Fortescue Implodes As Company Requests Debt Waiver: 2007 Deja Vu Liquidity Fears Send Stock Plunging

Tyler Durden's picture

Two weeks ago when we posted "The Kangaroo In The Metals Mine: Fortescue Trying To Raise $1.5 Billion From 20 Banks As Iron Prices Implode" we observed several developments in the bond prices of Australian mega iron miner, and fourth largest in the world, Fortescue, which suddenly found itself in dire need of cash which is always a first step to insolvency, which made us comment that just "like that we are back to those days of 2008 when the Chinese demand collapse meant any day could be FMG's last. Happy days are back again." Not really. We added that "as usual, the bond market is the first to get the memo that the landing is going to be a hard one. We give the farce that is known as equities about 4-6 weeks before they too get the memo." We were actually wrong: it took just two weeks for equities to finally figure out what we were warning about. From Reuters: "The world's no.4 iron ore miner Fortescue Metals Group Ltd has asked lenders to waive debt covenants if iron ore prices remain under pressure, the firm said on Thursday, after its shares suffered their worst loss in almost four years. Like other Australian miners, Fortescue's earnings have come under pressure from a plunge in commodity prices caused by weak demand in top consumer China. This has squeezed its ability to service its long-term debt, which stands at $11.3 billion." Of course, those who read our August 31 report, and were positioned accordingly and ahead of the market, made 20% in two weeks.

From Reuters:

On Thursday, Fortescue shares sank on a report by the Australian Financial Review that said it had asked its lenders to waive all its debt covenants for the next 12 months, citing unidentified sources.


In response, the company said it was in full compliance with all of its banking covenants, which are next due to be reviewed by December 31, and continues to have full access to all of its funding facilities.


"Fortescue is in the process of talking to its lenders about potential waivers in the event that covenants are put under pressure by extended volatility in the iron ore market," the company said in a statement released to the Australian stock exchange after the market closed.


Fortescue is particularly exposed to the Chinese iron ore market because its sole product is the steelmaking material - the worst performing major mineral in the past year - and it sells the vast majority of its output to China.

The bottom line:

Since early September, it has shed 12 percent of its value on concerns that it will have to raise equity to shore up its funding, a move that its founder and one-third shareholder, Andrew "Twiggy" Forrest, has resisted.


"This is a big deal because Fortescue is in a position where in order to actually invest more for the business and to grow the business they actually need to raise capital," said Damien Boey, equity strategist at Credit Suisse.


"But the thing is Andrew Forrest doesn't want to dilute himself by raising equity capital. He's kind of been hoping that commodity prices might rise so that maybe his profits would grow and that he wouldn't have to worry about it. But that hasn't happened."


Were Fortescue to obtain covenant waivers it would ease the pressure on its debt rating outlook, said Standard & Poor's analytical manager Suzanne Smith, but the company remains vulnerable as long as iron ore prices stay below $110.


"It's not only about covenant pressure. They're so exposed to the level of iron ore prices. That's also important," she said.

Naturally, the question remains - why should the stock market worry about anything: dont the central planners have everything under control? Turns out, no. And in fact, not even Bernanke could help here, as printing of more Iron Ore is precisely what the doctor did not order in a world rife with capital misallocation courtesy of free money, and in which oversupply is the primary culprit to serial defaults when suddenly the overdemand curtain is pulled back and it is all revealed to be a sham perpetuated by none other than the ZIRP/NIRP money spewing forth from the central printers.

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GetZeeGold's picture



Seems like we've seen this movie before.....

asteroids's picture

Drop rates to zero, commodities skyrocket, poverty ensues, demand crashes, prices fall. Not too hard to fortell.

GetZeeGold's picture



It's all in the manual somewhere.

sunaJ's picture



If you see me comin' better step aside

A lot of men didn't, a lot of men died.

One fist of iron and the other of steel,

If the right one don't getcha than the left one will.


You load sixteen tons, and whaddya get?

Another day older and deeper in debt.

St. Peter don't ya call me 'cause I can't go,

I owe my soul to the company store...

               -Tennessee Ernie Ford, Sixteen Tons

Desert Irish's picture

Hmmm now how bout that Aussie housing bubble....

The Squid's picture

But it's different here...

dannyboy's picture


Aus has quite abit of air before that jagged edged floor.

Also FMG hasn't fallen that far.. wow got alot to go aussie boys get on it. I'm sure socialist-in-chief there has it all under control, don't you Mr Gillard.

Rip van Wrinkle's picture

Mr??? Shit, I know she's butt ugly but still pretty sure she's a female.


Welsh, though. Big problem. Sheep shagger.

Shevva's picture

You only have to worry about the ones with wellys on cause they have somewhere to put the back legs to stop them running away, I also hear if you take them to a cliff edge they push back harder.

I'll get me coat.

Clowns on Acid's picture

She'll never be the man her  mother was.......

overmedicatedundersexed's picture

gm volt does not use iron they have  a hopium body and balsa wood beams. no wonder there is no demand for iron.

JPM Hater001's picture

Rumor: Peter Stark and Gina Rinehart had a lovechild and it's name was Snookie...Discuss

LongSoupLine's picture



but, but China's growing...all the "market masters" on CNBS said so!

o2sd's picture

Looks like Jim Chanos kicked another goal. He was short this piece of shit in April. As for the suckers that bought the junk bond issue a couple of months ago, I hope they lose their shirts.


Nukz's picture

When this is all over the RBA will wipe the dust of the printing press and launch some sort of LTRO especially considering our biggest banks huge dependence on foreign funding. 

Apocalicious's picture

Iron, bitchez! Oh, wait...

Barometer's picture

Maybe Fortescue can sell some of their oversupply to the Fed or ECB.
You know, to get a FAIR price

eddiebe's picture

We don't need more steel, we just need more money, right?

GetZeeGold's picture



We just need paper.....and some crayons.


Good to go!!!


I am a Man I am Forty's picture

I've made over 30% in a week in Alpha Natural Resources.  Going long.  And 14% in Vale going long in two weeks.

Vince Clortho's picture

How about Iron Federal Reserve Notes instead of paper?  Seems like that would kill a bunch of birds with one stone.

> increased demand for iron

> make it easier for airport scanners to find out who has the most cash in their suitcase

> increased sales of rust-oleum

> a body shot to the counterfeiting industry (particularly the Fed)


LULZBank's picture

LULZ from down under.

Stupid fucks... always export the crap while keeping the good stuff for themselves and then complaining about cash inflows.

Reminds me of this drug dealer, who would sell the crappy stuff while keeping the "boom" stuff for himself to smoke. Did'nt have much customers as one could guess.

Stuck on Zero's picture

Next month we'll read: "China Purchases Fortescue."


Element's picture

Andrew Forrest deserves what he gets. He's been loading up debt for years while the big boys got cashed-up and built-in efficiency margins to be ready for this price fall. Rio learned its lesson with debt in 2008, so Forrest should have taken the hint, but has been gambling on an unrealistically high price remaining high. It was never going to happen.  Rio and BHP will be salivating.

Dr Benway's picture

Yes and the irony is exquisite!


His recent $40m personal purchase of FMG stock has according to rumour been on margin.



The Squid's picture

Every single Fortescue executive is a massive iron ore/China bull. Anyone in their management ranks that has even raised the possibility that iron ore prices would not be $150-$200+ per tonne over the long term, has been shown the door in short order. Now that the unthinkable (for them) has happened, I can't wait to see the humble pie being served in that boardroom... Of course, the dip in iron ore is only temporary...