Andrew Forrest and shareholders in his iron ore miner Fortescue Metals Group lost $1.5 billion yesterday in a share price crash sparked by concerns the company was struggling to deal with its debts.
The company confirmed market speculation that it had begun talks with its financiers over a temporary reprieve from having to adhere to stringent conditions related to about $10 billion in debt.
Fortescue has been forced into the position by the collapse in iron ore prices in the past four months, which has threatened the profitability of its Pilbara mines.
Although Fortescue said it had a "supportive banking group and this is a prudent measure", it was of little comfort to investors.
Fortescue's shares dived 14 per cent to $2.99, their biggest one-day fall in four years, and wiped $1.5 billion off the company's market value, reducing it to $9.3 billion.
Mr Forrest, who founded Fortescue and remains its chairman and biggest shareholder, had $500 million wiped off his worth. Big corporate loans are usually subject to conditions, or covenants, that require profits to stay within a certain ratio of a company's annual interest rate bill.
Details of those conditions are closely kept secrets but analysts had said Fortescue could end up in breach of its covenants if profits were to fall below 2½ times its interest bill.
Breaching loan covenants could trigger demands for the immediate repayment of debts, which in Fortescue's case could cause its collapse. Standards and Poor's ratings services threatened this week to downgrade Fortescue's credit rating, citing concerns about debt covenant breaches.
In a statement late yesterday, Fortescue said it was "in full compliance with all of its banking covenants", with the next review due in December.
The crash in the price of iron ore has put pressure on the company's margins and some analysts have forecast that Fortescue's profits could fall to the point where earnings are only twice its interest bill.
With iron ore prices falling below $US100 a tonne last week, Fortescue took action, slashing 1000 jobs and pulling back its expansion plans to cut $300 million a year in operating costs and push back $1.6 billion in capital spending.
Fortescue said it was in the process of talking to its lenders about waivers "in the event that covenants are put under pressure by extended volatility in the iron ore market".