Fortescue Metals Group's (FMG) low performance-price ratio and $12 billion debt has sounded alarm bells for some Chinese investors recently.
China's Mysteel.com Consulting Director Xu Xiangchun told Xinhua on Monday that FMG's fast-growing business pattern had led it to rack up exorbitant debt in attempt to capitalize on demand, but the pure-play iron ore company is vulnerable to shift in the market.
"Last year, the price of iron ore was $160 per ton, which made FMG the fastest growing company in this field, but this year, the price dropped to $120 per ton, which weakens FMG' s profitability and also increases its risks of debt repayment," Xu told Xinhua.
Mysteel.com is a professional English steel website in China covering news of China steel market.
While FMG continues to develop new mines, Xu said, "FMG just wants to increase its market share to get stronger as soon as possible and the strategy may have huge potential risks."
The company is on track to expand its operations as planned to 155 million tons per annum (MTpa) by the end of 2013, a Fortescue spokesperson told Xinhua on Friday.
"We continue to see strong demand for our products and we are selling every ton of iron ore we produce," FMG told Xinhua in an email, adding that the company was currently "in a strong financial position," and that taking on a further $5 billion of debt last year had provided FMG with "additional liquidity and funding flexibility."
"The loan book however is volatile and if the iron ore price continues to slide the credit-worthiness may come into question," Xu said.
The Chinese press has recently been abuzz with reports that FMG intends to sell part of its infrastructure assets to overseas investors in order to ease its debt burden with Chinese investors supposedly a particular target.
Xu advised Chinese companies to use caution when evaluating FMG' s assets and carefully consider the potential risks of investment.
"Compared with Rio Tinto and BHP Billiton, FMG's cost of investment is higher but the quality of its ore and its profits lower, and the company's aggressive business pattern had resulted in a low performance-price ratio," said Xu.
