Fortescue CFO sees US$1 billion firepower to further reduce debt

[MELBOURNE] Fortescue Metals Group Ltd, which says debt repurchases are helping it slash costs amid a slump in iron ore prices, is looking to seize on opportunities to reduce its liabilities by at least another US$1 billion.

"We are sitting at about US$1 billion plus above our stated liquidity level, so we clearly have that sort of firepower on the balance sheet today," chief financial officer Stephen Pearce said in a phone interview on Wednesday.

"It's a question of assessing the best opportunity, the best timing and the best method of how we either call it, tender it, or seek to buy it back."

The world's fourth-biggest iron-ore producer repaid US$1.1 billion of debt in the final six months of 2015, trimming its net debt pile to US$6.1 billion as of Dec 31. Those early repayments have generated annualised interest savings of about US$88 million, boosting cost cutting measures that are helping the Perth-based producer withstand a more than 70 per cent tumble in iron ore prices over the past five years.

While Fortescue's profit for the six months through December declined 4 per cent, it beat analyst estimates as it lowered production costs by almost half. The producer's improved performance isn't being reflected in the pricing of its debt, opening potential opportunities for repurchases, Mr Pearce said.

While the yield premium over Treasury rates on Fortescue's March 2022 note, its largest outstanding bond, has narrowed to 1019 basis points as of 3.45 pm on Wednesday in Sydney from as much as 1267 last month, it's still wide of the level at which it was issued.

The secured notes were priced at a gap of 851 basis points back in April and Fortescue has since retired US$140 million of the US$2.3 billion initially issued, according to data compiled by Bloomberg. The miner has also bought back more than half of the notes originally issued on its April 2022 and November 2019 bond lines.

"There is a little bit of a disconnect between the cash we have and how we are traveling and the broader commodities sector. We will look to take advantage of that while that disconnect continues," he said in the interview. "We will do it as fast as the market opportunities allow."

BLOOMBERG