rbs report - buy - $7.25 price target

FMG's refinancing deal represents a major breakthrough for the company, in our view. The Solomon development can now be pursued without the need to work around restrictions placed on the company as a result of the previous debt. We maintain our high conviction Buy call, with FMG still looking cheap vs the sector

Debt refinancing a major positive
FMG has announced a new US$2.04bn corporate bank facility with a maturity of October 2015 and an initial interest rate of 7.5% (linked to Libor). The loan will be used to refinance (replace) the existing senior secured notes (SSNs) with a face value of ~US$2.09bn and an average interest rate of ~10.2%. Under the new financing arrangement, FMG will save around US$60m in interest expense annually. However, the SSNs were bought back at a premium of US$0.65bn. FMG reported cash of US$1.2bn at end-FY10, which we forecast will reduce to around US$0.5bn after the refinancing, excluding operating cash flow. We estimate FMG is generating around US$0.5bn in operating cash flow each quarter, which should see the cash balance return to over US$1.0bn by CY end, net of capex.

Solomon sooner rather than later
We have brought forward first production from Solomon from FY17 to FY15 on the basis that development restrictions associated with FMGs previous debt facility have been removed.

This is still conservative relative to FMGs guidance at the recent site visit, which had initial production targeted by June 2012, before ramping up to a 60Mtpa rate by June 2014. Our valuation and target price has risen A$0.24ps to A$7.25ps based on the increased cash flow (including higher prices). FMG notes that the Solomon Stage 1 feasibility is complete and awaiting board approval. Our forecasts are likely to be refined further once more details on the development are released. Our capex estimate is based on US$100/t, or US$6.0bn.

Investment view more left in the tank
FMG continues to look attractive relative to the rest of the sector from both the earnings multiple and P/NPV point of view. We expect positive valuation revisions across the market on the back of less conservative estimates around Solomons development. FMG also noted strong operating performance in the September quarter, with a new monthly export record, reinforcing the quality of its existing assets. We maintain our Buy call.