Why do investors panic? I think panic is a subjective term. For instance, if one was of the opinion that the expansion was a given, then the company says "errr...ummm.." one can choose to sit it out. Or one may choose to shop around for other opportunities. Everyone has a choice.
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c/o Bloomberg
Fortescue Says Funding for Second Expansion Uncertain (Update2) By Jesse Riseborough
Oct. 2 (Bloomberg) -- Fortescue Metals Group Ltd., seeking to become Australia's third-largest iron ore producer, said funding for the second stage of a A$7 billion ($5.5 billion) expansion is ``uncertain'' because of turmoil in debt and equity markets.
The first-stage expansion to 80 million metric tons, estimated to cost A$2 billion, will be financed by cash flow from its existing mine in Western Australia state, Graeme Rowley, executive director of operations, said today by phone from Perth.
``Given the current financial markets the first bite out of that has to be one we can manage out of cash flow,'' Rowley said. ``If you are trying to ask me how I am going to get to 160 (million tons) right now I have to say that is a little bit uncertain because that's the way the market is.''
Australian mining companies are seeking A$26 billion to build projects as the worst credit crisis since the Great Depression tightens debt markets and raises borrowing costs. Fortescue's mine is estimated to return ``free cash flow'' of A$5 billion a year once output reaches 80 million tons, Chief Executive Officer Andrew Forrest said last month.
Fortescue may have difficulty financing the second expansion, JPMorgan Chase & Co. analysts led by David George said in a report dated yesterday. The bank cut its share price target for the Perth-based mining company to A$5.41 from A$10.31 because of the funding concern. Financing the initial expansion to 80 million tons capacity isn't in doubt, George said.
53% Drop
Fortescue fell 8.7 percent to close at A$4.85 on the Australian stock exchange.
Turbulence in global credit markets has locked companies out of capital markets after financial companies booked more than $588 billion in writedowns and credit-market losses since last year. Some mining companies will struggle to raise money during the credit crunch, Goldman Sachs JBWere Pty said Sept. 24.
``We have abandoned the 160 million ton project as the basis for setting our price target and reverted to the new base case assumption of 80 million tons, which can clearly be funded,'' JPMorgan said in the report. The broker maintained its ``neutral'' recommendation. ``Funding for the former is very uncertain.''
Target Intact
``The target of 160 (million tons) is still very real and we are setting up all the plans so that we can do that,'' Fortescue's Rowley said today.
Expansion to 160 million tons by 2012 can be funded mostly by cash from the A$2.8 billion mine where output started in May, Alex Passmore, head of metals and mining research at Patersons Securities Ltd. in Perth, said today by phone.
``In the worst case scenario that could slow that expansion down'' to 2013 or 2014, said Passmore, who has a ``buy'' rating on Fortescue and a share price target of A$11.37. He estimates it will cost A$6.3 billion to reach 160 million tons.
A slowdown in economic growth globally has pared steel demand from builders and producers of cars and appliances, forcing mills to cut prices, and reducing expectations for an increase in iron ore prices next year.
Citigroup Inc. and Merrill Lynch & Co. in the past week cut estimates for next year's contract prices to a gain of 10 percent because of slowing steel output growth. Citigroup had previously forecast a 30 percent jump and Merrill a 15 percent rise.
FMG Price at posting:
$4.85 Sentiment: Sell Disclosure: Not Held
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