Fortescue Metals Group (ASX: FMG) is one of Australia’s largest mining companies, with four iron ore operations connected by rail to its own port, Herb Elliott, near Port Hedland in Western Australia’s Pilbara region. The past year was Fortescue’s biggest yet as it successfully hit its target 155 million tonnes per annum (mtpa) run rate after three years of continuous expansion.
Completion of T155
Fortescue CEO Nev Power describes financial year 2014 as being “exceptional” for the company. “We delivered on our promise in terms of project execution and ramp-up to 155mtpa and we continued to move down the global cost curve,” he says.
“In March 2014, we celebrated the official opening of our 40mtpa Kings Valley project at the Solomon Hub, marking the completion of our US$9.2 billion expansion of our Pilbara operations.”
Called the T155 project after its 155mtpa ramp-up target, the three-year expansion required major development of Fortescue’s port, rail and mining operations within the Pilbara. Works carried out between early 2011 and late 2013 included major extensions to Fortescue’s rail and port facilities, as well as the expansion of its Christmas Creek mine, located in the Chichester Hub, to 50mtpa.
But the largest part of T155 was the greenfield construction of the Solomon Hub, located in the Hamersley Ranges of the Pilbara to the west of the Chichester Hub. The Solomon Hub comprises the aforementioned Kings Valley project, as well as the 20mtpa Firetail Mine opened in May 2013.
Nev says that the low strip ratios of the Solomon Hub provide a valuable new source of low-cost production and that they will play an important role in reducing Fortescue’s overall operating costs.
“The Firetail and Kings Valley projects have evolved Fortescue’s product mix,” he comments. “Channel Iron Deposit (CID) ore produced from Kings Valley will become a new standalone product, while ore from Firetail is blended with Chichester ores to create the well-received Fortescue Blend.”
A record-breaking FY14
The on-time completion of the T155 expansion project enabled Fortescue to finish the 2014 financial year on an “outstanding note,” says Nev, with a record annualised shipping rate of 160mtpa for the month of June.
“In the June quarter, we also achieved our seventh consecutive shipping record of 38.7 million tonnes, taking full year shipments to 124.2 million tonnes,” he adds. The latter figure is 53% greater than the full-year shipments achieved in FY13, and within 2% of the full-year guidance of 127mt.
“With a continued focus on total delivered costs, we’ll continue our journey down the cost curve,” Nev continues. “Our total delivered cost to our customers in FY14 was $52 per wet metric tonne, inclusive of C1 costs and shipping, royalties and administration costs. We continue to focus on what we can control and managing our business as efficiently and as effectively as possible.”
Alongside driving production increases and cost reductions in FY14, Fortescue also put renewed focus this year on ensuring the safety of everyone involved in its growing operations.
“We took decisive action to reinforce that safety is the highest priority for everyone on a Fortescue site,” says Nev.
“The drive towards world-class performance in safety continued during the June 2014 quarter, with the company’s Safety Excellence project focusing on enhancing safety leadership. The project is delivering results, with improvements to safety outcomes among contracting partners and the sharing of incident lessons.”
Fortescue has no new mines on the way but it does have a number of smaller projects in the pipeline. One is a new 1.5mtpa ore processing facility for its Pilbara magnetite assets, funded by Taiwanese company Formosa Plastics. This is under construction now and scheduled for first production in the March 2015 quarter.
Others, including another processing plant, a very long pipeline and a berth are targeted to improve the performance and logistics of existing operations.
“We have the ability to leverage existing exploration assets in the Pilbara for low-cost growth, and we’re studying opportunities to drive down energy costs,” says Nev.
“Our strategy of switching from diesel to gas across our operations is underway with the construction of the Fortescue River Gas Pipeline, the longest to be built in WA in a decade. The pipeline will deliver gas to the Solomon Hub from early 2015 for use in the existing power station.”
Nev claims that this single energy-switch initiative will save Fortescue approximately $20 million per year, in addition to reducing its carbon emissions.
Also under construction is a fifth berth at Herb Elliott Port in Port Hedland, which, once operational by the end of the March 2015, will enhance the port’s flexibility and efficiency.
“We’re also progressing with the design and construction of a 5mtpa detrital processing plant at Solomon,” Nev adds.
“This plant will allow detrital ore to be processed, eliminating the need for an expensive wet plant addition to the Firetail ore processing facility and freeing the Kings Valley OPF to process Kings CID ore. It provides a lower cost and more efficient processing solution for our detrital ore, and ultimately an upgraded detrital product will be added to our Fortescue blend product.”
Targets for FY15
Even with so many cost reductions achieved and US$2.4 billion cash on hand on 30 June 2014, Fortescue still has a sizeable net debt of US$7.2 billion. Nev says that paying down this debt is one of Fortescue’s priorities, alongside “optimising the assets, finding ways to unlock value in our existing infrastructure through debottlenecking and incremental expansions”. He adds: “We also intend to adopt a dividend payout ratio of 30-40% after achieving gearing of around 40%.”
Through optimising assets and unlocking value, Fortescue aims to stabilise its run rate above 155mtpa at a reduced cost. “We’re aiming to ship between 155-160 million tonnes in FY15 at a C1 operating cost of $31-32 per wet metric tonne,” says Nev. “This guidance reflects a full year of operations from the Kings Valley project, operational cost efficiencies and an average US to Australian dollar exchange rate of 0.90.”
But besides this game of numbers, Fortescue also has ‘human’ targets. The company has always been a pioneer in championing and increasing employment opportunities for Australia’s Aboriginal population and this continues to be one of its leading principles. Fortescue runs a number of initiatives to make jobs more accessible and more rewarding for Aboriginal Australians, and aims to employ many more of them in the year ahead.
“We have an overall target to increase the number of Aboriginal employees working in our business to 15% by 2015,” says Nev. “Our Vocational Training and Employment Centres (VTECs) provide a pathway to employment for Aboriginal people through support and training. Importantly, we guarantee that if the trainee successfully completes the programme they are assured of a job with Fortescue or one of our contacting partners. In FY14, the VTECs trained and provided jobs for 122 people.”
Fortescue has come a very long way since its founding in 2003 and first shipment in 2008. But Nev asserts that the company’s vision remains the same as it always has been: “to be the safest, lowest cost and most profitable producer of iron ore.” That dream is now closer than ever.