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Fortescue boss says growth in China will help pay its debt

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Fortescue Metals Group (FMG) boss Neville Power says he is confident China’s continued growth will help the company generate enough cashflow to reduce its large debt.

Australia’s third largest iron ore miner’s massive growth plans in which production will have almost tripled from a current 55 million tonnes per annum to 155mtpa has pushed debt out to above $6 billion.

It has led prominent hedge fund manager and short seller Jim Chanos to label the company a “value trap” last month and reveal he was betting against the company, angering FMG chairman Andrew Forrest.

Mr Power said the company’s gearing (debt to equity) will have been reduced to an acceptable, investment grade level of 30 to 40 per cent by the end of 2013-14.

However he conceded once it hit 155mtpa it might adopt smaller increases and look to increase dividends.

Companies with high gearing become vulnerable to business cycle downturns, which Mr Chanos warned was a problem facing FMG, with iron ore prices falling this year while debt still had to be repaid.

Mr Power said iron ore prices had been consistently trading at $US120-$US150 a tonne, giving FMG strong margins.

He said FMG was a strong believer in the strength of the Chinese market going forward.

Outside the high level of urbanisation on China’s eastern seaboard, the country’s inland and western provinces were still poor subsistence farming areas, and the government was committed to addressing living standard differences, he said.

“They need growth of 7-8 per cent to provide employment levels to support that urbanisation,” he told reporters at the Annual Stockbrokers Conference in Melbourne on Thursday.

“We also want to provide a strong dividend yield and assess market conditions … people that invested to take advantage of the massive step up we’ve gone through, we want to reward them with a return on their investment.”

Iron ore production in China was declining and high cost, but steel was projected by the Chinese government to continue growing at 5.0 per cent if GDP growth was 8.0 per cent, increasing reliance on miners such as FMG, he said.