Always the last to know comes Fitch:
Singapore/Sydney-20 May 2015: Fitch Ratings has affirmed Australia-based iron ore miner Fortescue Metals Group Limited’s (Fortescue) Long-Term Issuer Default Rating (IDR) at ‘BB+’ and revised the Outlook to Negative from Stable. The rating action is in response to Fitch lowering its expectations for the benchmark iron ore price.
Fitch has also assigned a ‘BBB-‘ final rating to the USD2.3bn senior secured notes due in March 2022, which are issued by FMG Resources (August 2006) Pty Ltd, and guaranteed by Fortescue and its subsidiaries. The rating on the secured credit facility is notched up a level from Fortescue’s ‘BB+’ IDR to reflect the additional provision of quality collateral, including mining tenements. The assignment of a final rating follows the receipt of documents conforming to information received, and is in line with the expected rating assigned on 22 April 2015. A full list of rating actions can be found at the end of this commentary.
The agency has also downgraded Fortescue’s senior unsecured rating and the ratings on the outstanding senior unsecured notes by one notch to ‘BB’ given the material secured debt in Fortescue’s capital structure. Secured debt will form more than 2.0x prospective EBITDA (using Fitch’s mid-cycle commodity price assumption and volumes produced) for the next three years.
KEY RATING DRIVERS
Weaker Iron Ore Prices: On 8 May 2015, Fitch lowered its expectations for the benchmark iron ore spot price between 2015 and 2018. We now expect iron ore to average USD50/tonne in 2015 and 2016 on a cost and freight basis, and to improve to USD60/tonne in 2017 and to USD70/tonne thereafter. Based on these assumptions, Fitch expects Fortescue to sustain FFO-adjusted net leverage of more than 3x for the financial year ended 30 June 2015 (FY15) and FY16, before recovering to below 3x in FY17. The Negative Outlook on Fortescue’s Long-Term IDR reflects the risk that the company’s weaker credit metrics could be sustained over a longer period should iron ore prices underperform our current expectations, or if the company’s cost reduction programme falls short of its guidance.
Continuous Cost Improvements: The affirmation of Fortescue’s Long-Term IDR reflects the considerable improvements in its C1 cash costs, which include mining, port, rail, and operating lease costs. C1 costs reduced to USD26/tonne as at 31 March 2015 – a 26% improvement compared to 31 March 2014. The company expects its C1 costs to average USD18/tonne in FY16. The cost improvements will be driven by lower strip ratios in its newer mines, growing economies of scale on higher volumes sold, and, to a lesser extent, a weaker Australian dollar-US dollar exchange rate. As a result, Fortescue will maintain its second-quartile position in the global iron ore production cost curve, despite the cost curve “flattening out”, as higher cost producers exit the market and lower cost producers increase production.
Satisfactory Liquidity: Fortescue sold USD2.3bn of senior secured notes in April 2015, which will be used, among other things, to retire its debt maturing in 2017 and 2018. As a result Fortescue’s current earliest debt maturity falls in 2019, which is well beyond Fitch’s current expectations for a recovery in the spot iron ore price. Based on the agency’s current estimates Fortescue is likely to generate negative free cash flows in FY15, but neutral to positive free cash flow thereafter.
