Share surge as Fortescue restarts Kings

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 2013.

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 2013.

Shares in iron ore miners surged on Thursday after Fortescue announced it would restart work on the expansion of its lower-cost Solomon mine hub in the Pilbara, to develop its 40 million tonnes-a-year 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 refinancing, cost cuts of $300 million and the sale of non-core assets, including minority stakes in its port and rail infrastructure.

But iron ore bounced back above $US100 a tonne just as quickly and is now 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 increasing to a production capacity of 20 million tonnes a year by the end of March.

Fortescue shares closed up 4.1 per cent, or 18ยข, at $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 restart 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."

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".

He 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.

Mr Power said in terms of the "C1" cash cost to Fortescue, loaded onto a ship, ore from the Chichester hub costs $US47-$US48 a tonne, while ore from the Solomon hub costs $US26-$US27 a tonne.

On a weighted-average basis, implementing the total development program at Solomon - including both Firetail and Kings - would reduce Fortescue's costs by $US7-$US10 a tonne, he said.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles