Fortescue 'could surpass BHP, Rio'Mathew MurphySeptember 15,...

Fortescue 'could surpass BHP, Rio'
Mathew Murphy
September 15, 2010
ANDREW Forrest's Fortescue Metals Group could eclipse BHP Billiton and Rio Tinto to become Australia's largest iron ore producer, Royal Bank of Scotland analysts say.

But it may have to raise as much as $US18 billion ($A19.3 billion) in debt financing to win the title.

RBS analysts, led by Lyndon Fagan, told clients Fortescue's production could skyrocket from today's 40 million tonnes per annum (mtpa) to 355 mtpa by 2017.

It would surpass BHP, which RBS predicts will have capacity of 298 mtpa by 2017 and even Rio, which it forecasts to have 344 mtpa.

Mr Fagan said the forecast was likely to change if the BHP-Rio iron ore joint venture succeeded, which analysts think increasingly unlikely. But the 355 mtpa includes 200 mtpa of iron ore proposed for the Anketell Point port project.

''The target is aggressive from both an absolute tonnage and timing point of view,'' Mr Fagan said. ''However, we back Fortescue to relentlessly pursue all development projects. While the pipeline may be considered optimistic, Fortescue has proved it can deliver.''

Mr Fagan said that, based on his iron ore price estimates, Fortescue could self-fund an expansion to 155 mtpa by 2014. He said that to expand it to 355 mtpa would require Fortescue to raise $US9 billion to $US10 billion in debt in the next six years. That would rise to between $US17 billion and $US18 billion in a worst-case scenario, if iron ore prices fell to $US60 a tonne by 2012 then reverted in the medium term to $US48 a tonne by 2016.

RBS predicts that ''further debt and internal cash flow'' is the way to increase production, given Fortescue has expressed its reservations about a capital-raising diluting the share base.

Mr Fagan believes one of Fortescue's strengths is its relative size compared with BHP and Rio. ''We maintain our high conviction 'buy' call on the stock,'' he said.

Fortescue shares rose 5, or 1 per cent, to $5.02.

Source: The Age