'Explicit iron ore risk' behind Fortescue dropping its $3.3 billion debt refinancing

Andrew Forest and Staff at Kings Valley project opening at Solomon. Image Tony McDonough/Raw Image.

Shares in Twiggy Forrest’s Fortescue Metals dropped sharply after the pure play iron ore miner announced it was withdrawing plans to refinance debt.

Fortescue had previously announced plans to raise $US2.5 billion ($AU3.28 billion) in secured notes.

But interest from US investors proved to be weak.

CEO Nev Power said: “Whilst we have no debt maturing until April 2017, the objective of the refinancing was to extend Fortescue’s maturity profile and minimise interest costs. Debt capital markets were not favorable at this time and, as a result, we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage.”

Jonathan Sheridan of the Fixed Income Investment Group says there’s a lot of uncertainty in the credit market with everyone looking to what the US Fed will do with interest rates tonight.

Part of Fortescue’s plan was to extend the maturity of their entire debt structure.

“The market, given where iron ore is trading and potential softening in China, is just worried about any explicit iron ore risk,” Sheridan says.

Fortescue’s current 2022 bonds are trading at 11.7%.

“They were talking about 9% (for the new issue) and that just wasn’t acceptable … so that’s why they pulled it,” Sheridan says.

“Their problem is that they’ve got a single exposure to iron ore. If they were a bit more of a diversified miner then they would be in a better position.”

Fortescue’s earnings have taken a hit with falling prices for iron ore, driven by weakening demand from China.

Its shares have dropped from about $5.70 a year ago to $1.85 today.

First half net profit was down 81% to $331 million.

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