Fri August 31, 2012 10:49am
RATINGS agency Moody's has placed Fortescue Metals Group for a possible credit rating downgrade as the falling iron ore price puts the squeeze on the miner.
The agency late yesterday said its action “reflects the considerable constraints on Fortescue’s liquidity profile” thanks to the ongoing, rapid decline of the iron ore price, which is currently at around $US90 a tonne.
The iron ore price has reportedly fallen nearly 40 per cent over the past four months.
"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,” Moody’s analyst Matthew Moore said.
Fortescue is currently carrying out plans to increase its iron ore output at its Pilbara operations from 55 million tonnes per annum (mtpa) to 155mtpa by the middle of next year.
The miner recently announced a $600 million cost over-run for its expansion plans. Fortescue has about $6 billion in debt secured for the expansion.
Moody’s said Fortescue’s challenges could include the need to raise substantially more funding to meet its expansion schedule - if the iron ore price does not rebound in the short-term - and increased pressure on remaining within its financial covenants for this year.
The agency did note that a near-term rebound in iron ore prices to about $US115 to $125 a tonne will substantially reduce Fortescue’s concerns around liquidity and covenant pressure.
The possible ratings downgrade comes after Fortescue chairman Andrew Forrest spent nearly $39 million this week buying company shares to build his shareholding to around 32 per cent.
Mr Forrest said the company had a variety of “levers” it could pull in a bid to save money such as pulling back pre-strip or dewatering plans or smoothing out capital expenditure.
“If you compare debt to cash flow we’re in very, very good shape and we have very large pools of liquidity and people,” he said.
The chairman also flagged the potential sale of “non-core assets”, such as its accommodation rooms, airports or non-core iron ore assets.
“There are so many sources of liquidity that this company can rely on and we don’t need to,” he said.