Another nail in the coffin of mining boom

Fortescue cuts capex spend and lowers forecast production

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 4, 2012 10:48 am AEST

In yet another sign that the mining boom maybe over, Fortescue Metals Group Limited (ASX: FMG) has deferred the development of its Kings deposit within the Solomon mining hub, as well as the full completion of its fourth berth at Herb Elliot Port, Western Australia, until iron ore prices return to more sustainable levels.

Both Fortescue's chairman, Andrew Forrest and CEO, Nev Power have expressed their confidence in iron ore prices returning to levels around US$120 a tonne. The commodity is currently trading around US$90 a tonne, its lowest level since October 2009. Just two months ago, it was trading around US$135 a tonne.

As a result of the company's actions, Fortescue's capital expenditure in the 2013 financial year will fall from US$6.2 billion to US$4.6 billion. Staff numbers and operating costs would be reduced immediately to save approximately $300 million.

The company is also in advanced negotiations to sell its Solomon power station, and in discussions with two investors over the partial sale of its North Star magnetite (iron ore) project. As a result of the reduced capex spend, production guidance has been lowered from 86.5 million tonnes to between 82 – 84 million tonnes.

Fortescue is among the world's largest, lowest cost iron ore producers, so should have the ability to ride out an extended period of lower iron ore prices. Of course, company survival doesn't necessarily mean shareholders will do well. The issue for Fortescue is the large lump of debt, currently around US$8 billion, sitting on its balance sheet, and meeting the deadlines for interest payments, not to mention repaying or refinancing that debt.

Analysts have also expressed concerns over the ability of other smaller iron ore producers like Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX), to ride out the 'storm' and some may need to raise capital to shore up their balance sheets.

The Wall Street Journal has speculated that some of the smaller miners could be ripe for takeovers, but it would have to a brave buyer to wade in now.

The Foolish bottom line

The hopes and futures of many of our iron ore miners are relying on the iron ore price rising from these levels, and are captive to the commodity price. The only other saviour could be a fall in the Australian dollar against the greenback.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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