Fortescue Metals Group has reduced debt by US$1.7 billion in the past 12 months. Images: Fortescue Metals Group.
By Samantha James
FORTESCUE Metals Group has been buoyed by iron ore price increases in recent months after a depressing fiscal 2015 that saw the company scramble to cut costs and service its huge debt pile.
The iron ore miner surprised the market in 2016 with a slew of positive announcements, including a potential partnership with Vale SA, a reduction in debt by US$577 million and increased shipments for the March quarter of 42 million tonnes of iron ore.
Fortescue is the world’s fourth largest iron ore producer, with mining hubs at Chichester and Solomon in WA combining to produce more than 160 million tonnes per annum.
Chichester comprises the Cloudbreak and Christmas Creek mines and has an annual production capacity of more than 90mt of ore from three processing facilities.
Solomon includes the Firetail and Kings mines which together produce more than 70mtpa.
The company also wholly owns 620km of rail and port facilities at the Herb Elliot Port in Port Hedland, with 13 train sets hauling 36,000t each per day in an average cycle time of less than 23 hours.
Since the price of iron ore dropped in 2014, Fortescue has rushed to reduce costs; its product sold for a breakeven price of US$39/t in May 2015, leading to more than 700 job cuts across its sites.
Downsizing, together with a cost reduction strategy that saw Fortescue use wet processing to upgrade its ore and reduce impurities, has successfully slashed the company’s debt by US$1.7 billion in the last 12 months.
Debt remained a focus during the March 2016 quarter, when Fortescue initiated a US$577 million repayment by issuing a voluntary redemption notice to 8.25 per cent Senior Unsecured Notes due in 2019.
The outstanding notes would be redeemed in full in June, from accumulated cash on hand – the iron ore price had improved enough during the March quarter to boost cash balances to US$2.5 billion at the end of March.
The repayment of the outstanding notes would generate additional interest savings for Fortescue of US$48 million per annum.
Fortescue chief financial officer Stephen Pearce said the repayment was part of the company’s commitment to sustainability.
“[The] announcement brings the amount of debt Fortescue has repurchased in the last 12 months to US$1.7 billion, with our total debt repayments in the last two and a half years now exceeding US$4.8 billion,” he said.
“As previously flagged, we will continue to repay debt using accumulated cash balances and operating cash flows.”
Production on-track
For the three months ending 31 March, Fortescue shipped 42mt of iron ore – a 4 per cent increase on the same period last year – while continuing to lower costs to target US$13 per wet metric tonne (wmt).
Fortescue chief executive Nev Power attributed the increase in production to unseasonably mild weather in WA.
“Our production is running a few per cent higher than the target, because there hasn’t been any weather impact,” he said.
“Our [2016] guidance remains at 165mt but we are not going to adjust our production on a daily basis.”
Mr Power said March results were a testament to Fortescue’s unwavering focus to reduce costs.
“Our team has continued to innovate and deliver sustainable cost improvements generating strong cash margins,” he said.
“Fortescue has a fully integrated, state of the art, globally competitive suite of mining and infrastructure assets from ore processing to the fastest, heaviest haul rail line in the world and the world’s most advanced iron ore port.
“These outstanding assets, coupled with the company’s unique culture of determination and innovation, have seen Fortescue safely and efficiently deliver record peformance access all facets of the business.”
Cash costs were down to US$14.79/wmt from US$15.8/wmt in the previous quarter, and 43 per cent lower than a year earlier.
“While we are continuing to look for every opportunity, ongoing cost cuts will be more challenging because of the recent increase in the Australian dollar and higher fuel prices,” Mr Power said.
The company transitioned to owner operator at the Christmas Creel mine in April in a bid to get operating costs down to target levels.
Iron ore prices, which plunged to a decade low of US$38/t in late 2015, recovered slightly in March and April but were still down more than 70 per cent compared to the past four years.
However, marginally higher prices helped boost Fortescue’s cash balance by US$200 million, lowering net debt to US$5.9 billion.
Mr Power said that while Fortescue had benefited from the strong run in recent months, he expected iron ore prices to remain volatile.
Vale negotiations
Fortescue’s announcement in March that it had signed a memorandum of understanding (MoU) with Vale – the world’s largest iron ore producer – to potentially blend up to 100,000t of ore with Vale’s product in a bid to “enhance the competiveness of [both companies’] operations” was met with market speculation.
At the time, Mr Power downplayed the potential impact the partnership could have on the global iron ore market, stating that nothing had been decided.
“The MoU will allow us to work together to deliver long term value to our customers, through the efficient supply of an attractive and competitive new iron ore blend in China,” he said in March.
The agreement with Brazilian iron ore major Vale proposed the formation of one or more joint ventures for the blending of selected volumes of iron ore from both companies to suit the long term needs of Chinese customers and “improve the efficiency of the supply chain to the steel industry.”
It also provided a framework for Vale to invest in Fortescue through a minority acquisition of shares on market or investment in current or future mining assets.
Mr Power said work on developing the right blend was continuing into May, with the first volumes expected to hit the market in the second half of 2016.
