Fortescue Metals Group Ltd.

The stable outlook reflects our expectation that Fortescue's financial policy and growth strategy will remain unchanged. We expect the company's funds from operations (FFO)-to-debt ratio to be higher than 30% and debt-to-EBITDA ratio lower than 3x when industry conditions remain favorable. In our opinion, Fortescue's credit metrics have sufficient headroom at the current rating level to withstand moderate downside risk in iron ore prices should external pressures intensify. This includes our expectation of slower demand growth from China's steel industry amid increasing supply of low-cost seaborne iron ore. We could lower the rating if Fortescue's key credit metrics weaken such that the company's FFO to debt falls below 20% or debt to EBITDA approaches 4x. This scenario could occur if

...Fortescue Metals Group Ltd.'s earnings are highly leveraged to seaborne iron ore prices, price realization rates, and foreign exchange movements. We calculate that a US$5 per ton (/t) change in the price of iron ore would change Fortescue's annual EBITDA by approximately US$500 million, all else being equal. In our view Fortescue's position as one of the lowest-cost producers globally underpins the company's competitive position, which is tempered, however, by the lower overall price realization of the company's products. For the year ended June 30, 2019, the company reported full-year production of 168 million metric tonnes (mt). Average cash direct production costs (C1) were US$13.11 per wet metric tonne (wmt) for fiscal 2019, placing the company among the lowest-cost producers compared with global industry peers. Strong cash generation and robust balance sheet will result in limited pressure on the '##+' ratings, even under a moderate-stress scenario. In our view, the company can absorb...

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