Should you buy Fortescue Metals?

Australia’s third largest iron ore miner, Fortescue Metals Group (ASX: FMG), has announced plans to repay US$1 billion of debt early, which should see its interest costs fall further.

Just last week the miner announced that it had renegotiated a US$5 billion debt facility, achieving an interest rate reduction of 1%, cutting an estimated US$50 million off its interest bill. Today, Fortescue has announced that the company is paying back US$1 billion of debt two years early on its senior unsecured notes that are due to be repaid in late 2015, saving an estimated US$70 million in interest. The company also expects to repay the remaining US$1.04 billion in coming months.

Fortescue’s CEO Nev Power says the repayment is an historical turning point for the company, and it will continue to deleverage its balance sheet. Chief financial Officer Stephen Pearce noted that Fortescue’s strong financial position and reduction in capital expenditure meant the company could begin to make debt repayments in 2013. Fortescue is nearing the completion of its ramp up to produce 155 million tonnes of iron ore annually and therefore capital costs are falling.

The company is also focusing on cutting costs which should see free cash flow increase, allowing the company to repay more debt and cut interest costs further. Still, the company had US$12 billion of debt on its balance sheet before this announcement, so it has a long way to go in cutting debt levels.

Fortescue has also received the benefit of higher than expected iron ore prices. Many analysts had expected the iron ore price to fall to US$100 a tonne or below, as demand from China slows. But demand has increased, while oversupply has not materialised yet, leading the iron ore price to remain above US$130 a tonne for some time now.

While Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) have also ramped up their iron ore production, so far China is clearly keen on buying as much Australian iron ore as it can get its hands on. Even junior miners Atlas Iron (ASX: AGO) and BC Iron (ASX: BCI) are increasing their production of the commodity.

Foolish takeaway

As CEO Nev Power has said, this marks a turning point for Fortescue. If the iron ore price remains strong over the next few years, the company should easily be able to make its debt repayment schedule, and the current share price may appear cheap. The big risk is that the iron ore price does crash – putting Fortescue at risk of having to raise equity, or in a worst case scenario, folding completely.

Fortescue doesn't pay much in dividends, but are you in the market for high yielding ASX shares? Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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.