Late yesterday. S&P put FMG on downgrad watch:
Fortescue Metals Group Ltd. ‘BB-‘ Ratings Placed On CreditWatch Negative On Steep Decline In Iron Ore Prices
MELBOURNE (Standard & Poor’s) Sept. 12, 2012–Standard & Poor’s Ratings Services said today that it had placed its ‘BB-‘ corporate credit and issue ratings on Australia-based mining company Fortescue Metals Group Ltd. on CreditWatch with negative implications. The recovery rating is affirmed at ‘4’.
” The CreditWatch placement reflects our view that Fortescue’s earnings for year ending June 30, 2013 would be much weaker than expected due to the steep fall in iron ore prices since late July 2012,” Standard & Poor’s credit analyst May Zhong said. “Weaker earnings will erode its financial metrics, putting financial covenant pressure regarding its debt documents in the near term.”
The level of pressure is to a large degree dependent on near-term iron ore prices; however, we think it is unlikely that prices will recover sufficiently to alleviate covenant pressure. We expect that Fortescue will take steps to mitigate the risks concerning the covenants, and consider the timeliness of those actions to be important.
Compared to its iron ore peers, Fortescue is more vulnerable to a decline in iron ore prices due to its single-commodity exposure. In addition, the drop in iron ore prices coincides with the peak capital expenditure of its expansion to 115 metric tons per annum (mtpa) of production capacity. In our opinion, a successful execution of its expansion depends on continuing strong iron ore prices, in particular for the next 18 to 24 months, in part because the company is partially reliant on cash from operations to fund the expansion.
Ms. Zhong added: “Should benchmark iron ore prices persist at less than US$110 per ton for a period longer than to the end of calendar year 2012, we believe this will place significant financial covenant pressure in 2013. This price level will also push its credit metrics to fall to below levels commensurate for the ‘BB-‘ rating. Nonetheless, should benchmark iron ore prices recover to, and sustain at, about US$120 per ton in 2013, it will alleviate the pressure on its financial risk profile.”
To resolve the CreditWatch, we will assess the company’s actions to address the pressure on the financial covenants under its bank documents, and their implications on Fortescue’s access to funding to complete the 115mtpa expansion. In addition, we will review our forecasts of iron ore prices for the near and medium terms, and how they would affect Fortescue’s financial performance. If the risks around covenant pressures or low iron ore prices are not mitigated, the rating could go down by one notch or more. We expect to resolve the CreditWatch within the next 90 days.
