This week: Fortescue looks poised to continue to pay down debt, Newcrest has announced an update on the operational issue at its Cadia mine and PAYCE and Mirvac announce a joint venture for the East Village development which is very positive for PAYCE bonds
Fortescue is poised to continue to pay down debt
By Alen Golubovic
Fortescue (FMG) says it has $US1.5 billion available to pay down debt, with the company likely to keep buying debt back in the secondary market. The company bought back $US384m worth of bonds in the September quarter, and finished the period with $US2.6bn in cash. The company has previously stated a cash target of US$1-1.5bn so is well placed to make further bond buy backs given its large cash holding.
We believe that the unsecured 2019 bond will remain a priority for the company in terms of reducing debt because it matures first and also because of its high (8.25%) coupon. We expect the company will also look to progressively reduce the secured 2022 bond which is Fortescue’s most expensive debt costing 9.75% p.a.
FMG raised US$1.5bn with the 2019 issue and following progressive debt reductions and buyback, the amount outstanding has now fallen to US$889m - 59% of the total issued. If the company continues to buy back 2019 bonds, we expect to see upward pricing pressure from both the buying activity of the company, as well as increased confidence from the market that the company can fully repay the remaining bonds outstanding.
With the 2019 bond currently trading in the mid US$80’s we continue to view this bond as a good buying opportunity. Fortescue has been successfully addressing the concern of lower iron ore prices through operating cost reductions and progressive debt repayments.
An update on Newcrest’s Cadia mine By Alen Golubovic
Last week, Newcrest announced that the operational issue at its Cadia mine is worse than originally anticipated and that it will take at least another five weeks to be fixed. The impacted mill accounts for about 70% of the ore produced at Cadia, which in turn translates to a quarter of Newcrest's production. Cadia is also Newcrest's most profitable operation. We expect the December quarter (and as a result 1H15) will be weak for Newcrest based on the operational problem at Cadia. However, we believe Newcrest can still make up production in the second half of the financial year to achieve its FY16 guidance.
PAYCE and Mirvac announce joint venture for East Village – very positive for bonds
By Justin McCarthy
Published 29 October
PAYCE Consolidated Limited (PAYCE) announced to the ASX on 29 October 2015 that it has “entered into documentation to joint venture with Mirvac Group in the East Village retail and commercial centre”. Whilst the joint venture transaction is subject to certain conditions and is not expected to be completed until late 2016, we view the likelihood of it not proceeding as relatively small and take comfort from the Mirvac Group name. Given the very strong security position and likely call at $102 on 3 December 2016, the bonds represent value down to a yield to call of low-to-mid 4%.
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