Fortescue Says Can Withstand Slump in Iron Ore Prices--2nd Update

By Rhiannon Hoyle 

SYDNEY--Fortescue Metals Group Ltd. on Thursday sought to reassure investors it can survive the sharp downturn in the global iron-ore market, but later saw its debt downgraded by ratings firm Moody's, which warned of a "substantial weakening" in store for the company's earnings and credit.

The Australian iron-ore producer--the world's fourth-largest exporter by volume--has been scrambling to rein in spending as it grapples with a near-60% decline in iron-ore prices over the past year. During an operational update, the company's management said it had a strong cash balance and was quickly reducing operating costs, while damping fears it could be forced to sell off big chunks of its business or shutter mines.

Shares in Fortescue shot up 10%, but later closed with about half that gain.

The mining company has still lost nearly two-thirds of its value in the past year as investors have fretted over both its high debt pile and its ability to compete with bigger Australian rivals Rio Tinto PLC and BHP Billiton Ltd. All three companies operate large mines in the Pilbara region of Western Australia.

Fortescue has risen from a tiny explorer to become the world's fourth-largest iron-ore exporter in a decadelong campaign that sees it now shipping ore to Asia at an annualized rate of 165 million metric tons.

But the company is struggling to generate enough cash to repay billions in loans it used fund its aggressive expansion in the country's northwest. Last month, the company scrapped plans to refinance $2.5 billon of debt having failed to agree terms with investors.

Its costs remain higher than those of rivals Rio and BHP and its ore quality is lower, meaning it is more vulnerable to the sharp decline in market prices. Iron-ore prices have slumped to $50 a ton Thursday from nearly US$200 a ton in 2011.

"There is a plan B, C and D" if prices continue to weaken, said Chief Executive Nev Power. "Whatever the market price is, we will respond to that."

But Moody's Investors Service later cut its rating on Fortescue's debt to Ba2 from Ba1, adding its outlook on the company was negative. It said it expected iron-ore prices to remain low throughout 2015 and 2016.

"The rapid fall in prices means [Fortescue's] earnings and cash flow generation will be much lower over the next 12-24 months," said Matthew Moore, a Moody's senior analyst.

Meanwhile, Goldman Sachs slapped a "sell" rating on Fortescue on Thursday and warned it would "struggle to generate significant cash flow" if iron-ore prices fall to $40 a ton.

Fortescue recently said it was considering selling stakes in some of its mining assets--ending a proud policy of wholly owning the mines it operates, in contrast to rivals that have sold parts of their Australian mines to Asian investors in the past.

On Thursday, Mr. Power said he wasn't ready to rule any options in or out.

He signaled the company wasn't yet contemplating any mine closures, though. Equity raisings also aren't on the agenda at this stage, he said.

"We are very comfortable with our balance sheet," Mr. Power said, cautioning investors against underestimating the company.

Fortescue said its cash balance rose to US$1.8 billion at March-end, compared with US$1.6 billion at the end of December. The company said it expects to hold US$1.5 billion or more in cash through the current fiscal quarter as it lowers costs even further.

Its net debt, meanwhile, was slightly lower, at US$7.4 billion, compared with US$7.5 billion three months earlier.

Fortescue aims to end June--the close of its fiscal year--with a break-even price around US$41 a ton. Over the year that follows, it hopes to push that down further to an average US$39 a ton.

Mr. Power acknowledged Fortescue was facing an arduous challenge.

"The current state of the iron-ore industry has been a disaster for everyone," he said. "It has ripped the heart out of the industry. There are no winners in any of this."

Write to Rhiannon Hoyle at [e-mail]

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