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No Fire Sale for Fortescue, CEO Says -- Update09/09/2015 04:48PM AEST
By Rhiannon Hoyle
SYDNEY-- Fortescue Metals Group Ltd. signaled it is in no rush to sell off part of its iron ore mining operations in Australia, with its chief executive saying the company may wait for a recovery in the market before penning any deal with investors.
Fortescue, grappling with a sharp downturn in the price of its sole commodity, has considered selling stakes in some of its mining assets as a means of raising cash to pay back part of a multibillion-dollar debt pile accumulated as it built new mines and railways in iron-rich Western Australia. Its stock has swung wildly in recent months on speculation the world's fourth largest iron-ore exporter by volume was in talks with two Chinese suitors interested in purchasing a stake in its mines.
On Wednesday, chief executive Nev Power said Fortescue had been approached by more than two parties that have proposed investments in its mining operations, but that no advanced negotiations were under way. He suggested the miner may now hold back for signs of a rebound in the market for iron ore, the key ingredient in steelmaking, to ensure it gets the best possible price for any stake or stakes it may opt to sell--if it does offload any piece of the business at all.
"We are in very strong shape and therefore we can be patient," Mr. Power said in an interview. "That might mean we need to wait until potential investors think the iron-ore price is about to go up again, and then they will be more motivated."
Iron-ore prices have fallen roughly 60% since the start of last year, amid fears rising supplies of the raw material would overwhelm demand as China's economy slows.
Analysts have praised Fortescue's efforts to protect margins by driving operating costs lower--Macquarie recently described spending cuts as impressive, while banks such as Morgan Stanley have upgraded the stock. Fortescue intends to cut costs in the year ahead by nearly as much as the two prior fiscal years combined. However, several analysts have also questioned how Fortescue will cope should iron-ore prices weaken further.
The miner still has higher operating costs than Australian rivals Rio Tinto PLC and BHP Billiton Ltd. and sells its ore, which is of lower quality, for less.
Goldman Sachs forecasts a further 30% drop in iron-ore prices over the coming 18 months. Citigroup says it could be in the US$30s before year-end, from US$56 a metric ton now.
But, in Fortescue's eyes, the current iron-ore price which in July plummeted to a decade low of around US$44 is unduly depressed and should recover, said Mr. Power.
Whatever happens, "we don't need to have a fire sale," said Mr. Power, who said management was only interested in taking on an investor to help accelerate its debt repayments, but didn't need that investment to keep its business viable. "The reality is we can repay our debt from cash flow, and we will do that whatever the iron ore price is."
The miner's shares extended gains in Sydney, at one point trading as much as 10% higher on Tuesday's closing price.
At its peak, Fortescue owed banks more than US$12 billion. That debt helped transform it from a small explorer to the world's fourth-biggest iron-ore miner in little more than a decade, as China imported rising volumes of Australian iron ore. But the debt also left the Perth, Australia-based company vulnerable to global shocks and has weighed heavily on its shares.
The miner still had US$7.2 billion in debt after subtracting cash on its balance sheet at the end of June.
"We are not under any time pressure on that, though...and I think we would be more inclined to sell in an environment with a better iron-ore price," said Mr. Power.
Still, Fortescue will likely seek out investors for a magnetite project it is developing with Taiwan's Formosa Plastics Corp. and China's Baosteel Group Corp., Mr. Power said. He said Fortescue would want to lock in more partners that will buy that type of ore, which is a different type of mineral to the hematite ore it digs up at its other mines.
Mr. Power separately said he remains "absolutely" confident in the outlook for steel demand in China.
Concerns about China's economy, and particularly its demand for commodities, have been escalating on soft economic numbers and the surprise devaluation of its currency.
BHP recently lowered its projection for long-run steel demand in the country, the world's top producer of steel, but Mr. Power said he continues to expect a rising appetite as more people move to urban centers and new infrastructure is developed.
On Wednesday, China's finance ministry said the country would roll out a "more forceful" fiscal policy to stimulate economic growth, including allocating more funds to some infrastructure projects.
Write to Rhiannon Hoyle at [email protected]