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Can Fortescue hit growth targets? That's the $6bn question

FORTESCUE Metals expects to triple its annual production after undertaking two separate expansion projects nearly simultaneously at a cost of $6 billion. Not to mention repaying $1.3 billion of principal on its existing debt in the same period.
By · 13 Nov 2009
By ·
13 Nov 2009
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FORTESCUE Metals expects to triple its annual production after undertaking two separate expansion projects nearly simultaneously at a cost of $6 billion. Not to mention repaying $1.3 billion of principal on its existing debt in the same period.

Or at least, after scratching the surface, that's what Insider took from Fortescue boss Andrew Forrest's presentation to the Sydney Mining Club yesterday, in which he gave potential timelines and capital cost estimates for its Solomon expansion in the western Pilbara for the first time.

Fortescue is always talking about growth never about standing still because that helps it maintain a price-earnings ratio more than twice that of BHP Billiton and Rio Tinto. As a bonus, promises of expansion prove a handy distraction from the fact Fortescue has yet to meet its initial production targets after 18 months in operation.

The big news yesterday was that Fortescue expected it would cost $3.6 billion to build the first phase of its Solomon project in the western Pilbara, which would produce 60 million tonnes a year. And that Fortescue expected to sign off on the project in 2010 or 2011.

Sounds great in theory. But Fortescue had said it would approve a $2.5 billion or so expansion to 95 million tonnes of production as soon as an earlier expansion to 55 million tonnes was working like "clockwork".

The first 55 million tonnes is due to be completed by late next year, so presumably Fortescue is thinking it will approve the 18-month expansion to 95 million tonnes in 2011 or 2012.

Many are sceptical that Fortescue will be able to fund that primarily from internal cash flows after its $US6 billion debt package with Chinese lenders fell over. Credit Suisse thinks it is unlikely to complete that expansion until 2015.

Fortescue also has substantial principal payments on its junk bonds due in this time, including $312 million in 2011 and $950 million in 2013. Not to mention bond covenants that prohibit it from taking out more debt to fund the move to 95 million tonnes. So the big question is, how will Fortescue construct and finance more than $6 billion of expansions effectively at the same time?

Forrest yesterday said Wall Street was happy to offer the B-rated company more junk bonds and has hinted the Chinese might help fund the Solomon project.

But with a balance sheet already geared to the hilt and a record of constantly changing its mind about the best way to expand, it is only understandable that the investment community has a healthy scepticism about Fortescue.

Floating world

THE last-minute failure of the $1 billion Investa Australia Office Fund float this week does not appear to have deterred other property groups from thinking about flogging their assets to the public.

There was speculation in the market yesterday that Becton Property Group is preparing for a $500 million or so float of its retirement assets that are co-owned by Oman Investment Fund, possibly with help from Macquarie Capital.

Becton shares surged in the last hour or so of trading to close 22 per cent higher at 10?, but a spokeswoman was unable to confirm or deny whether it was preparing a float. If the speculation proves correct, it will be interesting to see how the offering is structured and priced.

Investa's attempted float failed after fund managers baulked at paying a price slightly higher than the net asset backing, given that most property funds are trading well below their asset backing.

Meanwhile, Kathmandu begins trading today, with the promoters hoping it will top Myer's performance and hit the bourse at or above its $1.70 issue price.

London calling

DESPITE the relative buoyancy of the Australian economy, the Australian Securities Exchange and local bond markets are not the only places to raise capital.

In fact, more than $US100 billion ($A107 billion) of equity has been raised on the London Stock Exchange and Alternative Investment Market this year, easily outstripping the amount raised locally.

The head of business development for the LSE Group, Nick Langford, is visiting Sydney and Perth this week in an attempt to get Australian companies to consider accessing London's capital markets.

About 31 Australian companies particularly miners have dual listings on AIM, while six are on the main board of the LSE, including Centamin Egypt, which transferred from the AIM to the LSE last Friday with a market value of #1.3 billion ($A2.3 billion). The big four Australian banks and BHP Billiton have previously accessed London's large sterling-denominated debt market.

In the past two years, several Australian explorers have scrapped their secondary listings on the AIM, citing issues such as lack of liquidity, because that market is dominated by institutional investors.

Langford counters that small companies are by nature rather illiquid and that liquidity also can bring severe volatility. Not to mention that some small Australian companies with retail-dominated registers should appreciate the ability to bring institutions on to their registers via a listing in London.

It remains to be seen whether AIM will return to the heyday of 2005-06 for Australian miners, or if many will continue to prefer Canada as an alternative. That $US4.6 billion has been raised this year on AIM alone shows the London market is a viable alternative to the local for companies seeking capital.

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