FMG retreats from asset sale

Fortescue Metals Group (FMG) backed away from a potential US$4 billion sale of port and rail infrastructure, in a sign the Australian iron-ore miner is increasingly confident about its ability to repay vast debts even as Chinese commodity demand softens.

Fortescue--the world's fourth-largest iron ore producer--put the assets in the remote Pilbara region of Australia up for sale late last year after a sharp fall in iron ore prices stretched its balance sheet and sparked emergency talks with lenders to renegotiate billions of dollars of debt.

But a 60% recovery in iron ore prices since September has boosted Fortescue's cash flow, allowed the Perth-based company to restart development of new mines in the Pilbara and reduced fears among its investors that executives might rush into a firesale of assets.

On Thursday, Fortescue said none of the bids for a minority stake in the port and rail assets--collectively known as The Pilbara Infrastructure, or TPI--had matched the price it was seeking. The remarks came as the company unveiled a 12% rise in annual net profit to a record US$1.75 billion.

"A continually strengthening balance sheet...makes us more resolute to get the full value for those assets," Fortescue Chief Executive Nev Power said.

Shares in Fortescue closed 4.2% higher in Sydney, compared with falls by Rio Tinto PLC and BHP Billiton Ltd. The broader S&P/ASX 200 index closed down 0.5%.

In its quest to break the dominance of Vale SA, Rio Tinto and BHP in iron ore production, Fortescue built a vast network of land holdings, power and water infrastructure, as well as railway and port facilities in the Pilbara, resulting in debts of more than US$10 billion.

The company has repeatedly said it is eager to start repaying that debt through cash flow and the sale of non-core assets. It has already offloaded its Solomon power station and a 25% stake in its Nullagine joint venture in the Pilbara.

"The question remains how quickly that debt will be paid down, but they are backing themselves a bit more, and that's good," RBS Morgans Perth-based analyst James Wilson said.

Pressure on Fortescue's balance sheet has slackened as iron ore has traded above US$130 a metric tonne for much of 2013, recovering from a near-three year low below US$90 a tonne last September.

Mr Power said the process to sell the minority stake in TPI hadn't been shelved entirely, and that discussions with potential buyers would continue. Still, Fortescue has dropped a deadline for a deal, which previously had been set for next month.

"As we've said a number of times, there is no imperative to undertake a transaction," Mr Power said.

"We are continuing discussions, we have new interest that has been raised with us, and we're also looking at alternatives as to how we can release that value."

Analysts had estimated a sale of up to 40% of the of its rail-and-port assets would raise as much as $4 billion.

However, bringing in a new investor to rail network and port berths would have been risky for Fortescue. Large miners like Rio Tinto and BHP retain sole ownership of vital export infrastructure because sharing it with rivals can drive up costs and make scheduling of cargoes difficult to coordinate.

Fortescue indicated it would instead use its own cash flow to start repaying debts. The company's investment in new mines has led to a rise in iron-ore exports, and it expects to reach a long-held production target of 155 million tonnes by the end of this year. Iron ore is Australia's No. 1 export and is mostly sold to Asia, especially China, the nation's biggest trading partner.

Although Fortescue's debt doesn't mature until late 2015, the company said it will begin repaying lenders before the end of the year.

Still, many analysts and investors are cautious on the outlook for iron-ore demand, as China's economy slows and major producers like Fortescue and Rio Tinto increase production further. Iron-ore prices have been among the most volatile in the commodities sector.

UBS forecasts iron ore prices to fall below US$100 a ton by the end of next year, from around US$140 a ton currently. It predicts a price below US$80 a ton by mid-2016.

Mr Power predicted Chinese iron-ore demand would remain strong.

"There is no question that iron-ore prices will continue to be volatile, but we don't see any factors that would contribute to a low price," he said.