-- Fortescue net profit up 53% as iron ore production
accelerates
-- CFO says company has headroom to increase debt if needed
-- CEO Nev Power expects iron ore price to rebound soon
(Adds comments from fund manager in sixth paragraph, Fortescue
officials in tenth-eleventh and fourteenth paragraphs, details
throughout)
By Rhiannon Hoyle
SYDNEY--Fortescue Metals Group Ltd. (FMG.AU) Thursday reported a
53% rise in full-year net profit, but saw its debt pile swell to
US$8.5 billion as it presses on with plans to triple iron ore
output in Australia's Pilbara region despite slumping commodity
prices.
Fortescue is facing a challenge from weakening Chinese demand
for steelmaking materials, which has driven the price of iron ore
down to a two-and-a-half-year low and prompted peers such as BHP
Billiton Ltd. (BHP) to delay approvals for multibillion dollar
investments nearby that would enable vastly higher exports from the
Pilbara.
Falling iron ore prices have also triggered concerns that
Fortescue may again need to tap debt markets soon, potentially to
plug a multi-billion-dollar funding gap as it ramps up spending to
expand annual iron ore production in the Pilbara to 155 million
metric tons by mid-2013.
Fortescue, which has grown from a tiny explorer to become the
world's fourth-largest iron ore producer by volume within a decade
by developing deposits overlooked by peers like BHP, said net
profit for the year to June 30 totaled US$1.56 billion compared
with US$1.02 billion a year earlier.
That was ahead of an average US$1.43 billion estimate from five
analysts' forecasts compiled by Dow Jones Newswires.
"A lot of people in the market are skeptical about Fortescue
meeting its production and financial targets, but it continues to
defy the skeptics and deliver to its own internal stress targets,"
said ATI Asset Management portfolio manager Ben Lyons, who holds
Fortescue stock.
Perth-based Fortescue cited increased production volumes as the
main reason for the profit growth. The company's revenue was up 23%
at US$6.68 billion.
The company's borrowings and financial liabilities at the year
end rose 75% to US$8.5 billion after it tapped debt markets for
funding to expand its mines, which include Christmas Creek.
Earlier this month, the company said it had secured an extra
US$1.5 billion in loans and credit. The move came after the company
said the capital required to achieve its expansion targets would
likely be close to US$9 billion, outstripping a previous US$8.4
billion forecast.
Fortescue's chief financial officer Stephen Pearce said these
loans would give the miner "flexibility" in the months ahead.
"We do have capacity [to increase our debt], but our preference
is not to take on additional debt," he said.
Analysts say Fortescue's stock is likely to take its cue more
from swings in iron ore prices than the company's production
growth, as the miner is highly geared to overseas demand and
doesn't have any exposure to other commodities.
The iron ore price fell to US$104.70 a ton Wednesday, its lowest
level since December 2009. The price is down 24% year-to-date amid
weak demand from Chinese steel mills.
Fortescue Chief Executive Nev Power told reporters that he
expects the iron ore price to rebound to between US$120/ton and
US$150/ton soon, and the company is continuing to develop plans to
expand beyond 155 million tons.
"How quickly we go into the next expansion phase will depend on
the iron ore market... but it looks very attractive at the moment,"
said Mr. Power, adding Fortescue would seek to pay down debt
first.
Fortescue announced a final dividend of 4 Australian cents a
share, taking the total for the year to 8 cents a share.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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