Iron ore miner, Fortescue scraps $2.5 billion debt deal

Australia’s Fortescue Metals Group Ltd, the world’s fourth-largest iron ore miner, pulled a $2.5 billion high-yield bond issue after investors rattled by tumbling ore prices balked at the offer, sending its shares to six-year lows.

The scrapped refinancing deal is the latest sign of anxiety about massive oversupply in the iron ore market and weak demand growth in China, which has left many smaller miners operating at a loss.

Built from scratch over the past decade, Fortescue’s $11 billion mine won the support of Chinese steelmakers who were eager for a new supplier to compete with the likes of giants Rio Tinto and BHP Billiton.

Still saddled with some $7.5 billion of net debt, Fortescue had been looking to push out its debt repayments by up to four years to 2021 and cut its interest costs as slumping iron ore prices squeeze its profits.

“It’s disappointing, because if they were successful, it would have meant there was basically no debt due this decade,” said Macquarie analyst Hayden Bairstow. “Their ability to weather any volatility in the iron ore price would have been much better.”

Macquarie expects iron prices to take another leg down to $48 at ton in the September quarter from $57.60 at present, the lowest since index pricing was introduced in 2009.

Big iron ore producers are still ramping up production, while China, the world’s biggest user of the steel-making material, has set its lowest target for economic growth in 15 years.

Fortescue said it canceled its planned $2.5 billion seven-year senior secured bond offering in New York, as it was unwilling to pay a high yield. Market sources told Reuters the miner had been prepared to pay up to 8.5 percent, well above its current average borrowing cost of about 5.3 percent, but Fortescue Chief Financial Officer Stephen Pearce denied it had offered this much.

“I can assure you we were never offering a yield of that quantity because we are very disciplined about the cost of capital we are prepared to take on,” Pearce told Reuters.

He said the company was not under immediate pressure as it was still making money and had $1.6 billion in cash on hand as of December, so it could continue to pay down debt and refinance closer to 2019, when it is due to repay $4.9 billion.

“I am very, very comfortable … because it is the right thing for the company in the long term,” Pearce said, adding that bond investors had been spooked by the recent sharp fall in oil prices.

Fortescue’s stock fell nearly 9 percent as investors worried it may need to sell new shares to shore up its finances, although analysts pointed to the company’s ongoing support from Chinese steelmakers, who have pre-paid $1.6 billion for iron ore supplies to help shore up the company’s cashflow.

“That support shouldn’t be underestimated,” said Mike Harrowell, a director at broker BBY.

Fortescue’s biggest shareholder behind billionaire founder Andrew “Twiggy” Forest, China’s Hunan Valin Iron and Steel Group, said last week it was “extremely positive” about Fortescue.

“I have confidence in FMG because they already completed their investment before the situation deteriorated so rapidly,” Hunan Valin chairman Cao Huiquan told Reuters.

Credit rating agency Fitch said the scrapped refinancing would not affect its ratings on Fortescue.

“ They’ve got two years to figure what they want to do,” said Fitch analyst Hasira De Silva. Fortescue nearly faced oblivion in 2012 when its debt peaked as it was ramping up output and iron ore prices briefly dipped below $100 a ton, but was rescued in a $4.5 billion debt deal.

It has since tripled its iron ore production, cutting its costs but contributing to a global supply glut.

Investment banks Credit Suisse and JP Morgan, lead managers for the issue, had initially approached the U.S. loan market for the $2.5 billion refinancing, but investors showed little interest despite the miner offering more than 400 basis points over the London interbank offered rate (Libor), market sources said.