Fitch Ratings has today commented that there will be no immediate impact on Fortescue Metals Group Limited's (Fortescue) Long Term Foreign-Currency Issuer Default Rating and senior unsecured rating of 'BB+' as a result of the February 18th 2011 ruling by the Australian Federal Court that Fortescue CEO Andrew Forrest breached the Corporations Law by misleading investors in 2004 and 2005. The Outlook remains Stable.
Fortescue has said that it will consider all available legal options. An appeal in the Australian High Court is a potential route for the company, whilst this course of action has yet to be confirmed. However, at this time, there remains a possibility that Andrew Forrest will be banned from acting as a company director and carrying out duties as Fortescue CEO.
While Fitch acknowledges that this is clearly not good news for Fortescue, the agency believes that, even without Andrew Forrest, the company has sufficient management depth to continue to execute the already board-approved expansion strategy. In February 2011, new Chief Operating Officer Neville Power joined Fortescue with the purpose of steering the company through the process of expanding to a production capacity of 155 million tonnes per annum. The new COO has a good prior record in mining and expansion projects from his time as CEO of Thiess' Australian business (a major Australian mining operator). Also, in getting to existing production levels, Fortescue has previously hired some very capable and experienced individuals across the organization.
From a financial perspective, the outlook for Fortescue, with or without Andrew Forrest, remains strong in view of the demand drivers which continue to remain in place, primarily the huge requirement for iron ore from developing Asia. At 1H11, the company continues to outperform the Fitch rating case by virtue of very strong iron ore pricing (averaging USD 138.5 per dry metric tonne over the 6 months to December 31st 2010 versus a conservative Fitch assumption of average USD 108 per dry metric tonne across FY11). Fortescue's recently released 1H11 financial results were strong. Underlying EBITDA was up 246% on the prior year period at USD 1.3 billion and net debt to EBITDA was down to below 1x. Cash balances have doubled in a 6 month period, moving from USD 1.2 billion at end June 2010 to USD 2.4 billion end December 2010, reflecting the exceptionally strong iron ore pricing environment.
