UPDATE: Fortescue Cash Reserves Up 67% On Quarter To US$1.24B

15th Jul 2010 07:04

(Adds analyst, executive comments, background) By David Fickling Of DOW JONES NEWSWIRES By David Fickling Of DOW JONES NEWSWIRES SYDNEY (Dow Jones)--Cash reserves held by Fortescue Metals Group Ltd. (FMG.AU) jumped more than 67% in the three months to the end of June to US$1.24 billion, as the company capitalized on record iron ore prices to fund its expansion plans in Western Australia state's Pilbara region. The company said Thursday that, despite increased costs in the June quarter, its decision to maximize tons shipped in a buoyant market was "a very easy and sound financial decision", as evidenced in its cash reserves. Shipments of iron ore during the quarter rose 13% on the previous quarter and 36% on the year to hit 11 million tons, the company said. This beat analyst expectations of around 9.5 million tons-10.5 million tons and is equivalent to an annual rate of 43 million tons. But brokers were alarmed by an unexpected rise in production costs--up 9.5% from US$29.43/ton in the March quarter to US$32.25/ton in the June quarter--in the context of falling spot iron ore prices. That came against previous guidance of US$30/ton, and an admission from the company that reaching the US$30/ton target would "be a challenge over the remainder of this calendar year". "You've got lower prices and higher costs," said Nathan Littlewood, an analyst at Credit Suisse in Sydney. "Costs do go up when you try to accelerate a project but I think it's a bigger problem." Stephen Pearce, chief financial officer at Fortescue, did not rule out a rise over the next 12 months to costs as high as US$35/ton, as cited by some analysts. "There will continue to be pressures to the upside" of the US$30/ton figure, he told reporters. The company said that costs were higher because it had been re-processing stockpiled material and trucking extra ore between facilities to make the most of current prices. The Metal Bulletin index of iron ore prices hit a record above US$180/ton during the quarter. "During the June quarter we made a deliberate decision to maximize the tons shipped," Pearce said. "The additional margin on those additional tons made it a very easy and sound financial decision." The sale price to Fortescue's customers in China, which includes shipping and insurance costs, averaged US$130/ton during the quarter, the company said in its quarterly production report. Some production had also been sold for the first time to customers elsewhere in Asia and in Europe during the first half of 2010, Fortescue said, a trend that was likely to continue in the coming months. It had also moved all its contracts to an index basis rather than the previous system of annual benchmark pricing for iron ore. Fortescue has grown over the past five years to become Australia's third-biggest iron ore producer behind BHP Billiton Ltd. (BHP.AU) and Rio Tinto Ltd. (RIO.AU). Its long-term future depends on upgrading capacity at its existing sites in the Chichester Ranges, which began production in 2008, launching a second production hub for the Solomon deposits north of Tom Price, and exploring in the Western Hub region to the northwest of Tom Price. The company put a hold on the latter two projects in May, citing the Australian government's proposed increases in mining taxes. It has yet to put them back on schedule, in spite of a watered-down version of the tax being announced last month. "We are still sufficiently concerned as to the final structure (of the tax) that we've not yet taken any firm decision" on the two projects, Deputy Chief Executive Russell Scrimshaw told reporters. Earlier in the day, the company announced an upgrade of its total iron ore resources by 160 million tons to 2.6 billion tons as a result of more detailed studies of the prospects around the Solomon Hub. The next three months of production would be slower than the previous quarter thanks to scheduled maintenance work replacing conveyor belts, the company said, targeting the top end of a 9 million tons-10 million tons range. -By David Fickling, Dow Jones Newswires; +61 2 8272 4689; [email protected] (END) Dow Jones Newswires July 15, 2010 02:04 ET (06:04 GMT)