Fortescue Cuts Spending Forecast 26% on Lower Iron Ore Price

Fortescue Cuts Spending Forecast by 26% on Lower Iron Ore Prices
Fortescue shares rose 2 percent to A$3.63 at 10:29 a.m. in Sydney trading. Photographer: Carla Gottgens/Bloomberg

Fortescue Metals Group Ltd., Australia’s third-biggest iron ore producer, cut its full-year spending forecast by 26 percent to $4.6 billion, joining rivals in delaying expansions as commodity prices decline.

The development of its Kings deposit and completion of the fourth berth at its Herb Elliott Port will be deferred until prices rebound, the Perth-based company said today in a statement. The shares declined in Sydney to the lowest in almost three years after the company reduced its annual production forecast by as much as 5 percent to between 82 million and 84 million metric tons.

BHP Billiton Ltd., the world’s biggest miner, last month delayed about $68 billion of projects, including an iron-ore port expansion, amid sluggish global growth. Fortescue may need to raise as much as $2.3 billion in extra debt if prices stay at current levels, JPMorgan Chase & Co. said Aug. 29.

“After the market digested the news, longer-term uncertainty about the iron ore price played a role in today’s trading,” Adrian Prendergast, an analyst at E.L. & C. Baillieu Stockbroking Ltd., said by phone today from Melbourne.

The shares fell 4.2 percent to A$3.41 in Sydney, while the benchmark S&P/ASX 200 Index dropped 0.6 percent. Fortescue earlier today rose as much as 3.4 percent to A$3.68.

Delaying Expansions

Fortescue told analysts on a call today that it would wait to see if the price recovers before moving forward with the expansion plans, said Prendergast who was on the call.

Iron ore prices fell to a three-year low of $88.70 last week. Chinese steelmakers are struggling to remain profitable after they ramped up capacity, only for sluggish demand to send steel prices tumbling.

Fortescue today set a “near-term” production goal of 115 million tons a year by completing the expansion of the Christmas Creek mine, starting the Firetail deposit and delivering port and rail projects.

The company had planned to reach an annual production rate of 155 million tons by the end of June next year, it said Aug. 23. It aims to complete development of its Solomon project when the market improves and has the option to resume expansion to reach 155 million tons, Chief Executive Officer Neville Power said.

“These measures reflect the company’s ability to reduce and delay cash expenditures to meet market conditions and provide us with head room in the event of further deterioration of iron ore prices,” Power said in the statement.

Chinese Growth

Concern that capital expenditure is slowing in Australia’s resources industry comes amid signs of waning growth in China, the biggest commodities consumer. Australia is the world’s largest supplier of iron ore and coal. Reports of the nation’s mining boom ending were exaggerated, Prime Minister Julia Gillard said today.

“This is a boom with three distinct phases,” Gillard said at a conference in Perth, according to an e-mailed text of the speech. “A prices boom, which is now passing. An investment boom, still to reach its peak as seen in those remarkable capex figures. A production boom, as all that effort comes to fruition in the years and decades ahead.”

Fortescue is in advanced talks on the sale of its Solomon power station and in discussions with two “major” investors over the partial sale of its North Star magnetite project, the company said.

Fortescue Debt

Fortescue needs iron ore prices to average above $115 a ton to avoid refinancing its first major debt repayment of $2.4 billion in 2015, Credit Suisse AG analysts Matthew Hope and Michael Slifirski wrote in an Aug. 27 report. The company may face a debt-rating cut as a result of the drop in prices, Moody’s Investors Service said Aug. 30.

“They’re taking pretty clear actions that should enable them to get through the next 12 months,” Chris Drew, an analyst at RBC Capital Markets, said by phone from Sydney. “If this works as planned, they don’t need to raise additional funds.”

The company expects iron ore prices will return to more than $120 a ton later this year, Power told reporters last week in Sydney. The price may average $145 a ton in the final quarter of this year, according to the median of seven analysts estimates compiled by Bloomberg.

BHP had been due to decide this year on approving three major projects including an iron-ore port expansion in Western Australia before it said last month it would delay all decisions. The three major projects may cost a combined $68 billion to build, according to a May 23 estimate from Deutsche Bank AG.

The relative yield on Fortescue’s biggest line of bonds -- $2.04 billion of 7 percent notes due 2015 -- surged 162 basis points last week to 685 basis points more than Treasuries, the highest since November, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

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