Sydney, October 02, 2012 -- Moody's Investors Service has today confirmed the Ba3 corporate family rating (CFR) of Fortescue Metals Group Limited (Fortescue). At the same time, Moody's has 1) downgraded the senior unsecured rating on FMG Resources (2006) Pty Ltd (FMG) to B1 from Ba3, and 2) assigned a (P)Ba1 rating to the proposed US$4.5 billion of Senior Secured Term Loan Facility. The outlook on all ratings is negative.

The rating actions on the CFR and senior unsecured rating conclude a review for possible downgrade that was initiated on 30 August 2012 and follows today's announcement by the company that the lead arrangers have launched the distribution of the Term Loan Facility into the U.S. institutional term loan market.

Moody's expects to assign a definitive rating on the Term Loan Facility upon closing and review of the final documentation.

RATINGS RATIONALE

"The confirmation of Fortescue's corporate rating reflects the improvements to the company's liquidity profile following the establishment of the proposed term loan facility, combined with the various cost cutting initiatives and capital expenditure deferrals announced by the company", says Matthew Moore, a Moody's Assistant Vice President -- Analyst .

"With the additional liquidity provided by the facility and the removal of earnings based covenants, which would have limited Fortescue's ability to borrow to fund operations and growth expenditures, we now expect that the company will have an adequate liquidity buffer to fund its reduced investment needs under a scenario where iron ore prices average around $95/t or higher" Moore adds.

"The downgrade of the senior unsecured rating to B1 from Ba3 reflects the large amount of secured debt that will now rank ahead of the senior unsecured notes in the capital structure, and which will have a priority claim on essentially all assets of the company", says Moore.

The (P)Ba1 rating on the new senior secured term loan facility reflects the facilities' priority position in the capital structure and the high expected recovery for the loan given significant coverage provided by Fortescue's asset base that is securing the loan.

"The negative outlook reflects Fortescue's high debt levels and weak expected near term credit metrics for the rating in the current price environment, the ongoing uncertainty around iron ore fundamentals and prices, and the need for the company to execute on its expansion plans in order to improve its credit profile and financial metrics to levels appropriate for the rating", Moore says.

The Ba3 corporate family rating also continues to be supported by the company's: 1) large scale operations and continuing improvements in its production profile, 2) the significant progress made to date on its expansion activities, 3) its moderate-to-low cash costs relative to its peers, and 4) its large long life high quality reserves base.

This is balanced against the company's: 1) limited operational, geographic and product diversity,2) high debt levels resulting from expansion activities, 3) exposure to volatile and uncertain iron ore prices and demand, and 4) and the potential for execution issues arising as it looks to complete its massive expansion plans. The rating also reflects uncertainty around future growth plans, including the resumption of the recently delayed Kings development.

Assuming around a US$100/t iron ore price for the next 12 to 18 months, we expect Fortescue's Debt-to-EBITDA to peak in FY2013 at around 5.0x to 5.5x, which is outside of the tolerance level for the rating. However, once production from the expansions ramps up this should fall to below 4.0x, which is an acceptable level for the rating.

Given Fortescue's single commodity focus it is very exposed to swings in ore prices. If prices were to fall and be sustained at the low levels seen in early September 2012, Fortescue's ability to maintain an adequate liquidity buffer and improve credit metrics in line with Moody's expectations would be extremely challenged. Under this scenario, rebalancing its credit profile and maintaining its ratings would likely require debt reduction via asset sales and / or other forms of non-debt funding.

The term loan facility entered into by Fortescue is guaranteed and secured by all of the assets of Fortescue and all of its subsidiary guarantors under the senior unsecured notes. Moody's considers the facility to be covenant light and does not expect there to be any earnings based financial covenants. Proceeds from the facility will be used to refinance the approximately US$3.6 billion of Fortescue's current credit facilities, to redeem the unsecured notes issued to Leucadia National Corporation (around US$715 million) and for general corporate purposes.

The rating could be downgraded if Fortescue experiences any major delays or further cost overruns with its expansion activities, which caused liquidity concerns and / or delays the expected strengthen of the company's credit metrics. Ratings could also be downgraded if iron ore prices drop materially from current levels and are expected to be sustained at lower levels. Specifically, the ratings could be downgraded if weaken Debt/EBITDA is greater than 4.5x or FFO/Interest falls below 2.0x on a consistent basis.

Given the current negative outlook we don't expect ratings to experience positive pressure in the near to medium term. However, ratings could be stabilized if Fortescue completes its expansion activities on time and on budget and is able to reduce leverage to more appropriate levels for the rating.

The principal methodology used in rating Fortescue Metals Group Ltd and FMG Resources (August 2006) Pty Ltd was the Global Mining Industry Methodology published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Fortescue Metals Group, based in Perth, is an iron ore producer engaged in the exploration and mining of iron ore for export, mainly to China.

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Matthew MooreAsst Vice President - Analyst Corporate Finance Group Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: (612) 9270-8102 SUBSCRIBERS: (612) 9270-8100 Terry Fanous Managing Director Corporate Finance Group JOURNALISTS: (612) 9270-8102 SUBSCRIBERS: (612) 9270-8100 Releasing Office: Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: (612) 9270-8102 SUBSCRIBERS: (612) 9270-8100 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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