Ore prices jeopardise Fortescue plans for Pilbara BY: RHIANNON HOYLE From: The Wall Street Journal August 02, 2012
FORTESCUE Metals may need lenders with deeper pockets than it first thought.
The miner requires iron ore prices to reverse course or it may have to raise as much as $US2.6 billion ($2.48bn) to fund its expansion plans in Western Australia, says Goldman Sachs.
That would be more than double the $US1bn that Fortescue - Australia’s third-largest iron ore miner after BHP Billiton and Rio Tinto - last month said it would seek to raise by the end of this year. That amount was determined after a detailed review of major new projects forced the company to revise its infrastructure budget higher.
The problem for Fortescue and other miners looking to tap debt markets is that the price of iron ore, a key ingredient in steel-making, is languishing near a two-and-a-half year low of $US115.20 a tonne, with little sign of a rebound in the near term unless China's economy suddenly picks up pace or China shutters mines.
Fortescue is working to triple its production in Western Australia's Pilbara region to 155 million tonnes a year by mid-2013. But it estimated in July that the capital required to achieve this will likely be closer to $US9bn, outstripping its previous $US8.4bn forecast.
According to Goldman analysts Ian Preston and Owen Birrell, Fortescue's net debt will now peak at $US9.5bn in the March 2013 quarter, leaving company executives to meet a funding gap of some $US200m. They expect the miner will successfully raise the additional $US1bn in the second-half of this year, to cover the gap and provide a buffer, but will fall short of meeting its output expansion target by around 12 months, they say.
There is, however, a big if.
Goldman’s expectation is based on an average iron ore price of $US141 a tonne in 2012, and $US155 a tonne in 2013 - well above the bulk commodity’s current market value.
Should the price average a slightly softer $US130 then debt will peak at $US10bn and Fortescue will require $US1bn in additional facilities just to meet the shortfall. If iron ore remains at current levels, as weak sentiment and ample inventories dampen demand from Chinese steelmakers, Fortescue may need a much heftier sum to plug the gap.
Goldman analysts say that with an average price of $US120 a tonne, Fortescue would need to raise $US1.5bn to fund its expansion. This would rise to $US2bn should iron ore average $US110.
According to Mr Preston and Mr Birrell, the worst-case scenario is that at a price of just $US100 - a level not seen since late 2009 - the Perth-based company would be under pressure to raise $US2.6bn and would need to refinance its $US2.04bn of senior unsecured notes at the end of calendar year 2015.
Industry participants have been citing subdued buying interest of iron ore from Chinese steelmills and traders, as steel prices there have also slumped. Steelmakers are focused on their own profitability as the economy cools and have been unwilling to bid up the price for commodity.
Overnight, the spot reference price for 62 per cent Fe grade imports at China's Tianjin Port was $US117.40 a tonne, up 0.3 per cent on the previous day but still well below the 2012 peak of $US149.40 in April.
Mr Preston and Mr Birrell said, "It is worth highlighting at this point that while these scenarios provide a deeper insight into the underlying sensitivities of Fortescue to a prolonged period of sub-$US120-a-tonne prices, it is not our view that these prices will be sustained."
The bank forecasts a recovery in prices as steelmill inventories are run down. The potential closure of high-cost, low-quality Chinese iron ore mines would also help lift the commodity’s value, they said.
Goldman's analysts say they have also "explicitly built in a level of conservatism into our production timing assumptions" given concerns that Fortescue will not meet its aggressive timeframes on the expansion. Should the miner meet its mid-2013 target on its production plans, the debt required in an environment where iron ore prices averaged $US100 or $US110 a tonne would be about $US400m lower than estimated, they noted.
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