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FMG Resources (August 2006) Pty Ltd -- Moody's affirms Fortescue's ratings and assigns a Ba1 to new notes; outlook stable

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Rating Action: Moody's affirms Fortescue's ratings and assigns a Ba1 to new notes; outlook stableGlobal Credit Research - 19 Mar 2021Sydney, March 19, 2021 -- Moody's Investors Service has affirmed Fortescue Metals Group Ltd's Ba1 corporate family rating (CFR). At the same time Moody's has affirmed the Ba1 backed senior unsecured ratings of FMG Resources (August 2006) Pty Ltd -- a wholly owned financing subsidiary -- and assigned a Ba1 to the subsidiary's new backed senior unsecured notes issuance. The rating outlook remains stable."IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."Rating assigned:Issuer: FMG Resources (August 2006) Pty LtdUSD 1,500,000,000 4.375% backed senior unsecured notes due 2031 at Ba1The new notes benefit from a parent guarantee from Fortescue Metals Group Ltd and will rank pari passu with the group's existing senior unsecured notes. The notes do not benefit from subsidiary guarantees. The proceeds for the notes will be used to tender for the company's senior unsecured notes due in 2022 and 2023 with any remaining proceeds used for general corporate purposes.RATINGS RATIONALE"Fortescue's ratings continue to be supported by its large-scale operations with low cash costs of production, a large base of long-life reserves, strong credit metrics and ample liquidity", says Matthew Moore a Moody's Vice President and Senior Credit Officer.Fortescue continues to exhibit strong operational performance highlighted by increasing iron ore production volumes and the maintenance of low cash costs of production. These high volumes and low costs will support Fortescue's ability to continue to maintain strong earnings and cash flow generation even in periods of lower iron ore pricing.The company's iron ore shipments increased 2% in the first half of the fiscal year ended June 2021 (1H fiscal 2021) and Moody's expects volumes for the full fiscal year of around 180 million tonnes, which continues to position Fortescue solidly as the fourth largest global iron ore producer. On the cost side, unit costs remained steady in recent periods with C1 unit costs below $13 per wet metric tonne (wmt). While Moody's expects these costs will increase with the strengthening of the Australian dollar, the agency believes C1 costs will remain below $14/wmt, which will continue to position Fortescue as one of the lowest cost iron ore producers globally.Fortescue's credit profile is balanced by limited operational, geographic and product diversity, as well as its exposure to volatility in iron ore prices and downside risk for discounts received for the lower grade ore it produces.As a single commodity producer, Fortescue is heavily exposed to movements in iron ore prices. However, in the current environment this is providing significant support to earnings and cash flow generation, as iron ore prices remain elevated from strong demand in China and continued supply constraints in Brazil. Spot prices for the 62% Fe index averaged around $126 per dry metric tonne (dmt) in 1H fiscal 2021 and have increased materially above these levels in the second half of the fiscal year. These elevated prices allowed Fortescue to report underlying EBITDA of around $6.6 billion in the half, which was a significant 57% increase on the previous corresponding period.In addition to the high spot prices for the 62% Fe index, discounts for Fortescue's products have remained tight, with the company achieving an average price realisation of around 90% relative to index prices in 1H fiscal 2021. These reduced grade discounts reflected lower steel mill profitability in China, as well as a shift in Fortescue's product mix with the addition of a 60.1% Fe West Pilbara Fines and Fortescue Lump products in recent periods.Fortescue continues to benefit from the flexibility provided by its very strong balance sheet and liquidity levels. Reported net debt was a low $110 million at December 2020 and adjusted gross debt/EBITDA was 0.4x for the twelve-month period to December 2020. Moody's expects that continued strong earnings and cash flow generation will allow the company to maintain debt/EBITDA below 1x over the next 12-18 months.The company's ratings also reflect the potential for execution challenges from its Iron Bridge magnetite joint venture. Fortescue revised the estimated capital costs of the Iron Bridge project, increasing the estimate to up to $3 billion from a previous $2.6 billion. First production from the project has also been postponed, and Fortescue now expects this to occur in the second half calendar 2022 versus a previous target for the first half. Fortescue's current estimate of increased development costs at Iron Bridge is very manageable given the company's strong balance sheet and the current high iron ore price environment. Also, once successfully developed, we believe Iron Bridge, combined with the recent successful completion of its Eliwana project, will provide a meaningful improvement in Fortescue's business profile. This reflects the diversification into higher grade iron ore production these projects will bring.Fortescue is also looking at several potential major projects through its Fortescue Future Industries (FFI) subsidiary and the company is dedicating around 10% of its net profit after tax to advancing these projects. FFI's potential projects include hydrogen and green iron developments, among others, which would increase diversity and reduce exposure to carbon transition risks for the company, but may also come with execution challenges. The ultimate timing, sequencing and complete funding for these potential projects is still unknown.The rating on the notes is in line with the current Ba1 rating on the other senior unsecured notes issued by FMG Resources. The new notes will rank pari passu with the existing notes and will rank behind the company's term loan and credit facility, which benefit from share specific security.The stable outlook reflects Moody's expectation for continued strong earnings and cash flow in the current iron ore price environment, and that credit metrics will be maintained comfortably within our tolerance levels for the rating over the next 12-18 months. The stable outlook also reflects that agency's expectation that Fortescue will be able to manage any further delays and/or increased costs from the Iron Bridge project without a material negative impact on its overall credit profile.As a mining company, Fortescue, like the industry as a whole, faces numerous high environmental risks across its operations, including in relation to natural capital and physical risks. However, regarding carbon transition, the company has set an ambitious target to achieve net zero operational emissions by 2030, as it seeks to reduce use of fossil fuels through hybrid solar gas energy projects such as Pilbara Energy Connect and Chichester Solar Gas Hybrid Project. The company is also exploring projects in green hydrogen production and green iron, as well as looking at battery electric vehicle technology for its mining fleet.Social risk considerations largely reflect health and safety and responsible production risks, including indigenous land rights issues.Governance risks are balanced by Fortescues strong financial policies and management track record. However, from a governance perspective, we note Fortescue's concentrated ownership as a risk. The company's founder and Chairman ultimately owns 36% of the company and has significant influence over its initiatives and strategic direction.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward ratings momentum would require Fortescue to continue to demonstrate a consistent track record of strong operating performance and continued traction towards increasing higher grade production. A significant issue for considering a rating upgrade will also be a firmer understanding of the company's future strategic intentions around growth and diversification.Moody's would also expect Fortescue to continue to maintain a strong financial profile in line with our current expectations.The ratings could be downgraded if realised iron ore prices fall below Moody's base sensitivity assumptions on a sustained basis and/or the company's cash costs and breakeven levels increase materially.Ratings could also be downgraded if the company embarked on debt funded growth and/or shareholder friendly initiatives, which materially weakened credit metrics. Financial metrics that Moody's would consider for a downgrade include EBIT/Interest expense below 4.0x, CFO (minus dividends)/ debt below 20%, and/or debt/EBITDA above 3.0x on a consistent basis. The rating could also be downgraded if Fortescue's liquidity deteriorates materially from its current level for a protracted period.The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.BACKGROUNDFortescue Metals Group Ltd, based in Perth, is an iron ore producer engaged in the exploration and mining of iron ore for export, mainly to China. Fortescue produces around 170-180mt of iron ore annually, making it the fourth largest seaborne producer globally. The company shipped 177 mt of iron ore in fiscal 2020.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Matthew Moore VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Pty. Ltd. 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