Merrill Lynch Report:Prod?n at 40mtpa rate; Revenue realisation...

Merrill Lynch Report:

Prod?n at 40mtpa rate; Revenue realisation ~US$150/t
FMG delivered 2Q production/shipments inline with prior guidance - 40mtpa. But the headline number could have been even better - down 2% to 9.93mt vs 1Q 10.0mt - as 500kt was deferred into 3Q. US$/t realisation was higher than expected. Adjusting ASP of $150/t for freight & moisture (~9%) we get ~$127/t. This appears to be in line with "benchmark" (62%) ore.

Costs pressured by AUD/contractor; higher ~20% QoQ
The hike in cash costs (QoQ) of 20% is clearly not positive (chart 2). Although we note that ~50% of this relates to higher FX (98.8? vs. 91.5?) and the balance largely attributable to contractor costs relating to the expeditious expansion of the Christmas Creek project. Cost pressures will likely abate from FY12 as the expansion ramp-up is completed. We also project that the AUD eases over time.

Cash position higher on debt raising; FCF strong
FMG commenced the quarter with $1.3bn cash at bank and closed with $2.4bn.

During the period the company had both substantial in/outgoings - debt retirement costs, CAPEX, free cash flow and new borrowings. Our reconciliation:

􀂄 Cash balance: 1 October - US$1.3bn; Cash via new bonds - US$1.5bn

􀂄 Cash paid for capex - $175m; Cash paid for debt retirement - US$650m

􀂄 Reported cash balance - US$2.37bn 􀃆 ~$400m FCF 􀃆 2Q(~$133m/mth) 55mtpa expansion on schedule; 155mtpa?early days Christmas Creek expansion to 55mtpa ? rail-link to existing FMG rail network is complete. First trainload of ore expected in Jan-11 (3Q11). Ore processing facility(OPF) construction on track with wet commissioning target in Feb-11 (3Q11).

Power plant construction completed and connected. US$8.4b approved for expansion to 155mtpa during Nov-10 & preliminary work commenced in 2Q11.