In todays Australian. Twiggy never stopsFORTESCUE is poised to...

In todays Australian. Twiggy never stops

FORTESCUE is poised to approve construction of an $US8.4 billion expansion of its Pilbara region iron ore operations in Western Australia



FORTESCUE Metals Group is poised to approve construction of an $US8.4 billion ($8.3bn), 100 million-tonnes-a-year expansion of its Pilbara region iron ore operations in Western Australia that it aims to complete in record time.

It is understood the board will consider a concurrent expansion of its existing Chichester Ranges operations and the new Solomon project, and associated port and rail infrastructure at a board meeting in Perth next week.

Fortescue Metals Group, led by Andrew Forrest, plans to fund half of the ambitious $8.3bn 100 million-tonnes-a-year expansion with cashflow from its existing mines, which are producing at a rate of 40 million tonnes a year, and the other half through debt.



The financing will be completed at a later date. It is likely to be in two stages and focused on debt from US and Chinese markets, with Chinese export credit financing being considered.

Mr Forrest has already approved an expansion of the Chichester Ranges operations to 55 million tonnes a year by mid-2011. The new expansion, which Mr Forrest has previously said would go to the board this month, is targeting an annual capacity of 155 million tonnes a year by June 2014. If the ambitious expansion can be achieved on time, it will be the fastest ramp-up in iron ore production at any WA operation.

By comparison, Rio Tinto has said it plans to add 115 million tonnes a year of production at its Pilbara operations by the end of 2015.

At the price being flagged, Fortescue's move will also be cheap compared with expansions planned by Rio and BHP Billiton.

Rio has told analysts its expansion will cost between $US100 and $US130 a tonne of annual capacity.

Based on its expected development cost, Fortescue believes it can expand its operations for just $US84 a tonne of annual capacity.

Analysts are sceptical that Fortescue can expand at the rate and cost it says it can.

Credit Suisse says the cost of Fortescue's expansion will be $US120 a tonne

The company, despite its huge achievement in building its own mines and railways in the Pilbara, has missed most of its production schedules in its seven-year life as an iron ore company.

But the view within the Perth-based miner is that Solomon is a much simpler, more conventional deposit than the one at the Chichester Ranges' Christmas Creek and Cloud Break mines and much less susceptible to delays.

At Solomon, Fortescue plans to produce 60 million tonnes of iron ore a year from two large open-pit mines. The mine will be connected with a 120km spur line to the Chichester hub, from where iron ore will be railed to Port Hedland.

The miner has been buoyed by strong demand for a $US2bn refinancing of its debt, which it secured through US bond markets and which had a $US15bn-strong order book.

Fortescue's refinancing of secured notes put an end to restrictive debt covenants that had blocked its ability to conduct further raisings.

Under conditions of the latest debt, the miner can now raise up to an extra $US4bn of secure debt without being subject to any leverage test.

Credit Suisse analyst Nathan Littlewood says he likes the stock for its production track record and ability to achieve against the odds.

"This business is in the somewhat rare situation among global mining companies of being long on growth opportunities and short on cash," Mr Littlewood said in a research note late last week. "Fortunately for FMG, in the current environment, access to new capital is easy and, at current iron ore prices, the stock generates tremendous amounts of operating cashflow."