Fortescue Metals Group chief executive Nev Power says BHP Billiton and Rio Tinto will be “sadly disappointed” if their aggressive expansion plans are aimed at knocking out the nation’s third-biggest iron ore producer.
Shares in Fortescue have plunged as quickly as the iron ore price, dropping 45 per cent since February to $3.57 on Friday, and wiping off $2.6 billion from the value of Andrew “Twiggy” Forrest’s 33 per cent stake.
Concerns have emerged about how long Fortescue can sustain the price rout, especially after larger rivals BHP and Rio upped the ante by planing to add an extra 75 million tonnes to the market by 2017, or nearly half what Fortescue is now producing.
Iron ore prices are hovering at about $US80 a tonne, a five-year low.
In a bitter war of words between the leading executives, Rio Tinto iron ore chief executive Andrew Harding said Mr Power was panicking, after the Fortescue chief described the expansions as a “scorched earth” strategy.
Speaking at Fortescue’s Cloudbreak mine, Mr Power toldFinancial Review Sunday on Channel 9 he was “anything but panicking”.
“We are very happy where the business is and where the business is going,” he said. “We still have further work to do to continue to reduce our costs and we are on track to do that.”
Fortescue’s margins are getting crunched. It may have a street on its mine named “quality street” but its ore remains a lower grade than that of its bigger rivals and, as a result, it has to offer discounts to its Chinese steel customers.
Fortescue is now pocketing about $US10 a tonne to $US15 a tonne from ore exported from its Pilbara operations.
Some analysts are concerned it has had to offer further discounts while concerns mount BHP and Rio’s expansions is aimed at further depressing prices to squeeze Fortescue out of the market.
“I have heard that commented,” Mr Power said. “All I can say is that they [BHP and Rio] going to be very sadly disappointed if that is their view.”
Asked if Fortescue was making a profit on the ore the miner was now digging up in the Pilbara, he said: “We are very profitable. Of course we’d like another $US10 a tonne on the iron ore price, as everybody would in the iron ore business.”
In September 2012, when an iron ore price crash hit before Fortescue had finished building its mines, the miner moved to sell its rail and port infrastructure business.
Mr Forrest, Fortescue founder and chairman, has described the ability to sell its infrastructure as the company’s “bullet-proof plan B”.
Mr Power said miner had not re-considered a sale of the infrastructure.
“We haven’t looked at that,” Mr Power said.
“We would consider selling a part of our infrastrucutre assets for the right value and on the right terms and conditions. Unless the right offer comes along then we won’t look at it.”
He said the miner could sustain even lower prices because it was pushing its production costs lower with every passing day.
“We are continuing to run the business to reduce the costs and reduce the cash requirements in the business,” Mr Power said.
While it has criticised Rio and BHP’s expansion plans, Mr Power is driving to lift production from its original plan for 155 million tonnes a year to 180 million tonnes.
It has opened him up to criticism that he is the Pilbara’s biggest hypocrite.
Mr Power defended his position, telling Financial Review Sunday some of his criticism was taken out of context and adding that perhaps the big miners were “a bit touchy about any discussion around their strategy”.
He said Fortescue’s production plans had been well signalled. When Fortescue’s fifth berth opens at Port Hedland early next year, the miner will have enough capacity in its network to export 180 million tonnes a year. Its current run rate is 166 million tonnes.
“My comment was more about what we were doing going forward rather than anything that has been done in the past,” Mr Power said.
Citigroup has estimated Fortescue will need to spend $US700 million improving its railway and mine assets to cope with a 180 million tonne a year output.
The bank says once the company’s fifth berth is completed, rail becomes a key constraint “requiring Fortescue to assess heavier axle loads and shorter cycle times”.
“We see additional rakes and passing loops being required to remove the bottleneck,” Citigroup said in a note to clients.
Mr Power said the company did not need to spend more capital improving the railways.
“The rail is fine,” Mr Power said. “We have no intention of spending more capital.”
He said Fortescue was not considering acquisitions in order to snatch ore from distressed players that could add more tonnes to its network more cheaply than expanding its operations.
“We are not looking to invest capital to expand production,” Mr Power said.
He said the company had resources of up to 16 billion tonnes.
“That’s the lowest cost tonnes,” he said.
But this did not mean acquisitions were off the table over the longer term.
“If there is a supply deficit we would look to expand,” he said.
FMG Price at posting:
$3.47 Sentiment: Buy Disclosure: Held
(20min delay)