Charts returning Monday. Yesterday’s iron ore price is an impressive 60 cents rise to $120.60. 12 month swaps rolled over to be down slightly at $113. Rebar average was flat but rebar futures fell. A very strong performance in the circumstances illustrating that a restock is definitely supporting the market in the short term. Be aware, however, that there is a history of iron ore prices falling with Chinese credit crunches not just because of concerns about growth but because traders can get squeezed on their leverage.
Meanwhile, after yesterday’s Vale declaration of war on Fortescue, the same’s corporate update was interesting. Stephen Bartholomeusz captures the message nicely:
Chief executive Nev Power said that, with the ramp-up in the group’s production capacity to 155 million tonnes per annum nearing completion, it expects to ship between 127 million and 133 million tonnes of ore in 2013-14 with C1 cash costs of between $US38 and $US40 a tonne. It also expects capital expenditure to fall from $US6.3 billion this financial year to $US1.9 billion.
The increased production, lower costs and much-reduced capital expenditure commitments ought to free up even more cash that the group can devote to its current priority – reducing debt. With net debt of about $US10 billion that is an obvious point of vulnerability for the group.
The free-fall in the iron ore price last year focused Forrest’s attention on a balance sheet that reflected the aggressive debt-funded development of the group. The next step in the de-risking of Fortescue will come if it can complete the sale of a minority interest in its Pilbara port and rail assets that was announced late last year.
The timeline for the sale originally had it occurring before the end of this financial year but Fortescue said today that while there had been strong interest and the sale process was “substantially advanced” if there were to be a sale it was likely to be announced in the September quarter. A sale would be expected to generate more than $3 billion, which would make a significant dent in Fortescue debt levels.
FMG has some nice assets. If only it didn’t have that mind-blowing debt boosting its real cost of production to $80-85. It’s a moot point whether it can sell enough assets in time to beat the coming fall in the ore price. Maybe. But if the price falls a bit too quickly then there’ll probably need to be new equity issued to pay down debt. If it falls fast then maybe the debt gets called in. Either way, if I’m a major I’ll wait and buy it for peanuts.
