from Ba2, and its corporate family rating to Ba2 from Ba3. Its outlook is stable.
“The upgrade to Fortescue’s ratings reflects the considerable progress that the company made in reducing its debt levels in fiscal 2016 and Moody’s expectation that it will continue to reduce debt further in fiscal 2017,” Moody’s vice president and senior credit officer Matthew Moore said.
“The debt reduction, in part facilitated by average iron ore prices that were higher than Moody’s previous expectations for 2016, has led to a significant improvement in leverage metrics for Fortescue.
“The company’s ongoing cost and debt reduction initiatives will allow it to maintain conservative financial metrics over the next 12-24 months under Moody’s base case sensitivity for iron ore prices.”
The ratings agency warned that iron ore prices are set to remain volatile and could fall further, but said Fortescue’s cuts to its costs and debt levels should help it better manage this volatility.
Moody’s base case for iron ore is around $US45 per tonne, but it said Fortescue has cut C1 cash unit costs by more than 70 per cent since fiscal 2012 — although it warned of the challenge of keeping costs this low, given current exchange rates and higher oil prices.
The ratings are also supported by Fortescue’s high quality reserves, despite its limited product diversity, Moody’s said.
Moody’s said it could upgrade Fortescue further if it keeps costs low and pays down more debt, although it could downgrade the miner if its costs rise or iron ore prices fall below Moody’s forecast.
Fortescue chief financial officer Stephen Pearce said the upgrade had no effect on the company’s debt capital structure.
“It is pleasing that Moody’s have formally acknowledged Fortescue’s cost performance and the continued execution of our debt reduction strategies which have improved Fortescue’s credit metrics,” Mr Pearce said.
