Share surge as Fortescue restarts Kings
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 18¢, 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.
Frequently Asked Questions about this Article…
Fortescue said it will restart work on expanding its lower-cost Solomon hub to develop the 40 million tonnes-a-year Kings deposit from January. The Kings expansion carries a price tag of about US$1.1 billion and had previously been shelved in September.
Fortescue has an ambitious goal of doubling iron ore production to 155 million tonnes a year by the end of 2013. Kings (40 Mtpa), together with nearby projects such as the Firetail deposit (rising to 20 Mtpa by the end of March), are part of the Solomon hub development that helps deliver that capacity increase.
The Kings expansion was deferred in September after iron ore prices plunged about 25% to below US$90 a tonne, which put pressure on Fortescue's balance sheet and loan covenants. Iron ore prices later rebounded — trading above US$100 and then above US$135 a tonne — and Fortescue says restarting Kings will smooth the workforce transition and support lower-cost production, prompting the restart.
Shares in iron ore miners rose after the announcement. Fortescue shares closed up 4.1% at $4.53. Mount Gibson Iron rallied about 6.6% and Gindalbie Metals closed up about 4.2%.
Fortescue reported C1 cash costs (loaded onto a ship) of about US$26–27 a tonne from the Solomon hub versus US$47–48 a tonne from the Chichester hub. On a weighted-average basis, developing the full Solomon program (including Firetail and Kings) would reduce Fortescue's costs by roughly US$7–10 a tonne.
No. Fortescue said it would not need to raise new capital to fund the Kings expansion. Earlier in the year the company completed a US$4.5 billion refinancing, implemented cost cuts of about $300 million and sold non-core assets to strengthen the balance sheet.
Fortescue said it has seen strong interest in its Pilbara port and rail infrastructure and would only pursue a transaction if it reflected the full long-term value of those assets. Management noted that a sale could help restore balance sheet strength by retiring debt earlier, but any sale would be value-driven.
Bell Potter analyst Stuart Howe said the restart isn’t surprising because Kings is a lower-cost project that helps Fortescue average down production costs. He also noted Kings provides significant production flexibility, which is important for managing operations through volatile iron ore markets.
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