Ben Bernanke helps Twiggy Forrest
City Index September 18, 2012 11:29 AM
<p>Australian listed iron ore producer Fortescue metals emerged from a trading halt today after it successfully managed to secure new funding which will replace existing […]</p>
Australian listed iron ore producer Fortescue metals emerged from a trading halt today after it successfully managed to secure new funding which will replace existing debts due to mature. It has been a tough few months for the single commodity exporter – first the iron ore price tumble and then rumours in the market around the unease of its lenders. Shares have accordingly fallen from an all year high of $6.18 to $2.99 when trading was halted last Thursday. Today’s news brings with it a cover rally with the stock up more than 15% in early afternoon Sydney trading.
We recently wrote about the iron ore price in our piece titled “Is the Chinese growth story over?” In it we stated “A further selloff in iron ore stocks could provide a great medium term trading opportunity for those with patience – BHP, Rio Tinto, Atlas Iron and Fortescue Metals could all represent compelling value at current prices.” Rio Tinto has bounced around 15% of its recent lows. BHP is also trending higher. The iron ore spot traded price has bounced from a low in the mid US$80s per tonne to above US$100 per tonne over the past week. Confidence is being restored.
Fortescue’s ability to raise a new US$4.5bn facility is important for many other industrial companies globally, not just those in mining. US 5 year treasury notes are currently yielding around 70 basis points. The lenders of the new facility to Twiggy Forrest’s Fortesue – Credit Suisse and JP Morgan – will fund the loan through the US debt market where debt is cheap thanks to Ben Bernanke.
The incentive for banks to take on risk – like lending to Fortescue – is too hard to resist. Fortescue did not disclose the cost of funding but there is no doubt the lenders would be writing up a solid margin. Loans will have the backing of Fortescue’s Pilbara assets – very strategically attractive. So it comes as somewhat of a ‘win/win’ situation, for now.
If an emerging iron ore producer, with single commodity risk and subject to short selling from US hedge fund guru Jim Chanos can manage to score such a large lending package, then other corporates will no doubt see the current interest rate environment as a once in a lifetime opportunity to secure cheap, longer term debt. This will help finance growth, like Fortescue’s plans to treble its iron ore production to around 155 million tonnes per annum. We see this as a small anecdote in what could be a very important theme for 2013 – the use of historically low priced debt to exploit depressed corporate valuations. We are now closely watching for other key mergers and acquisitions or leveraged buyouts by private equity players to develop in the next few weeks.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.