Fortescue Metals Group share price sinks on debt downgrade

Credit: iStock

Fortescue Metals Group Limited (ASX: FMG) has seen its share price fall 0.8% in trading so far today, after Moody’s downgrading the company’s credit ratings.

The ratings agency downgraded the miner’s corporate family rating (CFR) from Ba2 to Ba3 and placed the company on negative outlook. The company’s senior secured rating was downgraded from Ba1 to Ba2 and the senior unsecured rating from B1 to B2.

Moody’s says there is a fundamental downward shift in the mining sector, including slowing economic growth of China. However, the ratings agency also said that it expects “Fortescue’s operations will remain comfortably above breakeven levels under the ratings agencies’ base case price assumptions.

Moody’s also noted the company’s “lower breakeven levels combined with the company’s sizeable cash balances should allow Fortescue to continue to reduce debt levels and maintain a solid liquidity profile.

Fortescue has production costs that rival the two lowest cost iron ore producers in the world, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) and those costs could even be lowered further thanks to a potential joint venture with Brazil’s Vale to combine their ores, and the arrival of the first of eight specially-designed very-large ore carriers later this year.

In contrast to Moody’s downgrade, both Fitch and Standard & Poors reaffirmed Fortescue’s credit ratings in February. Moody’s had previously downgraded Vale, BHP and Rio, so the company is not alone.

Fortescue had US$2.3 billion in cash and US$8.4 billion of debt at the end of December 2015, and is likely to continue to pay down its debts – much like it did in 2015, including more than US$1.1 billion in the last half year.

Foolish takeaway

The credit rating won’t have much impact on Fortescue – and the company says it continues to focus on reducing operating and capital costs, which so far has done wonders for it.

The technology that's going to REPLACE the Internet is already here...

Dollar for dollar, insiders are calling it one of the biggest new markets in the history of modern business... NOW is the time to get in on the hush-hush industry that could be poised for growth of over 4,463%+ by 2020... And the 1 ASX stock that stands to grow YOUR money right alongside it! Simply click here to learn its name.

No credit card required, this report is yours FREE!

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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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.