Australia's Fortescue Comfortable with Debt, China Focus-Shanghai Metals Market

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Australia's Fortescue Comfortable with Debt, China Focus

Industry News 11:09:32AM Jun 11, 2012 Source:SMM

(Reuters) - The chairman of Fortescue Metals Group, the world's fourth largest iron ore producer, defended on Friday the hefty $6 billion debt taken on to fund an expansion, saying it was affordable even as growth in top metals consumer China slows.

Andrew Forrest, who is also the firm's founder, was speaking after several hedge funds sold Fortescue shares short on bets that iron ore prices will continue falling as China's economy continues to cool, crimping its demand for raw materials.

"In any event, and I should say very clearly, the slowing of China's boom will not affect Fortescue's expansion to 155 million tonnes at all," Forrest said in an interview released to the Australian stock exchange.

"The funding is in place and the development has a short payback period even at lower iron ore prices," he said of the $8.4 billion project to increase production.

Fortescue stock is the most heavily shorted among Australia's top 50 listed companies. Of the shares that can be borrowed, almost half are out on loan, according to securities lending research house Data Explorers.

Hedge fund manager Jim Chanos, famous for anticipating the collapse of Enron, recently called Fortescue a "value trap" that was captive to Chinese growth and caught in the "iron ore rush". He said he was betting against it.

The company's shares fell 1.9 percent on Friday, more than the broader market's 1.1 percent drop. Shares of bigger rivals BHP Billiton and Rio Tinto rose.

Forrest has the most to lose if short sellers turn out to be correct as he owns nearly 32 percent of the company.

Benchmark iron ore prices have been around $133 a tonne IODBZ00-PLT this week, compared with an average $139 a tonne in the six months to December.

Forrest's comments come after Fortescue Chief Executive Nev Power said the company had modelled its growth plans on iron prices at $110 a tonne, but still saw prices holding between $130 and $150 a tonne in the near term.

Hedge fund manager John Hempton at Bronte Capital said Fortescue's profit margins, while strong at current prices, were narrower than margins for Rio Tinto and BHP, and would come under strain if iron ore prices slid to levels hit during the global financial crisis of below $60 a tonne.

"If I take $20 per tonne off that price Fortescue is a darn good business," Hempton said on his blog (brontecapital.blogspot.com.au).

"But if the iron ore price drops by $50 this is very difficult and if it drops by $60 this is disastrous," he said.

Standard & Poor's earlier this year raised its rating on Fortescue's debt to BB- from B+ and Director May Zhong told Reuters she remains comfortable with this outlook, as long as China continues to grow even if at a slower pace.

"We do not expect iron ore prices to continue to fall below $120 or $100 in the next one to two years unless China stumbles -- and that means negative growth," Zhong said.

Like its bigger rivals, Fortescue believes in China's ability to sustain growth, as the government has plenty of tools to stimulate the economy, as it did on Thursday with an interest rate cut.

"In the current softening, some people seem to be losing sight of these basic points," Forrest added.


 

Australia's Fortescue Comfortable with Debt, China Focus

Industry News 11:09:32AM Jun 11, 2012 Source:SMM

(Reuters) - The chairman of Fortescue Metals Group, the world's fourth largest iron ore producer, defended on Friday the hefty $6 billion debt taken on to fund an expansion, saying it was affordable even as growth in top metals consumer China slows.

Andrew Forrest, who is also the firm's founder, was speaking after several hedge funds sold Fortescue shares short on bets that iron ore prices will continue falling as China's economy continues to cool, crimping its demand for raw materials.

"In any event, and I should say very clearly, the slowing of China's boom will not affect Fortescue's expansion to 155 million tonnes at all," Forrest said in an interview released to the Australian stock exchange.

"The funding is in place and the development has a short payback period even at lower iron ore prices," he said of the $8.4 billion project to increase production.

Fortescue stock is the most heavily shorted among Australia's top 50 listed companies. Of the shares that can be borrowed, almost half are out on loan, according to securities lending research house Data Explorers.

Hedge fund manager Jim Chanos, famous for anticipating the collapse of Enron, recently called Fortescue a "value trap" that was captive to Chinese growth and caught in the "iron ore rush". He said he was betting against it.

The company's shares fell 1.9 percent on Friday, more than the broader market's 1.1 percent drop. Shares of bigger rivals BHP Billiton and Rio Tinto rose.

Forrest has the most to lose if short sellers turn out to be correct as he owns nearly 32 percent of the company.

Benchmark iron ore prices have been around $133 a tonne IODBZ00-PLT this week, compared with an average $139 a tonne in the six months to December.

Forrest's comments come after Fortescue Chief Executive Nev Power said the company had modelled its growth plans on iron prices at $110 a tonne, but still saw prices holding between $130 and $150 a tonne in the near term.

Hedge fund manager John Hempton at Bronte Capital said Fortescue's profit margins, while strong at current prices, were narrower than margins for Rio Tinto and BHP, and would come under strain if iron ore prices slid to levels hit during the global financial crisis of below $60 a tonne.

"If I take $20 per tonne off that price Fortescue is a darn good business," Hempton said on his blog (brontecapital.blogspot.com.au).

"But if the iron ore price drops by $50 this is very difficult and if it drops by $60 this is disastrous," he said.

Standard & Poor's earlier this year raised its rating on Fortescue's debt to BB- from B+ and Director May Zhong told Reuters she remains comfortable with this outlook, as long as China continues to grow even if at a slower pace.

"We do not expect iron ore prices to continue to fall below $120 or $100 in the next one to two years unless China stumbles -- and that means negative growth," Zhong said.

Like its bigger rivals, Fortescue believes in China's ability to sustain growth, as the government has plenty of tools to stimulate the economy, as it did on Thursday with an interest rate cut.

"In the current softening, some people seem to be losing sight of these basic points," Forrest added.