Fortescue Metals Group Ltd. (FMG)’s talks with lenders to restructure debt is reviving investor memories of the disaster of billionaire Australian mining magnate Andrew Forrest’s previous venture a decade ago.
The nation’s third-biggest iron ore exporter plans to update the market by tomorrow after a record slump in its U.S. securities on Sept. 13. The Perth-based company halted its shares from trading last week as its market value plunged to A$9.3 billion ($9.8 billion).
The slide means Forrest has likely lost his place as Australia’s richest man as about $3 billion was wiped off the value of his stake in Fortescue since its peak this year on March 22 as the company raised borrowings to $10.6 billion to fund expansions and iron ore prices dropped. Anaconda Nickel Ltd., an earlier company of Forrest, who is also known as Twiggy, was forced to sell shares to meet debt payments in 2003 after its mine was delayed and costs blew out.
“He is pretty good, Twiggy, at convincing people from overseas to buy part of the dream,” said Peter Rudd, resources and mining manager at Altitude Private Wealth in Melbourne who has more than 20 years experience in the Australian mining sector. “As we know with Anaconda, that eventually fell over.”
U.S. investors Pacific Investment Management Co., which manages the world’s biggest bond fund, BlackRock Inc. and Franklin Resources Inc. (BEN:US) are the largest holders of Fortescue bonds, according to data compiled by Bloomberg based on filings from groups that are obliged to disclose their purchases.
U.S. bondholders who bet $400 million on Anaconda recouped 26 cents in the dollar after Forrest, who built the company, was ousted in 2001 from his position as chief executive officer. Anglo American Plc fared even worse, walking away with 7 percent of its $200 million investment, after battling to remove Forrest.
Anaconda shares slumped 89 percent ahead of the company being re-badged as Minara Resources Ltd. It was eventually taken over by Glencore International Plc (GLEN) last year. Fortescue shares have declined 30 percent this year compared with an 8.5 percent gain in the Australian benchmark index.
The spot price for iron ore dropped by more than a third this year on concern a slowdown in China, the world’s biggest consumer, would curb demand. Prices fell to a three-year low of $86.70 this month as Fortescue slashed its annual spending forecast by 26 percent to $4.6 billion.
The commodity price boom is over, Australia’s Resources Minister Martin Ferguson said in an interview with Bloomberg Television today. The nation can’t rely on increases in prices, he said.
Forrest’s net worth dropped to $3.4 billion on Sept. 13, according to data compiled and calculated through the Bloomberg Billionaire Index. More than 97 percent of his wealth is linked to shares of Fortescue. He bought $137 million worth of shares in June and another $38.6 million in August. BlackRock, the world’s biggest money manager, invested almost $97 million on July 6 to raise its stake in Fortescue to 2.1 percent, according to data compiled by Bloomberg.
The freefall in Forrest’s wealth came as short interest as a percentage of Fortescue’s free float reached 20.4 on Sept. 11, according to the latest available data compiled by Markit, a London-based research firm.
That’s the second highest among companies on the S&P/ASX 200 Index, according to data compiled by Bloomberg. Short interest in Fortescue shares reached 21.1 percent of free float Sept. 5, the highest on record, Markit data show.
“Fortescue has grown aggressively and clearly their assessment of potential downside scenario was too optimistic for iron ore and their financial leverage would leave them exposed to such volatility,” Henri Alexaline, a fixed-income investor who helps manage $1 billion at London-based FM Capital Partners Ltd. said in an e-mail on Sept. 14. “Yet when you consider their cost curve position, the rather formidable asset base and the supportive long-term economics of iron ore, lenders will see it as a win-win to grant some breathing space by waiving for 12 months the maintenance covenant around leverage.”
Fortescue expressed concern at the “continued rumors and speculation in respect of its bank-related facilities,” in a Sept. 14 statement that reiterated it was fully compliant with its financial covenants and has full access to all its funding facilities while talks with its bankers continue.
“It is likely that the company obtains waivers from the banks for a higher fee on its facilities,” Goldman Sachs Australia Pty noted in a Sept. 14 report that said banks may also demand a sale of equity.
Yvonne Ball, a spokeswoman for Fortescue, wasn’t immediately able to comment on any issues previously faced by Anaconda or Fortescue’s debt talks.
Fortescue may make asset sales including airstrips and accommodation facilities after agreeing to sell one of its three power stations to raise funds, as well as divesting stakes in its iron ore operations, Bank of America Corp. resources analysts Peter O’Connor and Peta Arnott wrote in a Sept. 14 note.
Bank of America extended a deadline to syndicate a $1.5 billion facility for Fortescue to the end of the month, a person familiar with the matter said last week. Bank of America Merrill Lynch agreed to underwrite the debt facility, according to a stock exchange filing from Fortescue last month.
About 20 lenders have been approached to join the loan and a range of international banks, including Chinese and Japanese, are processing credit approvals, other people said Aug. 30.
Moody’s Investors Service said Sept. 4 that Fortescue, rated Ba3, remained under review for a debt-rating cut as a result of the drop in iron ore prices. A rebound in iron ore to about $115 to $125 a metric ton will “substantially reduce concerns around liquidity and covenant pressure,” it said.
The company may face a $1.7 billion expansion funding shortfall on lower cash-flow estimates, Citigroup Inc. said in a Sept. 5 report. It may need to raise as much as $2.3 billion in extra debt if prices stay at current levels, JPMorgan Chase & Co. said Aug. 29.
The company will reduce its gearing as production ramps up, it said in a Sept. 13 presentation to investors in Hong Kong. Its preferred gearing range will be 30 percent to 40 percent in the 2014 fiscal year.
It signed an agreement this month to raise $300 million from selling a power plant to TransAlta Corp. The company has no plans for an equity raising and wants to sell non-core assets such as power stations and airports to raise cash, Chief Executive Officer Neville Power said Aug. 8. Fortescue hopes to complete talks soon with potential partners to develop the Northstar magnetite project, Power said Aug. 30.
Anaconda struggled to build the Murrin Murrin nickel mine in Western Australia using new technology, said Gavin Wendt, founder and senior resource analyst at Mine Life Pty in Sydney who has covered Australian resources for about 20 years.
“Anaconda was quite unique in what they were trying to do,” Wendt said. “There was a significant technology risk associated with the company.”
Forrest’s Fortescue doesn’t suffer the same metallurgical issues as Murrin Murrin, said Rudd, who was a geologist when Anaconda was experiencing problems.
“There’s a lower technical risk here but the financial one is just as great,” he said.
Fortescue had planned to reach an annual output rate of 155 million metric tons from its mines, port and rail operations in Australia’s Pilbara region by the end of June next year. It trimmed that to a “near-term” goal of 115 million when it cut spending plans this month.
Iron Ore Prices
Iron ore prices may as much as double in the fourth quarter to $145 a ton, according to the median of seven analyst estimates compiled by Bloomberg. A rebound to $110 a ton could trigger Fortescue to resume its expansion, Credit Suisse Group AG analysts led by Matthew Hope said in a Sept. 13 report. At that price the operation would have pretax cashflow of $2.1 billion. The commodity jumped 5.7 percent on Sept. 14 to $101.60, the highest since Aug. 22.
Fortescue may face a shortfall of $390 million in December when the short-term, $1.5 billion lending facility expires, Hope said. There may be another shortfall of $600 million in June 2014 when a revolver facility expires, he said.
“I wouldn’t under estimate Andrew Forrest’s ability to do a deal,” Ed Prendergast, a fund manager at Pengana Capital Ltd. said in an interview with the Australian Broadcasting Corp.’s Inside Business program yesterday. “The business was built from a deposit and then an idea and done on debt deals and deals into China to sell forward the product. He’s a very good deal doer,” and may be able to coordinate a rescue package, he said.
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