Fortescue profit drops 40%

Increased production levels no match for falling iron ore price

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 February 20, 2013 2:31 pm AEDT

Fortescue Metals Group (ASX: FMG) has seen its profit fall by 40% for the six months to December 2012, hit by falling iron ore prices, rising depreciation and amortisation costs, and higher interest costs.

Net profit came it at US$478 million compared to $801 million in the previous corresponding period, and the company cut its dividend.

And that's despite production volumes rising 32% to 35.7 million tonnes. The good news is that Fortescue has hit an annualised run rate of 100 million tonnes in December 2012, and the iron ore price has recovered to around US$150 a tonne, after falling below US$90 a tonne in September 2012.

The company's plan to get to 155 million tonnes of production per annum also appears on track, with required infrastructure milestones met and the Kings development recommencing in January 2013. Current cash costs are between US$45 and US$50 a tonne and expected to remain at those levels for the next four months. Once Solomon Firetail and Kings mines become fully operational, Fortescue estimates that cash costs will fall to around US$38-$40 a tonne.

The company maintained its forecast to ship between 82 and 84 million tonnes for the full 2013 financial year.

Foolish takeaway

With other iron ore miners including BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Brazilian giant Vale all increasing their iron ore production, it's hard to see the iron ore price remain at the current levels of around US$150 a tonne. China's demand is also expected to fall away as it moves to a more consumer focused economy, which could have major consequences for Fortescue, especially with more than US$12 billion of debt sitting on its balance sheet.

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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in BHP.

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