Fortescue share issue begs question of cash position
Matt Chambers | December 20, 2008
Article from: The Australian
http://www.theaustralian.news.com.au/story/0,24897,24825156-643,00.html
ANDREW Forrest's Fortescue Metals Group has taken the unusual step of issuing shares to pay contractor bills in a move that raises questions about the strength of the company's cash position.
Yesterday, Fortescue said it had issued 1.55 million ordinary shares to raise $3.65 million.
A spokesman said the shares were issued to a contractor in lieu of a cash payment and that the company might do similar deals in an effort to preserve cash.
The notice came on the same day the company revealed that a US court had frozen close to $US1.5 million ($2.19 million) of its cash in relation to claims lodged by ship owners seeking more than $US130 million in damages for suspended contracts.
Paying bills by issuing shares is not unheard of but in the financial sector it is usually done with success fees.
"The issuing of the scrip shows how tight things are for Fortescue at the moment," said one analyst who covers the stock. "It is a worry, as are the legal issues with the shipping contracts."
Fortescue shares fell 20c, or 8.5 per cent, to $2.16 yesterday.
The issued shares were sold to the contractor, whom Fortescue refused to name, at $2.36 a share, the previous day's closing price.
It was unclear whether the contractor immediately sold the shares, which would have weighed on the price yesterday, or chose to stay on as an investor. Any further deals might need to be mindful of the dilution effect the issuing of new shares would have for existing shareholders.
Fortescue would not say how much available cash it had, and pointed to the $624 million figure it previously gave at the end of the third quarter. One analyst said available cash was probably lower than this due to funds Fortescue needed to keep in an account to service debt. Fortescue, however, said all the cash was available.
In another effort to preserve cash, the spokesman said, Fortescue had put on 180-day terms of credit contractors that had been working on a now-suspended expansion.
Other contractors remained on normal terms of trade, he said.
The moves to preserve cash come amid a collapse in Chinese iron ore demand and still-frozen global credit markets.
In November, Fortescue suspended plans to increase capacity at its mines from 55 million tonnes to 80 million tonnes. This month it cancelled two-thirds of its shipping contracts as it switched to traditional deals that require the buyer to freight the product.
Fortescue is being sued by Greek shipping giant the Angelicoussis Group for $US130 million ($188 million) after cancelling a five-year contract to hire a bulk carrier. The miner said yesterday the face value of the case was considered to be an ambit claim.