Forrest to grow without China

"We have elected to not continue those discussions with China for the time being," Fortescue's chief executive, Andrew Forrest, said yesterday. "Doing the deal on the available terms was not in our long-term best interest."

The decision not to seek assistance from China was made less than two months after Fortescue advised the market of a $US6 billion funding deal in the works.

This backflip could delay Fortescue's effort to expand its output from its Chichester project from its present annualised rate of 38 million tonnes to 95 million tonnes.

BusinessDay understands there has been little in the way of serious talks with the Chinese for nearly a month and that the Chinese lenders had been seeking at least some equity in the company in return for the funding.

A Patersons Securities analyst, Alex Passmore, had previously expected Fortescue would produce 95 million tonnes a year by 2012, but said that would now "probably be slower than initially forecast".

In a recent report, Credit Suisse analysts said it was "simply inconceivable" that Fortescue would be able to expand its production to 95 million tonnes solely using operating cash flows, expected to be $US620 million this year. It estimated that expansion would cost $US2.4 billion.

Mr Forrest indicated that Fortescue might also use sale-and-leaseback arrangements and "other sources of capital" to help fund the expansion on top of internal cashflows. Fortescue's funding options are restricted due to the covenants of the bonds used to fund its projects, but could involve issuing equity or preference shares.

Mr Forrest did not rule out the potential to renew talks with the Chinese, but indicated that Fortescue was more likely to seek Chinese funding for its Solomon project than for increasing output at its Chichester project to 95 million tonnes a year.

Yesterday Fortescue approved a $360 million project to increase its annual production capacity to 55 million tonnes by December next year.

Mr Forrest declined to reveal when the company was expected to reach 95 million tonnes of annual production capacity.

"Once we've proved the 55 million-tonne operation works like a Swiss clock, then we believe the expansion could be done in a year," he said.

Fortescue has yet to meet its initial annual production target of 45 million tonnes and said it would take 13 months to construct the capacity needed to produce 55 million tonnes. It plans to start construction on that project next month.

Yesterday Fortescue reported record quarterly shipments of 9.5 million tonnes for the September quarter. Production costs rose to $US26.60 a tonne, compared with $US22.92 a tonne in the June quarter, primarily due to the appreciation of the Australian dollar.

"I think their production performance was solid," Mr Passmore said. "That will weaken in the December quarter with the usual wet season."