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Colin Lea
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The author is Australian with a long term interest and personal stake in financial planning and management. He works within the Financial Services Industry, is a member of the FPA Australia, and is a Certified Gold Seeking Alpha Contributor. Prior professional background of 20 years in military... More
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  • Fortescue Gets $4.3b Lifeline, Shares Soar 0 comments
    Sep 17, 2012 9:41 PM | about stocks: FSUMF

    Article from Sydney Morning Herald:

    Shares in Fortescue Metals have soared after the iron ore miner was handed a $4.26 billion lifeline by its creditors, which will delay its earliest debt repayments until November 2015.

    The iron ore miner this morning announced a commitment for a senior secured credit facility of up to $US4.5 billion from backers Credit Suisse and JP Morgan. The deal gives the troubled miner more time to manage its $US9 billion in debts, as the outlook for iron ore grows less certain.

    The miner's shares rose as much as 51 cents, or 17.1 per cent, to $3.50 in early trade.

    "This facility will be used to refinance all existing bank facilities and provide Fortescue with additional liquidity," the company said.

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    "The facility extends the earliest repayment date for any of the company's debt to November 2015 and removes financial maintenance covenants which applied under previous facilities," the company said, noting that Credit Suisse and JP Morgan both signed a full underwriting commitment for the facility that provided "funding certainty to Fortescue".

    Perth-based Fortescue also flagged potential partial sales of assets to a range of interested partners in order to strengthen the company's balance sheet.

    "Fortescue is currently evaluating these approaches," the company said. "Transactions of this nature are not required under Fortescue's new debt facilities and will only be pursued if they clearly add shareholder value."

    Fortescue shares were placed into a trading halt on Friday morning after its stock plunged the day before on revelations that the company was in talks with its creditors to renegotiate its debt covenants. The company's stock closed 48 cents lower, or 13.8 per cent, to $2.99 on Thursday.

    Job cuts

    The iron ore miner has cut $300 million from its costs and laid off 1000 staff in recent weeks in response to softer demand from Chinese steelmakers. Fortescue, with debts of $9 billion, requires iron ore to remain at $US110 per tonne or higher in order to cover repayments to its backers.

    The benchmark price for a tonne of iron ore at the Chinese port of Tianjin has sunk as much as 34 per cent since the beginning of July, reaching a low of $US86.70 a tonne on September 5, as growth in the industrial giant switches into lower gear. Since hitting the low, iron ore has regained some strength, rising by $US9 to $US105.1 after the US Federal Reserve unleashed its latest monetary stimulus which lifted global commodities prices.

    Leyland Asset Management senior portfolio manager Rohan Schmidt said the deal would be positive for Fortescue shares this morning but over the longer-term fate of the company was still tied with the direction of iron ore prices.

    "It looks like Fortescue stock may bounce on the open but it's still very much an iron ore price story," he said.

    "If the iron ore price stays under $US100 per tonne in the mid-term or well below this company would still be in trouble."

    Mr Schmidt said the deal announced this morning showed Andrew Forrest "still has a very good relationship with his bankers... once again he has shown his deal-making acumen".

    Mr Schmidt said, however, the debt may not be particularly attractive to the backer.

    "I imagine Credit Suisse and JP Morgan would want to offload this debt in the secondary market pretty quickly because I'm sure they don't want it on their balance sheets."

    Fortescue chief Nev Power said the company had started talks to restructure its bank facilities and scrap earnings-based covenants ahead of Fortescue's next review in December.

    ''This action, together with our previously announced measures, will continue to build on Fortescue's profitability, liquidity and above all, removes uncertainty around our financing arrangements," he said.

    Read more: http://www.smh.com.au/business/mining-and-resources/fortescue-gets-43b-lifeline-shares-soar-20120918-26397.html#ixzz26mV5W9Rn

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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