Ratings group, Moody’s Investors Service has downgraded Fortescue Metal’s (FMG) credit rating, ignoring the planned deal with giant Brazilian miner, Vale and the recent rebound in world iron ore prices.
Moody’s announced the downgrading last night in a statement, and added salt to the wound by giving Fortescue a negative outlook, meaning another downgrade could be possible in the next 18 months.
The downgrade ends a review process started on January 22 when Moody’s said it was looking at a possible downgrade to the ratings of Alcoa Australia, Newcrest Mining, South32 and Fortescue Metals Group.
Since then iron ore prices have soared past $US60 a tonne, but have started retracing and Fortescue’s shares hit a high of $3.08 a week ago yesterday, and have since fallen more than 16%, despite the proposed deal with Vale which would see an iron roe blending business established and the Brazilian giant buy between 5% and 15% of the issued shares in Fortescue on market.
The deal needs approvals from regulators in Australia, china, Japan and Europe.
Moody’s cut Fortescue Metals rating to Ba3 from Ba2. At the same time, Moody’s has also downgraded the senior unsecured and senior secured ratings of FMG Resources (August 2006) Pty Ltd to B2 and Ba2 from B1 and Ba1, respectively.
The outlook on all ratings is negative.
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Moody’s said there was the need to recalibrate ratings under a protracted challenging environment given what they consider to be a fundamental downward shift in the mining sector, including the slowing economic growth of China.
“While lower oil prices, lower freight costs, and currency depreciation have contributed to a reduction in the company’s operating costs, underpinned by ongoing improvements in operational performance, the drop in prices has and will continue to impact financial performance,” Moodys said.
"The downgrade reflects Moody’s expectation of weaker performance over the next two years resulting from the significant drop in iron ore prices experienced in 2015 and our expectation that prices will not likely experience any meaningful and sustained recovery through to 2017," says Matthew Moore, a Moody’s Vice President and Senior Credit Officer.
Moody’s said its “expectation for lower iron ore prices going forward reflect the agency’s view that steel production in China, the principal destination of Fortescue’s iron ore shipments, will decline and that ongoing iron ore supply additions will continue to pressure fundamentals."
"As a single commodity producer, lower average iron ore prices will lead to Fortescue’s revenue and earnings dropping over the period despite its stable production profile and reducing its operating and capital costs."
Moody’s said the ratings are not expected to be upgraded in the near term given current operating conditions and iron ore prices, “however, the ratings could be stabilized if Fortescue demonstrates a track record of operating with lower costs of production and an ability to further reduce debt levels in the now lower pricing environment.”
“This would be evidenced by an ability to maintain Debt-to-EBITDA comfortably below 4.0x through all reasonable pricing assumptions,” Moody’s said in the statement last night.
"The ratings would likely be downgraded if the company does not continue to reduce debt in a lower pricing environment and/or is unable to sustain and improve on recent cost reductions such that its all-in breakeven unit costs of production increase above Moody’s pricing sensitivities.
"Continued pressure on iron ore prices sustained at the low end of our sensitivity cases could also lead to a downgrade. Financial metrics that Moody’s would consider for a downgrade include Debt-to-EBITDA remaining above 4.0x on a consistent basis. The rating could also be downgraded if Fortescue’s liquidity levels deteriorate below USD1.5 billion for a protracted period."
At the same time, “reflecting the improvements in the company’s cost profile, Moody’s expects Fortescue’s operations will remain comfortably above breakeven levels under the rating agencies base case price assumptions.”
Moody’s also noted the company’s “lower breakeven levels combined with the company’s sizable cash balances should allow Fortescue to continue to reduce debt levels and maintain a solid liquidity profile.”
