MELBOURNE: Australia's Fortescue Metals Group said on Thursday that it could weather far lower iron ore prices than previously touted, as the world's No.4 exporter of the steelmaking ingredient cuts costs faster than planned.
The company said it would push on with its drive to slash costs after hitting a cost-reduction target six months early due to improved efficiency at its operations, lower debt and falling prices for oil and freight.
"If you stack all those together ... that results in a substantial reduction in our cash breakeven below our last guidance at $36 a tonne," Chief Executive Nev Power said after the firm released its quarterly production report. He was referring to the ore price at which the company would neither make nor lose cash.
That compares with prices near $41 a tonne <.IO62-CNI=SI> on Thursday and would make Fortescue more competitive with the world's lowest cost producers, Rio Tinto and BHP Billiton .
Iron ore markets have been hit hard by a rapid increase in supply from major producers at a time when growth has slowed in top consumer China, with prices down 35 percent over the past year.
Fortescue said it had cut costs to $15 per wet metric tonne in December, six months ahead of schedule, and that it would announce a lower production cost target and new breakeven guidance at its half-year financial results in February.
Analysts said the result in the first half of the financial year that began in July implied the company would generate around $1.4 billion to $2 billion a year in free cash flow. That would ensure it could continue to pay down debt, easing worries it could struggle to manage its debt load.
"Hmmm, that doesn't look distressed," Peter O'Connor, an analyst at broker Shaw & Partners, said in a note.
Fortescue's shares jumped as much as 8 percent after the quarterly report was released.
Debt investors have been cautious, with Fortescue's U.S. notes with a November 2019 maturity trading at around 75 percent of face value. CEO Power said the notes had been dragged down along with oil and gas companies' high-yield bonds.
"If the market will price our debt at those low levels, then it's a great opportunity for us to buy it back ahead of time and do it very economically."
Fortescue cut its net debt to $6.1 billion as of December, which was better than expected, after buying back $750 million worth of notes for 82 percent of their face value. It expects to buy back more notes by June.
Production costs averaged $15.80/wmt in the December quarter, down 45 percent from a year earlier. Fortescue also cut its capital spending target nearly 40 percent to $200 million.
It shipped 42.1 million tonnes of ore in the December quarter, up 2 percent from a year earlier.
Comments
Comments are closed.