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Fortescue takes first steps to cut debt

Fortescue Metals Group (ASX: FMG) intends to take advantage of stronger revenues and a recent revival in business conditions to pay down $140 million worth of debt that was taken on in September 2008. The outstanding preference shares are to be redeemed in their entirety on November 11, 2013. They represent the most expensive debt on the company’s balance sheet, with a hefty 9% coupon.

That balance sheet is still groaning under a net debt pile of approximately US$9.9 billion as at June 20, 2013. The company says the repayment is a milestone and reflects a new Fortescue, complete with improved margins and record revenues.

Fortescue recently announced a full-year net profit of US $1.7 billion and further surprised the market with a 10 cents per share dividend payout. The iron ore miner aims to be delivering 155 million tonnes per year come December, and says this expanded production is the driver behind the early debt repayments.

Foolish takeaway

A recovery in China and iron ore prices have seen a share price surge since June, as the market takes comfort the group will be able to manage its overall borrowings. History shows a pattern of iron ore price volatility, with strong rebounds following price drops, and the company has defied those who predicted the worst just over a year ago.

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Motley Fool contributor Tom Richardson does not own shares in any of the companies mentioned in this article.

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