Fortescue Metals Group Limited (ASX: FMG) announced on Wednesday that it will repay US$1.6 billion in debt early, after strong operational performance and commodity prices in 2012-13 improved cashflow and profitability. The US$1.6 billion comprises US$1.04 billion of unsecured notes due in 2015 and $600 million in unsecured notes due in 2016. The notes are a form of debt utilised by the company and wipe out all debt due before 2017.
The latest repayment follows US$1 billion in debt repaid in late 2013, and brings total repayments since November 2013 to over US$3 billion. Fortescue's gross debt load now stands at US$9.6 billion, down from a peak of US$12.7 billion during the company's ambitious, debt-fuelled expansion, aimed at producing 155 million tonnes of iron ore per annum.
What some considered as a massive gamble, has paid off handsomely for the group's shareholders so far. Fortescue has grown to be Australia's third-largest miner and the world's fourth-largest iron ore producer by volume. The company's debt load is essentially the biggest risk to its long-term strategy, as it restricts the company's ability to withstand lower iron ore prices. In 2013, the company declared the importance of capital management in the years ahead, with a debt reduction program put in place to reduce gearing from around 160% to 40% over a number of years. This was in preference to increasing the dividend payout.
The debt reduction should also have important impacts on the company's cashflow. Paying back the US$3.07 billion in debt has reduced the group's annual interest payments. The savings should go straight into earnings or may go towards paying down the company's debt in the year to come.
Foolish takeaway
The repayment of a further US$1.6 billion in debt has continued to reduce the investment risk in Fortescue Metals. Net debt will be reduced to US$7.8 billion by the end of March 2014, to take gearing (net debt to equity) to around 100% in 2014, with the company targeting 30% – 40% in coming years. This has dual benefits; interest payments are reduced in the short term as the next tranche of company debt is now not due until calendar year 2017, and the company is better equipped to handle any short-term falls in the iron ore price. The company remains a high-risk proposition and will likely have a volatile year.
