fortescue offloads ore at discount

January 30, 2009
FORTESCUE METALS has admitted selling some of its iron ore shipments at a discount to the benchmark price before the conclusion of this year's pricing talks.

The miner yesterday reported $612 million of earnings before interest and tax for the first half, which included a $74 million loss on shipping contracts. It is in dispute with several shipping companies after it pulled out of contracts when shipping prices plunged towards the end of last year, but does not expect to book further losses in the second half.

In the December quarter Fortescue's cash on hand fell to $440 million, from $624 million at the end of September. The substantial fall came despite Fortescue gaining $322 million from selling and leasing back some of its infrastructure, which will serve to raise operating costs. Of the $440 million remaining, about $160 million is restricted cash that will be put towards making interest payments, leaving Fortescue with $280 million in free cash, highlighting the importance of the leasing arrangements.

Fortescue has placed its plans to expand output to 80 million tonnes a year on indefinite hold due to the weak market for iron ore and the difficulty in obtaining funding. It has also faced difficulties ramping up its targeted production rate of 45 million tonnes a year because of a weak market for lump ore, the need to keep the amount of alumina low and water issues. It reported cash production costs of $38.32 a tonne in the December quarter, compared with $29.87 a tonne in the September quarter.

"It would be wrong for me to say we haven't been challenged," said a Fortescue executive director, Graeme Rowley.

Fortescue expects to ship about 18 million tonnes of iron ore in the second half, compared with 13 million tonnes in the first half. It received an average price of $96.63 a tonne for its ore in the December quarter, compared with $88.69 a tonne in the September quarter.

But the rapid fall of the Australian dollar meant the company should have received more than $96.63 a tonne in the December quarter if it was selling all of its ore at the benchmark price. Mr Rowley said it was discounting its ore on a "case-by-case" basis and noted smaller, private Chinese steel mills were more accepting of shipments than larger, state-owned rivals.

Fortescue said the spot price for ore of its quality was about $US65 to $US70 a tonne and noted "some adjustments to selling price will be required until the new pricing regime is agreed for the 2009-10 year".