Iron ore rout wipes nearly $300 mln off Fortescue bonds

By James Regan

SYDNEY, July 9 (Reuters) - Falling iron ore prices are dragging Fortescue Metals Group bonds lower, cutting the value of the Australian miner's recently issued senior secured note by nearly $300 million.

Rising ore output from bigger rivals is driving the price down and pressuring the margins of Australia's smaller producers, including Fortescue.

Fortescue Chairman Andrew "Twiggy" Forrest tried unsuccessfully to persuade bigger rivals Rio Tinto (LSE: RIO.L - news) and BHP Billiton (NYSE: BBL - news) to slow down expansion work to support the price.

Iron ore has tumbled by 40 percent so far this year and analysts are tipping prices could go as low as $38 before year end as Chinese demand wanes and port stockpiles swell. Wednesday saw iron ore plummet 11.3 percent to $44.10 a tonne, the lowest since the Steel Index started tracking it in 2008.

Fortescue improved its outlook in April with a crucial, albeit expensive, $2.3 billion refinancing that rolled over loans maturing in 2017 and 2018.

Since then, Forescue's stock has fallen as much as 22 percent.

The company's 9.75 percent senior secured seven-year non-call three-year bond, which benefits from added security, including mining tenements, was priced at 97.608 to yield 10.25 percent, according to data provided by IFR, a Thomson Reuters publication.

Investors who booked the new bonds were delighted after the notes rocketed more than four points on the break, to over 102 on the bid side.

There is less glee now, with the bonds which technically mature on March 1 2022 but are redeemable four years earlier, quoted around 95 for a 10.85 percent bid side yield.

"We think Fortescue's fundamentals will be challenged over the next few years, as iron ore prices at $40/t would drive leverage into the double digits and result in significant cash burn over the next few years," Citi said in a note reiterating a sell recommendation on the company's senior notes.

Fortescue's lower rated senior unsecured $1.5 billion 8.25 percent bonds maturing in November 2019 have fared even worse, slumping to 75.375 for a bid side 16.45 percent yield.

"We have previously guided a cash cost of production of $18 (per tonne) for fiscal 2016, putting us firmly in the same part of the cost curve as our largest competitors," Fortescue Chief Financial Officer Stephen Pearce said in a statement e-mailed to Reuters.

"We are making a profit on every tonne that we produce and our cost performance is sustainable," it said.

Bonds issued by Rio and BHP are proving more resilient.

Rio's $1.2 billion 3.75 percent bonds maturing in June 2025 and BHP's $1 billion 2.875 percent bonds maturing in February 2020 were holding up much better at 97.57 and 98.863, respectively. (Additional reporting by John Weavers; Editing by Ed Davies)