September 14, 2012 / 6:38 AM / 6 years ago

Australia's Fortescue to restructure debt; shares on trading halt

MELBOURNE (Reuters) - Australia’s Fortescue Metals Group Ltd (FMG.AX), the world’s No. 4 iron ore miner, is under pressure to announce asset sales as it seeks to cut its $11 billion debt load to allay mounting liquidity concerns and arrest a plunge in its share price.

The company, one-third owned by billionaire founder Andrew “Twiggy” Forrest, said on Friday it would announce a restructuring of its debt next week, and asked for trading in its battered shares to be halted until then.

“It’s clearly a company in strife, and if they hadn’t gone into a trading halt today, who knows where their shares would have gone,” said Tim Gerrard, an analyst at Investec.

Fortescue has become something of a lightning rod for investor concerns about the prospects for Australia’s resources boom, which is stumbling after a seven-year bull run.

Almost entirely exposed to Chinese demand for iron ore used to make steel, Fortescue’s fortunes have suffered in tandem with a near halving in iron ore prices .IO62-CNI=SI over the past year. The stock is down 39 percent since the end of June.

Shares of Fortescue dived the most in almost four years on Thursday after a report that the company had asked its lenders to waive all debt covenants for the next 12 months.

Earlier this month, Fortescue announced it was slamming the brakes on plans to triple its iron ore capacity, cutting hundreds of jobs and selling non-core assets to preserve cash.

Bankers and analysts said lenders would likely be putting pressure on Fortescue to come up with ways to reduce debt, including quick asset sales, the sale of a stake in its mines or an equity raising. The company has already flagged it may try to sell its accommodation units, which analysts estimate could fetch $200-$400 million, and its airports.

One option could be to sell the company’s mining equipment, with the West Australian newspaper reporting that Fortescue is talking to billionaire Kerry Stokes’ Westrac business, owned by Seven Group (SVW.AX), on a possible sale. An analyst estimated the book value of the mining fleet at $1.4 billion.

Seven Group and Westrac were not immediately available for comment.


Analysts’ estimates on how much the company could raise on its low grade magnetite iron ore assets range from below $100 million to $500 million, but selling them would be very difficult in the current market.

“I don’t think the non-core asset sales will save them if the iron ore price stays around $90 a tonne,” said Chris Drew, an analyst at RBC Capital Markets.

Benchmark iron ore prices hit a 3-year low around $86 a tonne last week and are currently around $96/tonne.

An outright sale of Fortescue’s mine-to-port rail line in the Pilbara in Western Australia could raise more than $2 billion, but analysts and a senior mining lawyer said Fortescue would be unlikely to want to let go of it completely. The line is one of its key sources of value in a region where other miners are struggling to build infrastructure.

“If the strategy is to find the easiest way they could raise $500 million to $1 billion, that would be one of the priorities,” said Fitch ratings analyst Vicky Melbourne, referring to a possible sale of a stake in the railway.

Fortescue on Friday reiterated it was meeting all its debt covenants and said it expected to make an announcement regarding “the restructure of its bank related facilities” by September 18.

“Fortescue remains concerned about continued rumors and speculation in respect of its bank related facilities,” the company said in a statement. “Discussions with its banks have progressed significantly overnight and it is in the best interests of shareholders to halt trading in Fortescue’s securities.”


Investors are worried Fortescue will have to raise equity to shore up its funding, a move that Forrest has resisted.

Forrest, a hard-dealing former stockbroker, has almost all his wealth - estimated at $5.8 billion by Forbes as of March, but now nearer $3 billion - tied up in the company he built, mostly with borrowed money. He has spent over $170 million buying more Fortescue shares since June, facing off against hedge funds betting the stock will fall.

Analysts at CLSA, which hosted Fortescue Chief Executive Nev Power at a forum in Hong Kong on Thursday, said they expected Fortescue to have to raise more cash.

“If the iron ore price remains around current levels then we suspect Fortescue will need to source at least an additional $1 billion of funding in the near term and around $4 billion over a two year period to bring gearing down to the 30-40 percent target,” Hayden Bairstow and Amit Ramdev said in a note.

Fortescue secured a $1.5 billion loan facility in August fully underwritten by Bank of America Merrill Lynch (BAC.N), but sources told Reuters Basis Point that attempts to syndicate the loan among a wider pool of lenders were struggling amid concerns about the outlook. Bank of America Merrill Lynch has declined to comment on the covenant waiver talks.

Lenders to Fortescue include National Australia Bank (NAB.AX), Commonwealth Bank of Australia (CBA.AX), Westpac Banking Corp (WBC.AX), Australia and New Zealand Banking Group (ANZ.AX), JPMorgan (JPM.N), Bank of America Merrill Lynch, Deutsche Bank (DBKGn.DE), Credit Suisse CSGN.VX and RBS (RBS.L), according to Loan Pricing Corp data.

Additional reporting by Narayanan Somasundaram and Sharon Klyne in SYDNEY; Writing by Lincoln Feast; Editing by Chris Gallagher and Ian Geoghegan

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