Bloomberg News

Fortescue Sells $1.5 Billion Junk Bonds to Fund Expansion

October 25, 2011

(Updates with CFO comment in fourth paragraph.)

Oct. 26 (Bloomberg) -- Fortescue Metals Group Ltd., Australia’s biggest junk bond issuer, sold $1.5 billion of eight-year notes to help expand its iron ore operations.

The 8.25 percent securities are callable after four years and were priced to yield 648 basis points more than similar- maturity Treasuries, according to data compiled by Bloomberg.

“Selling $1.5 billion is a good size deal, and the price was in line with similar bonds,” Gus Medeiros, senior credit analyst at Deutsche Bank AG in Sydney said by phone. “In the current market it’s probably a fair level.”

Investors bid for 3 1/2 times as many bonds as the company sold, and the notes were marketed to yield between 8.25 percent and 8.5 percent, Fortescue Chief Financial Officer Stephen Pearce said on a media call. Fortescue is expanding to meet growing demand in China, the world’s biggest producer of steel.

Fortescue, Australia’s third-largest iron ore producer, scrapped plans in May to borrow $1 billion through an unsecured term loan from U.S. investors, saying lender offers didn’t meet expectations.

“Markets now are a little tougher to where we were at May, when we were coming off the tail end of a very strong market,” Pearce said. “What we’ve done here is do a deal where there’s really been no market and no issues in the high yield bond market for some period of time.”

Triple Output

The mining company, whose biggest shareholder Andrew Forrest ranks as Australia’s third-richest person according to BRW magazine, plans to use the money raised for an $8.4 billion expansion of operations in the Pilbara region of Western Australia, which will almost triple its iron ore output.

Iron ore prices for immediate delivery to China, Fortescue’s biggest customer, dropped the most in more than two years yesterday to hit $131.70 a metric ton, the lowest level in 15 months, as demand from steelmakers wanes. Fortescue produced iron ore at an average cost of $46.95 a ton during the third quarter.

“We’re still selling all the product we’re producing,” Chief Executive Officer Neville Power said on the call. “We might see a couple of months of volatility but then we would expect strength to continue.”

The average spread that speculative-grade miners pay on U.S. dollar bonds has widened 170 basis points this half to 650 basis points, Bank of America Merrill Lynch’s U.S. High Yield, Metals/ Mining Index shows. High-yield or junk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

Fortescue’s profit rose 31 percent in the six months to June 30 after boosting production and increasing shipments.

--Editors: Garfield Reynolds, Benjamin Purvis

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net


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