Fortescue Says FY12 Net Profit Up 53%, Debt Pile Grows Sharply

   By Rhiannon Hoyle 
 

SYDNEY--Fortescue Metals Group Ltd. (FMG.AU) Thursday reported a 53% rise in full-year net profit, but saw its debt pile swell to US$8.5 billion as it presses on with plans to triple iron ore output in Australia's Pilbara region despite slumping commodity prices.

Fortescue is facing a challenge from weakening Chinese demand for steelmaking materials, which has driven the price of iron ore down to a two-and-a-half-year low and prompted peers such as BHP Billiton Ltd. (BHP) to delay approvals for multibillion dollar investments nearby that would enable vastly higher exports from the Pilbara.

Falling iron ore prices have also triggered concerns that Fortescue may again need to tap debt markets soon, potentially to plug a multi-billion-dollar funding gap as it ramps up spending to expand annual iron ore production in the Pilbara to 155 million metric tons by mid-2013.

Fortescue, which has grown from a tiny explorer to become the world's fourth-largest iron ore producer by volume within a decade by developing deposits overlooked by peers like BHP, said net profit for the year to June 30 totaled US$1.56 billion compared with US$1.02 billion a year earlier.

That was ahead of an average US$1.43 billion estimate from five analysts' forecasts compiled by Dow Jones Newswires.

Perth-based Fortescue cited increased production volumes as the main reason for the profit growth. The company's revenue was up 23% at US$6.68 billion.

"A key feature [behind the rise in earnings] was the outstanding operational performance, achieved within an environment of major construction works across all mine, port and rail sites," Chief Executive Nev Power said in a statement to the Australian Securities Exchange.

The company's borrowings and financial liabilities at the year end rose 75% to US$8.5 billion as it tapped debt markets for funding to expand its mines, which include Christmas Creek.

Earlier this month, the company said it had secured an extra US$1.5 billion in loans and credit to help fund the expansion of operations in Western Australia. The move to tap debt markets came after the company said the capital required to achieve its expansion targets would likely be close to US$9 billion, outstripping a previous US$8.4 billion forecast.

Fortescue shipped a record 17.8 million tons of iron ore in the March-June period, up 42% on volumes just three months earlier when operations were hit by heavy rain.

Analysts say Fortescue's stock is likely to take its cue more from swings in iron ore prices than the company's production growth, as the miner is highly geared to overseas demand and doesn't have any exposure to other commodities.

The iron ore price fell to US$104.70 a ton Wednesday, its lowest level since December 2009. The price is down 24% year-to-date amid weak demand from Chinese steel mills.

"With the spot price having broken the US$118 a ton resistance level and currently grinding lower day-by-day, jitters about Fortescue's substantial debt burden will grow the longer price weakness remains," Credit Suisse analyst Matthew Hope said.

Fortescue announced a final dividend of 4 Australian cents a share, taking the total for the year to 8 cents a share. Credit Suisse earlier this week forecast a total annual dividend of 9 cents a share.

Write to Rhiannon Hoyle at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires