Fortescue plans lowers costs as production steadies

07-Aug-2017

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 millon 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 USD 70 a tonne and sold down the shares 1.2% to USD 5.24.

The company also reported cash costs (known as C1 costs) of USD 12.16 a wet metric tonne, down 15% on the June quarter in 2016. Fortescue says it can drive costs down further to USD 11 to USD 12 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.

Fortescue said that “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.”

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.

Fortescue said that “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.”

Source : SHARE CAFE

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