Gosh darn it, things are moving fast. Fortescue is officially at risk:
Sydney, August 30, 2012 — Moody’s Investors Service has today placed on review for possible downgrade the Ba3 corporate family rating of Fortescue Metals Group Limited (FMG) and the Ba3 senior unsecured rating of FMG Resources (August 2006) Pty Ltd.
RATINGS RATIONALE
“The rating action reflects the considerable constraints on Fortescue’s liquidity profile due to the rapid and continuing decline in the iron ore price to levels that are below our base case expectation,” says Matthew Moore, a Moody’s AVP — Analyst.
“Fortescue is investing heavily in its significant capacity expansion project, and the depressed operating cash flow, arising from the drop in iron ore prices combined with the potential for ongoing short-term weakness, is raising material challenges for Fortescue.”
These challenges may include 1) the need to raise substantial incremental funding to meet project delivery schedule, and 2) increased pressure on remaining within its financial covenants for the twelve-months to December 2012, particularly its Debt-to-Consolidated Cash Flow covenant. The recent announcement of $600 million cost over-run to the expansion project has also added to Fortescue’s challenges.
Accordingly, Moody’s sees an increased risk of a delay to capital expenditures related to the company’s expansion project (to increase production capacity from 55 to 155 million tons per annum – ‘mtpa’) without additional external funding, or in the absence of a meaningful iron ore price rebound in the short-term.
The review will focus on 1) the company’s ability to reduce and/or delay its cash expenditures, 2) its plans and ability to secure additional non-debt financing in order to maintain adequate liquidity to continue to fund its operations and remain within covenant levels. The review will also consider any plans that Fortescue may have to obtain covenant relief should the price environment in the short-term remain at current depressed levels.
In addition, the review will consider the near-term performance and outlook for iron ore prices. Moody’s notes that a near-term rebound in iron ore prices to around the $115 to $125 per tonne level will substantially reduce concerns around liquidity and covenant pressure.
Moody’s recognizes that Fortescue’s credit profile should improve materially upon successful commissioning of the expansion project, with production capacity expected to grow from 55mtpa to 155mtpa by mid next year. This will support a solid credit profile over the medium to long term.
