Fortescue Says First-Quarter Iron Ore Cash Costs Drop 24%

  • Shipments little changed from year earlier amid expansion halt
  • Supplier forecasts cash production costs to fall further

Fortescue Metals Group Ltd., the fourth-biggest iron ore exporter, cut first-quarter production costs by 24 percent and trimmed debt, bolstering its balance sheet with prices forecast to extend declines.

Cash costs averaged $16.90 a wet metric ton in the three months ended Sept. 30, down from $22.16 a ton in the previous quarter, the Perth-based company said Thursday in a statement.  It’s forecasting costs will fall to $15 a ton by July and intends to revise earlier guidance that costs would average $18 a ton in the current fiscal year.

“It’s further encouragement on the costs front from Fortescue,” Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone. “They are a company that recognized fairly early the strategic need to get to work on their costs, given their position as a possible swing producer in iron ore. It’s so far, so good.”

Large global iron ore suppliers are winning savings as they raise output to fully utilize railroads to ports, while producers in Australia are also being boosted by lower fuel prices and a declining local currency, according to Bloomberg Intelligence.

‘Strong Demand’

Fortescue has halted output expansions as iron ore prices have fallen about 70 percent from a 2011 peak on faltering demand growth in China, which consumes about two-thirds of global exports. Demand for its ore remains strong despite the softening of steel markets in China, the company said.

The stock rose 6 percent to A$2.29 in Sydney, trimming its decline this year to 16 percent.

The steelmaking ingredient will extend declines in 2016 as the largest suppliers continue to raise output and overwhelm production cuts by costlier rivals, according to BMI Research. Iron ore delivered to China in the three months to Sept. 30 averaged about $55 a ton, compared with more than $90 a ton in the same period a year earlier, according to Metal Bulletin Ltd. data.

There’s a general supply and demand balance in iron ore markets shown by relatively constant level of Chinese port stocks, Fortescue said.

Debt Trimmed

Fortescue has bought back $384 million of debt since July 1 and trimmed its net debt to $6.6 billion as of Sept. 30, the producer said in the statement. The company may seek to carry out further repurchases if pricing is favorable, Chief Financial Officer Stephen Pearce told reporters Thursday on a conference call.

The producer retains an option to sell stakes in its assets and use the proceeds for debt repayments, Chief Executive Officer Nev Power said in an interview last month. Hebei Iron & Steel Group Co. and Tewoo Group Co. approached Fortescue about acquiring a stake in its infrastructure assets and may consider buying stakes in some mines, according to people with knowledge of the matter.

“Our team is continuing to deliver sustainable cost reductions through an unwavering focus on optimizing every aspect of Fortescue’s operations,” Power said in the statement. Cash costs were cut by 47 percent compared to the same period a year earlier, he said.

As China’s economy grows at the slowest pace in 25 years, weaker demand has slashed the prices of metals to grains, eroded producers’ profits and pressed companies including Glencore Plc to accelerate debt-reduction programs. 

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