Fortescue’s December production report is out and is another solid result:
Fortescue shipped 42.1 million tonnes of iron ore at a record low cash production cost (C1) of US$15.80 per wet metric tonne (wmt) for the December 2015 quarter. Early repayment of US$750 million of debt (US$618 million of cash) was completed during the quarter.
The cash balance at 31 December 2015 was US$2.3 billion demonstrating the strength of Fortescue’s operating cashflow generation.
Chief Executive Officer, Nev Power, said “Fortescue continues to deliver strong results, improving the productivity and efficiency of our operations and further cementing our position as a low cost, reliable supplier of premium iron ore products to our customers.”
“The outstanding performance of our team combined with world class assets and effective strategy are driving sustainable improvements with production costs lowered for the eighth consecutive quarter. This continues to generate positive operating cashflows which has allowed net debt to be reduced to US$6.1 billion.”
HIGHLIGHTS
• US$15.80/wmt C1 cost
• 42.1mt shipped
• Price received of US$40.46 per dry metric tonne (dmt), an 87 per cent price realisation
• Net debt of US$6.1 billion inclusive of US$2.3 billion of cash on hand at 31 December 2015
• US$750 million of debt repurchased, realising a pre-tax gain of $124 million PRODUCTION SUMMARY (million tonnes) Q2 FY16 Q1 FY16 VAR% Q2 FY15 VAR% Ore mined 44.8 45.1 -1% 43.6 +3% Overburden removed 49.9 52.7 -5% 91.2 -45% Ore processed 41.6 40.9 +2% 36.7 +13% Total ore shipped including third party product 42.1 41.9 – 41.1 +2% C1 (US$/wmt) 15.80 16.90 -7% 28.48 -45% Note: Tonnage references are based on wet metric tonnes (wmt). Fortescue ships with approximately 8 – 9 per cent free moisture.
So, cash was drawn down by $300 million in the quarter, sales are good, costs keep falling but the discount rose to $13 from $9. It’s another good quarter but it needs stellar to stop falling. The WSJ sums up its problem:
“The more exposed you are as a miner to Chinese infrastructure, the more trouble you are in,” said Steve Johnson, chief investment officer at Sydney-based Forager Funds Management.
Goldman Sachs expects Fortescue to sell iron ore at an average US$39 a ton in the six months through June. The broker estimates every one percentage-point move in the ore-grade discount cuts Fortescue’s annual earnings by 3% before interest, tax, depreciation and amortization.
Fortescue’s share price has tumbled 30% over the past year, and Goldman Sachs expects it will fall further. UBS, on the other hand, predicts it will rebound after hitting its lowest level since 2008 this week.
Still, Mr. Johnson said miners must considerably reduce production.
“The price is going to keep falling until that happens, and it is not going to be BHP or Rio that have to take that step,” he said.
As the Australian juniors shut in the months ahead, FMG becomes the genuine marginal cost producer and given the outlook is for more steel output falls this year (-5% in my view) in China and rising iron ore supply, the price will have to keep falling to eliminate FMG (and Kumba) tonnages.
In short, it remains royally buggered.
