Possibly the best thing that could have happened to FMG was the iron ore price falling to USD85 per tonne, some 12 months ago. That’s the point at which FMG had its “titanic” moment. The company realised that if it didn’t take evasive action very quickly, the ship could go down. A frantic weekend solidifying its debt position ensured the company’s survival.

Since then the company has worked tirelessly to position itself as “the best on ground”. What it lacks in the quality of the underlying resources that BHP or RIO possess, it has made up through ensuring that the process chain is as efficient as it can possibly be.

FMG has come a long way and still has some way to go. However I suspect that within 12 to 18 months’ time, the company’s break-even point won’t be too far away from that of BHP’s iron ore division. It is currently number 3 on the world cost curve.

Facts

  • FMG’s breakeven cost is USD70 per tonne; a reduction of USD20 per tonne over the past twelve months
  • The September quarter average realised  price was USD121 per tonne, compared to USD113 in the prior quarter
  • The cash balance was $2.8 billion at end of September 2013

Major upcoming events

  • March 2014 ramp up to production of 155 mtpa
  • Debt repayment in the 2014 calendar year of USD4 – 5 billion dollars
  • Blending of high grade, high phosphorous ore from Firetail in the Solomon hub with the lower grade, low impurity ores from Christmas Creek. This will reduce strip rations and substantially reduce operating costs
  • Introduction of autonomous haulage fleets, which will lead to large costs savings

Major longer time frame events

  • Construction of a 5th load out berth at Port Hedland will allow ramp up of production to 175 mtpa
  • The majority of production ramp up will be achieved through “sweating” existing assets and hence the cost of new production could come in as low as USD60 per tonne
  • Corporate culture relies heavily on a bottom up approach, whereby those who are working on a process are encouraged to become part of the efficiency drive. This has created a culture whereby everyone in the production chain is focused on margins

Late Entry Benefits

  • The world’s heaviest gauge rail network with a resultant very low unit haulage cost
  • Super-efficient rail workshops
  • Extremely low cost ship loading operations

Investment schematics

  • Various initiatives should see break-even coming down to around USD60 per tonne
  • Cash flow, once full ramp up is achieved (based on current prices and currency levels) is expected to be USD7.5 billion per annum. This is expected to increase to USD8.5 billion per annum from 2016, once final expansion to 175 mtpa has been achieved
  • Debt is expected to be USD4 to 5 billion by the end of the 2014 calendar year
  • The current capital expenditure cycle is effectively at an end. This is the major point of differentiation between Fortescue and RIO and BHP as those companies are still at the expansion stage
  • Based on FMG’s own forecast 2014 numbers, FMG is trading on a forward PE of 6 times
  • Once the current debt payment cycle is complete, the company has the potential to become a long term, high yield play (dependant, of course, on the underlying currency and commodity prices)
  • The average market forward PE is 10 times and BHP is on 12 times. One comment that was consistent amongst all those who attended the trip is that the main point of differentiation between FMG and BHP and RIO is that FMG is seen to be ex-capital spend,  which was seen as a significant positive

—oooOooo—

12 November 2013 Companies