Tough times for Australia’s third iron ore player, Fortescue Metals Group, (FMG) which revealed lower sales, production and earnings yesterday.
Despite what appeared to be bad news, the market took it in its stride. The shares eased 10 cents to 4%, or to $2.32.
Thanks to the recent injection of $644 million from the previously announced placement of shares to the Chinese steel group Hunan Valin Iron & Steel, Fortescue is not under financial pressure.
But the pressure remains high, with Fortescue’s decision to pursue $400 million of cost-cuts this year to deal with the squeeze on its margins from falling prices..
Fortescue said earnings fell 66% as prices dropped and wet weather slowed production.
No mention of demand which cut output at the huge CVRD (Vale) mines in Brazil by 37% in the March quarter.
Earnings before interest and tax fell to $US63 million in the three months to March 31, from $US183 million in the previous quarter.
The company also cut its full- year sales forecast by 15% because of slower mining rates and lower ore grades than anticipated (which is rather strange, given the min is very new).
Fortescue joined the world’s biggest producer Cia. Vale do Rio Doce in cutting prices as demand from steelmakers fall because of the global recession.
Heavy rain in the Pilbara hurt Fortescue’s operation and those of Rio Tinto which blamed the weather for a 15% fall in first quarter production.
But BHP Billiton powered on, mining was impacted by the weather, but the company sold as much iron ore as it could get its hands on.
If clients couldn’t take iron ore under contract, BHP sold it into the spot market: Some 50% of first quarter production may have been sold this way, 28% in the first nine months.
BHP did everything to keep its mines producing at capacity to keep costs under control; unlike in its coking coal mines in Queensland where there’s been a 15% cut and upwards of 1,000 jobs lost.
“The adverse operating conditions over the March quarter will impact on the full-year results as Fortescue will not be able to catch up lost production,” the statement said.
“Fortescue has been working with its customers to accommodate the fluctuating trading conditions and price adjustments have been made at prices less than the benchmark.”
Fortescue has been taking legal action against some customers who wouldn’t take deliveries: it said there was 10 cargoes in the second quarter that were not taken.
Fortescue now expects to ship 15% less ore in the June 30 year, or 26 million tonnes, it told the ASX in yesterday’s production statement.
Shipments fell to 6.17 million tonnes in the three months ended March 31, from 6.28 million tons in the previous quarter.
"The mining ramp up program was well under target with 6.55Mt produced in the quarter, down 22% on December quarter due to the combined impact of a deliberate scale back of drill and blast generated ore and the adverse impact of heavy rains,” the company said.
"The full financial year 2009 sales projection is now at 26Mt, which is down around 15% on previous guidance.”
Ore processed during the March quarter totalled 6.5Mt, up three per cent on the December quarter. Railed ore was also 6.5Mt, up 7% on the previous quarter.
The miner said it would process about 7Mt of ore in the June quarter, with all of this material to be railed and shipped.
Fortescue said it had placed a much greater focus on surface miners as part of its strategy to reduce the volume of drill and blast material, which needs to be crushed before being fed to the ore processing facility.
"With the wet season now ending, the forecast production rates for the surface miners reflect the continuing improvement in output,” Fortescue said
”The ramp up to targeted surface miner production rates is on target and the trend is expected to further improve.”
The World Steel Association has forecast a 15% fall in steel consumption over calendar 2009, with China seeing a 5% drop.
It’s not going to be an easy time for Fortescue, or even Rio, which is keeping its 2009 forecast at 200 million tonnes, even though that means a significant boost in output over the next three quarters.
BHP seems to have weathered the storm so far in better condition that its two local competitors, or Vale of Brazil, which also has a huge exposure to nickel.
