A defiant Fortescue Metals Group (FMG) yesterday claimed that it can continue to generate cash despite the price of iron ore plunging to decade-lows earlier this month.
Australia’s third-largest miner of the steelmaking ingredient said its all-in break-even rate has fallen to $US39 per tonne, thanks to “sustainable cost reductions”.
C1 costs – the cash costs for production – improved 9% to $US25.90 in the March quarter, from the prior quarter and was down sharply from the first quarter of 2014.
The company promised to cut that cost to just $US18 a tonne in 2016 – the changes in the mining contracts which hurt Macmahon Holdings (MAH), and this week revamp of its mining roster (and the loss of up to 700 jobs) will play a part in that cut.
The company said its average per tonne price was $US48 a tonne, more than half the $US107 a tonne a year ago.
Production jumped from 31.5 million tonnes a year ago to 40.4 million tonnes in the three months to March (which was also down slightly from 41.1 million in the December quarter).
Taking into account the sharp fall in the average realised price, Fortescue’s quarterly revenues look like they have taken a $US1.4 billion hit in the March quarter from a year ago, with $US650 million of that from the December quarter.
Iron ore sent to China was just under $US50 a tonne last night, up from the 10 year low of $US46.80 in the first week of the month.
Like its revenue and iron ore prices, Fortescue shares have fallen sharply in the past year, as the company has battled to cut costs and try to refinance $2.5 billion of its $US2.4 billion of debt (unsuccessfully as it turned out). That debt was down $US300 million from a year ago.
FMG 1Y – Fortescue ‘impacted heavily by the threat of oversupply’
In yesterday’s March quarterly production update the company said it’s being “impacted heavily” by oversupply.
CEO Nev Power said in yesterday’s report:
"Fortescue has achieved another strong operational result underpinned by outstanding performance on costs with C1 guidance for FY16 now at US$18/wmt.
"Our relentless pursuit of sustainable cost reductions has ensured continued positive cash margins with closing cash increasing to US$1.8 billion, despite a volatile market “impacted heavily by the threat of oversupply."
But that $US1.8 billion was only $US100 million higher than a year ago (but $US200 million up on the December 31 figures).
Of that $US1.8 billion, $US1 billion (down from $US1.2 billion at the end of December) is from pre-payments made by customers for iron ore to be delivered over the next two years. $US200 million of that figure was amortised in the March quarter, so in reality Fortescue now has $US800 million on hand and unencumbered, which is better than the $US400 million at December 31.
Fortescue shares rose 5.4% to $1.955, but they were higher during the day at $2.035.
