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Fortescue most at risk, says S&P


Andrew "Twiggy" Forrest's Fortescue Metals is the most vulnerable iron ore miner in the world to lower commodities prices, Standard and Poor's Ratings Services (S&P) says.

The credit agency warned in a report on eight global major iron ore producers on Tuesday that it didn't expect iron ore prices to climb much further in the near term.

Iron ore prices have plummeted from a peak in 2011, from more than $US180 a tonne to $US90 per tonne before settling to a current level just above $US100.

S&P said that as a single commodity miner with no other operations to offset iron ore's performance, Fortescue was vulnerable to both earnings and ratings stress.

Fortescue has received negative press lately for its high debt of $US12.7 billion ($A12.32 billion) as the falling iron ore prices shrunk its margins to near unprofitable levels.

Its ability to cut costs was limited because capital expenditure for its expansion was at its peak.

That puts Fortescue at a double disadvantage, facing a high earnings impact from low iron ore prices and limited financial flexibility.

A global giant like BHP Billiton has far more asset diversity and ability to cut capital expenditure, Vedanta enjoyed high earnings in oil and zinc while even Vale was a low enough cost producer to handle lower prices despite being mostly exposed to iron ore, S&P said.

Ukraine-based Ferrexpo was also heavily exposed to prices, while Rio Tinto would be more exposed than it would like this year due to weak aluminium prices and operational issues with copper production.

"Indeed, for heavily indebted miners, their liquidity levels and discretion in reducing costs would be critical to their credit quality," S&P said.

It was also announced on Tuesday, that Moody's downgraded the rating on Fortescue's unsecured debt to B1 from Ba3.

Moody's has a Ba3 rating for Fortescue, S&P has a BB-minus rating and Fitch a BBB-plus, all with negative outlooks on ratings.

However all three agencies have praised the company for its debt refinancing, pushing out repayments to late November 2015.

A slowdown in China, the world's largest producer and consumer of steel, and a sluggish European economy have reduced demand for iron ore.

S&P said an iron ore price persisting at or less than $US100 per tonne would threaten miners that are substantially debt-laden.

Iron ore prices needed to average above $US120 per tonne in the near term to alleviate potential negative rating pressure for certain producers, assuming other factors such as costs and foreign exchange rates remain the same.

In the next two years, it believed iron ore prices could recover incrementally from the current low levels, when restocking activity starts in China and with some improvements in global steel demand.