While the MSM is happy to report a “serene” sense of control at Fortescue Metals Group, the truth is very obviously the opposite. Let’s look at its comms from yesterday. At the AGM from CEO Nev Power:
“We’ve got the ability now to run the organisation on very low capital, we’re delivering iron ore to China at very low cost and we will continue to drive those down,” Mr Power said.
He said the company was still ahead when interest repayments on its debt were added to the cost of production.
“We’re making a strong cash margin at the current price, to the $45 a tonne you can add about $3 a tonne of interest and $3 or $4 a tonne for sustaining capital,” he said.
“Even converting that, with the moisture content, that gives us a very strong margin at today’s prices.
“So we’re not at all concerned about this current iron ore price.”
The breakeven point is still in the low $70s so if you’re not worried about it you should be sacked. He went on:
“The iron ore price has come down and stayed down lower than we expected it to and there seems to be a few factors around that,” he said.
“One is a softening in demand from China, secondly there are large iron ore stocks at the port which provides a supplier of last resort but those stocks are being consumed.”
But he said long-term demand from China remained strong.
“The iron ore market is in balance right now because the iron ore stocks are not growing, they’re actually reducing, that means a lot of high-cost production has left the market,” he said.
“We are in a cyclical business and we are in a cyclical low, but we would expect that to come back to long term sustainable levels.
“Another 200 million people in China will move from rural areas to urban cities by 2020 and beyond.”
For whom some 70-90 million homes sit already built, empty and waiting. It’s not a cyclical low, it’s a structural shift and FMG needs a new narrative.
That was forthcoming from founder and owner Twiggy Forrest:
“They’ve said they’re out to restrict the growth of other companies and restrict other opportunities being brought into the marketplace by their competitors,” he said.
“To me that’s a very fine line to tread when your major customer is one of those people you’re trying to shut out of the market.”
“I wouldn’t have thought it’s a very customer-friendly policy and I only hope that it doesn’t have any impact on the bilateral relationship with China, which is very strong.”
So, it’s geopolitics? No wait:
Fortescue Metals Group has “mature” plans to diversify into other industries, with chairman Andrew Forrest confirming that the company is running the ruler over opportunities in six different commodities.
Mr Forrest conceded at the iron ore miner’s annual meeting on Wednesday that all of the company’s “eggs are in one basket” but that it would only diversify if an investment opportunity could provide equal returns to its existing mines.
Unwilling to be drawn on what the six commodities are Mr Forrest only confirmed that one of the industries under scrutiny was oil and gas.
“It is one of about six different commodities we review all the time and we have plans both mature and immature in several different industries,” he said.
“If you look at the whole resources sector – copper, oil, uranium, gas – the whole resources sector is down so it is strength in weakness where the greatest opportunities are,” he said.
“Are there great opportunities out there, that’s really the question, not that we are seeing yet but we are a patient company.”
Let’s not forget that the outgoing chairman said the day before that diversification would be unwise, rather suggesting that the rats are abandoning a sinking ship.
Whether its lowering costs, paying down debt, diversification, bogus cyclicality, geopolitics, none of it matters. FMG is the emerging marginal cost producer with the majority of its production on the wrong side of any future market balance and as such prices will keep falling until that production is gone.
The only way out is to push costs down enough to palm this ignominious position onto another major miner. Here’s the UBS cost curve (which is rapidly moving out of date):
Ferrexpo is small. Kumba is big at 50-60mtpa but it will be cutting costs furiously too. Vale is out of reach and has already chopped $5 per tonne out with its Valemax breakthrough.
FMG is in the fight of its life and the lesson for investors is that that will drive the iron ore price down and down and then down some more.
