Fortescue Metals Group will go ahead with a large expansion project in Western Australia later this year, if the recent recovery in the iron ore price is sustained.
Fortescue said it expected the price of iron ore, a key steelmaking ingredient, to stabilise at about $120 a tonne as stimulus packages generated increased demand for steel and restocking at Chinese mills.
Last month the world’s fourth-biggest iron ore producer put plans to increase production from 55m to 155m tonnes a year on hold, as the price of iron ore slumped to a three-year low of $87 a tonne.
The price has since recovered to about $113 a tonne, during which time Fortescue has restructured its large debt pile and lifted its borrowing capacity through a new $5bn lending facility with US investors.
Nev Power, Fortescue’s chief executive, said that if prices held, work on the 40m-tonnes-a-year Kings deposit in the Pilbara region of Western Australia could resume by December.
“We will continue to monitor the market conditions in China. But if the iron price stays around where it is today we’d be very confident about kicking off,” he said. “We raised an extra $500m in the debt facility so we’ve got the liquidity”.
He was speaking after Fortescue announced production results for the three months to the end of September. The company, which last month axed more than 1,000 employees and contractors in an effort to cut costs, said it had shipped 16.1m tonnes in the quarter in spite of disruptions from maintenance and production activities. This was slightly ahead of company guidance.
David Liu, Fortescue’s head of sales and marketing, said Chinese steel mills had gone to extraordinary lengths to destock their inventories in response to slowing economic growth. He said this “over cautious” response explained why the iron price had “overshot” on the downside and quickly rebounded.
“As more and more [Chinese] steel mills start to claw back profit margins this will hopefully encourage them to plan more rationally and reduce market volatility,” he said.
Fortescue recorded an average sale price for its iron ore of $98 a tonne in the quarter. Analysts estimate that Fortescue is barely profitable at an iron ore price of $100 a tonne. This is because of interest payments on its large debt pile and taxes. Although the iron ore price has recovered, it remains significantly below this year’s high of nearly $150 a tonne.
Fortescue maintained its output target of 82m to 84m tonnes for the year to June 2013 and said it expected to be producing at an annualised rate of 115m tonnes by March. Shares in Fortescue rose 3.5 per cent to A$3.85.