A RESURGENT iron ore price should allow Fortescue to push back against its banks and avoid breaching covenants, investors say.
Fortescue is due to come out of a trading halt today, imposed on Friday after a leaked report the previous day that it was seeking relief from its loan covenants.
One source told BusinessDay that last week’s media leak came from a bank trying to lower the price of entry to Merrill Lynch’s $1.5 billion loan syndicate.
The source expected Fortescue would shortly announce it had gained covenant relief and that Merrill Lynch had completed its loan syndication.
Credit Suisse analyst Matthew Hope yesterday said Fortescue was ”on the front foot now”.
With the Chinese government announcing new infrastructure spending and the steel mills’ buying strike over, alongside the US Federal Reserve’s QE3 (quantitative easing) program and fresh measures to gain control of Europe’s sovereign debt crisis, Mr Hope said it was ”a big positive week, last week”.
After Friday’s recovery in the iron ore price back above $US101.50 a tonne, he said, Fortescue could ”push back” on its lenders.
Mr Hope said most loan covenants were backward-looking – that is, they related to historical earnings – and, given the next test would come on December 31, would be based on the company’s most recent accounts released in August, so it would be some time before any breach became evident.
But Anna Kassianos, resources and energy analyst for Platypus Asset Management, remained wary, saying the company was still vulnerable should iron ore prices fall again.
She said it would take an equity investment at a premium by an off-take partner like Baosteel, or a strategic investor like Glencore, to make Fortescue a more attractive investment.
If Baosteel invested it would show they ”really believed in a sustained recovery of the iron ore price”, Ms Kassianos said.
Glencore, she said, had always coveted a stake in iron ore and, with Mick Davis likely to lose control should the takeover of Xstrata succeed, its emphasis would shift to shelving capital spending on longer-term expansion projects and aiming for shorter-term gains.
Fortescue was a more attractive takeover target for the likes of Glencore since last Friday’s victory in the High Court, which could give it access to Rio Tinto’s rail lines in the Pilbara, she said.
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