"Bulletproof" Fortescue Pulls $2.5 Billion Offering Amid Slumping Iron Ore Prices

Tyler Durden's picture

Fortescue Metals Group, the fourth largest miner of a commodity that’s collapsed some 50% over the past year, had the novel idea to tap the frothy high yield market for cash in order to refinance more than $2 billion in debt maturing over the next four years. Unfortunately, the company ran into a problem: investors wanted 9%. That doesn’t look particularly good considering the paper the company was looking to repay has coupons ranging from 6% to 8.25%, so rather than refinance at a higher rate, Fortescue decided to take the “disciplined and prudent” step to pull the offering entirely. Here’s FT

Fortescue Metals Group pulled a proposed US$2.5bn bond and refinancing of the company’s debt on Wednesday in a sign of deepening distress in the iron ore market.

 

The company, founded by entrepreneur Andrew “Twiggy” Forrest, blamed volatility in US credit markets for pushing up the cost of the bond issue. The decision to cancel the refinancing comes days after Fortescue decided not to proceed with a US$2.5bn secured loan when investors demanded better terms. 

 

“Debt capital markets were not favourable at this time and as a result we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage,” said Nev Power, Fortescue chief executive.

 

Shares in the miner fell as much as 7 per cent to an eight-year low on Wednesday, before closing down 5.3 per cent at A$1.87 on the Australian Stock Exchange.

While those of a cynical persuasion will undoubtedly place some of the blame for the lackluster reception on iron ore prices, Fortescue was quick to note that not only does a 70% drop in prices over four years not really matter, the company is in fact invincible when it comes to costs. Here’s Bloomberg: 

Fortescue Metals Group Chief Financial Officer Stephen Pearce said his company’s position on the iron cost curve is “bulletproof” and production costs weren’t an issue in recent discussions with debt investors.


 “We’re making a positive cash margin on every single ton we produce and that wasn’t an issue at all in the discussions that we had with the investors,” Pearce said in interview from New York. “They are very satisfied with the progress we’ve made on our cost reductions.”

That’s good because it turns out that decelerating Chinese economic growth just might be hurting demand as indicated by the fact that prices continue to slide on the back of the most fundamental of fundamental factors, a supply/demand imbalance. More from Bloomberg

Iron ore Sept. contract on Dalian commodity exchange falls 2.6% to 443 yuan/MT, weakest since Sept. 17 when contract started.

 

Australia, the world’s biggest iron ore exporter, lowered its outlook for prices this year as rising shipments expand a global glut.

 

Rates will average $60 a metric ton this year, the Department of Industry and Science said in a report. That compares with $63 forecast in December and $88 in 2014, it said.

 

Iron ore sank 47 percent in 2014 and extended losses this year as surging low-cost supply from Australia and Brazil spurred a surplus just as demand growth slowed in China.

 

China accounts for more than two-thirds of global iron ore imports and produces as much steel as the rest of the world combined. The government set a 2015 economic expansion goal of about 7 percent, the lowest in more than 15 years, as leaders tackle industrial overcapacity and a property slump.

 

Steel output in China will shrink this year as demand has peaked, China & Iron Steel Association Deputy Secretary-General Li Xinchuang told a conference in Perth, Australia, last week, predicting a decline to 814 million tons from 823 million tons last year. Production will probably drop this year for the first time since the early 1980s, UBS Group AG said on March 10.

Despite the dramatic decline in prices, Fortescue notes that its all-in delivered price to China is around $41 and CFO Stephen Pearce says he’s confident the company can count on “tremendous support” from US capital markets going forward. 

More, from Citi:

Fortescue has withdrawn the previously announced US$2.5b senior secured note offering as the interest cost objectives were not met. FMG was planning to use the proceeds to repay the US$1b in notes maturing in 2017 (coupon 6%), US$400m in 2018 (coupon 6.875%) and US$700m of the US$1.5b due in 2019 (coupon 8.25%), with the US$300m balance topping up working capital.

 

Rather than lowering the interest cost, we understand the funding cost for the proposed US$2.5b secured note was likely to be 8.5-9%, hence why the offering was pulled.

 

Although there is no near-term liquidity issue, FMG has ~US$1.6b in cash and no debt maturities until 2017, investors will now have to monitor the health of the US credit market, in addition to the all-important iron ore price, as at some point FMG will still have to refinance debt facilities. At our bearish iron ore price forecasts that bottom at US$53/t in 3Q15, before a modest recovery in 2016 to US$62/t, we forecast notional free cash flow generation for FMG in FY15 & FY16, before cash generation improves in FY17+.

 

On top of the notes that were going to be refinanced, FMG also has a US$1b unsecured note due in 2022 (coupon 6.88%) and a senior secured credit facility of US$4.9b that matures in 2019. As part of the planned refinancing the target was to push out the maturity of the secured facility until 2021+.

 

Given the aborted re-financing FMG may look to additional customer prepayments (currently ~US$1.2b to be delivered over the next few years) as a means to boost cash flow and repay maturing debt.

 

Meanwhile, these same "tremendously supportive" capital markets are actually not proving to be all that supportive...

  • FMGAU 8.25% 2019 down 3.7%, FMGAU 6.875% 2022 dropped 1.6%, and FMGAU 6% 2017 slid 0.5%

...and although Fortescue says it can afford to be patient in the event markets mistakenly price in a massive decline in what the company sells, Goldman notes that in fact, paying the bills may turn out to be increasingly difficult: 

FMG is not expected to generate sufficient cash  to repay near-term maturities based on iron ore price forecast which is expected to fall from $74.50 in 2015 to $62 per tonne in 2016 and $60 in 2017.

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NoDebt's picture

I think we're just getting warmed up on this Great Depression II.  

There is oversupply of EVERYTHING.  China going catatonic was the last straw.  

If it's not a government-mandated price structure (heathcare, education), it's going nowhere but down.

 

Jack Burton's picture

Big Oversupply in retail! Target just fired 1,700 headquarters workers, with another 1,000 coming soon. Retail sales at Target have been beaten down by a consumer without any wage growth.

Toxicosis's picture

That's not true, my wages went way up when I tapped that line of credit and got myself three new active credit cards.

flacon's picture

Remember when Rare Earth Metals were all the rage 4 years ago? Look at Molycorp, trading at FORTY EIGHT CENTS ($0.48), down from a high of EIGHTY DOLLARS ($80) a share. Another company that has gotten CREAMED is CLIFFS NATURAL RESOURCES - iron ore. Trading below $5, down from a 2011 price of over $100 / share. 

http://scharts.co/1H0ns3N

 

Rigger's picture

I am an Australian, based in Perth, W.A. I found it interesting that the Australian version of oligarchs (Including the 'entrepeneur' mentioned above, Forrest) all seem to be 'diversifying' into my own industry - beef processing. Twiggy bought Harvey Beef, W.A's largest beef producer, last year. Gina Rinehart (fat, ugly mole who inherited billions in mining operations from daddy) has just bought more than a million hectares in cattle ranches in W.A. Clive Palmer I know has been looking at investing in it also.

 

Anyone care to share some insight on why they think they are doing this? I'm a bit miffed... Sure, food is a 'bulletproof' industry to some extent, that's why I chose it, but nearly every other protein/meat is cheaper to raise/process than beef... If the economy collapses severely, it would be better to be in a cheap meat like chicken... Something the unemployed can afford... Anyone else care to weigh in on my musings...?

Squid-puppets a-go-go's picture

good observation and i honestly cant shed light on it. do you think they are acquiring pastoral land so that they wont have owner-objections in exploring/mining ?

Rigger's picture

I did think of that. Short answer? No.

 

Long answer - Forrest's acquisition of Harvey Beef would have netted very little land, in a part of W.A that only has coal, a dying export. As for Rinehart - owns the politicians anyway, she could strip mine fucking Ayers Rock if she wanted to... Farmers would be a very small speedbump on her way to claiming mining rights on their land.

Wild Theories's picture

would the strong beef price in recent times be a good enough reason? it's the only agri-commodity price that hasn't fallen with the others in the past year.

most of these guys are commodity producers, they do look at price trends, if beef is the only thing on an upward, or at least not on a downward trend like this entire list here

http://www.tradingeconomics.com/commodities

maybe there's your reason


when I see the beef price as the only thing standing green in a sea of red, if I had a few million dollars I'd take a look too.

Rigger's picture

It's one of the very few reasons that makes any sense... Still, they didn't accumulate billions by being dumb, surely they're smart enough to realise they are, likely, buying at the top?

Squid-puppets a-go-go's picture

speculation: theres prolly something in recent china trade agreements about aussie beef replacing american. 

oudinot's picture

That's nothing Jack, Target in Canada is closing all 133 stores and firing 17,000 employess.

Target Canada will pay out $140 MM dollars in termination compensation: the failed CEO of Target Canada will get $70MM in compendation, the other 17,000 employess will share the balance.

junction's picture

Listen, when someone is an entrepreneur, we know they will solve the problem.  In this case, Fortescue will fire a few thousand employees, shut down some mining operations and replace its CEO. As Carly Fiorina and Meg Whitman have demonstarted as CEOs at Hewlett-Packard, you just keep on firing people to solve your company's financial problems.  Eventually, you solve the problem or you walk away with a platinum parachute.  The people who really solve problems are the government economists who compute the inflation rate and the jobless rate.  Just say everything is wonderful and that Obama's Kill List would never include Americans.  Then drink a few mouthfuls of IQ reducing fluoridated water.   

Jack Burton's picture

The Northern Minnesota Iron Mining Industry announced it's first processing plant shut downs, along with the mines. Two operations closed for indefinite times. 2 thousand workers, making 40-90K a year layed off. This should be the start, more to come no doubt. Small towns around the mines in panic mode. Lower prices and lower production mean less tax going to MN state coffers. Tens of millions of dollars from the iron ore tax go to public schools. Already school boards are in panic mode, each school will lose millions! For every Mine job, 2-3 jobs support that one. So 2,000 miners out of work soon translates into overall 6,000 people jobless.

You bet. America has nearly full employment. The economy has reached escape velocity.

The Shape's picture

Ah don't cry for them, they can make $63 an hour online like that guy's sister in-law does.

stormsailor's picture

seems like around here  nail shops,  pizza,  a huge circle jerk of service jobs,  no one creating wealth. just passing it around.  even worse,  the first 10 days of the month are busy,busy.  rest of the time sort of dead.   the entire city has turned into a giant walmart.

de3de8's picture

And Tattoo store fronts

indygo55's picture

Jack, If they aren't registered as unemployed, they are not unemployed. When will someone state the real numbers as Shadowstats.com does but in an open and repeated manner? MSM wont do it and too many are watching and listening to that alone. How can the masses be told the truth? Is it so bad that people simply will not look? I am afraid many are just like that. I mean its all over the place but people will not see. Sad really.

 

zhandax's picture

The  masses are too distracted to care about the truth.  

Billy Shears's picture

Bankruptcy, eventually...

Billy Shears's picture

To hell with buying stuff on credit or otherwise. If I can't afford it I just don't need it! Put that in your economic pipe and smoke it!

mrpxsytin's picture

Yes. But go one further. Do not pay until delivery. A small story out of Australia is that a fertiliser distributor wracked up over $100 million in debt with National Australia Bank (NAB). NAB demanded an immediate debt paydown of $40mil. The distributor waited until their customers paid for their next orders ($13mil) and the bank scooped the money straight out of the bank account and the distributor NEVER delivered the fertiliser! 

Now the customers are threatening to sue the bank but we know how that will turn out...

NidStyles's picture

It doesn't take a genius to figure out what the deal was there.

 

Just look at the board of directors, they are all JPMorgan/Goldman-ites and Zionists. Every single one of them is an internationalist. THey are only there to destroy the economy, not help it.

Dubaibanker's picture

The biggest reason, in my humble view, that this bond issue was pulled back because one of the oldest iron ore producing mines in Sweden (of all the places...who would have thunk?) has declared bankruptcy on Wed.

It probably shook the bankers / advisers sleeping on the giant tree of money and shook them up awake and made them advise the client (Fortescue) that it is better not to make 2% on the bond deal and instead make their client confront reality of commodity prices and its impact on Fortescue and its bond issue.

Sweden is not China after all...nor is it America/EU/Japan/UK, the land of tooth fairies and magical money....

BRIEF-Dannemora Mineral says files for bankruptcy

disabledvet's picture

Who uses steel anymore?

 

I mean seriously...if the best the Navy or Air Force can do is spend 10 or 15 billion and only get one ship or plane then that's not good news for the steel business. Plus the whole "Russian Thingy" has been blown wide open because of the moronic sanctions regime.  That leads to and has in fact ledmtoma flood of pretty much everything.

 

Talk about "low prices.". " Free everything" comes to mind.

 

PLUS the eventuality that Putin's Russia might collapse.

 

Fortescue has PRICELESS assets.  I am unclear if this attempt to raise capital is the sign of a sale or just a test of the capital markets.  Certainly if its the latter it's a bad one.

 

Surprising given the folks behind the company.  "Lot of prehistoric sharks in that Ocean."

 

 

SHRAGS's picture

Demand for air travel between Perth & the Pilbra  (Karratha, Chrismas Creek) & Mt Newman has been significantly reduced over the last 9 months or so. Flights between the East coast & the Pilbra were stopped 12 months or so.  Things have been slowing down for quite a while based on the reduced travel.

 

Dragon HAwk's picture

9% how dare they ask for that much Interest.. The rates should be Negative. pay us and we will take your Money kind of thing.. /S

 

Magooo's picture

A quick call to any central bank and they can get their 2B and another 5 at zirp.

 

No story here.

 

 

hardmedicine's picture

I have a SERIOUS QUESTION for all you financial geniuses.

Is it time to just give in ?  I mean, you guys have been wrong since 2008.  I think after all that time it may be finally to the point of surrender............ What about going all in now in stocks?  Isn't it time to just go with the flow?

 

What say ye?

NidStyles's picture

How have "we" been wrong?

 

(note that using the word "we" is quite offenssive since even "we" don't all agree on everything, that is why "we" are here, to share information.)

The Navigator's picture

Strange how Billion Dollar stores used ot grab our attention, now not so much anymore.

I wonder how long before trillion dollar stories will be passed by with Quadrillion grabbing most of our attention.

Guess that depends on

1- if a collapse haoens 1st or

2- the fakery can keep the can kicking going and sheeple keep buying the bull shit

Otherwise, Quadrillion stories become the new norm.

Unimaginable just 10-15 years ago

theliberalliberal's picture

ol' twigs will be fine