FMG / FMS

Comparing FMG to FMS, one wanted to do it the other is waiting.
FMG needed a I/O of $85 now they need a price of   around $28 an d dropping. Of course they are benaficiating  and transporting ore 200km from one mine to beneficiation plant. Message is get on with it and make it work. Good to see if they are paying back another trench of there loan on Wednesday. Nice Xmas present for Twiggy?
great story and something to learn from and aspire to.
FMG became fighting fit by becoming the biggest loser
Date
November 20, 2015
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Peter Ker
Peter Ker
Resources reporter
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The FMG beneficiation plant in the Chichesters.
The FMG beneficiation plant in the Chichesters. Photo: Damien Smith
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If Fortescue Metals Group successfully repays a significant chunk of its $US6.6 billion ($9.29 billion) net debt on Wednesday, it will not be because iron ore prices are flying high, nor because the miner has sold its assets for spare cash.
There are a lot of people with all the scepticism under the sun about whether we can do this and whether it is achievable.
Fortescue chief executive Nev Power
The $US750 million repayment, which would be the second in four months if completed, has largely been made possible at this faminous time in the iron ore cycle because of a fiercely debated set of changes to the way the company mines its iron.
A set of changes that, as always with Fortescue, has attracted its fair share of doubters, but appears to be winning acceptance.
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When Fortescue had its near-death experience in September 2012, to break even the miner needed iron ore prices to average about $US89 a tonne – double the price the bulk commodity was fetching on Thursday.
These days the miner can "wash its face" as long as iron ore prices average higher than about $US38 a tonne.
The extraordinary cost reduction is often waived away as a consequence of the weaker Australian dollar and oil prices over the same period, which have significantly reduced the relative cost of the wages Fortescue pays to workers in Australia and the fuel it uses to run its generators and ship its product to Asia.
But the truth is more complex, and controllable factors have played as much, if not more, of a role in reducing the company's costs.
Second hub
The Chichester tenements are far from the easiest to mine in the Pilbara.
The Chichester tenements are far from the easiest to mine in the Pilbara. Photo: Damien Smith
The changes began in 2013, when the company began mining at a second "hub" in the Pilbara, about 200 kilometres from its original mines in the Chichester Range.
Having two hubs allowed Fortescue to blend the ore from its various mines, meaning ore with high iron grades and high levels of impurities like alumina and silica could be blended with ore bearing fewer impurities and lower iron grades to create a product with the exact specifications required by the Chinese steel mills that are Fortescue's main customers.
But the construction of several beneficiation plants across its mining hubs has been the main bridge between the original, high-cost Fortescue and the company that today is almost as cheap a producer of iron ore as Rio Tinto and BHP Billiton.
To understand why the beneficiation plants were necessary, the nature of the ore bodies in the Chichester Ranges that Fortescue's original mines were built on must be appreciated.
The Chichester tenements are far from the easiest to mine in the Pilbara, with the iron contained in a patchwork quilt of clay and sediment.
They are also close to the water table, which is not ideal given Chinese steel mills do not pay for water.
In its earliest days, Fortescue had to mine carefully around the clay and sediment in the proverbial patchwork to ensure it extracted the ideal grades of iron.
Painstaking
The nadir of iron ore prices is widely tipped to arrive in 2016.
The nadir of iron ore prices is widely tipped to arrive in 2016. Photo: Bloomberg
The process was not only painstaking, but was labour and machine intensive, with the valuable iron and the unwanted waste both needing to be carted away in separate trucks to their destinations.
But the introduction of the beneficiation plants allowed the miner to collect the iron and the impurities together and dump them into the beneficiation plants, where screens and separation systems known as cyclones sorted the wheat from the chaff.
The beneficiation strategy lowered costs in several ways – it dramatically quickened and simplified the mining process, enabling the iron and the waste to be moved with fewer machines and fewer humans, reducing the bill for diesel and wages.
Beneficiation also shifted the boundary between what was considered waste and what was considered product, meaning ore containing low iron grades could become valuable if processed up to the required standard.
With lower-grade ore becoming usable, more of the tenement could be considered good enough to become product, effectively extending the mine life.
Perhaps most importantly, the introduction of the beneficiation process lowered "strip ratios", a term that compares the amount of waste being moved with the amount of valuable product being produced.
Less waste
Once a high-cost producer, Fortescue's 'cash costs' have fallen by more than 40 per cent.
Once a high-cost producer, Fortescue's 'cash costs' have fallen by more than 40 per cent. Photo: Bloomberg
A lower strip ratio means less waste must be shifted to access each unit of iron, and the mine is therefore cheaper to run.
Strip ratios in the Chichester mines reduced from 5.4 before 2013 to 2.3 in the year to June 30.
Fortescue forecasts its Chichester strip ratios to be 1.6 for the next five years and about 2.3 over the life of the mine.
Once a high-cost producer, Fortescue's "cash costs" – the cost of putting iron ore on a ship, excluding administration costs like interest – have fallen by more than 40 per cent over the past three years, and by the end of this financial year will be within a dollar or two of the world's lowest-cost iron ore exporters, BHP Billiton and Rio Tinto.
"This is not magic, this is a lot of hard work and a lot of people around FMG engaging in thinking about how we can improve our business," Fortescue chief executive Nev Power said this week.
"We are not putting relatively high-grade iron units in the waste piles. We are mining that, processing it to upgrade it to product grades and then selling that."
The scale of the cost reduction revolution at Fortescue led many in the analyst community to believe the results were too good to be true.
Slashing spending
In recent months the tide of opinion has shown signs of turning.
In recent months the tide of opinion has shown signs of turning. Photo: Bloomberg
Fortescue was accused of selectively mining just the very best parts of its tenements at the expense of their longevity, and of slashing spending on crucial maintenance, like engine repairs, to unsustainable levels in a bid to ride out the dip in iron prices.
The scepticism was fanned by the fact the majority of BHP and Rio's iron ore does not go through the same beneficiation process, muddying attempts to compare Fortescue's strategy with its rivals.
"There are a lot of people with all the scepticism under the sun about whether we can do this and whether it is achievable," Mr Power said.
"That is the same scepticism about whether Fortescue [would] ever be here ... there are people out there that are just born sceptics."
But in recent months the tide of opinion has shown signs of turning.
Fortescue took more than 70 analysts and shareholders to the Chichester Range in October to demonstrate the strategy first hand, and a growing number of analysts now believe that Fortescue's cost-reduction achievements are real and sustainable for the medium term at least.
Big impact
FMG has been labelled 'competitive and sustainable'.
FMG has been labelled 'competitive and sustainable'. Photo: Erin Jonasson
Deutsche analyst Paul Young published a note to clients earlier in November after inspecting Fortescue's Pilbara operations in October, and said beneficiation plant upgrades were having "a big impact" and the reduced cost levels were sustainable in the medium term.
"We now think FMG can maintain their all-in costs around $US30 per wet metric tonne for at least the next three years," he wrote.
Mr Young said Fortescue's strip ratios, costs and capital spending would rise in the long term, but predicted the miner would be able to reduce its net debt by $US1.6 billion by June 2017.
Shaw and Partners analyst Peter O'Connor told clients Fortescue's business model was "competitive and sustainable", and the company was "thriving, not just surviving".
"FMG is a legitimate player at the major end of the iron ore industry and is here to stay for the long haul," he said.
"Recent iron ore processing developments by FMG have yielded significant upside in terms of reserve and resource upside via lower ore cut-off grade, mining costs lowered materially via lesser material movement requirements, while capital, both current and future, is significantly freed up."
Despite Fortescue typically being ranked as the world's third- or fourth-cheapest iron ore producer, Mr O'Connor went as far to say it was the world's cheapest once the large dividends paid by BHP and Rio were taken into account, and Vale's massive capital spending program was considered.
Confident
Fortescue chief executive Nev Power.
Fortescue chief executive Nev Power. Photo: Bloomberg
Mr Power said this week he was confident the company had addressed most of the concerns held by the "sceptics".
"We have specifically set out to explain more of what we are doing around strip ratios and to explain the processes we go into," he said.
"We want to make sure the investment community come on that journey with us and fully understand what it is about."
While there is growing acceptance of its strategy and performance, Fortescue has not reached yet its happy ending.
The nadir of iron ore prices is widely tipped to arrive in 2016, with many believing the price will fall far enough to shave away most of the company's profit margin.
Citi is among the most bearish, predicting prices to average $US41 a tonne in 2016.
Fortescue says 450 million tonnes of iron ore production is above it on the cost curve and will provide some protection amid weak prices.
Not ideal
The company has taken advantage previously of the debt discount trend.
The company has taken advantage previously of the debt discount trend. Photo: Bloomberg
But slim margins are not ideal when you have $US6.6 billion of net debt to pay down within seven years.
Happily for Fortescue, significant savings are being achieved in the realm of debt repayments too.
If Wednesday's debt repayment goes ahead as hoped, Fortescue will service $US750 million of its unsecured bonds for the price of about $US650 million, thanks to the fact that its debt is trading on markets at between 75¢ and 93¢ in the dollar, depending on the particular tranche and its conditions.
The company has taken advantage previously of the debt discount trend, which is the equivalent of getting a discount on a household mortgage.
Fortescue serviced $US384 million of debt in the September quarter, at a cost of $US305 million, in a transaction that will save it $US33 million in interest a year on top of the face value savings.
When asked why its debt was trading below face value, Fortescue chief financial officer Stephen Pearce said there was no single reason.
"It could be general market views, it could be balancing their own book, it could be a lot of reasons why they would buy and sell a debt piece just like an equity piece," he said.
"It could be around views on China, iron ore or whatever."
Just another sceptic for the turning, perhaps.
The reporter inspected the beneficiation plants in the Chichester Range this week with the assistance of Fortescue Metals Group.
Read more: http://www.smh.com.au/business/mini...ghting-fit-20151119-gl3fxj.html#ixzz3utzxjZNf
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