Moody’s reiterates Fortescue negative watch

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Not much joy for FMG following yesterday’s announcement with the share price still falling and Moody’s unimpressed:

Sydney, September 04, 2012 — Moody’s Investors Service has today announced that it is continuing its review for possible downgrade of the Ba3 corporate family rating of Fortescue Metals Group Limited (Fortescue) and the Ba3 senior unsecured rating of FMG Resources (August 2006) Pty Ltd. Fortescue’s ratings were first placed on review for downgrade 30 August 2012.

RATINGS RATIONALE

Our decision to keep the ratings on review for possible downgrade follows today’s announcement by Fortescue that it will be deferring project expenditures and cutting costs in response to volatile market conditions and uncertainty around iron ore prices. The company expects that the announced plans, which include a deferral of the development of the Kings deposit at the Solomon mining hub (around 40 million tonnes per annum ‘mtpa’), to bring capital expenditure savings of around US$1.6 billion during the financial year ended 30 June 2013 (FY13). In addition the company has announced plans to reduce operating costs by around $300 million.

“Fortescue’s ratings were placed on downward review last week due to the considerable constraints on its liquidity profile and covenants following 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.

“The successful implementation of announced initiatives to reduce capital expenditure and operating costs, should alleviate some of the liquidity and covenant pressure Fortescue is facing” says Moore, adding “The impact of these initiatives on the company’s near term liquidity profile and ability to remain within its covenants will depend on the timing in which the announced reductions and cost savings are achieved, and the near term price performance of iron ore”.

As such, the review will continue to focus on 1) the company’s ability to achieve the announced reductions combined with any plans for further reductions and/or delays to 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 while remaining 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 US$115 to US$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.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.