By Peter Ker
Fortescue Metals Group may look to borrow “up to $US1 billion” in coming weeks in order to cover a $US600 million cost blowout on its iron-ore expansion project.
The company revealed the cost overrun in today's production update. The blowout marred an otherwise strong quarterly production report for Fortescue, which achieved its goal of exporting more than 55 million tonnes in the year to June 30.
Andrew Forrest, chairman of Fortescue Metals Group.Credit: Penny Bradfield
Fortescue shares gave up early gains of more than 2 per cent, to be down about 1 per cent, or 4 cents, to $4.60 in afternoon trading.
Speaking around midday, AEST, Fortescue's chief financial officer Stephen Pearce said the company is still considering options for sourcing the extra funds. He confirmed the expansion would cost at least $US9 billion, up from a target of $US8.4 billion, prompting the need to raise an additional $US1 billion.
He said the company would consider “the normal range of options in terms of discussions with banks or other funding parties”.
“We have a number of options in front of us, we are fairly well advanced in those discussions, and so I would be hopeful we will be able to announce something in the short term,” he said.
Mr Pearce said the company was unlikely to sell bonds, and he also ruled out bringing in another company as a way to source the funds.
The company successfully raised almost $US2 billion in March selling bonds but may now tap banks instead.
Predicted blowout
The blowout came as little surprise to analysts, many of whom had long-predicted that Fortescue would struggle to keep its expansion project within its $US8.4 billion budget.
Much of the extra costs was caused by design changes at the Solomon mining hub, while the port and rail expansion also contributed to the blowout.
Despite the cost bulge, Fortescue said the expansion remains on schedule, meaning the company should achieve an annual production rate of 155 million tonnes of iron ore by this time next year.
Actual export numbers for the 2013 financial year are likely to be about 89 million tonnes, meaning Fortescue should enjoy significantly more cash-flow from iron sales over the next two years.
Mr Pearce said it will likely be mid-2014 before the company can expect its credit rating to be lifted by ratings agencies to investment grade.