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Fortescue open to asset sales
Fortescue Metals said it remains open to asset sales, despite recently overhauling its multi billion-dollar debt to push out the timing of repayments.
"We've completely derisked our assets and therefore it's a good time to be thinking about (sales), but we don't have anything under active consideration and we'll just take it as it comes," chief executive Nev Power said on the sidelines of a Sydney conference.
"As you saw from our balance sheet, there's no imperative for us to do anything," he added.
Last month, the world's fourth largest miner raised $US2.3 billion in debt just a month after it scrapped a similar-sized bond offering saying it couldn't agree on terms with investors.
To secure the refinancing, Fortescue agreed to pay an interest rate of 9.75 per cent on its newest seven-year bonds, which were sold mostly to US-based investors. That is higher than the 9 per cent coupon investors were pushing for at the time of the pulled bond deal in March.
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Fortescue may get marginal player status
Iron ore Amanda Saunders
629 words
4 Jul 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Even as Fortescue Metals Group races to hammer down production costs, the leaner miner faces the prospect of becoming the marginal producer of the large iron ore players, once Brazil's Vale brings its new mega expansion project online, analysts say.
Iron ore crashed spectacularly overnight on Thursday - falling 6 per cent to $US55.63 a tonne - its biggest one-day decline in a year. It snatched back much of the modest recovery made since hitting a record low of $US47 a tonne in early April.
UBS mining analyst Glyn Lawcock told AFR Weekend that "the concern the market has is that the all-in cash delivered price that FMG needs to be cash-neutral is ultimately going to be the dictator of where the long-term price settles".
Fortescue could become the highest-cost of the large producers - Vale, Rio Tinto and BHP Billiton, and newcomers Roy Hill and Anglo American, he said.
"As more low-cost supply comes on, and high-cost supply is pushed out, ultimately the risk is that Fortescue becomes the most significant size marginal player. So even with their newly discovered cost base, they could still find themselves not making cash."
Vale sealed a major $US16.5 billion ($21.6 billion) expansion last month with financial backing from China that will allow the miner to produce 90 million tonnes of high-quality iron shipped to China at a cost close to that achieved by industry leader Rio Tinto. The project, S11D, with cash costs of $US11 a tonne, should be finished next year.
"We would expect S11D to drop Vale below FMG on an all-in cash break-even basis to China," Mr Lawcock said. Vale's costs are inflated by hedged freight, but that will also change.
Fortescue chief financial officer Stephen Pearce told AFR Weekend last month that the miner had a cost structure superior to Vale's, and believed some investors failed to recognise this. "We believe we are well positioned in terms of the four global iron ore majors and we expect [on a break-even basis] to even come a little bit below where Vale sit."
Barclays mining analyst Amos Fletcher told AFR Weekend that "whether the higher cost producer is FMG or Vale, the cost curve is going down; so investors should stick with the lowest-cost producers - BHP and Rio".
"If FMG's financial 2016 cost targets are achieved - and I would question if not the achievability, then certainly the sustainability - e.g. maintenance capex at $US2 a tonne is probably not sustainable for FMG - that would see them at a lower cash break-even than Vale," Mr Fletcher said.
But the London-based mining analyst agreed that S11D could see Fortescue become the marginal producer among the big four. Fortescue is targeting production costs, also known as cash or C1 costs, of about $US18 a tonne this year, from $US26 in the June half.
Fortescue put its break-even at about $US39 a tonne, while Mr Lawcock estimated it at $US44 a tonne. Vale's break-even is about $US43 a tonne and it is targeting $US40 this year.
Gina Rinehart's Roy Hill project will come onto the market later this year with a lower break-even than Fortescue; that will likely start creeping up in one to two years as sustaining capital costs and strip ratios increase.
"Fortescue has got cash today but the risks are that if they hold their cost base down here, the question ultimately is ... will the price come down to meet them?" Mr Lawcock said.
"Then they will be in just as much trouble as if they'd been running at a $US50 cost base."
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Fortescue's largest shareholder in Chinese corruption probe
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/w/j/z/2/image.related.afrArticleLead.620x350.gkwct4.png/1447236341896.jpg[/img]Former Hunan Valin chairman Li Xiaowei, pictured with Fortescue chairman Andrew Forrest in 2009, is thought to have been detained by Chinese authorities last year. Supplied
A former board member at Fortescue Metals Group and the man who rescued the company during the global financial crisis is the subject of a major corruption probe in China, complicating efforts by the iron ore miner to raise capital.
Li Xiaowei, the former chairman of Hunan Valin Iron and Steel, which owns 14.7 per cent of Fortescue, is under "investigation", according to the local procurator's office.
It is understood Mr Li was detained last year along with at least two other employees of the giant steel maker, as Chinese investigators target the once-booming sector.
The steel industry probe is part of Beijing's three-year-old corruption crackdown, which has lasted longer and snared more senior figures than most expected.
On Tuesday evening, the former chairman of Baosteel, Ai Baojun, who was most recently deputy mayor of Shanghai, was also placed under investigation for corruption.
"The whole sector is under scrutiny now; the priority for state-owned steel mills is to remain low-profile and ensure they are safe from corruption investigators," said one industry player. "That's why I seriously doubt there will be a Chinese white knight for Fortescue."
A spokesman for Fortescue declined to comment on the corruption probe into Valin.
VICE-GM ALSO DETAINED
A Communist Party newspaper in Hunan confirmed last month that Mr Li was under investigation, citing a report from the local procurator's office. It gave no further details.
Last July, Chinese authorities announced Valin's vice-general manager, Zheng Boping, had been detained in relation to an ongoing bribery case. China Business News said the case involved "other senior executives".
Mr Li took the helm of Valin in 1998 and was in charge of the state-owned steel maker when it invested $1.2 billion in Fortescue in mid-2009.
At that time, the market was concerned about Fortescue's high debt levels amid slumping commodity prices during the global financial crisis.
Prior to the capital injection, Fortescue's stock price had fallen 60 per cent.
As part of the deal with Valin, Fortescue also agreed to increase iron ore shipments to the mill from 1 million to 4 million tonnes annually.
Mr Li, who joined the Fortescue board in June 2009, stepped down from Valin in late 2011. Shortly after that, in February 2012, he resigned from the Fortescue board.
RELATIONSHIP 'VERY STRONG'
Fortescue chief executive Nev Power hinted in March that Valin might be interested in increasing its stake in the company. He noted the relationship was "very strong" and said Valin's investment in Fortescue was "one of the most successful" by a Chinese steel company anywhere in the world.
At its annual meeting in Perth on Tuesday, Fortescue chairman Andrew Forrest said the company was not looking to raise equity, but would not rule out asset sales in the future.
"Fortescue has really strong cash flows and really strong management. We don't see any reason to issue equity," he told reporters after the meeting.
"We have a lot of interest in our assets. We are not taking any balls off the table there, but we can say with cash flow like we have, with operating costs falling like they are, the company is under no pressure at all."
But pressure may come early next year, as Citigroup and other major brokers are forecasting the iron ore price to fall below $US40 a tonne from its current price of around $US48 a tonne.
For much of this year, Fortescue fanned rumours it was in talks with two Chinese state-owned companies interested in making an investment in its infrastructure or mines. The two names most often mentioned were iron ore trader Tewoo and Hebei Iron & Steel.
Nothing has ever come of these talks amid suggestions the parties could not agree on price.
STEEL SECTOR ROCKED
Tim Murray, the managing director of Beijing-based J Capital Research, said a Chinese company had not made a major iron ore investment in the last two years.
"The Chinese government has shifted its overseas investment priority to oil and gas and away from bulk commodities like iron ore," he said.
Mr Murray also noted "any organisation that has a senior official charged with corruption will be paralysed for years".
China's steel industry has been rocked by a sharper than expected downturn in construction and manufacturing, as the country no longer needs as many new bridges, railways, airports and apartment towers.
The Chinese government's chief forecaster, Li Xinchuang, president of the China Metallurgical Industry Planning Association, believes Chinese steel consumption will fall 20 per cent over the next 15 years.
In the first nine months of the year China's steel production fell 2.1 per cent, while consumption fell by 5.8 per cent, according to government figures released late last month. That was the sharpest decline in consumption in three decades.
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Fortescue proves sceptics wrong as it lifts performance
Paul Garvey
[Image: paul_garvey.png]
Resources Reporter
Perth
[Image: 549258-9515af7e-8f65-11e5-981e-32743fba0054.jpg]
Fortescue Metals chief executive Nev Power. Source: News Corp Australia
[b]The past few months should have been ugly for Andrew Forrest’s Fortescue Metals Group.[/b]
After all, Fortescue was supposed to be the poor cousin of Australia’s big iron ore producers BHP Billiton and Rio Tinto. Fortescue was the over-leveraged, high-cost relative with the inferior assets to its Pilbara rivals and was a favourite of short-sellers.
But, since July, when a brief rally in iron ore prices came to an end, something strange has happened. Shares in Fortescue have actually gained 28 per cent since the release of the company’s quarterly report in late July, despite a 12.1 per cent fall in iron ore prices over the same time.
In comparison, Rio Tinto shares are down 9 per cent while BHP has plunged 24 per cent, its drop accentuated considerably by the recent tragedy at its Samarco joint venture in Brazil.
The recent rally — albeit it one that still leaves Fortescue well short of its boomtime highs — reflects not only Fortescue’s recent success in overhauling and improving its operations, but its ability to convince a sceptical market that the improvements are real and sustainable.
Fortescue’s latest efforts to promote its operational progress in the face of a dim iron ore price and convince the doubters about the merits of its cost overhaul saw the company last week host a tour of journalists to its Christmas Creek mine, echoing an analysts tour held last month.
Since its inception Fortescue has always attracted plenty of scepticism — no doubt largely due to the reputation of its founder and chairman Forrest — and chief executive Nev Power says he understands there are some who continue to doubt the sustainability of Fortescue’s operational improvements.
“I know there are people with all the scepticism under the sun about whether we can do this and whether this is achievable,” Power told reporters during this week’s media tour.
“That’s the same scepticism about whether Fortescue would ever be here, or whether we would ever get to 155 (million tonnes per annum), and all the other scepticism.
“I’d say, look at what’s been achieved and judge us on our merits about doing what we say we’re going to do. We have systematically delivered against every single thing we said we were going to do.”
The operational progress made by Fortescue has become apparent in the miner’s last two quarterly reports.
The most recent figures show that both production costs and the amount of waste being moved at Fortescue’s mines have roughly halved since the start of 2014, while the amount of ore mined has increased more than 40 per cent.
Gross debt has also fallen meaningfully over that time, from just under $US11 billion ($15.3bn) to less than $8.1bn (assuming its current $US750m debt buyback in the US is fully taken up, as expected).
On almost any measure Fortescue is a better company today than it was in early 2014.
The key exception is, however, the one that will matter the most to investors. Fortescue’s share price today is less than half what it was back in early 2014 due to the iron ore price, which has fallen from more than $US120 a tonne to just $US45.44 a tonne on Friday.
While the iron ore price is in the doldrums, there doesn’t seem the same sense of panic at Fortescue today as there seemed to be at the height of their ill-fated campaign for a government inquiry into iron ore prices.
Power says the success in improving the performance of Fortescue’s mines has helped improve confidence within the business.
“Every day, the more we achieve, the more we see ahead as opportunity. This is not slashing and burning and driving suppliers to the wall, this is about genuine creativity and innovation in our processes,” he said.
“This is not magic, this is a lot of hard work, and a lot of people around Fortescue engaging in thinking about how we can improve our business.”
The biggest improvement at Fortescue’s mines — and the change that has drawn the most cynicism — has been the big increase in production and sharp drop in waste movements over the past two quarters.
That sharp drop in so-called strip ratios, or the amount of waste rock that needs to be moved to reach each tonne of ore, was at first seen widely as a case of “high-grading”.
High-grading is the practice of deliberately targeting premium parts of an orebody to deliver a temporary improvement in performance, but which ultimately shortens the life of the operation by quarantining lower quality areas from being economically mined in the future.
The recent media and analyst tours have aimed to better illustrate just how those improvements have been achieved and why they are sustainable. Crucial changes have been made to Fortescue’s ore processing facilities in the 18 months since Fortescue took control of them from contractor Mineral Resources, allowing it to feed lower-quality ore into the front end of the plant and still produce the same higher-quality ore at the other end.
That ability to remove more impurities during processing has allowed Fortescue to classify more of its waste material as ore, delivering a double benefit of more ore production and less waste.
Fortescue has been able to scale back the use of “surface miners” at its mines in favour of conventional and more reliable truck and excavator combinations. Moving from two contractors to one at the mines has also been a significant cost saving, as has the move to a more efficient roster system.
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