Rising oil, dollar loom as hurdles to Fortescue savings plan
Andrew Forrest’s Fortescue Metals Group has spelled out how it plans to deliver another round of deep cost savings.
Andrew Forrest’s Fortescue Metals Group has spelled out how it plans to deliver another round of deep cost savings.
Shares in the miner jumped more than 5 per cent yesterday to their highest level since March 2014 as it kicked off its annual analyst tour of its Pilbara iron ore operations.
Presentation materials released yesterday provided fresh clarity on how it aims to save another $US3 per tonne from its production base. The company wants to lower its cash costs to just $US12 to $US13 per tonne, but there has been rising scepticism about whether it can meet that target given recent gains in the oil price and strength in the Australian dollar.
The company’s costs are also due to come under pressure from a rise in its strip ratio, the amount of waste rock it must dig to access each tonne of ore, and an increase in sustaining capital expenditure across its mines.
The slides yesterday showed that the company expects it can deliver another $US3 a tonne in efficiency and productivity improvements split between mining ($US1.70 a tonne in savings), ore processing and beneficiation (US70c) and procurement (US60c).
The mining savings include increased equipment productivity and greater use of self-driving vehicles. The company also flagged it expected to generate savings by sourcing more equipment and consumables from China.
The presentation materials also repeated the company’s commitment to holding a minimum $1 billion in cash on its balance sheet for liquidity purposes. Last week’s September quarterly showed that the cash on hand had increased to $1.8bn, which leaves another $800m available for further debt repayments in the near term.
Last year’s analysts and media site visits represented something of a turning point for Fortescue, as the tours led to an increased market confidence in the sustainability of its cost base.
That confidence, along with a healthy rebound in the iron ore price, has helped make Fortescue the third-best performed stock on the ASX this year. Its shares have soared from around $2.20 at the time of last year’s site visit to a high yesterday of $5.44, lifting the value of Mr Forrest’s stake by more than $3bn.
The strength of this year’s share price rally coupled with the building cost headwinds has led to a shift in analyst sentiment against Fortescue.
According to Bloomberg data, just three of the 21 analysts who cover Fortescue rate it a buy and of 12 rate it a sell.
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