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Summary

  • Fortescue Metals is calling $500M worth of unsecured bonds maturing in 2018 and further reduces its net debt position.
  • As I already explained Fortescue was generating quite a lot of FCF, this is not unexpected, as reducing the debt also reduces the interest payments and further enhances the FCF.
  • The investment thesis remains standing as Fortescue proves it is capable of reducing debt thanks to its free cash flow.

Fortescue Metals (OTCPK:FSUMF) has announced it is voluntarily repurchasing $500M worth of bonds, which would otherwise mature in 2018. According to the prospectus of these bonds, Fortescue has the right to buy them back at 105.156% of the principal value. This means that Fortescue will have to buy back the bonds above par, but in the longer run this will be accretive to the bottom line, as Fortescue will save tens of millions in interest payments, and probably over $125M over the next four years (considering Fortescue's average interest expenses/net debt were in excess of 8%). So this looks like a good move to me and shows that the management has a longer term vision. Calling the bonds will cost the company approximately $525M, but will very likely reduce the cash outflow by $40M per year.

This move means that Fortescue will have reduced its total net debt by $3.6B in just one year, as the company continues to make free cash flow from its gigantic 150Mtpa+ iron ore operations, even though the iron ore price isn't really cooperating. As the total outstanding amount of 2018 unsecured bonds is $900M, I consider this $500M repurchase to be a first step and I would actually expect the remaining $400M to be called later this financial year, and very likely after announcing the H1 financial numbers in early 2015.

Even though Fortescue's iron ore has a relatively low quality, the company is fully benefiting from economies of scale which allows the company to remain free cash flow positive and to reduce its net debt profile very fast.

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Source: Update: Fortescue Metals Reduces Its Debt