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Fortescue's 'go slow' adds to warning signals

Date
September 4, 2012 - 12:32PM



Adele Ferguson
Business columnist



Fortescue cuts spending, staff

After the market closed last night Fortescue Metals Group made a few calls to some of their valued contractors and mining services clients to give them the heads up on plans to pull back on their expansion plans in the Pilbara to account for the sustained fall in iron ore prices.

The company's message was that it would be a small adjustment, a “go slow” if you like and that it would have little, if any, impact on their overall work.

Fortescue Metals duly this morning issued a detailed announcement to the ASX outlining a $300 million cut in operating costs, a 26 per cent decrease in capital expenditure to $4.6 billion, and a reduction in its production guidance following a move to defer its Kings deposit within the Solomon mining project.

Its boss Nev Power also mentioned the potential sale of its Solomon power station for an estimated $300 million. But with its decision to defer the Kings deposit, it might have to take a discount.

The decision to pull in its belt was prudent given the fall in commodity prices and the slowdown in China. Still, it wouldn't have been an easy decision to make given it sends a powerful message to the market that the board isn't confident that iron ore prices will jump back soon.

It is further evidence that the boom is over but it doesn't mean that a bust is on its way. If China starts to stimulate its economy, iron ore prices will rise again.

Miner pinch

Nevertheless, if iron ore prices stay at these levels or drift lower it will put pressure on the boards of some smaller miners to outline their plan B.

Put simply it throws into question some other companies expansion plans, which are unquestionably uneconomic at current iron ore prices.

According to a table compiled by Deutsche Bank, the cost of producing iron ore for Fortescue Metals Group is $US63 a tonne, compared with $US86.90 a tonne for Mount Gibson and $82.50 for Atlas Iron.

With iron ore prices falling well below $US100 a tonne, and some economists forecasting they could fall as low as $US70 a tonne, financing will get tougher, investors will start to bail, and hedge funds will start pouring in to short the stock.

Fortescue Metals, is still profitable at these levels but it has been the target of hedge funds.

In July more than 5.9 per cent of its stock was shorted, making it the 21st most shorted stock on the ASX. By August, more than 7.4 per cent of its stock was shorted, making it the 15th most shorted stock - and today's that level stands at 15.7 per cent. (The shares, up as much as 3 per cent in early trading, have now retreated by about as much.)

There is a lot of doom and gloom going on in mining, with many mining services companies, drillers, contractors, all being forced to look at their pipeline of upcoming projects to ensure investors are being kept fully informed.

Read more: http://www.smh.com.au/business/mining-and-resources/fortescues-go-slow-adds-to-warning-signals-20120904-25bpn.html#ixzz25SvCmTd3