Fortescue Metals Group (FMG) took decisive action to secure the profitability and liquidity of the company in response to volatile market conditions and uncertainty over future iron ore prices. The company has confirmed its commitment to complete the expansion of its Christmas Creek mine, commission the low-cost Firetail deposit at Solomon mine and deliver port and rail projects to deliver a near term growth target of 115 million metric tons per year (mt/y). The completion of Christmas Creek stage two ore processing facility will see first ore produced from the next expansion phase within four weeks.

FMG will defer the development of the Kings deposit within the Solomon mining hub and the full completion of its fourth berth at Herb Elliott Port until iron ore prices return to more sustainable levels. Spot iron ore prices recently dropped below $90/mt.

These measures will reduce FMG’s 2013 production from 86.5 million mt to 82 million - 84 million mt. As a result of these actions, FMG’s 2013 capital expenditure will be revised downward to $4.6 billion from $6.2 billion. FMG CEO Nev Power said staff numbers and operating costs would be reduced immediately to save approximately $300 million. The focus in the short term will be on reducing operating expenditure at the Cloudbreak mine until the low-strip ratio Firetail operations, with costs in the lowest quartile of the global cost curve, come online in the March quarter 2013. The flexibility this provides in terms of the marginal cost of production will deliver ongoing profitability during times of lower iron ore prices.

“The cost reductions from existing operations combined with the introduction of low cost ore from Firetail will strengthen our position as a low-cost producer,” he said. “These measures reflect the company’s ability to reduce and delay cash expenditures to meet market conditions and provide us with head room in the event of further deterioration of iron ore prices.

In related news, FMG announced it had sold the power station at its Solomon iron ore mine in the Pilbara region of Western Australia to TransAlta Corp. for $300 million. Fortescue has concurrently entered into a long-term Power Purchase Agreement with TransAlta for 100% of the power station’s 125-MW capacity over the current life of the Solomon mine.

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