Price rally has Fortescue aiming high
AFTER a near-death experience, Fortescue Metals has reinstated its ambitious goal of doubling iron ore production to 155 million tonnes a year by the end of next year.
Shares in iron ore miners surged on Thursday after Fortescue announced it would re-start work on the expansion of its lower-cost Solomon mine hub in the Pilbara, to develop its 40 million tonnes per annum Kings deposit from January.
The $1.1 billion Kings expansion was shelved in September after iron ore prices plunged by 25 per cent to below $US90 a tonne, putting the highly-geared Fortescue in potential breach of its loan covenants.
Fortescue shares almost halved, falling as low as $2.97, and the company announced a $US4.5 billion ($4.34 billion) refinancing, cost cuts of $300 million and the sale of non-core assets including minority stakes in port and rail infrastructure.
But iron ore bounced back to more than $US100 a tonne just as quickly and is trading above $US135 a tonne.
Fortescue said development would resume at Kings to enable a smooth transition of the construction workforce from its nearby Firetail deposit, which is ramping up to a production capacity of 20 million tonnes per annum (mtpa) by the end of March.
Fortescue shares closed up 4.1 per cent or 18c to $4.53, while Mount Gibson Iron shares rallied 6.6 per cent, and Gindalbie Metals closed up 4.2 per cent.
Bell Potter analyst Stuart Howe said the decision to recommence the Kings expansion was not surprising.
"Kings is a lower-cost project which allows Fortescue to average down its production costs. I'd have expected Kings to go ahead even if the iron ore market did falter again. Kings provides significant production flexibility for Fortescue," Mr Howe said.
Fortescue chief executive Nev Power said the effect of the September deferral was simply to "smooth out our capital expenditure, so we don't have such a big outflow in a short space of time".
Mr Power said Fortescue had had strong interest in its Pilbara port and rail infrastructure and would only pursue a transaction if it reflected the full, long-term value of the assets. A sale would allow Fortescue to restore balance sheet strength by retiring debt earlier, he said.
Fortescue would not need to raise new capital to fund the Kings expansion, he said. "We don't envisage that at this stage".
Mr Power said in terms of the "C1" cash cost to Fortescue, loaded onto a ship, ore from the Chichester Hub cost $US47-$US48 a tonne, while ore from the Solomon Hub cost $US26-$US27 a tonne.
On a weighted average basis, implementing the total development program at Solomon would reduce Fortescue's costs by $US7-$US10 a tonne, he said. Fortescue expected iron ore to trade around $US120 a tonne next year.
Malcolm Maiden— Page 13