Fortescue Metals share price sinks despite more debt repayments

Fortescue Metals Group Limited (ASX: FMG) has seen its share price sink 3.8% to $3.165, despite announcing that it was repaying US$650 million in debt by the end of this month.

It’s the second announcement from the iron ore miner in the past two weeks, after the company announced that it was repaying US$577 million in Senior Unsecured Notes due in 2019.

The total repayment of US$1.227 billion will save the Fortescue US$76 million in interest expenses each year. The company has repaid US$2.3 billion of debt so far this financial year, generating US$164 million in annual interest savings.

The miner will have US$6.8 billion worth of total debt left once these repayments have been made, but given the company’s history, it wouldn’t surprise me to see Fortescue continuing to pay down its debt levels.

Higher iron ore prices and a massive effort to slash production costs have allowed Fortescue to generate more free cash and thereby pay back debt. The world’s fourth-largest iron ore miner is targeting C1 cash costs of just US$13 a tonne in June 2016, after achieving US$14.79 a wet metric tonne in the March 2016 quarter.

However, the iron ore price tumbled 4.3% overnight to US$63.41 a tonne, and steel and iron ore futures point to further falls in the spot iron ore price again tonight.

That’s still a long way above Fortescue’s breakeven price of US$28.40 a tonne, but the recent appreciation in the Australian dollar and higher oil prices could mean Fortescue struggles to hit its production cost targets.

Fortescue says it has lower costs than Brazilian giant Vale now, and is approaching the two major leaders, Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP).

Iron Ore Cost curve Apr 2016

Source: Fortescue Metals Group presentation 4 May 2016


The overnight fall in iron ore price hit both Rio and BHP as well as the ASX-listed junior miners, with the major’s share prices down 7.9% and 9.7% respectively (although Brazil unveiled a monster civil lawsuit today against BHP for its Samarco disaster).

Foolish takeaway

A number of commentators have already said that they expect iron ore prices to fall further in the second half of 2016, and that may be coming true. No wonder Fortescue is making hay while the sun shines.

Forget BHP and Rio.

This "dirt cheap" company. is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for income-hungry investors, including SMSFs, this ASX company could be the "Holy Grail" of dividend plays for 2016. Click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required.

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

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.

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