Iron ore miner Fortescue Metals has continued a positive week by settling a legal dispute with investment group Leucadia.
Fortescue paid the New York-based Leucadia $US715 million ($A685.16 million) but got itself out of an ongoing royalty obligation.
Fortescue said on today it would save significant interest payments by buying Leucadia out of the unsecured loan notes it paid $US100 million for in July, 2006.
Leucadia was Fortescue’s first big backer and secured a four per cent royalty payment from revenue at two of its mines once iron ore production began in 2008.
However, it sued Fortescue in 2010 to stop the miner issuing more notes that Leucadia said would have diluted its returns.
The notes were due to mature in August 2019 and have proved highly profitable for Leucadia as the iron ore price soared to record highs for much of the past four years.
The notes earned more than $US220 million ($A210.82 million) in royalties in the past financial year alone, while the Leucadia loan notes had a book value of $US897 million ($A859.57 million) at June 30, using a 42 per cent discount rate.
The royalty payments have received more negative attention by investors as iron ore prices plunged to around $US100 ($A95.83) a tonne in recent weeks, shrinking Fortescue’s margins to near unprofitable levels.
The company refinanced its debt this week, pushing out repayments to November 2015, but increasing overall debt by $US900 million ($A862.44 million) to $US12.7 billion ($A12.17 billion), about $US6.7 billion ($A6.42 billion) of which is undrawn.
Fortescue chief executive Nev Power wants gearing - the debt to equity ratio - of between 30 and 40 per cent by the 2014 financial year.
However, Patersons Securities analyst Alex Passmore doubts the miner’s ability to do that, saying on Thursday that the current level was 162 per cent.
Mr Power said that, depending on future iron ore prices, interest payments on the Leucadia note would have increased considerably over coming years due to the ramp-up in production at the Christmas Creek and Cloudbreak mines in Western Australia.
"This agreement significantly reduces the overall cost of debt for the company, reflecting
Fortescue’s continued commitment to profitability,” Mr Power said in a statement.
Fortescue today also announced that it had put first ore through a second train unloader at Port Hedland in WA.
The extra train unloader is a key part of Fortescue’s expansion in port infrastructure capacity to 115 million tonnes a year.Fortescue shares closed nine cents, or 2.4 per cent, weaker at $3.60, with weak manufacturing data out of China prompting falls across resources stocks.