Time to board the Fortescue train?

Things going swimmingly for Australia's third force in iron ore

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 7, 2013 11:19 am AEDT

Australia's third largest iron ore miner, Fortescue Metals Group (ASX: FMG) has seen its shares rise more than 20% in the past month, as the iron ore price defies the experts' predictions of doom.

And yesterday the company had some good news on another front, with credit rating agency, Standard & Poor's, upgrading its senior secured debt one notch to 'BB' with a positive outlook from BB-. A positive outlook means Fortescue could see further upgrades to its debt rating in future. The credit rating upgrade should also help lower Fortescue's massive interest bill as well as allowing the company to achieve a better interest rate on its US$5 billion debt facility, which it is in the process of repricing.

Still, Fortescue holds a massive $10 billion of debt on its books, which remains a key risk over the long term survival of the company. The company should be able to make a dent in its debt over the next couple of years, as production ramps up to 155 million tonnes of iron ore per annum and the cash flows in – as long as the iron ore price defies the critics and remains at a relatively high level.

Iron ore is currently trading above US$130 a tonne, while most analysts and commentators had expected the price to fall closer to US$100 a tonne as demand from China fell. In fact the opposite has occurred, and iron ore imports into China have surged in recent months keeping the price above US4130 a tonne.

That news is good for other iron ore miners including Rio Tinto (ASX: RIO) , BHP Billiton (ASX: BHP) and juniors Atlas Iron (ASX: AGO) and BC Iron (ASX: BCI).

Despite predictions of massive oversupply in iron ore coming on, there has been little sign that demand has fallen below levels of supply. In fact, a massive surge in supply now seems unlikely with some large African iron ore projects facing major issues, and China looking for the best quality iron ore – such as from Australia's Pilbara region.

Foolish takeaway

The key to Fortescue's future is the company's ability to pay back its massive debt. Any moves to repay some of it over the next year or so could see the share price rocket ahead. Until it can demonstrate that, Fortescue remains a high-risk, potentially high-return company.

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