Fortescue Metals (ASX:FMG)
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5 Years : From Apr 2012 to Apr 2017
Fortescue Metals Group Ltd. (FMG.AU) Friday unveiled a US$8.4 billion three year expansion in Western Australia state's iron-rich Pilbara region including new railways, port berths and mines as it competes with larger rivals BHP Billiton Ltd. (BHP) and Rio Tinto Ltd. (RIO) for demand from developing Asian economies.
Australia's third largest iron ore miner expects it will have to raise another US$4 billion of debt to pay for the expansion, with spending weighted 15%-20% in 2011, 45% in 2012, and the balance through 2013, perhaps trailing into 2014.
Chief Financial Officer Stephen Pearce ruled out an equity raising and wouldn't elaborate on when Fortescue will raise more capital, only telling reporters that it's "working on a number of initiatives" and will take into account prevailing market conditions and iron ore prices. Fortescue last month priced US$2.04 billion in unsecured notes in the high-yield U.S. bond market.
Lacklustre demand from developed economies and concerns China will damp blistering economic growth have miners cautious about their short-term prospects, but most expect robust longer term demand as China's wealth continues to grow and other developing nations like India seek raw materials to underpin more belated expansions.
Still, most analysts expect the price of iron ore to halve to around US$75/ton by the middle of this decade, given a large new supply of iron ore coming into the market due to increased investment in mining globally.
BHP this week announced extra spending on its growth projects in the Pilbara, which accounts for around a third of global seaborne iron ore exports, and Rio is also beefing up its operations there.
Fortescue said the US$8.4 billion will be used in a procurement and expansion program at its existing Chichester and greenfield Solomon hubs, including US$4.6 billion for rail and port infrastructure.
Its iron ore production capacity is expected to increase to 155 million metric tons a year from 55 million tons. Ore from the expansion's last processing facility at the Solomon hub is expected to be shipped in the September quarter of 2013.
Current capacity is only 40 million tons but it's on track to grow to 55 million in mid-2011 through an existing expansion program.
Last financial year, BHP produced 124.9 million tons of iron ore and Rio Tinto produced 171.6 million tons in 2009.
Even with the expansion, Fortescue's production capacity at 155 million tons would be below Rio's current 220 million ton capacity and Rio is planning to grow capacity to 333 million tons by mid-2015.
"This decision will enable Fortescue to leverage its existing infrastructure and its massive land holding across the Pilbara to exponentially increase product sales within key markets of Asia, Europe and Australia," Chief Executive Andrew Forrest said in a statement.
Executives on a conference call with reporters rejected a suggestion that the implied development cost of US$84/ton is too optimistic, saying that the estimate is consistent with the current expansion to 55 million tons and that Fortescue's infrastructure is already "designed for expansion".
Fortescue grew rapidly by taking on large volumes of debt to build its own railway line to compete with the proprietary lines owned by BHP and Rio.
Its net debt peaked at US$6.11 billion at the end of June 2008, at a time when the company's annual earnings before interest, tax, depreciation and amortisation amounted to just US$45.9 million.
However, conditions attached to its bonds limited its ability to grow beyond its existing Cloud Break and Christmas Creek mines, leading to the refinancing of US$2.04 billion of bonds last month.
The company's US$100 million 2006 loan note agreement with Leucadia National Corp. (LUK) also commits it to pay 4% of revenues from the Cloud Break and Christmas Creek mines as interest, net of government royalties, leading to US$172 million of payments to Leucadia in July this year.
The miner is expected to tour investors in Europe and the U.S. before the end of the year to raise interest and inspect equipment for the project.
Under the terms of the revised debt agreement in October, Fortescue is able to raise an additional US$4 billion of secured debt and further unsecured debt equivalent to around 2.5 times its annual operating profit, suggesting an overall debt ceiling of US$7.3 billion to the end of December.
-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com