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Print[Ferro-Alloys.com] Australia's Fortescue Metals Group Ltd said it will slash capital spending by 25 percent and wind back its expansion plans, the second iron ore miner in two weeks to defer a big-ticket project in the face of weaker demand from China and tumbling prices.
The move, less than a week after Fortescue reassured investors its expansion plans were on track, follows a decision by mining giant BHP Billiton Ltd to shelve a USD20 billion copper and gold mine expansion in Australia and put all other approvals worldwide on hold.
Slowing demand and weaker earnings have cast a harsh light on Fortescue's USD11.3 billion in liabilities and the company's ability to pay its debt. The junk-rated iron ore miner was warned last week by Moody's Investors Service that the ratings agency may cut its Ba3 rating due to falling iron ore prices.
"They've taken decisive action to address the main criticism they face, which is running a balance sheet with a high amount of leverage," said Ben Lyons, an analyst at ATI Asset Management, which owns shares in Fortescue. "There's just a short-term question around their ability to service that debt."
The world's No 4 iron ore producer said it would lop USD1.6 billion off capex spending this year, eliminate hundreds of jobs and only commit to a near-term growth target of 115 million tonnes a year, down from 155 million tonnes.
"They're basically trimming their sales for what looks as though it's a changed environment," said Tim Schroeders, a portfolio manager at Pengana Capital, which does not own Fortescue shares.
Fortescue shares initially jumped 3 percent, but reversed course to be down as much as 3.7 percent at a 28-month low, as the market factored in its lower production outlook.
Investors had been nervous Fortescue would face a funding shortfall for its USD9 billion project to triple production, but Chief Executive Nev Power said just last week he was confident Chinese demand would improve, justifying the spending.
"The problem is that this has happened much faster and the fall is much sharper than anyone had anticipated," Power told a media briefing on Tuesday.
"We have seen a buildup of inventories in the steel market and I think there has been a loss of confidence in China about the market in the short term and in particular the lack of stimulus packages that were expected from the Chinese government," Power said.
Fortescue, which has built Australia's third-largest iron ore operation in just 9 years, has a net debt to total equity ratio of 62 percent, compared with 26 percent for BHP and 17 percent for Rio Tinto Ltd/Plc .
The company needs to ensure it has enough cash to finance its debt obligations as falling iron ore prices reduce its margins and cash flow.
Ratings agency Standard & Poor's said Fortescue's credit quality would be at risk if iron ore prices stay below USD100 a tonne through December.
"That will put significant pressure on their credit quality," S&P resources corporate ratings director May Zhong told Reuters. "They need to do more to give them more buffers in their rating." S&P rates Fortescue BB-minus, also at junk status.
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