Fortescue Metals is expected to cave to pressure from its bankers and announce a capital raising, as negotiations continue to restructure the troubled miner’s heavy debt.
The company placed its shares in a trading halt today to stop a rout including a 14 per cent plunge in its stock on Thursday, losing $1.5 billion in market value.
Most of the plunge came in the last hour of trade on Thursday after a report that Fortescue had asked its lenders to waive its debt covenants for the next 12 months.
Later that evening it admitted talking about “potential waivers” and on today said it had held more talks with its bankers and that the discussions had progressed well.
Concerns about Fortescue’s ability to pay back its gross debt of about $US9 billion ($A8.57 billion) have come to a head in recent days with the iron ore spot price falling below $US100 ($A95.24), leaving the company no longer profitable.
The company’s founder and chairman Andrew “Twiggy” Forrest owns more than 32 per cent of the company and has resisted raising money by issuing stock that would dilute his stake, preferring instead debt financing.
Mr Forrest appeared to be still resisting a capital raising today, with rumours linking him to a number of plans to save Fortescue’s balance sheet.
That follows a $300 million sale of a power station at one of Fortescue’s mines last week, along with delaying $US1.6 billion ($A1.52 billion) of capital expenditure and cutting 1000 jobs and operational costs by $300 million.
CommBank Global Markets Research said in a note to clients that a Standard & Poor’s report this week reported that Fortescue was at "serious risk of breaching its banking covenants", and placing it on CreditWatch with negative implications was serious.
"In our view, this puts further pressure on FMG (Fortescue) to consider raising equity ... FMG should seek additional equity now,” it said on Friday.
Mine Life senior resources analyst Gavin Wendt said if Fortescue’s bankers were to give the miner the support it wanted, it would have to raise some cash.
"The lenders want to know how they’re going to be repaid and if the company is not making money, of course that’s fairly serious,” he told AAP.
"In a sense Fortescue’s destiny is out of its control.
"It is controlled by the goodwill of its bankers and the iron ore price, it will be desperately hoping the price stays above $US100 per tonne because if it goes to $US90, $US85 or $US70 for an extended time then I think the company’s going to get wiped out."
If bankers do not meet Fortescue’s request to waive its debt covenants including extending or syndicating a Bank of America Merrill Lynch $1.5 billion facility, it might not be able to draw down further and meet payment obligations.
It could also mean its debt falls due immediately.
A sharp fall in Chinese demand has caused the iron ore price to fall, with some suggestions that country’s leadership has partly manipulated the price by stockpiling steel at uneconomic levels.
Mr Wendt said that before the recent boom, iron ore mining was typically a low-margin, high-capital expenditure business and the smaller producers or hopefuls would disappear while prices were below $US100 a tonne.
Fortescue's biggest customer, Baosteel, today denied Australian media reports that FMG was trying to sell it a 15 per cent equity stake.