Fortescue Metals First-Half Profit Slips 4% as Costs Slashed

  • Producer's cash costs have almost halved from a year ago
  • Company will target savings, possibly further debt repurchases

Fortescue Metals Group Ltd. reported first-half profit declined 4 percent, beating analysts’ estimates, as the world’s fourth-biggest iron ore exporter almost halved its production costs and trimmed its debt pile.

Net income was $319 million in the six months ended Dec. 31, from $331 million a year earlier, the Perth-based company said Wednesday in a statement. That compares with a $263 million median estimate among three analysts surveyed by Bloomberg.

“Fortescue’s transformation and its journey down the cost curve has been under-appreciated by investors, it’s pretty remarkable.” Jeremy Sussman, an analyst with Clarksons Platou Securities Inc. who rates the producer as a buy, said by phone from New York. “It is pretty clear that Fortescue is not the marginal producer.”

Productivity gains will be increasingly important for iron ore producers as prices of the steel making ingredient remain low on weak demand and abundant low-cost supply, BHP Billiton Ltd. said Tuesday. Daily iron ore prices in December touched the lowest since May 2009 amid faltering growth in China, the top consumer.

Fortescue fell 4.8 percent to A$2.00 in Sydney, trimming its advance this year to 7 percent.

The producer’s C1 cash costs, a measure that includes expenses for mining, processing and rail and port transport, fell 47 percent to $16.34 a wet metric ton, the company said. It will seek to lower costs to $13 a ton by July, from a January forecast of $15 a ton, it said.

“Clearly the next dollar will be harder than the last dollar,” to remove from costs, Chief Financial Officer Stephen Pearce said in a phone interview. “We have got very targeted initiatives that we know will deliver the savings as we look forward.”

The company forecasts it will achieve a breakeven cost of $28.80 a dry metric ton by July. Ore with 62 percent content rose 0.2 percent Tuesday to $51.60 a ton, the highest since Oct. 23, according to Metal Bulletin Ltd. data.

Monitor Sales

Fortescue will monitor asset sales as the commodities price rout forces stressed competitors in the mining sector to divest operations and it will continue to consider plans to expand into commodities other than iron ore, Chief Executive Officer Nev Power told analysts on a conference call.

“We’re starting to see more and more quality assets coming to the market,”  Power said. “We are opportunistic and we have our eye over the horizon.”

Net debt fell to $6.1 billion at Dec. 31 as Fortescue repurchased more than $1.1 billion of debt last year. The action has generated annual savings of about $88 million, Fortescue said. “We are well placed to continue with further debt reductions,” Pearce said in the statement.

Fortescue will pay a dividend of 3 Australian cents, up from 2 Australian cents in the previous half, it said in the statement. Producers including BHP Billiton Ltd. and Glencore Plc have slashed dividend payouts amid their efforts to win cost savings amid the broader rout in commodities prices.

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