Fortescue bullish on China
Delivering the miner's quarterly production report, Mr Power said China's hunger for development would continue to underpin iron ore prices, and he echoed the sentiments of Atlas Iron boss Ken Brinsden that the investment community had been too negative and had overestimated the impact the projected sharp increase in iron ore supply would have on prices.
"I don't see the level of supply that's been announced coming into the market," Mr Power said. "It's very easy to announce all of these projects but much more difficult to get them funded and put infrastructure solutions and so
on in place."
Rio Tinto, BHP Billiton, Gina Rinehart's Roy Hill Holdings and a host of smaller miners have flagged big production increases in coming years. Fortescue will increase its capacity to 155 million tonnes by the end of the year.
But Mr Power said Fortescue's increase in supply of 50 million tonnes this year would push higher-cost producers, including those in China, out of the game and "keep the market in supply-demand balance".
Most analysts believe iron ore prices will settle below $US100 a tonne in the next year as a result of the surge in supply.
Iron ore prices have dipped since mid-February as concerns over the health of the mining sector mount, but have held up well in recent days at the $US140-a-tonne mark.
Mr Power rejected suggestions there could be a repeat of last year's scare, with Fortescue pushed into a precarious financial situation after ore prices plummeted to $US86.70. "The circumstances are quite different to what they were last year ... fundamentally we are in a different position to last year," he said.
Having just returned with company founder Andrew Forrest from a visit to China as part of a high-profile business delegation to the Boao Forum, Mr Power said he was not worried by the weakness of recent Chinese economic data.
"While this quarter has attracted some interest because it is 7.7 per cent [growth] compared to the previous quarter of 7.9 per cent ... China is growing extremely well," he said on Thursday. "We're continuing to sell all tonnes we produce."
The company remained tight-lipped about the multibillion-dollar sale of a 40 per cent stake in its rail and port assets in the Pilbara, other than to say it was "progressing well". Chief financial officer Stephen Pearce said a select group of buyers had now been shortlisted, but that the process was confidential.
"What I can say is it is going exactly as we have planned," he said. "We will announce an outcome when we are in a position to do so."
The sale, which analysts tip to attract a price of more than $3 billion, is designed to pay down Fortescue's debt as it looks to slash gearing levels to its target range of between 30 and 40 per cent.
Frequently Asked Questions about this Article…
Fortescue reported a 3% increase in quarterly production and says it remains on track with aggressive expansion plans, aiming to lift capacity to about 155 million tonnes by the end of the year. The company also expects to add roughly 50 million tonnes of supply this year.
Chief executive Nev Power said he is "more confident than ever" that China’s ongoing development will underpin iron ore demand and prices. After a recent visit to China with company founder Andrew Forrest, Power said China is growing strongly and Fortescue is continuing to sell all the tonnes it produces.
Most analysts quoted in the article expect iron ore prices to settle below US$100 a tonne over the next year because of a surge in supply. However, prices had dipped since mid‑February but were holding up recently around US$140 a tonne; last year prices fell as low as US$86.70 a tonne.
While Rio Tinto, BHP Billiton, Roy Hill and several smaller miners have flagged big production increases, Fortescue’s CEO says many announced projects are easy to announce but harder to fund and bring into production. Fortescue believes not all announced supply will actually come into the market, which should limit the downside pressure on prices.
Fortescue says its expected increase of about 50 million tonnes this year will put pressure on higher‑cost producers — including some Chinese producers — and help keep the global iron ore market in a supply–demand balance by displacing more expensive supply.
The multibillion‑dollar sale of a 40% stake in Fortescue’s Pilbara rail and port assets is "progressing well," according to the company. CFO Stephen Pearce said a select group of buyers has been shortlisted and the process remains confidential; analysts expect the deal could attract more than US$3 billion and that proceeds would be used to pay down debt.
Fortescue intends to use proceeds from the sale to reduce debt and bring gearing down toward its target range of 30–40% of capital. The company says the sale process is proceeding as planned and an outcome will be announced when ready.
Everyday investors should note Fortescue’s rising production and capacity target (about 155Mt), management’s bullish view on sustained Chinese demand, and the company’s plan to reduce debt via the asset sale. At the same time, iron ore prices remain volatile and analysts warn prices could fall below US$100/tonne if supply surges. These factors — production growth, price sensitivity, and balance‑sheet actions — are key points to watch when assessing Fortescue as an investment.
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