Fortescue Confident Of Ore Expansion
Sydney Morning Herald
Thursday March 6, 2008
FORTESCUE Metals has expressed so much confidence in its ability to expand to 110 million tonnes of iron ore production a year that it has booked a huge half-year loss for accounting purposes.
The company, which does not expect to ship the first tonne of ore from its Pilbara project until May, reported a $975 million loss after it more than quadrupled the value of a 13-year loan note repayable to US investor Leucadia to $1.8 billion.The loan note, which carries fairly onerous terms, was agreed in 2006 in return for Leucadia taking a 10 per cent stake in Fortescue at a premium to its share price at the time. Having Leucadia onside as a major investor helped Fortescue to raise $2.7 billion of project financing through the junk bond market.The note carries a minimum repayment of $US100 million by 2019, but more importantly it gives Leucadia the right to 4 per cent of revenue from production at Fortescue's Cloud Break and Christmas Creek iron ore deposits during the same period.Fortescue chose to revalue the note for accounting purposes after becoming confident it would approve an expansion to 110 million tonnes of annual production, compared with an initial rate of 45 million tonnes a year.Additionally, its iron ore price forecasts increased after Brazil's Vale recently settled with steelmakers on a 65 per cent to 71 per cent rise in the annual benchmark price.Fortescue's executive director, Graeme Rowley, said the company did not regret the terms of the Leucadia note."We think the deal is excellent," he told the Herald. "This isn't a deal that lasts forever. The more money they make, the more money we make."Fortescue's 96 per cent of retained net revenues from its Cloud Break and Christmas Creek projects to 2019 is worth $45 billion based on its valuation of the Leucadia note.Mr Rowley noted the Leucadia royalty did not apply to Fortescue's other deposits, such as its recent Solomon find, which could underpin a further expansion to 200 million tonnes a year.In its half-year accounts, Fortescue revealed it had recently accepted a fully underwritten $US246 million ($265 million) facility from two international banks to purchase rail and port assets. It said the funds should be fully drawn by the end of next month.Fortescue has $4 billion of long-term liabilities and $289 million in current liabilities. Citigroup yesterday initiated coverage of the company with a $7 target price and a sell rating. The investment bank's net present value of $5.70 a share was based on a 50 per cent probability of an expansion to 110 million tonnes.Citigroup said the next stage of expansionseemed to be taken as a fait accompli by Fortescue, but it believed "there are still a number of hurdles for it to overcome". The broker added that based on spot iron ore prices and a certain expansion to 110 million tonnes, Fortescue would have a net present value of $25.50 a share.Fortescue shares closed 7c higher at $7.70.
© 2008 Sydney Morning Herald