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Iron ore expansions defy price volatility

THE state’s biggest iron ore miners are forging ahead with expansion plans as most report solid performances for the final quarter of 2012.

The latest round of quarterly figures paints a picture of cautious optimism among Rio Tinto, BHP Billiton, Fortescue Metals Group and smaller miners.

Both Rio Tinto and BHP Billiton achieved slight production and sale increases over the December quarter; Rio shipped 3 per cent more ore (63 million tonnes) compared to the September quarter, while BHP increased 6 per cent to 42mt.

While both are planning significant production ramp-ups in 2013, Rio is expected to continue as the biggest producer with a production rate of 290mt per annum by year’s end.

The positive view of the market and continued investment in the sector comes despite the sharp price drop last September to below $US90 a tonne (40 per cent lower than prices five months earlier), and recognition that the current prices around $US145/t are unlikely to be sustained.

To guard against future price fluctuations, the big players are emphasising cost reductions and productivity optimisation.

Rio says part of its increased production performance for the December quarter was due to de-bottlenecking and productivity improvements, which lifted nameplate capacity by 7mtpa.

The biggest loser from the September price plunge was FMG’s Kings mine, at which expansion was halted amid profitability concerns following the price slump.

Now, however, the mine looks to be a major part of FMG’s long-term plans.

The company is restarting the expansion of the Kings mine this month with completion expected before the end of the calendar year. At that point, Fortescue’s total production is expected to have reached 155mtpa.

Not only will the Kings mine boost production rates by 40mtpa, it is also expected to significantly reduce the company’s cash costs. FMG’s current cost of production is about $US50/t, but the company claims that will fall to as little as $US25 to $US30/t at its Solomon operations -which also includes the 20mtpa Firetail mine -once the expansion is complete.

At current prices, that would give Fortescue a profit margin of around $US100/t after taxes and royalties.

Admittedly, those figures represent a best-case scenario outcome for FMG; the consensus in the marketplace is that the recent rebound in the iron ore price - attributed to the political stability in China after the recent leadership changes - is unlikely to be sustained.

While that’s helping the business case for current investment and ramp-ups, projected increased production from Western Australia over 2013 is tipped to help the price settle at around $US120 per tonne.

Mount Gibson chief executive Jim Beyer highlighted the fragile nature of the current commodity market in the company’s December quarterly.

“The upswing in prices since September has been encouraging, but the recent price movements may be an indicator of future price volatility,” he said.

Mount Gibson was the most impressive performer in percentage terms over the quarter, lifting shipments by 52 per cent.

The company followed FMG’s lead in cutting manpower amid the dismal market last year; 270 staff were laid off as part of an ongoing program to eliminate or defer between $120 million and $150 million from its initial 2013 budget.

Mr Beyer said this ongoing program was providing the company with a buffer against potential price weakness.

Mount Gibson eclipsed Atlas Iron’s production figures in the December quarter. It shipped to 2.7mt, while Atlas Iron’s sales grew 10 per cent to 1.8mt.

During the December, quarter Atlas secured a $US325m financing package to fully finance its Horizon 1 expansion projects. They include the Abydos mine, which will add at least 2mtpa to overall production rates and the Mt Webber mine, which has the potential to produce 3mtpa of direct shipping ore initially, expanding to 6mtpa.

The company also managed to sell four cargos of lower grade ore at an average price of $US81 per tonne.

The only company to report reduced production and sales over the December quarter was BC Iron, with the amount of ore shipped dropping from 1.2mt to just over 1mt.

The company has attributed the drop to low-grade ore being struck and crusher performance issues.

The current quarter should look better for BC Iron, however, as its deal with FMG on the Nullagine Iron Ore Joint Venture took effect from January 1.

The $190 million deal ups BC’s stake in the joint venture from 50 per cent to 75 per cent -taking its share of projected annual production from 2.5mtpa to 4.5mtpa.

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Share Price

Closing price for the last 90 trading days
Source: Morningstar

BN30 Index

Index = 100 as of 4 Jan 2016
Source: Morningstar

Total Shareholder Return as at 31/01/18

1 year TSR5 year TSR
195thMineral Resources59%18%
231stSouth3245%0%
393rdWoodside Petroleum9%4%
568thFortescue Metals Group-19%5%
722ndAtlas Iron-45%-55%
709 WA (and selected non WA) listed companies ranked by 1 year TSR relative to other companies with similar revenue
Source: Morningstar

Share Transactions

10/11/17
$0 Bought
03/10/17
$9k Issued
29/09/17
$0 Bought
Total value as at the date of the transaction
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Revenue

1st-Fortescue Metals Group$10,999.7m
2nd-South32$9,392.9m
3rd-Woodside Petroleum$5,715.9m
4th-Mineral Resources$1,470.4m
5th↓Atlas Iron$896.6m
499 listed resources companies ranked by revenue.
Source: Morningstar

Remuneration from Fortescue Metals Group

617thMark Barnaba$223k
731stSharon Warburton$170k
792ndElizabeth Gaines$161k
Ranked by total remuneration from all listed WA companies

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