Moody's has upgraded Fortescue Metals Group Ltd.'s corporate family rating to Ba1 from Ba2 as a result of the Australian iron ore producer's substantial debt reduction and continued cost improvements.

The rating agency also upgraded the senior unsecured and senior secured ratings of FMG Resources Pty. Ltd. to Ba2 and Baa3, from B1 and Ba1, respectively.

"Fortescue has been able to capitalize on higher iron ore prices and utilize the incremental cash flow generated to make sustainable improvements to its balance sheet and debt levels", Matthew Moore, a Moody's vice president and senior credit officer, said Jan. 19.

Fortescue paid off a further US$1 billion worth of debt in December 2016, which brought its debt-to-equity down below the company's target of 40%.

The company has also slashed its C1 cash costs by more than 70% since the 2012 financial year and is aiming to exit the 2017 financial year at US$12 to US$13 per wet tonne.

As a result, Fortescue's fiscal 2016 EBITDA improved to approximately 45% from about 30%, despite a roughly 17% drop in revenue.

Moody's expects EBITDA margins in the 2017 financial year will improve further.

Under its medium-term price range for iron ore of US$45 to US$65 per tonne, Moody's expects that Fortescue will achieve adjusted debt to EBITDA of about 2.0x or less over the next 12 to 24 months.

Moody's outlook for the company is stable.