Today, shares of Fortescue Metals Group Limited (ASX: FMG) soared more than 5.6% to $2.31, following the release of its September quarter production report this morning.
Operational efficiencies led to significant cost reductions during the period despite robust iron ore production of 41.9 million tonnes. Cash production costs fell to just $US16.90 a wet tonne, enabling the company to generate strong cash flows and pay down $US384 million of debt.
"The results demonstrate Fortescue's ongoing commitment to consistent, sustained high performance across the entire business," Fortescue CEO, Nev Power, said.
Fortescue produces a low-quality iron ore from its Pilbara operations that usually attracts a lower price than the 62% Platts index quoted in financial media. During the period, Fortescue's price realisation was 91%, averaging $US50 per tonne, which compares with the Platts price of $US55 per tonne.
At 30 September 2015, the China-dependent iron ore miner had $US2.6 billion of cash on hand, yet its net debt position stood at $US6.6 billion.
Despite the debt pile however, Fortescue's Chief Financial Officer, Stephen Pearce, said, "Fortescue's debt structure has high levels of flexibility and no maintenance covenants." Fortescue confirmed it intends to lower its gearing to 40%.
Further, over its 2016 financial year, the company is targeting production of 165 million tonnes, at a production cost of US$18 per tonne. By the end of its 2016 financial year, Fortescue expects production costs to hit just $US15 per tonne. However, it did acknowledge its forecasts rely on favourable exchange rates.
Buy, Hold or Sell?
Despite today's positive share price reaction and its forecasts for lower costs, Fortescue shares remain a risky bet. Although some analysts may argue the downside risk is limited at these prices, I'd rate it as a sell – and use the money to buy a better investment!
