huge re-rating coming !, page-3

A bit of institutional trading desk commentary on this slated sale:

Fortescue Metals has confirmed speculation, announcing it has commenced a process to consider the potential sale of a minority interest in its existing rail and port assets after receiving “strong interest from a number of strategic and financial parties”. Fortescue said the sale process is being conducted with a small group of selected investors and any sale would only be transacted at “full and fair market value and on the basis that the current efficiency of infrastructure and mining operations are not impacted”.

No specifics regarding either size of the stake (other than it was of a minority interest) or of the valuation were provided. On our expectations though, the sale of a minority stake (say 30-40%) could be expected to realise several billion dollars (perhaps very approximately $2-$3.5bn) which would be a significant contributor to debt reduction or part funder to the increasingly likely looking restart of the Kings expansion.

Providing (and this still very much needs to be ascertained) that Fortescue can receive full value for the sale - enough to offset the otherwise increase in operating costs and that the proceeds are directed to either debt reduction or expansion funding and not immediately to shareholders(of which we have more confidence) – then the transaction will be positive for Fortescue credit profile. In our view, the assets to be sold are inextricably linked with the mining operations and, notwithstanding be open to third parties, would inevitably be effectively stranded assets were Fortescue’s mine to cease operation, then the supporting infrastructure assets themselves would be of little value. As such, we don’t see the sale of these assets as in anyway diluting the credit quality of Fortescue’s asset portfolio.

As previously noted, we see the re-initiation of the Kings expansion as an efficient use of capital and not, in itself negative for credit (the major area of uncertainty being whether it can be completed on budget). A fuller credit analysis of an infrastructure asset deal we’ll have to leave until details, principally proceeds raised are made public.

Also of note is a further solid rise in the iron ore price overnight. This rose a further 2.2%, following on from Friday’s 2.3% rise and taking it once again above $130/dmtu. In our view, such a level – if maintained - certainly supports a decision to restart the Kings expansion.