Fortescue Scraps $2.5 Billion Bond Sale

By Rhiannon Hoyle 

SYDNEY-- Fortescue Metals Group Ltd. scrapped a planned $2.5 billion bond sale Wednesday, a surprise move that highlights investor jitters toward iron-ore exporters because of slack demand for the commodity from China and rising supply.

Fortescue--the world's fourth-largest iron-ore exporter by volume--had hoped to lower its interest charges as part of a broader campaign to protect profits from falling iron-ore prices. The company earlier this month outlined plans for a multibillion-dollar debt refinancing, that included the debt issue as well as a plan to extend the maturity on an existing $4.9 billion credit facility.

Fortescue has been grappling with a halving in iron-ore prices over the past year, as supplies from new and expanded mines outpace demand for the raw material. The company's net profit tumbled more than 80% in the six months through December despite a sharp rise in shipments.

"The objective of the refinancing was to extend Fortescue's maturity profile and minimize interest costs," Chief Executive Nev Power said. "Debt capital markets were not favorable at this time and as a result we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage."

Iron-ore prices have been hit by a glut in supply coming from Australian companies including Fortescue and its larger peers Rio Tinto PLC and BHP Billiton Ltd. That has coincided with moderating demand growth in China, the world's biggest consumer of the commodity.

Many banks are forecasting iron-ore prices to fall further this year as global supplies continue to rise.

Analysts said Fortescue's decision to abandon the debt restructuring illustrates weak sentiment toward iron ore. Still, they believe Fortescue can meet future repayments and maintain its current dividend, as long as iron-ore prices don't fall further.

"They have miscued in terms of seeking to refinance now, but it would be much worse if the debt and bond markets were totally closed to them," said Mike Harrowell, Sydney-based resources analyst at broker BBY.

Fortescue accelerated debt repayments in recent years as it earned healthy margins on iron-ore prices above $100 a metric ton. Iron ore now trades at $58 a ton, closer to Fortescue's operating expenses.

It costs Fortescue in the mid-$40-a-ton range to produce and deliver its ore, which it sells at a discount to benchmark spot prices due to lower iron content than its larger rivals.

Mr. Power has previously said paying down a hefty debt pile, that was used to fund past rapid expansion and at its peak topped $12 billion, is Fortescue's top priority. The mining company, founded by billionaire Andrew Forrest, used large loans to build up a network of land assets, power-and-water infrastructure, and rail-and-port facilities in the resource-rich Pilbara region of Western Australia state.

Fortescue said the next deadline for repayments on current loans is in April 2017.

Write to Rhiannon Hoyle at [e-mail]

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