(The following statement was released by the rating agency) Fitch Ratings-Sydney-October 29: Fitch Ratings has affirmed Fortescue Metals Group Limited's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB+'. The Outlook on the IDR is Stable. Fitch has also affirmed the 'BB+' rating on the outstanding senior unsecured bonds issued by FMG Resources (August 2006) Pty Ltd and guaranteed by Fortescue. At the same time, Fitch has chosen to withdraw the ratings on Fortescue for commercial reasons. 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, Fortescue's 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 its 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 the Eliwana and Iron Bridge mines 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 iron 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 (FYE19), which was at the top end of its guidance of USD12-13/wmt, and the company has provided guidance that these costs are expected to further increase in FY20 to USD13.25-13.75/wmt. This recognises the effect of higher haulage costs due to changes in production locations and increases in the cost of labour after 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 our forecasts on the mining company. Investment Grade Credit Metrics: Fortescue's credit metrics are strong for the company's rating. We expect funds from operations (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 project 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, driving our expectations that Fortescue's EBITDA margin will increase in FY20 (FY19: 59%). Prices rose recently after Vale S.A. (BBB-/Stable), 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. Derivation Summary Fortescue is among the leading low-cost iron ore producers globally, which positions it well against peers. Both Fortescue and Vale are highly exposed to a single commodity - iron ore. Historically, Vale has been stronger than Fortescue due to the high iron content in its ore and low cost, despite Fortescue benefiting from its proximity to China and lower sovereign risk than Brazil. However, the financial impact on Vale of the tailings dam collapse and the subsequent lower production, which resulted in Vale's downgrade, offset its advantages 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 wages and electricity costs. 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 2019, USD70/dmt for 2020, USD60/dmt for 2021 and USD55/dmt for 2022 - Fortescue's C1 cost to be around USD13/wmt in FY19 and FY20 - Capex of around USD1.3 billion for FY19, including the contribution to Iron Bridge, in line with company guidance - Dividend payout ratio to remain at the upper end of Fortescue's guidance of 50%-80% of net profit after tax from FY19 to FY22 RATING SENSITIVITIES Rating sensitivities are not applicable as the rating has been withdrawn. Liquidity and Debt Structure Comfortable Liquidity, Debt Structure: Fortescue had USD1.9 billion of cash on hand at FYE19 and a USD1.1 billion 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. 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. Fortescue Metals Group Limited; Long Term Issuer Default Rating; Affirmed; BB+; RO:Sta ; Long Term Issuer Default Rating; Withdrawn; WD ----senior unsecured; Long Term Rating; Affirmed; BB+ ----senior unsecured; Long Term Rating; Withdrawn; WD FMG Resources (August 2006) Pty Ltd ----senior unsecured; Long Term Rating; Affirmed; BB+ ----senior unsecured; Long Term Rating; Withdrawn; WD 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. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10099441 Solicitation Status https://www.fitchratings.com/site/pr/10099441#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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