Low iron ore prices have pushed back Fortescue Metals Group's aggressive plan to pay its debt down early, a move that may also threaten a promised dividend bonanza from the miner.
In February, when Fortescue's ramp-up to a 155 million tonne-a- year production rate was still supported by prices as high as $120 a tonne, the company was predicting it would pay down at least $US2 billion in debt by the end of the year.
The repayment plan would also support an increase in its dividend payment ratio from about 18 per cent of profits last financial year, to between 30 per cent and 40 per cent as debt levels fell.
Iron ore prices are now below $US100/t and Fortescue's ore sold for an average of only $US82/t in the June quarter. Fortescue's production costs have also fallen sharply but the company is also damping expectations of a quick reduction in debt levels.
Chief executive Nev Power told the Diggers & Dealers conference yesterday the miner now planned to pay down between $US2 billion and $US2.5 billion in the "next couple of years".
"That will be as fast as we can do it, we're very focused on paying down the debt," Mr Power said.
"But the debt is already at manageable levels, with a net debt of $7.2 billion. We're focused on that target of getting our gearing below 40 per cent, and the speed at which we get there will be determined by free cash flow from operations.
"The factors in that are obviously the price but secondly our cost structure. We're continuing to improve our costs and that will be adding to our free cash flow as well. So that timing (of debt repayments) will come and go a bit as iron ore prices and costs change."
Mr Power said Fortescue remained committed to paying an increased dividend but it would progressively increase as Fortescue's debt and gearing ratio came down.
"It's a little bit of a balancing act," he said. "We've committed to a payout ratio of 30 to 40 per cent. But we've also said our priority is going to be paying down debt.
"We see it as bringing the dividends up at the same time the debt comes down."