Fortescue Metals Group (FMG)

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#31
Iron fist to fore
1781 words
2 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Resources

In an exclusive interview with AFR Weekend, Andrew Forrest dismisses the doubters but concedes his mistake in using the word 'cap' during the present imbroglio, writes Jennifer Hewett.
Note to the market. The irrepressible Andrew Forrest has lost none of his trademark confidence in Fortescue, nor his enthusiasm for China's continued growth and economic potential.
Now, as always, Forrest is convinced the doubters are wrong and will be proven so. Fortescue's future, he tells AFR Weekend, is assured. The company is on a relentless and successful race to drive down costs, so far keeping just ahead of the equally relentless decline in the price for iron ore.
"Any analyst without a vested interest will tell you Fortescue is still doing well right now and, as every day goes past, is becoming more competitive," Forrest says with typical fervour.
During a frenetic trip to China, he was constantly in and out of meetings with senior Chinese political and business leaders in Beijing and Shanghai and at the annual Boao forum held in China's south.
The recent company board meeting was held in China and the FMG signs at Boao were almost as ubiquitous as Forrest's bouncing presence. He was one of only four people asked to give a speech to President Xi Jinping at Boao at a meeting of global business - where Forrest invited Xi to visit his company. Their firm handshake was covered on Chinese television. Forrest knew Xi long before he became President.
The leader's office has asked Forrest's senior business leaders group to become a semi-official think tank between China and Australia. And rather than China being alarmed at his comments about curbing production to drive up the iron ore price, Forrest says he is repeatedly asked what the fuss in Australia is all about.
Yet, Forrest also knows the fuss in Australia won't die down while the price is so low - and likely to keep falling. The real questions are how low it will go and for how long. Plenty of analysts are marking down Fortescue's ability to survive the carnage, as they did repeatedly while Forrest built the company from an idea into the world's fourth-largest iron ore miner in super quick time.
Despite the risks, an innovative Forrest has always outsmarted doomsayers - able to keep building a massive empire while being told by "experts" why Fortescue would fail.
Yet Forrest's conviction he can keep doing so doesn't lessen his fury and frustration at what he argues is a catastrophically counter-productive strategy from Rio Tinto and BHP Billiton. He believes their determination to flood the market with supply - and to keep on expanding, no matter the impact on the price - is a desperate race to the bottom where no one wins.
Apart from being so damaging to Fortescue's bottom line and share price, he insists it devastates our national interest and "incinerates tens of billions of dollars worth of value" for BHP and Rio shareholders, too.
"Rio is competing with BHP to smash global investment returns for their shareholders, as well as tax and royalty receipts for the federal and state governments," he says. "Their statements that they will expand at any price drives down that price in their endeavour to drive everyone else out of business.
"When has market share strategy over shareholder returns ever helped a company? What BHP and Rio are doing is buying, at massive cost, expansion capacity even when the higher commodity price justification for such investment has evaporated. It's as though they are stuck in a time warp, unable to move with the changed circumstances. Over time, it will be seen for what it is - egos before commonsense."
Right now, though, market commonsense sees it as making Fortescue vulnerable. That's mainly due to its still higher cost of overall production for a product that gets about a 15 per cent discount due to lower quality. Combine that with the company having $US9 billion ($11.8 billion) of debt and the semi-permanent market presence of big "shorters" of the stock, and it helps explain why the FMG share price has fallen more than 60 per cent since last year.
Fortescue's total all-in costs are around $US43.50 a tonne, for example. The target is to get that down further to between $US35 and $US37 a tonne this year. And FMG always prides itself on its ability to consistently exceed its targets. "That will make Fortescue's cash costs at least as competitive as BHP and Rio, so you have to ask what their strategy is, because it's not about making adequate profits," Forrest fumes.
But when Fortescue is receiving only about $US43-$US44 a tonne for its ore at today's low prices, Forrest knows there's no margin for error. That's even tougher when Fortescue expects the price fall to continue, thanks to its competitors' views on increasing production. It obviously affects sentiment, especially given heavy trading in a relatively new Chinese iron ore futures market. It is a vicious price loop for the world's four major producers, including Brazil's Vale, not to mention the rest of the industry.
Such commercial devastation is compounded by what Forrest calls the Chinese economy "taking a breather" as the economy slows and new environmental restrictions and Xi's crackdown on corruption work their way through the system. That is even though demand for steel, Forrest insists, will stay strong long term.
This still requires staying alive in the short term.
Some analysts and investors in BHP and Rio are effectively calling this a Darwinian process of natural selection where only the fittest can and should survive. But others are being persuaded that Forrest's logic is right - that there can be only losers, most particularly Australia. It's not as if BHP Billiton and Rio Tinto have not made major strategic errors of judgment in the past.
Essentially, the BHP and Rio national interest argument is that if they don't increase tonnage from Australia, other countries will. And, in commercial terms, that the world's two lowest-cost producers still make money for shareholders on every tonne, no matter how low the price sinks. Forrest scoffs at such logic. His most polite term is that it's "sadly fallacious".
"When they are saying other people will do it if we don't, they are actually talking about themselves," he says.
He argues no other company in the world could now invest to build production unless the capital had already been committed at boom time price - as with Gina Rinehart's Roy Hill Mine in the Pilbara and Vale's new mine in Brazil. According to Forrest, it is overall returns that matter, rather than considering only the profit on each extra tonne. Rio and BHP are destroying those with their expansion plans, he says, as well as everyone else's.
"No one would contemplate investing to expand in collapsing commodity price markets, apart from those who have no interest in shareholder wealth or are engaged in market-share-at-all-cost pricing," he says. "All the new projects were financed when prices were higher. Commercial capital would now be too expensive.
"So no one else will replace those tonnes. You need a price of at least $US100 a tonne to expand, and the global banking sector is so disillusioned with the lack of leadership and the return on all capital, rather than just incremental capital, that there is a flight of capital from the resources sector."
That market pressure will only intensify, especially if the iron ore price has further to fall. It was Forrest's disgust at his competitors' strategy that led to an off-the-cuff response at a Shanghai dinner that the majors should agree to "cap" production.
He now concedes it was a mistake to use the word "cap" because of potential anti-competition implications. But Fortescue was stunned at the instant over-reaction of Rod Sims at the Australian Competition and Consumer Commission, suggesting this could mean illegal collusion or attempts to form a cartel.
Rio's Sam Walsh dismissed Forrest's comments as "hare-brained". But Rio and BHP could only have enjoyed the furore. There was never the slightest possibility either would take the advice to stop plans to lift production to 360 million tonnes and 290 million tonnes respectively.
After an early flurry of confected concern by Treasurer Joe Hockey, the federal government is also keen to stay silent, saying it's for the market to sort out.
This sort-out is happening - but at enormous and growing cost to government budgets and Australian taxpayers. And for what reason, exactly? Forrest describes this as the "Walsh effect" - simply driving down returns. West Australian Premier Colin Barnett is as vehemently contemptuous as Forrest of Rio and BHP's tactics.
To Forrest's critics, of course, FMG can't escape responsibility for oversupply by ramping up production to 165 million tonnes per annum, with the potential to lift to 180 million tonnes. Forrest justifies this by describing it as past investment when it's the future investment in expansion that's the problem.
But it's now Fortescue's problem that's most acute. So, as well as savagely pruning costs, Forrest has received interest from some large Asian companies about the possibility of taking a modest stake in FMG assets in return for a large capital injection. Fortescue already has a strategic Chinese investor in Hunan Valin, which has 15 per cent, compared with Forrest's holding of
33 per cent.
Nor is Fortescue alone in believing the company represents a buying opportunity, given it has completed construction of its new mines, rail and port network. US-based Capital Group, one of the world's biggest long-term investors managing $US1.3 trillion, recently bought 6 per cent. It has just raised that to 7 per cent, even as the ore price continues its decline.
Fortescue has also received strong interest from US capital markets about a possible return. This was after it pulled a planned $US2.5 billion refinancing effort last month when it failed to get money as cheaply as it wanted. FMG continues to insist there's no rush as the next scheduled debt repayment of $1 billion is not due until 2017 and that there is considerable interest from the banking community to refinance that. Fortescue, says Forrest firmly, will always be strong. A nervous market is yet to be convinced.
Jennifer Hewett attended the Boao Forum as a guest of FMG.
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#32
FMG will need to drive down their cost futher with iron ore hitting $47 today.
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#33
Yes as expected, FMG has driven costs further down, and lower costs are expected:

http://www.skynews.com.au/business/busin...utput.html

Fortescue Metals reduced its quarterly cash costs by nine per cent to $US25.90 a tonne while lifting production one per cent to 37 million tonnes.

The miner shipped 40.4 million tonnes of iron ore in the March quarter, down two per cent from the previous three months, and received an average $US48 a tonne.

That compares to $US66 a tonne during the six months to December 31.

The miner's shares were 7.75 cents, or four per cent, higher at $1.93 at 1017 AEST.

The miner will now decide on plans for job cuts.

The company is urgently cutting costs to deal with low iron ore prices that show no sign of recovery, and the recently announced restructure of its rosters fuelled speculation employees will be let go.

Prices have plunged as demand from China fell and producers continued to ramp up output, and that trend is expected to again be reflected in Fortescue's March quarter production report.

Also hit by falling commodity prices is energy giant Woodside, which holds its annual general meeting in Perth on Thursday.

The company's revenue dropped 20 per cent in the three months to March, due mainly to lower prices.

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Well this reminded me something, 大难不死,必有后福。It is indeed that such a tough situation has make FMG stronger. Now the big problems lie in its huge debts, my opinion is that FMG should sell some of its mining assets to reduce leverage, lets see.
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#34
FMG jialat liao lah, they know BHP and Rio are eyeing their asset but really can't do much if iron ore keep on getting cheaper.
Virtual currencies are worth virtually nothing.
http://thebluefund.blogspot.com
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#35
if iron ore price less than 75 /ton, FMG loss money... what is the price now? think twice
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#36
(16-04-2015, 08:44 PM)RT Knight Wrote: if iron ore price less than 75 /ton, FMG loss money... what is the price now? think twice

Do you have evidence to substantiate your statement?
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#37
Fortescue seeks government help to contain exports
THE AUSTRALIAN APRIL 17, 2015 12:00AM


Matt Chambers

Resources Reporter
Melbourne


Fortescue CEO Nev Power, photographed in Perth. Source: News Corp Australia

Fortescue Metals Group has called for federal and West Australian government intervention to stem the price-sapping surge in Australian iron ore exports, with chief executive Nev Power declaring it has “ripped the heart” out of industry and communities and hurt the economy.

The call came despite Fortescue declaring it would produce 5 million tonnes more iron ore this year than previously indicated as it came through the West Australian cyclone season unscathed.

Mr Power gave a searing evaluation of the impacts of the huge boomtime ramp-up of supply from the majors — in which Fortescue has played a big part — stepping up a campaign to stop BHP Billiton and Rio Tinto pursuing low-cost ­expansions that both are considering.

“The current state of the iron ore market has been a disaster for everyone,” the Fortescue chief said yesterday after the release of the company’s March quarter production results.

“It’s ripped the heart out of the industry, it’s ripped the heart out of the contractors and suppliers of the industry, it’s ripped the heart out of the communities, and there are absolutely no winners in any of this, only losers.”

The comments come three weeks after Fortescue’s chairman and major shareholder Andrew “Twiggy” Forrest called on BHP and Rio to join him in committing to cap production, in statements that drew the ire of Australian Competition & Consumer Commission.

Analysts have a downbeat outlook for the industry. Investment bank Goldman Sachs yesterday slashed its long-term iron ore price from $US55 a tonne to $US45.

The bank cut its Fortescue and Rio recommendations to sell and cut BHP to neutral.

It cut its Fortescue target price to just 50c per share, representing a reduction in the value it places on Mr Forrest’s once $10 billion-plus fortune to just $500 million.

Fortescue’s calls for restraint come despite the miner being the biggest global contributor to the supply surge, having quickly ramped up to production rates of 165 million tonnes a year.

Fortescue yesterday confirmed it was operating at full capacity, boosting previous guidance of 155-160 million tonnes to between 160 million and 165 million.

Mr Power admitted existing investments, including Fortescue’s, were made on over-optimistic views of Chinese steel demand.

But he said new investments, no matter how cheap, should not be made by his competitors in what would become an oversupplied market.

“Governments need to have a really hard look at what’s happened in the industry and assess how they want to manage it,” Mr Power said yesterday.

“Talking to governments at both the West Australian and federal level, I understand the iron ore price projections are the single biggest issue in both the WA budget and the federal budget.

“The extent of the industry impacts, right across our nation, is causing concern and uncertainty at those levels, so I’m sure governments both in WA and at federal level are very focused on it.”

While West Australian Premier Colin Barnett has warned BHP and Rio to keep in mind that the state owns the iron ore, Tony ­Abbott and Joe Hockey have steered away from any suggestions of intervention.

Rio is considering investing in new mines so it can fully use its iron ore rail and port capacity, while BHP is looking at debottlenecking its infrastructure to add capacity.

Both say the expansions will be low-cost and make good returns, even at current depressed prices of about $US50 a tonne.

Yesterday, Fortescue said it would be able to drive costs, including interest, sustaining capital and shipping, down to break-even levels when the benchmark iron ore price was $US39 a tonne.

The cost guidance, which is partly based on roster restructuring that could cost 700 WA jobs, and production guidance boosted Fortescue shares by 10c, or 5 per cent, to $1.96.

Mr Power insisted the cost cuts were “permanent and sustainable” despite analysts’ scepticism. That break-even price would see Fortescue profitable even under the most bearish analyst assumptions.
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#38
Power should stop blame game and focus on costs
THE AUSTRALIAN APRIL 17, 2015 12:00AM

Barry FitzGerald

Resources Editor
Melbourne

Fortescue has done itself no favours with its histrionics on the rights of what it has been doing — increasing iron ore production — and the wrongs of what Rio Tinto and BHP Billiton have been doing — increasing production.

If that doesn’t confuse, maybe this will. In September last year, Fortescue boss Nev Power said that through Fortescue’s own rapid growth, it had helped bring “the iron ore price back from unsustainable peaks back to more long-term and sustainable competitive pricing’’.

Iron ore was $US80 a tonne. Now that it has plunged to below $US50 a tonne, the tune has changed.

The additional tonnes that have arrived, and those still coming from the world’s lowest cost producers — Rio, BHP, Brazil’s Vale and Fortescue itself — are now the problem, it seems. “It’s ripped the heart out of the ­industry, it’s ripped the heart out of the contractors and suppliers of the industry, it’s ripped the heart out of the communities, and there are absolutely no winners in any of this, only losers,” Power said. Nothing there about sustainable competitive pricing.

Power doesn’t actually include Fortescue in the clutch of low-cost producers who have done evil by expanding production because guess what, it is now “entirely ex-growth,’’ ignoring the 5-10 million additional tonnes it has planned for 2015 by sweating its infrastructure base, just as Rio and BHP are doing.

Power was speaking at yesterday’s briefing on Fortescue’s March quarter production and cost performance. And given the histrionics, it’s a wonder that Fortescue doesn’t sell up and get out of the business altogether.

Anyone would think that Fortescue was under the pump given the carry on. And it is.

But at least it has hope where still higher cost producers don’t.

To its credit, Fortescue gave a snapshot of what its break-even price could look like in the fast-­approaching 2016 financial year. It took an educated stab at $US39 a tonne which kind of looks OK with iron ore currently at $US49.70.

It would buy more time to deal with the elephant in the room — excessive debt of $US9.2 billion ($12bn).

But if some of the more dire price forecasts out there for iron ore to fall to $US35 a tonne prove correct, because of the stickiness of high cost production not dropping off as quickly as hoped, Fortescue will have its work cut out to survive.

The March quarter cost reduction achievement was laudable stuff, even if there was a one-off saving of about $85 million by slashing overburden removal while iron ore stocks were run off. And when Power says the drive to lower costs will be relentless, he is the kind of guy you can believe.

That’s the message he should have got across yesterday rather than playing the blame game.

That sort of twaddle is best left to politicians with budget ­problems caused by them not framing things around the ­inevitable fall in iron ore prices from that “unsustainable peak’’ that Power referred to last ­September.
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#39
I think Goldman is too daring to give a 50c value to FMG even Iron Ore at US$40 "No Rebound", FMG may still make money if it meets its forecast C1 cost of US$18 by 2016. A separate note, Capital Group has raised its stake in FMG again to over 7% as of end of March 2015.
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#40
Fortescue raises bond offer to $US2.3bn

http://www.theaustralian.com.au/business...7316504711

Iron ore miner Fortescue Metals has upsized its high-yield bond offering to $US2.3 billion due to high demand after earlier announcing a $US1.5bn debt issue.

This morning, the under-pressure miner launched the bond offering, just a month after the group's failed attempt to secure $US2.5 billion in fresh funding from the market.

Fortescue chief executive Nev Power said the latest offering had seen strong demand from the market.

“Once again the US capital markets have shown great support for Fortescue. The March 2015 quarterly results, reduction in operating costs and our track record of delivery have all been key factors in this great outcome for Fortescue”, Mr Power said

Investors responded well to the developments. By 10.15am (AEST), Fortescue shares were 8.14 per cent higher at $2.06, against a benchmark index decline of 0.09 per cent. In earlier trade, Fortescue shares touched a four-week high of $2.08.

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9.75% interest, can FMG still survive with it? Huh
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