UPDATE: Fortescue Says FY12 Net Profit Up 53%, Debt Pile Jumps

-- Fortescue net profit up 53% as iron ore production accelerates

-- CFO says company has headroom to increase debt if needed

-- CEO Nev Power expects iron ore price to rebound soon

(Adds comments from fund manager in sixth paragraph, Fortescue officials in tenth-eleventh and fourteenth paragraphs, details throughout)

 
   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.

"A lot of people in the market are skeptical about Fortescue meeting its production and financial targets, but it continues to defy the skeptics and deliver to its own internal stress targets," said ATI Asset Management portfolio manager Ben Lyons, who holds Fortescue stock.

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.

The company's borrowings and financial liabilities at the year end rose 75% to US$8.5 billion after 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. The move 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's chief financial officer Stephen Pearce said these loans would give the miner "flexibility" in the months ahead.

"We do have capacity [to increase our debt], but our preference is not to take on additional debt," he said.

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.

Fortescue Chief Executive Nev Power told reporters that he expects the iron ore price to rebound to between US$120/ton and US$150/ton soon, and the company is continuing to develop plans to expand beyond 155 million tons.

"How quickly we go into the next expansion phase will depend on the iron ore market... but it looks very attractive at the moment," said Mr. Power, adding Fortescue would seek to pay down debt first.

Fortescue announced a final dividend of 4 Australian cents a share, taking the total for the year to 8 cents a share.

Write to Rhiannon Hoyle at [e-mail]

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