SYDNEY—Fortescue Metals Group Ltd. said it intends to cut costs
in the year ahead by nearly as much as the two prior fiscal years
combined, as the miner steps up its defense against a slumping
iron-ore price.
Once a tiny explorer, Fortescue took on major producers Vale SA,
Rio Tinto PLC and BHP Billiton Ltd. in a decadelong expansion that
turned it into the world's fourth-largest iron-ore exporter. But
the cost of digging up its ore is higher than those rivals, and the
miner also sells its raw material, which is lower quality, for
less. That leaves it vulnerable as iron-ore prices fall.
In 2012, executives set about cutting costs from the business,
spooked by a sharp dip in prices that sparked emergency talks with
lenders. Cutbacks were wide-ranging, from job layoffs to company
funded barbecues.
Now, Fortescue thinks it can go deeper. On Thursday, the miner
said it expects to cut costs a further US$1.4 billion in the year
through June, 2016, almost matching the US$1.6 billion of savings
recorded over the 24 months prior.
"That means we will produce the same amount of tons as we did
last year, and we will spend US$1.4 billion less in doing so,"
Chief Financial Officer Stephen Pearce said on a conference
call.
The miner is renegotiating rates with suppliers and changing how
it blends and processes ore. Mr. Pearce wouldn't say whether there
would be more job cuts, although he said: "We will always continue
to refine our organization."
Chief Executive Nev Power said Fortescue aims to "close the gap"
with BHP and Rio Tinto. All three companies operate large mines in
the Pilbara region of Western Australia.
Analysts praised the miner's efforts on costs, and its higher
production. The Perth-based producer said iron-ore shipments
totaled 165.4 million metric tons in the year through June, up 33%
on-year and at the top end of its earlier projection of 160-165
million tons.
But that wasn't enough to turn investors' attention away
Thursday from the weak iron-ore price, said traders.
The spot price declined 2.7% late Wednesday to US$50.70 a ton.
Earlier this month, the price fell to a decade low of US$44.10 a
ton, down 38% this year and more than two-thirds on the start of
2014.
"Again, not a day to be in iron ore," said Quay Equities head of
trading Tristan K'Nell. Fortescue shares were recently down 6%.
Analysts predict iron ore will fall further later this year,
largely on rising supplies, including from billionaire Gina
Rinehart's new 55-million-ton-a-year Roy Hill mine in Pilbara. BHP
and Rio Tinto are also producing more.
"The well-documented continuation of rising seaborne supply
continuing to overwhelm weak demand from China remains the dominant
theme in the iron-ore market," said Argonaut Securities analyst
Helen Lau. Citi analysts forecast prices to fall into the US$30s
before year-end.
Fortescue said it would now hold production steady at 165
million tons. The miner estimates it has a break-even price of
US$39 a ton, although that estimate has a lot of moving parts,
including the value of the Australian dollar. A falling Australian
dollar is good for resources exporters, who have their costs in
that currency but sell their commodities in U.S. dollars.
Mr. Power argues Fortescue's balance sheet is in good shape to
weather further price dips. The miner recently managed to refinance
its debt, albeit at a higher interest rate.
"With US$2.4 billion in the bank and no debt due until 2019, we
are in an incredibly strong position" to hold on through any
declines below that break-even price, he said.
Still, Fortescue's stock has lost nearly two-thirds of its value
in the past year as investors have fretted over both its high debt
pile and its ability to compete with BHP and Rio Tinto, which are
also cutting costs.
"This Darwinian environment demands cost advantage and a strong
balance sheet," Morningstar Inc. analyst Mathew Hodge said
recently. "Fortescue Metals Group has neither."
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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