I reckon FMG production costs must now be well below the...

I reckon FMG production costs must now be well below the targeted $15. Plummeting oil costs alone (which happily are a huge negative for BHP’s consolidated results) would have already had a big impact without management even lifting a finger. (It also assumes flat production, which yesterday’s port shipments might indicate are actually higher.)

When the production costs were last reported at $18 and falling, all in cash costs were reported at $25 (which includes shipping, royalty and admin.) I reckon shipping costs have fallen in addition to admin (small anyway) so all in cash costs have probably reduced too something like $21-22. (i.e. $15 max plus $6’ish conservatively) So anything above $22 is positive cash flow.

That’s before taking into account a rapidly declining AUD (a big positive). At last report, I think they were using 75 cents. For every cent movement in AUD, EBITDA increases by 2% ($56milion) and NPAT increases by 7% (39million). Or put another way, production costs fall by those numbers, resulting in even lower production costs. Less than $15 would not surprise me at all.

But the important thing is the impact of all this on cash flow. With iron ore at just $37, cash would be $15 per ton ($37 less my estimate of $22). Reality is higher as that io price is a bottom over a few days only. I think positive cash flow will be excellent over the last half (production x net difference between the io moving average price and landed cash costs of $22).

It wouldn’t take one of our smart forum contributors with more brain power and time than me to do some good numbers on this. Wouldn’t it be brilliant if strong cash flow allowed FMG to repay yet another chunk of debt at 80 cents in the dollar – money for jam!

Looking forward to the next report. FMG is on the verge of being the low cost producer.