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

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.