SYDNEY, July 23: Fortescue Metals Group Ltd is forecasting stronger operating margins in the months ahead as iron ore prices hold up on robust buying from Chinese steel mills.
Australia’s third-biggest iron ore miner also said it remains in talks to sell part of its coveted port and rail operations in Australia, but maintained the sales process would be scrapped if it does not get a high enough price.
‘We will only proceed with that sale provided we can get full market value at terms and conditions that allow us to continue to operate our supply chain efficiently and freely,’ Chairman Nev Power told reporters.
The comments come as the company’s June quarter data shows Fortescue is ramping up iron ore production faster than expected and lowering costs and capital spending, suggesting it may no longer be under pressure to sell a stake to pay down debt.
‘We are already in a very strong position globally from a cost perspective and our focus on cost savings and cost effectiveness continue to push us down that curve,’ Power said.
The iron ore price rose 4 percent last week and is up 13 percent so far in July, heading for its best month since December. The benchmark spot price <.IO62-CN=SI> stood at $131.50 a tonne.
Power said Fortescue had upped its cash balance by $700 million to $2.2 billion as of June 30, reflecting improving operating cashflows and a rapid decrease in capital expenditure as its expansion work winds down.
Fortescue also cut costs by 18 percent in the last quarter and forecasts iron ore prices of $110-$130 a tonne for the rest of 2014, Power said.
‘They’re not forced sellers,’ said Ben Lyons, a fund manager at ATI Asset Management, referring to the possible sale of the infrastructure assets.
It has already sold a power station for $300 million and half its interest in a mining venture for $190 million.
In December it unveiled a plan to offload a minority stake in its Pilbara Infrastructure (TPI) unit), which analysts estimate could bring in $4 billion.
Since then, the Australia dollar has fallen by around 14 percent, giving Fortescue’s bottom line a healthy boost.
Fortescue founder and chairman, Andrew Forrest, is believed to be a reluctant seller of TPI as it provides an outlet for its ore to the lucrative Chinese steel markets.
Fortescue’s early backers, Ian Cumming and Joseph Steinberg at U.S investment firm Leucadia National Corp, in June said Forrest has too much sway over the board.
‘His personality dominated the FMG board and the other directors were more inclined to follow his lead as to the appropriate amount of equity, debt, leverage and the rate at which to expand, as opposed to our more conservative views,’ Cumming and Steinberg said in a letter to Leucadia shareholders.
Fortescue showed a 41 percent jump in output last financial year as it moved closer to an annual rate of 155 million tonnes by the end of December. In the month of June, it shipped at an annualised rate of 120 million tonnes, 5 million tonnes above target thanks to improved production processes.
The infrastructure assets include 280 km of rail lines and access to Port Hedland, the word’s largest iron ore terminal.
One potential buyer, Australian rail operator Aurizon Holdings Ltd, which wants to expand its coal hauling business to include iron ore, has stated publicly it is not interested in a minority stake in TPI.
There is speculation that Chinese steel producers could be interested, though none have come forward. Fortescue’s second-biggest shareholder is steel group Hunan Valin Iron and Steel Group Co Ltd.
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