Fortescue, Australia’s third largest iron ore miner, has been downgraded by Moody’s just as it assures investors it’s still selling iron ore for a profit despite the 60% slump in prices.
Moody’s downgraded Fortescue’s corporate family rating to Ba2 from Ba1 and given it a negative outlook. It also downgraded senior unsecured rating to Ba3 from Ba2 and senior secured rating to Ba1 from Baa3.
This comes as Fortescue continues to look at refinancing its debt which stands at $US7.4 billion after a bid to issue bonds in the US stalled with the falling price of iron ore. The company has no debt maturing until 2017.
“The downgrade of Fortescue’s corporate family rating reflects the very weak iron ore fundamentals and our expectation that iron ore prices will remain around the current weak levels through 2016,” says Matthew Moore, a Moody’s senior analyst. “Such price levels will lead to a substantial weakening of Fortescue’s earnings and key credit metrics compared to our previous expectation.”
Slowing steel production growth in China and significant oversupply issues will keep prices at low levels through 2016, says Moody’s.
Moody’s has lowered its base case average price sensitivities for iron ore to $US50 a tonne for 2015 and $US45 for 2016.
However, Fortescue said it’s break even price was about $US39 a tonne. And in the March quarter it received an average of $US48, close to the current price.
Investors cheered the news that Fortescue had cut costs by 9% per tonne in the March quarter. Its shares jumped 8% before closing about at $1.95, up about 5%.
The company’s cost target for the 2016 financial year is $US18 per wet metric tonne as it drives savings to lower the cost of production.
An Australian dollar weakening against the US dollar also helps Fortescue.
However, Moody’s expects margins to fall significantly, dropping to around $US12 a tonne or lower through 2017 compared to over $US40 per tonne in 2014.
“Our negative outlook reflects our view that Fortescue’s credit profile will remain very sensitive to movements in the iron ore price, which is exposed to downside risk,” says Moore.
“The rating could be downgraded further if the company is unable to sustain and improve on recent cost reductions such that all in breakeven unit costs of production remains above our pricing sensitivities,” says Moore.
“Continued pressure on iron ore prices below our sensitivity cases could also lead to a downgrade.”
However, Moody’s expects that success in Fortescue’s ongoing cost reduction plans will allow it to remain around break even cash flow levels.