Update Fortescue Metals and its balance sheet problems

09/12/2012 2:13 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

This isn’t good news for Fortescue Metals Group (FMG.AU in Sydney or FSUMF in New York) and it indicates the problems increasingly facing smaller mining companies as commodity prices remain depressed. (For more on Fortescue’s problems and those for the iron ore sector see my post http://jubakpicks.com/2012/08/31/plunge-in-iron-ore-prices-stresses-fortescue-metals-balance-sheet/ ) Fortescue is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com//

Yesterday Bank of America (BAC), the underwriter on a syndicated $1.5 billion loan, extended the syndication deadline for a month, Bloomberg reported. That’s usually a sign that the syndicate leader is having trouble lining up enough syndicate members to sell the entire loan without significantly sweetening the terms.

Fortescue Metals Group, Australia’s third largest iron ore miner and by far its youngest, shows $7.6 billion in debt and the company needs an iron ore price of $105 a metric ton, Citigroup estimates, to service the debt it has taken on to develop its mines and transportation infrastructure. On August 29 Moody’s Investors Service announced that it had put its Ba3 rating—junk bond territory--for Fortescue under review because of the 24% drop in iron ore prices in the last month. On September 5 Fitch Ratings revised the Australian miner’s outlook to negative from stable to reflect the “increasing pressure on liquidity and covenants that Fortescue is facing as a result of a precipitous fall in iron-ore prices.” Fortescue Metals Group is the largest issuer of junk bonds in the mining sector.

The stock fell 5.07% overnight yesterday in Sydney and 1.79% yesterday in New York on the news.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Fortescue Metals Group as of the end of June. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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