MENU

Time to board the Fortescue train?

Australia’s third largest iron ore miner, Fortescue Metals Group (ASX: FMG) has seen its shares rise more than 20% in the past month, as the iron ore price defies the experts’ predictions of doom.

And yesterday the company had some good news on another front, with credit rating agency, Standard & Poor’s, upgrading its senior secured debt one notch to ‘BB’ with a positive outlook from BB-. A positive outlook means Fortescue could see further upgrades to its debt rating in future. The credit rating upgrade should also help lower Fortescue’s massive interest bill as well as allowing the company to achieve a better interest rate on its US$5 billion debt facility, which it is in the process of repricing.

Still, Fortescue holds a massive $10 billion of debt on its books, which remains a key risk over the long term survival of the company. The company should be able to make a dent in its debt over the next couple of years, as production ramps up to 155 million tonnes of iron ore per annum and the cash flows in – as long as the iron ore price defies the critics and remains at a relatively high level.

Iron ore is currently trading above US$130 a tonne, while most analysts and commentators had expected the price to fall closer to US$100 a tonne as demand from China fell.  In fact the opposite has occurred, and iron ore imports into China have surged in recent months keeping the price above US4130 a tonne.

That news is good for other iron ore miners including Rio Tinto (ASX: RIO) , BHP Billiton (ASX: BHP) and juniors Atlas Iron (ASX: AGO) and BC Iron (ASX: BCI).

Despite predictions of massive oversupply in iron ore coming on, there has been little sign that demand has fallen below levels of supply. In fact, a massive surge in supply now seems unlikely with some large African iron ore projects facing major issues, and China looking for the best quality iron ore – such as from Australia’s Pilbara region.

Foolish takeaway

The key to Fortescue’s future is the company’s ability to pay back its massive debt. Any moves to repay some of it over the next year or so could see the share price rocket ahead. Until it can demonstrate that, Fortescue remains a high-risk, potentially high-return company.

Every Aussie investor knows Telstra, but only the smart money is on the move now... Discover whether you should buy, sell or hold Telstra shares in our brand-new report, written by a top Motley Fool analyst. It's free, click here for your instant download!

Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.