Fortescue Reports Record Profit on Higher Iron Ore Output

Fortescue Books Record Profit on Output, Meets Expectations
Fortescue is completing a $9 billion expansion to almost triple production by the middle of next year at its operations in Western Australia’s Pilbara region. Photographer: Carla Gottgens/Bloomberg

Fortescue Metals Group Ltd., Australia’s third-biggest iron ore producer, said full-year profit rose 53 percent to a record, meeting expectations, after an increase in output countered declining prices.

Net income climbed to $1.56 billion, or 50.06 cents a share, in the 12 months ended June 30 from $1.02 billion, or 32.83 cents, a year earlier, the Perth-based company said today in a statement. The average of 15 analyst estimates compiled by Bloomberg was $1.55 billion.

Fortescue is spending $9 billion to almost triple production by the middle of next year at its operations in Western Australia’s Pilbara region. Expansion beyond 155 million tons of annual capacity will depend on when iron ore prices recover as the company focuses on reducing debt, Fortescue Chief Executive Officer Neville Power said today.

“The concern and focus for us is the debt while the iron ore price is heading down,” Credit Suisse Group AG analysts Matthew Hope, Michael Slifirski and Sam Webb wrote in a report today. The results offer “no huge surprises,” they said.

Shares in Fortescue gained 2.2 percent to A$4.24 at the close in Sydney. The benchmark stock index gained 0.2 percent.

Junk Bonds

Fortescue, which has $10.6 billion of debt based on data compiled by Bloomberg, earlier this month borrowed $1.5 billion after reporting a 7.1 percent project cost overrun. The biggest seller of mining junk bonds needs iron ore prices to average more than $115 a metric ton for the next 18 months to avoid raising more funds, JPMorgan Chase & Co. said in a July 26 note.

Power said today he has no plan to raise additional debt although the company has the ability. Fortescue also announced a final dividend of 4 cents a share, in line with analyst estimates.

The price of iron ore for immediate delivery to the Chinese port of Tianjin, a benchmark for Asia, averaged about $150 a ton in the 12 months to June 30, about 8 percent lower than a year earlier. It dropped a further 22 percent since June 30.

Domestic production of iron ore in China, the biggest consumer, is falling, while seaborne imports are rising, the company said. Power said he expects iron ore prices to recover to about $120 a metric ton in “the medium term.”

Fortescue reiterated its goal to lower its gearing ratio to between 30 percent and 40 percent by the end of fiscal 2014 before committing to new projects. Growth in China, the world’s biggest importer of iron ore, has decelerated to the slowest pace in three years as the government sought to cool inflation and investment in certain sectors, including real estate.

“With this period of consolidation we really have to change to review all of our further expansion option,” Peter Meurs, director of development, said on a conference call with analysts and media today.

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