Australia’s third-largest iron ore miner, Fortescue Metals, appears to have become the first major player to run into serious difficulties following a melt-down in the price of the steelmaking ingredient over the summer.
Iron ore dropped again on Thursday to trade at $96.10 a tonne after a brief rally that took the commodity into triple digits. Benchmark 62% iron ore fines at China's Tianjin port hit a three-and-a-half year low of $86.70 last week.
Fortescue – still 32% owned by Andrew (aka Twiggy) Forrest – shocked the market and sent its share price plummeting 14% after it announced that it is seeking a 12-month waiver of its debt covenants.
Fortescue – which started commercial mining barely five years ago – was built up to its current size without issuing new equity instead opting for debt financing. The Perth-based company owes lenders more than $10 billion and the request for debt relief comes a week after it said its scaling back expansion plans and putting on hold spending.
The Financial Review hints that billionaire founder and chairman Forrest may have played a role in the decision not to issue shares:
"Some brokers have questioned why Fortescue would postpone the introduction of lower cost production rather than raise new equity to complete its $US9 billion expansion. An equity raising would dilute Mr Forrest’s stake if he did not participate in the issue.
The Brisbane Times calculates that Fortescue is losing money with iron ore at current prices and that the company needs to earn at least $105 a tonne to break even:
Like many miners and mining services companies, Fortescue was too bullish on China and the outlook of iron ore prices. It said it would expand into a 155-million-tonne-a-year iron ore outfit and then brought its expansion plans forward. In a show of machismo it left itself exposed to a downturn.
Fortescue's troubles have led to speculation that it is now a firm takeover target. The most likely candidate is cash-rich Hancock Prospecting owned by Gina Rinehart. Twiggy's fellow Australian mining tycoon is the second richest billionaire from the world of mining with an estimated fortune of $19.5 billion and is developing a deposit called Roy Hill adjacent to Fortescue.