Fortescue Metals Group Limited fuels bulls with US$500 million debt repayment

Credit: Chatham House

Iron ore miner Fortescue Metals Group Limited (ASX: FMG) has continued to chip away at its alarming debt pile, announcing it has repaid another US$500 million in an update this morning.

Incredibly, the company has repaid a total of US$2.9 billion in debt so far in financial year 2016, reducing its annual interest expense by US$186 million! The latest repayment of a 2019 secured loan will generate annual interest savings of US$21 million, improving the company’s bottom line.

The group’s Chief Financial Officer, Stephen Pearce, attributed Fortescue’s ability to repay such an impressive amount in 2016 to its operational performance and cost reductions across the group. A rebound in the iron ore price in recent months has likely also played a role.

Fortescue Metals Group is Australia’s third largest iron ore miner, and the fourth largest in the world, behind BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) as well as Brazil’s Vale. Fortescue has long been considered one of the riskiest from that group due to its higher operating costs and mountain of debt, but it has done remarkably well on both fronts in recent times.

In a Bank of America Merrill Lynch presentation in May, the company said it had a breakeven price of US$28.40 a tonne. By comparison, one tonne of iron ore is currently fetching US$52.29, according to The Metal Bulletin, after rising 2.8% overnight.

It has also experienced a spectacular turnaround since plunging below US$40 a tonne in December 2015, helping to spark a 74% turnaround in Fortescue’s shares since the beginning of the year.

There’s no denying that Fortescue has improved its position in recent months, but it is still exposed to commodity risk. Many economists don’t believe that the iron ore rally can be sustained based on low demand and growing supply, suggesting a heavy fall could occur in the second half of this year.

If the iron ore price were to fall sharply, that could certainly have an impact on Fortescue’s shares, which is something investors do need to be mindful of. Still, it is pleasing to see Fortescue paying down its heavy debt load, which will help to reduce the risks facing the business in the long run.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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