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Fortescue cuts US$50m off interest bill

Australia’s third-largest iron ore miner, Fortescue Metals Group (ASX: FMG) will save around US$50 million off its annual interest bill after renegotiating one of its key debt facilities.

Fortescue managed to get its margin reduced from 4.25% to 3.25%, as well as extending the maturity of the debt facility through to June 2019, and has the ability to see the margin rate fall to as low as 2.75%, if the miner can get its leverage ratio down below 2.5 times.

Recently, credit ratings agency Standard & Poor’s upgraded Fortescue’s senior secured debt one notch to ‘BB’, with a positive outlook.

Still, Fortescue paid US$892 million in the 2013 financial in interest expenses on borrowings and finance lease liabilities, so the US$50 million is not going to significantly lower the company’s interest costs. Fortescue also capitalised US$342 million of interest, related to specific borrowings that finance assets under construction.

Therefore, getting the interest rate is a relatively small step in cutting the company’s interest bill, and Fortescue will be relying on paying down those debts as soon as it reasonably can. With much of its capital expenditure program completed and as production of iron ore ramps up, Fortescue should see rising free cash flow, which will enable the company to begin paying down its debts.

Of course, Fortescue will be hoping the iron ore price remains around current levels or better. The commodity has been trading above US$130 a tonne for some months, despite Fortescue, BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and junior miners such as Atlas Iron (ASX: AGO) ramping up their iron ore production.

Fortescue could also cut its debt further if it can sell a minority stake in its wholly owned subsidiary The Pilbara Infrastructure (TPI). So far the company has been unsuccessful, but estimates suggest Fortescue could realise up to $3 billion from a partial sale.

Foolish takeaway

While it’s only a small step, saving US$50 million on costs per year gives the company a little more breathing space to pay back its US$12 billion in debt. Fortescue is still a high risk stock, but should it manage to navigate the next few years successfully, the company could end up as one of the largest iron ore miners in the world.

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

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