Markets: Fortescue's debt demolition

Citigroup’s mining analyst is forecasting Fortescue’s debt gearing to collapse if iron ore prices stay above $US90 a tonne.

Citigroup’s mercurial mining analyst Clarke Wilkins likes Fortescue shares.

Wilkins, who has a buy on the stock, expects Fortescue’s gearing – its level of long-term debt compared to its equity capital – to be less than 40 per cent by the end of 2015 at Citigroup’s forecast iron ore price of $US115 a tonne.

If the spot price for iron ore remains around $US130 a tonne, Fortescue’s gearing drops below 40 per cent in early 2015, according to Wilkins. The spot price for iron ore imported through the northeast Chinese port of Tianjin yesterday rose US40 cents, or 0.3 per cent, to $US131.90. The Tianjin spot price has gained 19 per cent since May 31 when it hit a low this year of $US110.40.

Wilkins says Fortescue needs the price of iron ore to remain above $US90 a tonne to comfortably meet its debt payments. The company currently has $US12.7 billion in debt, including a $US5 billion term loan and $US7 billion of unsecured notes. Wilkins says Fortescue’s $US2.2 billion in cash as of June 30 was adequate.

The Citi analyst has a 12-month forecast for Fortescue shares of $5.10. At 1530 AEST the stock was up 15.5 cents, or 4.3 per cent, to $3.775. This year Fortescue’s shares have fallen 19 per cent.