Fortescue surprises with $US1.5b in new loans

Fortescue Metals Group has surprised the market by raising more funds than it promised to less than three weeks ago, in what may be a precautionary move against slumping iron ore prices.
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The iron ore exporter reported today it had raised $US1.5 billion ($1.44 billion) in short-term loans to cover a recent cost blow out on its expansion project at Port Hedland.

Fortescue shares are higher in early trade, rising 15.5 cents, or 3.7 per cent, to $4.335.

When Fortescue announced the cost over-runs on July 16, chief financial officer Steve Pearce said the company would look to borrow a bit more than the $US600 million shortfall, and would probably raise  “up to $US1 billion”.

Since then a series of analysts have speculated that $US1 billion may not be enough, particularly if iron ore prices continue to hover below $US120 per tonne, as they have over the past fortnight, crimping Fortescue’s cashflow.

Goldman Sachs said last week if iron ore prices stayed at $US120 per tonne, Fortescue would need to increase it’s borrowings to $US1.5 billion – the amount the company eventually announced to market today.

Fortescue said $US750 million of that money was through a revolving-credit facility, while the remaining $US750 million was borrowed as a term loan. Both mature on December 31, 2013.

Mr Pearce said today the extra money gave the company extra flexibility as it completed its Pilbara expansion.

Junk bonds

Fortescue is already the biggest mining issuer of sub-investment grade, or junk bonds.

The loans will help pay for Fortescue’s plans to almost triple output by next year after last month reporting the cost overrun.

The credit facility provides a short-term funding solution for its $US9 billion expansion to annual production of 155 million metric tons a year, Fortescue said in a statement. Bank of America Corp. is the underwriter and arranger.

Mining companies are struggling with cost inflation from rising wages and mining equipment as producers in Australia, the biggest iron ore and coal shipper, seek to build new projects to supply growing demand in Asia.

“The Chichester Hub is on target to meet the scheduled ramp up by the end of 2012 and we remain completely focused on delivering the 155 million ton per annum expansion by mid-2013,” Mr Pearce said in the statement.

The company last month said total spending on its Chichester Hub and Solomon projects, as well as associated port and rail infrastructure, would rise to $US9 billion from $US8.4 billion.

Fortescue, controlled by billionaire founder Andrew Forrest, has more junk-rated bonds outstanding than any other mining company, according to data compiled by Bloomberg on debt graded by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

Junk, or high-yield bonds, are rated below Baa3 at Moody’s and BBB- at S&P and Fitch.

BusinessDay with Bloomberg

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