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Fortescue seeking to cut debt amid commodity market turmoil

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Fortescue Chief Executive Officer (CEO) Nev Power climbs a pile of iron ore at the Fortescue Solomon iron ore mine located in the Valley of the Kings, around 400 km (248 miles) south of Port Hedland in the Pilbara region of Western Australia in this file picture taken on Dec 2, 2013.

[SYDNEY] Fortescue Metals Group Ltd, the iron ore miner that's seeking to cut its debt, is confident it can ride out turmoil in commodity markets even as larger competitors like Glencore Plc battle to withstand the rout.

"Over the last 12 months we generated over US$2 billion of cash from operations and we have around US$2.4 billion in the bank, so we are in a very different situation to them," Chief Executive Officer Nev Power said in an interview. "We have finished our capital expenditure and we are in a fantastic position to be able to weather out any volatility." Glencore, which plunged 73 per cent this year, was meeting with debt investors Wednesday amid questions about the strength of its balance sheet and a US$10 billion debt-reduction plan announced earlier this month. Fortescue, which has US$7.2 billion net debt, cut its cash costs by 21 per cent in fiscal 2015. "If Fortescue hadn't moved down the cost curve, there's no doubt that they'd be getting similar questions," Jeremy Sussman, an analyst at Clarksons Platou Securities in New York, said by phone Wednesday. "Management has done a phenomenal job of taking costs out of the business." Fortescue rose 1.8 per cent to A$1.70 at 10:25 am in Sydney, trimming its decline this year to 38 per cent.

The yield premium over Treasuries on the $2.3 billion of March 2022 notes, the company's largest outstanding bond, rose 48 basis points to 1022 basis points on Monday, Trace pricing shows. That was the biggest increase since Aug 11 and the widest spread since it touched a record 1035 on Aug 25. It eased to 1008 on Tuesday.

Fortescue carries a rating of BB at Standard & Poor's, two steps below investment grade, and the equivalent score of Ba2 at Moody's Investors Service. Both credit assessors have a negative outlook on the company. A Bloomberg model of default-risk that considers factors such as share performance and debt indicates the firm should be rated an additional step lower.

Iron ore has tumbled 71 per cent from a 2011 peak as weaker demand growth in China collides with a growing supply glut as the largest and lowest cost suppliers raise output, seeking to win savings by fully utilising their mines, railroads and ports. Fortescue's full-year earning's for fiscal 2015 demonstrated its improving cost position amid challenging trading conditions, S&P said last month.  Fortescue has flexibility to make early debt repayments ahead of its next scheduled maturity in 2019, Mr Power said in the phone interview Tuesday. The miner also retains an option to sell stakes in its assets and use the proceeds for repayments, he said.

Hebei Iron & Steel Group Co and Tewoo Group Co approached Fortescue about acquiring a stake in its infrastructure assets, people with knowledge of the matter said last month. They may also consider buying stakes in some of Fortescue's mines, for a total investment of about US$1 billion to US$2 billion in the firm's assets, two of the people said, asking not to be identified as the information is private.

"Paying down debt is our priority, and we will continue that," Mr Power said. "If there was an opportunity, as we have talked about, to accelerate that through introducing an investor into the business then we would also do that, but we don't need to, so we are in a pretty good position." Iron ore with 62 per cent content delivered to Qingdao declined 1.4 per cent to US$56.05 a dry ton on Tuesday, according to Metal Bulletin Ltd. It sank to US$44.59 on July 8, a record low for daily price data dating back to May 2009.

"Obviously, if iron ore prices move lower then companies with debt in general will be more heavily scrutinised," Mr Sussman said. "However, at around US$50 a ton for iron ore, it's unlikely investors will be asking Fortescue those questions."