Concerns that Fortescue Metals Group may struggle to pay back the interest on its growing debt bill were inflamed yesterday when the iron ore price hit its lowest level for nearly two-and a half years, sending its share price plunging.
Low steel prices caused by slowing growth in China have put increasing pressure on the price of the base metal, contributing to its fall to $US94.80/t overnight, down from $137/t midway through June.
Some analysts are predicting prices will slump as low as $80/t before rebounding.
However a sustained fall in iron prices will increase the pressure on the debt-laden Fortescue.
After securing $US1.5 billion in debt to cover any extra blowouts at its $US9 billion ($8.7 billion) Pilbara expansion this month, Fortescue, like many junior iron ore players, has heavily exposed itself to debt to cover capital expenditure.
Fortescue's net debt will peak at $US9.14 billion in December 2013, according to Morgan Stanley.
The investment house suggests Fortescue, which has previously enjoyed record iron ore prices, will have its profit margin reduced to wafer-thin levels if the iron ore price stays at its current level.
It said if the spot price of about $99 a tonne were to persist "as an extreme downside", Fortescue's earnings would struggle to cover its interest repayments.
Fortescue's share price yesterday fell 6.41 per cent to $3.65 - its lowest since October 2009.
The high-stakes expansion strategy is essential to help Fortescue lower its mining-only costs to an estimated $US35/t in 2015, by bringing on the low-cost Solomon project.
Patersons Securities analyst Alex Passmore said Fortescue would have to cut costs if prices stayed in the mid-$90/t range.
"But I don't think they will stay at these levels for long," he said.
He estimated the iron ore play still had some breathing space, with the company's "all in" cost level - including royalties, freight to China, exploration and interest on the company's various debts - at the $84/t mark.
A Fortescue spokeswoman said it expected iron ore prices to return to more sustainable levels (US$120 to US$150) in the short to medium term.
The company defended its debt position as a way to give it additional protection from the increased volatility in financial and commodity markets.
"We have raised $US5 billion worth of debt during the 2012 financial year and since June 30, we have raised another $US1.5 billion to take into account the increased volatility in financial markets and to give us additional protection against fluctuations in the iron ore price going forward," she said.
Although Fortescue predicts an iron ore rally, some analysts aren't so sure, with one suggesting the price dip as a long-term trend.
Morningstar resources analyst Matthew Hodge said every miner had a tipping point, but Fortescue's was closer due to its reliance on debt.
"If the iron price goes to low $80/t for five seconds then it probably doesn't matter too much," he said.
"But if it sustains below $100 for six to 12 months, then perhaps they'll (Fortescue) need to do something."
The company has introduced a range of cost-cutting measures, including trying to sell off its 120 megawatt power station at Solomon.
Other iron ore companies struggled yesterday, with Atlas Iron losing 4.5¢ to a $1.46 and market leader Rio Tinto shedding a $1.21 to $50.54.
A spot price of $99 a tonne would mean FMG would struggle to cover its interest repayments.