Fortescue survives industry credit re-rating

Fortescue has survived the industry-wide credit downgrading unscathed and unchanged.

Fitch has reaffirmed the iron ore miner’s credit rating as other majors see their ratings downgraded or are given negative outlooks for the future.

BHP and Glencore were hit hard, going from A+ to A and BBB to BBB- respectively whilst Anglo American and Freeport McMoran were cut below the investment grade, while rating Anglo’s credit grade rated as junk only days before the miner carried out a massive restructure that will see it exit from Australia.

Moody’s investor service has also downgraded Rio Tinto’s ratings, one of the last major miners to retain its rating unchanged, from A3 to Baa1, and given the company a negative outlook.

In its note, Fitch stated Fortecue’s Long Term Issue Default Rating (LT IDR) remains at BB+, although it did continue to give a negative outlook on the miner.

It has also affirmed its long term ratings at BBB- on the secured term loan and note and BB on the unsecured notes.

“The affirmation of Fortescue's ratings comes in spite of the decline in market prices for iron ore, and reflects the company's strong progress in cost reductions,” Fitch said.

“Fortescue's cash production costs (or C1 costs) reduced by almost 50 per cent over the 12 months to end-2015, averaging USD16/ton in 1HFY16 (fiscal year ends 30 June). “

This is cost per tonne average is biting on the heels of fellow majors BHP and Rio Tinto, which sit at US$15 per tonne.

It is aiming at a US$13 per tonne operational cost, with Fortescue estimating its new break even benchmark iron ore price as US$29 per ton, an enormous drop from the US$39 per ton reported last year.

“The benchmark price for iron ore, with 62 per cent iron content delivered to China has fallen by around 40 per cent during the same period. The ratings factor in Fitch's view that the benchmark iron ore price will average around USD45/ton in 2016 and 2017, and recover slightly to USD50/ton in 2018 and over the long-term.”

However, Fitch went on add that the continuing negative outlook on its LT IDR marks a continuing risk for the miner’s credit profile should iron ore prices weaken again.

“Fortescue's ability to deleverage remains sensitive to iron ore prices, despite it achieving significant cost reductions,” it said.

Stephen Pearce, Fortescue’s CFO, stated it “is pleasing that Fitch has recognised Fortescue’s ability to generate positive free cash flow and maintain comfortable liquidity levels, despite recent market volatility”.

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