Forrest fails to exaggerate Fortescue's financials - Investors cheer

Andrew Forrest came under fire this week for being “prone to severe exaggeration”. Who would have thought?

But Leucadia National, the Manhattan based fund that helped establish Fortescue Metals Group, couldn’t complain about the company’s latest set of numbers delivered in this morning’s quarterly report.

While the quarterly production came in a whisker below the guidance given just three weeks ago, it was Fortescue’s cash performance that had investors cheering.

Cash costs in the fourth quarter dropped 17% to $36 a tonne aided by better strip ratios, a focus on costs and a lower Australian dollar. Meanwhile full-year capital expenditure at $6.2 billion was $100 million lower than expected.

The one issue that received scant attention in the report was an update on the company’s planned sale of The Pilbara Infrastructure, its rail and port facilities.

The assets were earmarked for sale early this year in an attempt to slash Fortescue’s heroic debt levels, particularly after last year’s sudden collapse in iron ore prices came dangerously close to putting the company’s operations at break-even.

Iron ore prices, however, have remained surprisingly buoyant this year despite forecasts of a looming over supply coupled with weakness in China (see Annette Beachers If China is slowing, why won't iron price fall?).

As a result, the pressure on Forrest and Fortescue has eased. A month ago, the deadline for a deal – estimated at around $3 billion – was extended to the September quarter in the first sign the urgency had lifted.

It is now believed Fortescue, courtesy of ore prices and a falling  currency, will have at least $1 billion more in cash available towards the end of this year than it would have anticipated last Christmas.

That will occur just as the company’s heavy capital expenditure program begins to wind down. Fortescue stock has bounced 18% since its mid-June nadir.

But at $3.69, it is still way below its February peak of $5.30.