Australia’s third iron ore miner, Fortescue Metals Group is still talking cost cutting as it maintains production guidance for 2017-18 at 170 million tonnes – little changed than the 170.4 million shipped in the year to June this year.
The company said in its 4th quarter production report (without no annual figures) that it is aiming to cut its cash costs to as low a $US11 a tonne in the current financial year, after dropping them by 15% in 2016-17.
Fortescue said it had shipped 44.7 million tonnes in the quarter, taking total shipments across the 2017 financial year to 170.4 million tonnes, in line with guidance.
The market took all this in its stride, ignored the return of spot iron ore prices to over $US70 a tonne and sold down the shares 1.2% to $5.24.
The company also reported cash costs (known as C1 costs) of $US12.16 a wet metric tonne, down 15% on the June quarter in 2016. Fortescue says it can drive costs down further to $US11 to $US12 a wet metric tonne.
But unlike its larger rivals, BHP and Rio Tinto, Fortescue, with its lower grade ore (around 58% iron oxide against the 62% average the bigger companies mostly ship), won’t be looking at a big jump in earnings in the year to June 30. That’s because the discount its ore received because of its lower quality (based on the benchmark index price for 62% ore delivered to northern China on a cfr basis), has widened in recent months.
Fortescue said the average price it received through the June quarter was $US37.82 a tonne. It said the contracts it entered into during the quarter reflected 73% of the average index price for top quality 62% iron ore through the quarter.
“The current spread in prices between iron ore grades is expected to continue in the short term while steel mill profitability and iron ore port stockpiles remain at current high levels," Fortescue said on Thursday.
In the June quarter of 2016, Fortescue said it received an average of 88% of the benchmark price, which suggests the discount the group is facing has more than doubled from 12% to 27% in the year to June.
"In the longer term, Fortescue expects average price realisations to revert to historical levels as market conditions normalise and steel mills maximise the value in use of their operations."
In its third quarter production report in April, Fortescue cut its guidance for the 2018-17 to 75% to 85% of the index. Fortescue said on Thursday that it expected the 2018 financial year to be similar – 75% to 80% for the full year. “Realisations are expected to continue at or slightly below the low end of guidance in the first half before recovering to historical levels in the second half of FY18," Fortescue said.
The discount has grown because Chinese steel mills – the major buyers – are after more supplies of higher grade ore with a 62% plus iron oxide content because it produces a higher yield of steel. The steel mills can afford to pay the extra because of booming profits and prices for steel products in the domestic Chinese market.
Fortescue’s financial strength improved in the year to June – the company’s cash pile rose to $US1.8 billion over the quarter, as did its gross debt, which rose to $US4.5 billion due to an increase in finance lease liabilities after the delivery of two of its new ships during the quarter.
In May, it extended the earliest maturity of its debt to 2022 (from 2019) by refinancing $US1.5 billion of existing debt through the issue of unsecured notes.
Fortescue revealed on Thursday it had received unconditional commitments for a new $US525 million revolving credit facility "from a syndicate of financial institutions in Australia, China and Europe". The facility is expected to close by the end of July.
Fortescue said it would provide "enhanced capital management flexibility, with its terms reflecting Fortescue’s strengthened credit profile".
