(The following statement was released by the rating agency) Fitch Ratings-Sydney-September 06: Fitch Ratings has assigned Australia-based Fortescue Metals Group Limited's (BB+/Stable) USD600 million senior unsecured notes due 2027 a rating of 'BB+'. The notes are issued by Fortescue's wholly owned subsidiary, FMG Resources (August 2006) Pty Ltd, and guaranteed by Fortescue. Fortescue expects to use the proceeds as part of the refinancing of its USD1.4 billion syndicated term loan due 2022. Fortescue is conducting this refinancing as part of its management of its debt maturities.The note is rated in line with Fortescue's existing senior unsecured notes, based on our understanding that the notes are issued with the same terms and conditions as its current outstanding notes issued in 2017 and 2018. We understand that the notes are not explicitly guaranteed by Fortescue's subsidiaries, but in Fitch's view, the investors of the notes will have materially the same access to Fortescue's consolidated cash flows as the investors of its existing senior unsecured notes because Fortescue and its key subsidiaries are linked via a deed of cross guarantee. The notes also rank pari passu in right of payment with Fortescue's outstanding senior unsecured debt and have access to share pledge security.Fortescue's 'BB+' Long-Term Issuer Default Rating (IDR) reflects its position as one of the lowest-cost iron-ore suppliers to Asia (mainly to China), which has helped it withstand periods of weak global iron-ore prices, and its substantial mining assets. We believe that its investment in the USD2.6 billion development in Stage 2 of the Iron Bridge Magnetite Project supports the miner's efforts to improve production flexibility as the investment moves it closer to its strategic goal of having a majority of products with greater-than-60% iron content. This, combined with the additional flexibility to be provided by the USD1.3 billion Eliwana mine development, will further enhance its ability to respond to cyclical and structural global demand shifts for iron ore, supporting its profit margins and allowing it to retain its market share. Key Rating Drivers Price Realisation Affects Profitability: Fortescue's cost of mining and shipping iron ore to China compares well with other major low-cost iron-ore producers such as Rio Tinto (LON:RIO) Ltd (A/Stable) and BHP Group Limited (A/Stable). However, its profitability is not as strong due to price adjustments based on its lower Fe content blend. Its price adjustment to the benchmark (62% Fe Platts CFR Index) has narrowed from the highest level of around 35% since December 2018 due to increased demand from Chinese steel mills. Its mines were in the third quartile of the iron ore global cost curves in 2019, according to CRU's business-cost model, which adjusts for grade and price realisation.Fitch expects price realisation to improve as Eliwana and Iron Bridge come into production and raise production flexibility and the average Fe content. Eliwana's approval has enabled Fortescue to introduce a 60% Fe content blend - West Pilbara Fines - which was first delivered in 2019 and volumes are likely to rise to 40 million tonnes per annum once Eliwana begins production in December 2020. Iron Bridge will enable Fortescue to market the mine's 67% Fe content ore as a distinct product or use the ore in the blending of other products, depending on market conditions. This will enhance Fortescue's profitability as it can respond to changes in demand and price realisation for various grades of ore.Further Cost Improvements Challenging: Fortescue's C1 costs (which include the cost of mining, processing, port and rail) averaged around USD13 per wet metric tonne (wmt) in the financial year ended June 2019 (FY19), which was at the top end of its guidance of USD12-USD13/wmt, and the company has provided guidance that these costs are expected to further increase in FY20 to USD13.25-USD13.75/wmt. This recognises the effect of higher haulage costs due to changes in production locations and increases in the cost of labour following a period of minimal increases. Fitch also continues to take into account factors beyond Fortescue's control, such as crude oil prices and the Australian dollar exchange rate, which can affect the mining company in our forecasts.Investment-Grade Credit Metrics: Fortescue's credit metrics are strong for its rating. We expect FFO adjusted net leverage to remain below 2.5x over the next four years. This includes the impact of the Eliwana project, which will be financed by operating cash flow, the USD2.1 billion contribution to Stage 2 of the Iron Bridge project, which Fortescue has said will be funded by a combination of specific non-recourse project debt and operating cash flow - although the project financing has not yet been agreed on - as well as Fortescue increasing its dividends to shareholders.Fitch's consolidation of Fortescue's debt for its proportionate share of the Stage 2 development at this point is due to the strategic importance of the Iron Bridge mine despite the plan for non-recourse debt to fund the project. Flat Iron-Ore Prices: Fitch increased its expectation for benchmark iron-ore prices in March 2019 to USD75 per dry metric tonne (dmt) for 2019, USD70/dmt in 2020 and USD60/dmt in 2021, keeping our long-term price at USD55/dmt thereafter. This is based on our forecast that iron-ore prices will remain high following the recent rises after Vale S.A. (BBB-/Rating Watch Negative), the world's largest iron-ore miner, said it would cut around 10% of its output for up to three years after the collapse of a tailings dam in January 2019, driving our expectations that Fortescue's EBITDA margins will remain elevated in FY20 (FY19: 59%). Derivation Summary Fortescue is among the leading low-cost iron-ore producers globally, which positions it well against its peers. Both Fortescue and Vale are highly exposed to a single commodity - iron ore. Vale has historically been considered stronger than Fortescue due to the high iron content in its ore and low cost, despite Fortescue benefitting from its proximity to China and lower sovereign risk than Brazil. However, the financial impact of the tailings dam and the lower production caused by the incident, which resulted in Vale's downgrade and continues to be reflected in the Rating Watch Negative, have offset these benefits and reduced the rating differential between the companies to one notch. The gap between their relative strengths will continue to narrow with our expectations of the increase in the average grade of Fortescue's product suite as its new mines come online. Anglo American (LON:AAL) plc's (BBB/Stable) rating reflects its significant commodity exposure and geographic diversification as one of the world's largest mining companies. This is despite its high exposure to South Africa, which is a challenging environment with an active, unionised workforce and comparatively high wage and electricity cost inflation. Fortescue, like Anglo American, has improved its financial profile as it prioritises balance-sheet strength. However, Fortescue's weaker profitability is reflected in the two-notch difference between the ratings on the two companies as a result of lower price realisation due to the iron content of its ore being lower than the benchmark. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer- Benchmark iron-ore price to average USD75/dmt for the remainder of 2019, USD70/dmt for 2020, USD60/dmt for 2021 and USD55/dmt for 2022- Fortescue's C1 cost to be around USD14/wmt in FY20- Capex of around USD2.4 billion for FY20, including the contribution to Iron Bridge, in line with company guidance- Dividend payout ratio to remain within Fortescue's guidance of 50%-80% of net profit after tax from FY20 to FY22, with the level reflecting the company's capex commitments RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action- Maintaining FFO adjusted net leverage at less than 2.5x on a sustained basis (FY19: 0.4x).- Cost position of key operations, adjusted for grade and price realisation, moving to the second quartile on a sustained basis.- Maintaining neutral free cash flow on average on a sustained basis.Developments That May, Individually or Collectively, Lead to Negative Rating Action- FFO adjusted net leverage that is higher than 3.0x for a sustained period. Liquidity and Debt Structure Comfortable Liquidity, Debt Structure: Fortescue had USD1.9 billion of cash on hand at FYE19 and a USD1,025 million undrawn revolving credit facility. Following the refinancing of its USD1.4 billion term loan, the company will have no debt maturities until 2022, when the first tranche of the unsecured notes issued in FY17 of USD750 million falls due. Total debt (including finance leases) of USD4.0 billion at FYE19 does not include financial maintenance covenants. This provides the flexibility to reshape its capital structure, which is supported by its strengthened financial credit profile. Date of Relevant Committee 04 April 2019 ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg. FMG Resources (August 2006) Pty Ltd ----senior unsecured; Long Term Rating; New Rating; BB+ Contacts: Primary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325
Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com; Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Solicitation Status https://www.fitchratings.com/site/pr/10087520#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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