Fortescue Metals has taken on higher than expected debt to fund its massive iron ore expansion plans, announcing $US1.5 billion ($A1.44 billion) in new funding.
The figure is 50 per cent higher than the extra $1 billion Australia’s third-largest iron ore producer last month flagged it would need.
Fortescue’s large gearing – including a large proportion of high-yielding US junk bonds – and sensitivity to iron prices have previously raised investor concerns.
US hedge fund manager Jim Chanos said earlier this year he was betting against Fortescue repaying its debts and short selling the stock.
Fortescue opened a $US750 million short term loan, plus a revolving credit facility also worth $US750 million, the company says.
Billionaire Andrew Forrest’s company has set the ambitious target of tripling annual iron ore output to 155 million tonnes by the middle of next year – almost as high as BHP Billiton’s current production rate.
However producing iron ore is the company’s only real earner and it’s cashflow is being hurt by falling prices in the commodity and cost inflation.
Fortescue chief executive Nev Power last month said the cost of expansion work at its Chichester and Solomon projects, along with associated rail and port infrastructure, would be closer to $US9 billion than the previous figure of $US8.4 billion.
However Goldman Sachs analysts have crunched the numbers and warn that in a worst case scenario – an iron ore price of $100 a tonne – it would have to raise another $US2.6 billion to fund the expansion and refinance more than $2 billion in debt.
To stop its net debt rising beyond $US10 billion, the analysts say it would need iron ore prices to recover from current two-and-a-half-year low levels of $US115 a tonne to $US141 a tonne in 2013 and $US155 the next year.
The company’s stock is underperforming the ASX’s All Ordinaries index but is outperforming BHP Billiton and Rio Tinto.
It was nearly three per cent higher to $4.305 at 1500 AEST on Monday.
“The facility provides a short-term funding solution to support the company’s expansion to 155 mtpa (million tonnes per annum),” chief financial officer Stephen Pearce said in a statement on Monday.
“The Chichester Hub is on target to meet the scheduled ramp-up by the end of 2012 and we remain completely focused on delivering the 155 mtpa expansion by mid-2013.”
Bank of America Merrill Lynch is the underwriter and arranger, with the loan due to mature on December 31, 2013.
