Fortescue bid to sell power plant in pursuit of savings

FRESH from unveiling a $US600 million blowout on its Solomon development, Fortescue Metals Group has continued its hunt for savings by trying to offload its 120 megawatt power station at the future mine site.

By InvestSMART · 19 Jul 2012

By InvestSMART ·
19 Jul 2012

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Industry sources say the sale of the Solomon gas and diesel-fired plant, being built by contractor UGL, is being handled by Macquarie Group. It should net Fortescue at least $200 million based on the most recent power station sale in WA, which was sparked by the struggles of infrastructure group Babcock & Brown in 2009.

Fortescue, chaired by Andrew Forrest, declined to comment yesterday. However, the miner said on Tuesday that it would raise an additional $US1 billion in debt to fund rising construction costs at Solomon, meaning the sale of its power station could be used as a contingency, or to potentially reduce the amount of debt it has to raise.

There is a long list of potential bidders for Fortescue's Solomon power station, given its potential role as part of a mooted $8 billion network of interconnected power stations and transmission lines in the Pilbara being assessed by competing infrastructure providers.

These include pipeline company APA and utilities Alinta, Canadian giant ATCO and state-owned Horizon Power.

Korean and Japanese firms are also circling the state for power investments, buoyed by forecasts from the Chamber of Minerals and Energy that incremental power demand from energy-hungry miners could increase by 2200MW by 2015.

The proposed sale of the Solomon power station continues Fortescue's attempts to outsource operations to offset cost increases. A $US200 million cost escalation at Solomon announced last year was offset by handing the contract for construction of its Chichester mine ore processing facility to Mineral Resources, allowing Fortescue to stick to its $US8.4 billion expansion budget. Tuesday's blowout increases the budget to $US9 billion.

Analysts were damning yesterday of Fortescue's announcement to raise more debt, with Deutsche Bank accusing the company of disguising $US2.6 billion of expansionary capital expenditure as "sustaining" capital expenditure.

"As such we see the [Solomon] expansion now as a $US13.2 billion project," Deutsche wrote.

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Frequently Asked Questions about this Article…

What is Fortescue trying to sell at its Solomon mine site?

Fortescue is marketing the 120-megawatt gas- and diesel-fired power station being built at the Solomon mine site. The plant is being constructed by contractor UGL and the sale process is being handled by Macquarie Group.

Why is Fortescue selling the Solomon power station?

The proposed sale is part of Fortescue’s hunt for savings after cost blowouts on the Solomon project. Selling the plant could be used as a contingency to reduce how much new debt the company needs to raise or to free up cash, and fits with Fortescue’s strategy of outsourcing operations to offset rising construction costs.

How much could Fortescue get from the sale of the power station?

Industry sources in the article say the sale should net Fortescue at least US$200 million, based on the most recent comparable power station sale in Western Australia (triggered by Babcock & Brown in 2009).

Who are the potential buyers for the Solomon power station?

Potential bidders mentioned include pipeline company APA, utilities Alinta and state-owned Horizon Power, Canadian giant ATCO, and a range of Korean and Japanese firms. The plant could also form part of a proposed multi‑billion‑dollar Pilbara network of interconnected power stations and transmission lines.

How does the possible sale affect Fortescue’s debt plans and expansion funding?

Fortescue has said it will raise an additional US$1 billion in debt to fund rising construction costs at Solomon. The sale of the power station could be used as a contingency or to reduce the amount of that debt the company needs to raise by providing cash proceeds.

What recent cost blowouts at Solomon should investors be aware of?

The article notes a fresh US$600 million blowout on the Solomon development and references a prior US$200 million escalation announced last year. Those increases have pushed Fortescue’s expansion budget from about US$8.4 billion to roughly US$9 billion.

What are analysts saying about Fortescue’s handling of Solomon and its capital spending?

Analysts were critical in the article: Deutsche Bank accused Fortescue of disguising US$2.6 billion of expansionary capital expenditure as 'sustaining' capital expenditure and said the Solomon expansion is effectively a US$13.2 billion project, signalling investor concern about transparency and rising costs.

What might the power station sale mean for everyday investors in Fortescue?

For everyday investors, the sale could provide Fortescue with cash to offset cost overruns or reduce the amount of new debt it must issue, which can be positive. However, ongoing cost blowouts and plans to raise more debt have attracted analyst criticism, so investors should weigh potential short-term liquidity benefits against the broader concerns about rising project costs and capital requirements.