กรุงเทพฯ--3 ก.พ.--Standard & Poor's
MELBOURNE (Standard & Poor's) Feb. 3, 2016--Standard & Poor's Ratings Services said today that it has affirmed its 'BB' corporate credit rating on Australia-based mining company Fortescue Metals Group Ltd. (Fortescue). The outlook on the issuer credit rating remains negative. At the same time, we affirmed the 'BB+' senior secured and 'B+' senior unsecured issue ratings. The recovery rating on the senior secured debt issue remains at '2' and the recovery rating on the senior unsecured debt remains at '6'.
We recently lowered our price assumption for iron ore (see "Standard & Poor's Revises Its Price Assumptions For Metals On Continuing Price Weakness," published to RatingsDirect Jan. 22, 2016) following lower-than-expected demand from China and other developing markets, combined with ongoing excess industry supply.
"Our price deck assumes that price pressure will remain through to 2018," said Standard & Poor's credit analyst May Zhong. "That said, our view that Fortescue will continue to generate a positive cash margin amid lower iron ore prices due to its ability to improve production costs and manage capital expenditure, will result in credit metrics in line with the 'BB' rating and our assessment of an aggressive financial risk profile."
Fortescue's combined average strip ratios have decreased through improvements in ore processing and mining production efficiencies, which have reduced costs. In addition, a depreciating Australian dollar and reduction in freight costs have also been positive for Fortescue's cost of production. We expect Fortescue's C1 costs to reduce to US$15 per wet metric ton and freight costs to be about US$3 to US$4 per ton over the year ending June 30, 2016. Based on these cost guidance, we expect Fortescue's all-in break-even cost (including interest expense and sustaining capital expenditure) on a 62% Fe (iron) Platts (delivered to China) price to be about US$35 per dry metric ton at the end of fiscal 2016. In our view, the company's maintenance of its low cost profile is key to riding out the market downturn. Compared to its more diversified peers like Rio Tinto PLC and BHP Billiton Ltd., Fortescue has less financial flexibility to respond to further weakening in iron ore prices.
We continue to assess Fortescue's business risk as satisfactory, based on the company's large-scale iron ore production, competitive cost position, and long reserve life. Tempering these strengths is the company's lack of customer and product diversity. As such, we view Fortescue's profitability as being sensitive to the continued volatility in commodity markets while the impact of the slowdown in China plays out amid supply and demand imbalances.
Ms. Zhong added: "The negative outlook on Fortescue reflects the challenging market conditions facing iron ore players. Slower demand growth from China's struggling steel industry and continued increase in low-cost seaborne iron ore supply are sustaining tough conditions. As such, Fortescue's credit metrics
could fall below our current expectations if external pressures intensify."
We could lower the rating if Fortescue is unable to sustain recent improvements in its profitability, or if key credit metrics continue to weaken such that the company's funds from operations (FFO) to debt falls to about 12%
or debt to EBITDA approaches 5x. This latter scenario could occur if benchmark iron ore prices fall below US$40 per ton for a prolonged period (assuming an 85% realization rate for Fortescue's products) and the company fails to offset this by deeper cost reduction.
We could revise the outlook to stable if the company continues to deliver sustainable improvements in its cost position and successfully arrests the downward trend in its credit metrics, either due to a stabilization of market conditions or a meaningful reduction in its absolute debt level.