Should you buy Fortescue Metals?

Iron ore miner plans to repay more than $5 billion of debt within the next twelve months

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 December 3, 2013 9:57 am AEDT

Iron ore miner, Fortescue Metals Group (ASX: FMG) is planning to pay off a US$4.95 billion term loan within 12 months as it takes advantage of the current strong iron ore prices.

Chief financial officer Stephen Pearce has told the Australian Financial Review (AFR) that he wants to be analyst predictions of when the miner will pay off its debt. "I'd like to think that maybe we could surprise on the upside," Mr Pearce said.

Fortescue repaid $140 million of preference shares last month as part of its plan to deleverage its balance sheet. The company had $12 billion of debt on its balance sheet at the end of June 2013, but announced early in November that it wants to repay US$1 billion of debt before the end of this year. The iron ore miner has benefited from strong iron ore prices with the commodity staying above US$130 a tonne for much of the year. Strong demand for iron ore from China has buoyed the iron ore price, making a mockery of analyst predictions of prices falling to $70 a tonne.

While Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP) have also ramped up their iron ore production, so far China is clearly keen on buying as much Australian iron ore as it can get its hands on. Even junior miners Atlas Iron (ASX: AGO) and BC Iron (ASX: BCI) are increasing their production of the commodity. The miners are also likely to benefit from the falling Australian dollar, which is currently trading around US 90 cents.

Fortescue's CEO, Nev Power, has told the AFR that he wants to strike a balance between catering for investors looking for dividends and those more concerned with capital growth. "We don't want to alienate all those big superannuation funds that are predominantly looking to dividend yields," Mr Power said.

Foolish takeaway

Should the iron ore price remains strong over the next few years, Fortescue should easily be able to make its debt repayment schedule. Shareholders could also be rewarded with high dividends while the company pays down its debt. At the current price Fortescue may appear cheap, but a crash in the iron ore price could rain on its parade, making the company a very high risk play.

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