Iron ore shipments by Fortescue Metals Group Ltd. (FMG.AU) increased by 12.6% on year in the quarter ended Dec. 31 to 10.6 million metric tons, but the stronger Australian dollar kept up the pressure on the miner's margins despite a 20% rise in its selling prices.

The world's fourth-largest iron ore miner said its average selling price was US$150 per dry metric ton, including cost and freight at end-user ports, compared to US$125/ton in the previous quarter.

Cash costs rose an identical 20% on the quarter to US$41.50/ton, Fortescue said in its second-quarter production report.

Chief Financial Officer Stephen Pearce said US$3 of the US$6.67 increase in cash costs was down to the rise in the Australian dollar, which rose 7.3% against the U.S. dollar from an average 91.5 U.S. cents to 98.8 cents over the quarter.

"The December quarter costs were clearly higher than we would like and higher than our target levels," he said, although the increase in prices was offsetting the impact of the rises. In both quarters, the margin of sales prices above cash costs came to 72%.

Management said rainfall slowed some of the company's construction activities and caused three iron ore cargoes carrying a total 500,000 tons of ore to be deferred to the current quarter.

A tropical cyclone bearing down on Australia's northwest coast on New Year's Day caused the temporary closure of the Pilbara iron ore region's two major bulk ports.

However, executive director Russell Scrimshaw said a backdrop of rising iron ore prices left the company optimistic about its prospects.

"The market is strong, demand is strong. I'd love to be able to produce more but we're buoyant about the medium term," he said.

Fortescue expects to mine 40 million tons a year from its Christmas Creek and Cloudbreak mines and is planning an US$8.4 billion expansion to 155 million tons a year of production in 2014, which would put it on a par with the current output of Rio Tinto PLC (RIO) and BHP Billiton Ltd. (BHP), the world's second and third-biggest iron ore miners behind Brazil's Vale SA (VALE).

Fortescue's own share of ore shipped, excluding third-party shipments, rose 9.4% on the year to 9.9 million tons, the miner said, while the overburden removed to access ore bodies increased 50% to 39.5 million tons.

The miner's production was well ahead of the previous year but slipped back from the record September quarter, when 11.1 million tons of ore was mined and 10.1 million tons of Fortescue's production was shipped.

The miner said it had sold a trial shipment to an Australian steelmaker, understood to be BlueScope Steel Ltd. (BSL.AU) as the only other steelmaker, OneSteel Ltd. (OST.AU), mines its own iron ore.

"The initial sale was a trial shipment but we expect we will have a continuing long-term relationship with that customer," said Scrimshaw.

Fortescue said cash on hand increased by US$1 billion during the quarter to US$2.37 billion. Two bond issues over the December quarter raised US$3.54 billion in capital, although $2.04 billion of that total was replacing an existing debt facility which was repaid.

Australia's Bureau of Meteorology is predicting a heavier-than-usual cyclone season in the Pilbara, with 11 or 12 storms expected before the cyclone season ends in April, of which only two have formed so far.

Paul Hallam, director of operations, said the company hopes it has been spared the impact of the weather. "We've got our fingers crossed," he said. "We have been fortunate in not being impacted by any major events since we started production."

The company said it wasn't worried by the impact of flooding in Australia's Queensland state, which has caused disruptions to the state's exports of hard coking coal that some analysts expect to double the price of the commodity to US$400/ton or more.

That could have knock-on effects for iron ore demand, as the tighter margins for steelmakers who use hard coking coal may cause them to trim production, and thus iron ore purchases.

"We've already scheduled our shipments over the next few months and the (iron ore) price has continued to adjust (upwards) over the last few weeks while this bad weather has hit coking coal states," said Scrimshaw. "We think our book's pretty well covered."

Management also said they were unconcerned about moves by China to raise interest rates, as they were only likely to affect smaller, less profitable steel mills.

"There's probably more than 800 steel mills in China," said Scrimshaw. "The largest 50 or so are our customers, and yes there is consolidation going on (but) we're not concerned. We'd love to have more stock to sell if we could," he said.

-By David Fickling, Dow Jones Newswires; +61 2 8272 4689; david.fickling@dowjones.com
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