By Rhiannon Hoyle
SYDNEY-- Fortescue Metals Group Ltd. sought to reassure
investors it can survive the sharp downturn in the global iron-ore
market, as two influential analysts questioned the company's
ability to withstand the slump.
The Australian iron-ore producer--the world's fourth-largest
exporter by volume--has been scrambling to rein in spending as it
grapples with a near-60% decline in iron-ore prices over the past
year. During an operational update on Thursday, the company's
management said it had a strong cash balance and was quickly
reducing operating costs, while damping fears it could be forced to
sell off big chunks of its business or shutter mines.
Shares in Fortescue initially shot up as much as 10%, although
they later halved those gains.
The miner has still lost nearly two-thirds of its value in the
last year as investors have fretted over both its high debt pile
and its ability to compete with bigger Australian rivals Rio Tinto
PLC and BHP Billiton Ltd. All three companies operate large mines
in the Pilbara region of Western Australia.
Fortescue has risen from a tiny explorer to become the world's
fourth largest iron-ore exporter in decadelong campaign that sees
it now shipping ore to Asia at an annualized rate of 165 million
metric tons.
But the company is struggling to generate enough cash to repay
billions in loans it used fund its aggressive expansion in the
country's northwest. Last month the company scrapped plans to
refinance $2.5 billon of debt having failed to agree terms with
investors.
Its costs remain higher than rivals Rio and BHP and its ore
quality is lower, meaning it is more vulnerable to the sharp
decline in market prices. Iron-ore prices have slumped to $49.7 a
metric ton on Wednesday from nearly US$200 a ton in 2011.
"There is a plan B, C and D" if prices continue to weaken, said
Chief Executive Nev Power. "Whatever the market price is, we will
respond to that."
Even so, Goldman Sachs slapped a "sell" rating on Fortescue on
Thursday and warned it would "struggle to generate significant cash
flow" if iron ore prices fall to $40 a ton.
Meanwhile Moody's Investors Service said the continued fall in
iron ore prices raised the chances of ratings action on miners'
bonds. It said Fortescue would likely become loss-making with ore
prices in the mid-$40 range.
Fortescue recently said it was considering selling stakes in
some of its mining assets--ending a proud policy of wholly owning
the mines it operates, in contrast to rivals that have sold parts
of their Australian mines to Asian investors in the past.
On Thursday, Mr. Power said he wasn't ready to rule any options
in or out.
He signaled the miner wasn't yet contemplating any mine
closures, though. Equity raisings also aren't on the agenda at this
stage, he said.
"We are very comfortable with our balance sheet," Mr. Power
said, cautioning investors against underestimating the company.
Fortescue said its cash balance rose to US$1.8 billion at
March-end, compared with US$1.6 billion at the end of December. The
company said it expects to hold US$1.5 billion or more in cash
through the current fiscal quarter as it lowers costs even
further.
Its net debt was meanwhile slightly lower, at US$7.4 billion,
compared with US$7.5 billion three months earlier. Fortescue aims
to end June--the close of its fiscal year--with a break-even price
around US$41 a ton. Over the year that follows, it hopes to push
that down further to an average US$39 a ton.
Mr. Power acknowledged Fortescue was facing an arduous
challenge.
"The current state of the iron-ore industry has been a disaster
for everyone," he said. "It has ripped the heart out of the
industry. There are no winners in any of this."
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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