Do you find it somewhat ironic that a company would release a statement commenting that it doesn't comment on media speculation? I'm not sure if ironic is the right word for it but that's exactly what the world's fourth largest iron ore miner Fortescue Metals Group Limited (ASX: FMG) had to do on Friday afternoon following another week of speculation that the group was looking to sell a major stake in the company to Chinese investors.
Surge!
Fortescue has traded as high as $2.60 in the last three months after the iron ore spot price rallied from around $45 to nearly $65 and investors latched onto the story that some of Fortescue's heavy debt load could be alleviated by an investment by one of China's major steel groups, like Baosteel Group Corp, or a Japanese firm.
Bloomberg reported that the company held talks with as many as 10 potential Asian investors to help fund the repayment of a large portion of the group's $7.4 billion net debt pile, while others have speculated that a capital raising could be on the cards.
Help is on the way
Investors that keep up to date with developments in the Australian mining market, will know that Fortescue is the fourth largest ore producer in the world, behind Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Brazil's Vale in scale, ore quality, leverage, and breakeven cost.
This leaves Fortescue in a precarious position when the iron ore price falls below $50, as it did earlier this year. The solution to this problem, or so management tell us, is that the company's breakeven costs will be reduced to $41 per tonne from over $70 not more than 18 months ago.
Part of Fortescue's plan could be to sell a stake in its Western Australian Chichester and Solomon mining hubs to a foreign investor for a sizeable cash sum, which could be used to lower debt. This will dilute existing shareholders and further reduce the dividend payable to shareholders in coming years.
