fmg debt - a closer look

There's been a lot said about FMG's debt levels, and a lot of people bandying around figures of around $6B. Its a pity its so easy to bandy those figures around and it takes a bit of effort to see the numbers in their full context.

The facts are:

1. that FMG has only about $2B of actual debt, and a provision of a further $4B based on future sales revenue projections (which if not achieved will result in a revised provision at some point).

2. The debt obligations are spelt out exactly in FMG's annual report, and can be categorised into 2 categories - basically a series of quaterly and half-yearly fixed interest payment obligation on the $2B of senior secured debt` facilities, and a variable interest payment obligation on the $100M aubordinated debt facility (for which the provision for future payments is $4B).

3. The fixed interest payments on senior secured notes total just over $100M p.a.

4. The interest (at 4% of sales) on the subordinated note would be between $120-250M p.a. depending on sales revenue (see scenarios further on).

5. None of the debt facilities are due for repayment until 2011.

In terms of scenarios for next year (2009), I can see the following possible scenarios (in rough terms):

Sales volume = 35, 45 or 55 Mt (depending on demand and production capacity)

Sales price = 20%, 30% or 40% reduction (resulting in prices of $116, $102 or $87 per ton respectively) on current benchmark price for fins ore of $145/ton.

Assume operating costs/ton is what FMG says it is (i.e. $20/ton).

Taking even the worst of these scenarios, i.e. lowest sales volume (35Mt), and lowest sales price (US$87/ton), the following calculations are straightforward based on the operating costs and finance costs (debt obligations) stated above:



Sales Volume 35Mt
Sales Price (40% reduction from $145/ton) $87/ton
Sales Revenue $3,045,000,000

less operating costs (@ US$20/ton) $700,000,000
Operating Profit $2,345,000,000

less subordinated loan payments (4% of sales)$121,800,000
less fixed debt repayments $101,376,000
Total debt payment obligations $223,176,000

Profit after Operating & Finance Costs: $2,121,824,000

What this tells me, and I'd welcome the opinion of any qualified accountant to tell me I'm barking up the wrong tree, is that

a. FMG's debt level is well within its affordability even in the worst scenario for next year, and therefore,

b. Anyone going on incessantly about the debt levels hasn't done the numbers for themselves, and therefore,

c. FMG is a solid investment for the future based on its financials and on its demonstrated operating performance