What a difference time can make in the share market. 2 years and 2 weeks ago, Fortescue Metals Group Limited (ASX: FMG) rolled the dice and raised $2.3 billion in bonds with an interest rate of 9.75% per annum.
It was a desperate move, designed to give the company breathing room by refinancing its near term debt. Creditors wanted a high rate of interest to compensate them for lending to the company, which was perceived to be in dire financial straits. Fortescue had $9 billion in debt on its balance sheet at the time, more than its total market capitalisation:
Now, the picture looks a little different:
Things could so easily have gone the other way for Fortescue, but they didn't. Higher iron ore prices turned the company's fortunes around, and it paid off a stack of debt. This morning, Fortescue raised $1.5 billion in a bond offer that was heavily oversubscribed, paying an interest rate of just ~5% per annum and pushing the company's nearest debt repayment date out to 2022. Total debt has dropped from $9 billion to $3.6 billion in the past 2 years, and shares have enjoyed a corresponding turnaround:
The real question is, is Fortescue still an opportunity today? It looks conventionally cheap, with the company reporting US$1.2 billion (A$1.6 billion) in profit in the first half, pricing shares today at about 6 times earnings, if we doubled the first half to approximate the full year. BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) both look more expensive on this basis.
However, Fortescue's future profits are dependent on the price of iron ore, which is uncertain. Still, for investors looking at the sector, Fortescue's now a low debt iron ore miner with the lowest cost of production in the world. It could be worth a closer look.
