Fortescue plans $2b expansion in Pilbara

Tag : iron ore

FORTESCUE METALS has not yet turned a profit, but the iron oreminer is confident its cash flows are so strong it can fund anexpansion project costing up to $2 billion solely from internalsources by the end of next year.
The company yesterday reported a loss of $2.5 billion because itwas forced to increase the expected payout associated with a $US100million note ($124 million) held by the US investor LeucadiaNational to $4 billion.
The value of the payout - comprising 4 per cent of the company'srevenues from its Cloud Break and Christmas Creek projects through2019 - has risen because Fortescue is now assuming it will ramp upproduction to 160 million tonnes a year amid higher iron ore pricesthan previously forecast.
Fortescue's chief executive, Andrew Forrest, said the company wason track to reach its initial target output of 55 million tonnes ayear by the first quarter next year.
The company had decided to expand production to an annual rate of80 million tonnes by the end of next year, at an expected cost ofless than $2 billion.
"That [is] … an interim step funded only from a portion ofour free cash flows," Mr Forrest said. "We have no external debtrequirement at all out to 80 million tonnes."
Mr Forrest said the expansion would give Fortescue more than $5billion of free cash flow a year, allowing it to fund furtherexpansions to 120 million and then 180 million tonnes a year.Yesterday it boosted its reserves by 54 per cent to 1.6 billiontonnes, underpinning more than 10 years of production at itstargeted levels.
He said the size of the initial expansion to 80 million tonnes wasdictated by the company's ability to fund the move internally, andon the capacity of infrastructure.
Fortescue reported a "trading profit" of $72 million for last year,including eight weeks of operations covering the earlycommissioning stages of the Pilbara iron ore project. It shipped1.6 million tonnes during that period and has shipped another 5.9million tonnes since July 1.
But the "trading profit" included only production and shippingcosts, royalties and depreciation. It excluded $32 million ofadministrative expenses and all interest and taxes.
When asked what Fortescue earned before interest and taxes, MrForrest said: "I couldn't comment on it."
A BBY analyst, John Veldhuizen, said it was "very unlikely" thatFortescue's operations were profitable before interest and taxeslast year. But he noted the accounts were distorted because it hadbeen ramping up production and had revalued the Leucadia note.
Last year's earnings were "immaterial", Mr Veldhuizen said. "Thisyear is really getting to the point where you will be able to makesome sort of assessment about operating costs."
Fortescue had $192 million cash as of June 30, but Mr Forrest saidits cash balance had since risen to $500 million.