Monday, 17 December 2012 14:20
Debt-laden Fortescue Metals Group plans to sell a stake in its prized Pilbara rail and port assets, but the move has raised worries about what the loss of control will mean for its future growth.
Fortescue has been lauded for taking on giants BHP Billiton and Rio Tinto, when they wouldn't provide access to their train lines, by building its own line and allowing juniors to access it.
However the recent heavy falls in the iron ore price and the company's massive debt of more than $US10 billion ($9.52 billion) - expected to peak at $US12 billion ($11.43 billion) - threatened its financial position, forcing it into a series of job cuts and asset sales, with this the latest one.
CEO Nev Power said in a statement to the ASX on Monday that the company was in negotiations with "a small group of selected investors" about a sale.
The company has provided third party access to its infrastructure to juniors such as Atlas Iron and BC Iron while retaining control over it - something it stands to lose through a sale.
The difficulty would be finding a buyer that would pay enough to enable Fortescue, the world's fourth largest iron ore miner, to continue pursuing its plans to nearly triple iron ore output to 155 million tonnes a year, Morningstar senior equities analyst Mathew Hodge said.
"If they get someone to pay more than what I think they're worth and are not giving up too much control I guess that's a good thing," he told AAP.
"But then on the investor side if you are getting no control and paying a bunch of money, then why would you bother."
If fellow iron ore miners such as Gina Rinehart's Hancock Prospecting or Atlas Iron invested enough money it could allow for economies of scale and give Fortescue enough cash to push on with its growth, Mr Hodge said.
Mr Power insisted in Fortescue's statement that "any sale would only be transacted at full and fair market value and on the basis that the current efficiency of infrastructure and mining operations are not impacted".
Pengana Capital fund manager Tim Schroeders saw the move as an admission by Fortescue that its current structure was not robust enough to service its debt.
It was too early to tell if its restructuring by selling assets would make it more viable.
The sell-down was also complicated by the fact that Fortescue already provided third party access - in other words what that would mean for pricing and control of train line and port assets.
"This is not supportive of the company's future expansion intentions," Mr Schroeders told AAP.
"At the end of the day the conundrum is the same whatever spin you put on it: the company's got too much debt.
"If you are divesting infrastructure assets or selling equity in mines, you are just avoiding the obvious in terms of an equity issue."
The company resisted pressure from bankers in September to raise equity, preferring debt financing after reports it was in danger of breaching debt covenants.
Fortescue Metals Group
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