Boom rolls on as Fortescue lifts dividends

ANDREW Forrest and his fellow Fortescue Metals Group’s shareholders have been given a taste of what the future looks like for the increasingly deleveraged miner, collecting a higher than expected dividend as part of a strong first-half result.

Fortescue announced yesterday it would pay a 10c fully franked interim dividend, double that forecast by analysts. The payout will see Mr Forrest, who owns a 33 per cent stake in the miner, collect a dividend of almost $103 million for the half.

Fortescue and Rio plot Pilbara expansion

Rio Tinto and Fortescue Metals Group are confident they will keep growing their Pilbara iron ore operations despite a concerted push by many investors for more cash to be returned.

Rio chief executive Sam Walsh told an analyst briefing in Sydney that the miner’s board was likely to approve $US4.3?billion of spending on iron ore mine expansions needed to take capacity to 360?million tonnes by 2015.

And at the opening of Fortescue’s Firetail mine in the Pilbara, chief executive Nev Power outlined plans to boost production by a further 10?per cent to 170?million tonnes at a minimal cost after it completes a $US9?billion expansion plan by the end of this year.

Both mining companies indicated they are well aware that investors are seeking higher dividends and share buybacks, particularly after Woodside Petroleum issued a special dividend and raised its payout ratio last month.

But Fortescue chairman Andrew Forrest said the miner could be “both a yield and a capital growth company. It doesn’t have to be one or the other.”

Fortescue disappointed investors in February when it held back on paying an interim dividend despite paying one six months earlier. But it unveiled plans to move to a fixed payout ratio of 30 to 40?per cent in the future.

Mr Forrest, who owns 33?per cent of the miner he founded, said Fortescue would resume dividends as soon as it was “responsible” to do so.

‘Best project in the Rio portfolio’

Mr Walsh admitted to analysts that in recent investor meetings, some fund managers had questioned whether Rio should proceed with its iron ore expansion or return the cash to shareholders. Rio has been looking to sell non-core assets and clamp down on costs in an effort to maintain a single-A credit rating currently on negative watch.

But analysts that attended the briefing said it appeared the expansion was likely to be approved by the board in the fourth quarter despite some recent market speculation it could be delayed.

“The message was, barring a black swan event in North Korea, the project is likely to go ahead,” JPMorgan analyst Lyndon Fagan said. “It was confirmed as the best project in the [Rio] portfolio. We would be surprised if they cancelled that project despite the noise around.”

However, another analyst said his view was that delaying the project would be a “really good signal” to the market about capital discipline. Rio has already approved the necessary infrastructure spending and will lift its production capacity from 290?million tonnes by the third quarter of this year.

Mr Walsh and new chief financial officer Chris Lynch met with analysts on Monday and were joined by Rio chairman Jan du Plessis at an earlier investor meeting. It is the first round of in-person briefings Mr Walsh has done in Australia since taking on the top job in January. The miner’s annual meeting is in Sydney on Thursday.

On to the next phase

At the Firetail mine opening, Mr Power indicated the company’s expansion to 155?million tonnes of annual production would mark the end of the company’s major construction phase.

He foreshadowed that would be followed by an “efficiency” phase that could lift production by a further 5?per cent to 10?per cent. “We see the next phase beyond 155?[million tonnes per annum] as optimising, de-bottlenecking and increasing the productivity of the assets that we have,” Mr Power said. “The quality of these assets is fantastic. There is a lot of incremental volume that can be put through these facilities with no additional capex.”

Fortescue is expected to approve construction of a $US250?million fifth berth at Port Hedland in the 2014 financial year to boost its port capacity to around 180?million tonnes.

Fortescue Atlas deal on track

In what could be a win-win outcome for both companies, junior iron ore miner Atlas Iron Limited (ASX: AGO) could be set to utilise Fortescue Metals Group’s (ASX: FMG) railway line and infrastructure.

Atlas needs a railway to connect its iron ore mines in East Pilbara to Port Hedland, in conjunction with Brockman Mining (ASX: BCK). The company has been looking at building its own railway and has implemented a feasibility study with rail operator Aurizon Holdings (ASX: AZJ) – ex QR National.

According to the Australian Financial Review, Fortescue is keen to maximise the sale price for a 40% plus stake in its rail and port infrastructure. The company is reportedly targeting proceeds of between $3 to $4 billion from the sale to pay down debt. In return for the stake, the winner will receive an annuity, rather than run the infrastructure themselves, which will likely be based on freight carried.

By signing up Atlas as a customer for its rail and port assets, a potential 40 million tonnes of additional iron ore could be added to Fortescue’s existing rail, boosting the annuity and therefore the sale price higher. Atlas, in turn, could face costs of $3 billion to build its own railway and infrastructure, plus an additional $2 billion for a new export terminal at South West Creek. An option to use Fortescue’s rail line would be much cheaper.

There’s also the fact a new rail line from the Pilbara to the coast would add to existing railways run by Fortescue, BHP Billiton, Rio and another planned by Gina Rinehart’s Hancock Prospecting to transport ore from the giant Roy Hill iron ore mine. Adding another railway that might be underutilised doesn’t make much economic sense.

Foolish takeaway

With benefits of sharing the existing railway and infrastructure apparent for both parties, it seems only a matter of time before Atlas and Fortescue come together.

Macmahon tipped for largest ever contract

PERTH ( – Iron-ore giant Fortescue Metals has named ASX-listed Macmahon Holdings as the preferred contractor for the expansion of its Christmas Creek mine, in the Pilbara.

If awarded, the five year contract, valued at around A$1.8-billion, would be Macmahon’s largest ever mining contract.

The contract would require Macmahon to operate and maintain the fleet required to deliver opencut mining services at the Christmas Creek mine, with most of the fleet supplied by Fortescue. Work was expected to ramp up to full production by mid-2013.

Macmahon said that mobilization to the site would start under a limited notice to proceed, and added that negotiations regarding the final contract were continuing and would likely be completed by the end of November.

Big miners regaining favour

Tony Featherstone is a Morningstar contributor and a former managing editor of BRW and Shares magazines. This article was originally published by Investor Weekly, a Sterling publication.

What a difference a few weeks makes. In September, newspaper headlines screamed about the meltdown in iron ore prices, and resource stocks tumbled. Commentators called an “end” to the mining investment boom amid fears that China’s economy was heading for a hard landing.

After tanking to US$88 a tonne last month, the iron ore price has rebounded to US$120 a tonne. Fortescue Metals Group (FMG) this week said it expects the iron ore price to stablise at current prices; Macquarie Equities Research sees a floor of US$115 over the next few years.

The big mining stocks have followed the iron ore price higher. Australia’s third-largest iron ore miner, Fortescue, has stunningly rallied from below $3 in September to $4.07. Macquarie has an outperform recommendation on it.

Rio Tinto (RIO) has jumped from a 52-week share price low of $48.37 to $56.05, and BHP Billiton (BHP) has rallied from an annual low of $30.09 to $33.45. Their prices are still well down on peak levels over the past 12 months, but sentiment has improved markedly from a few weeks ago.

Macquarie has outperform recommendations on Rio and BHP. Its 12-month share price targets of $76 and $39 respectively for Rio and BHP suggest considerable upside and a catalyst for a sharemarket rally in 2013 given the high weighting of these stocks in the S&P/ASX 200 index.

Several small and mid-size resource stocks are also starting to rally, after heavy falls this year.

Solid quarterly production reports from the big miners have also buoyed investors, and reports last week of better-than-expected Chinese export data led to calls that its economic slowdown may have bottomed.

A resumption of stronger Chinese growth would support higher commodity prices and potentially higher share prices of leading ASX-listed resource stocks.

Mining services stocks with heavy iron ore exposure, such as NRW Holdings (NWH), also rallied this week after sharp falls in recent months. Tumbling iron ore and coal prices raised fears that more mining projects would be cancelled or deferred, in turn leading to less work for service providers.

Conditions are not as strong as a year ago, but fears about some mining services stocks may have been overstated.

Fortescue Metals Group – Pilbara mining jobs revealed

Keeping a watchful eye over the activities of the biggest mining companies in Australia is important if you want to know where the mining jobs are in the Pilbara. For people looking to get into the mines, the financial reports produced by the big mining companies reveal clues and insights into their current and future mining activities. This information is very handy for people looking to get into the mines, because reading between the lines can uncover some real mining job opportunities.

Here are the highlights from Fortescue Metals Group for the period ending September 2012…

  • Quarterly shipments of 16.1 million tonnes (mt) slightly above guidance;
  • Liquidity and maturity profile enhanced with a US$5.0 billion (bn) Senior Secured Credit
  • Average realised CFR sales price of US$98 per dry tonne (dt), reflecting the decrease in global iron ore prices
  • Average C1 cost of US$49.44 per wet tonne (wt), up 7% from the prior quarter
  • Commissioning of the second train unloader, increasing overall port capacity to 115mt
  • First ore processed through the second ore processing facility (OPF) at Christmas Creek, marking the ramp up to more than 50mtpa from Christmas Creek and the expansion of the Chichester operations to 95mtpa by the end of the December 2012 quarter
  • Approval received to develop the fifth berth at Anderson Point; and
  • Total expansion expenditure as at end September 2012 of US$6.1bn for infrastructure and US$0.7bn for mine fleet with cash on hand as at end September 2012 of US$2.4bn.

Pilbara Iron Ore Mining Developments

Christmas Creek phase 2 expansion
The September 2012 quarter also saw the completion of much of the infrastructure associated with the expansion including the new Christmas Creek Airstrip, expanded Christmas Creek power station, key stockyard upgrades and power distribution. Early mining works for the expansion have progressed well and stocks are ready to ramp up production in line with the OPF. Delivery of heavy mobile equipment to support the ramp up continues with additional Cloudbreak resources reallocated to support this activity.

  • US$1 billion project budget
  • Committed contracts US$0.8bn

Solomon 60mtpa

  • US$3.2 billion project budget
  • Committed contracts US$2.9bn

A key feature of the Solomon development is the extensive use of modules and all modules for the crushing hubs have been received and installed. In addition, half the modules for the Firetail OPF have arrived in Port Hedland, with 269 of them now delivered to site. Modules are being successfully installed, conveyors are being completed and the train loading system has been installed in the stockyard.

In September, Fortescue awarded Leighton Contractors the mining and operations contract for the Firetail deposit. The US$1.5 billion five-year contract will deliver whole-of-mine management at Firetail, including operating and maintaining the mining fleet, ore handling plants and associated infrastructure.

View a list of Leighton mining jobs on

This includes a commitment by Leighton’s to engage graduates of Fortescue’s Indigenous training and employment program VTEC, and to support Fortescue’s commitment to provide opportunities for Aboriginal contractors and joint ventures to further expand Indigenous employment opportunities.

Fortescue has also committed US$2.1 billion to its port expansion project at Port Hedland in Western Australia, as well as committed contracts worth US$1.9 billion for its rail expansion project.  The Rail project remains on schedule to deliver the two key components of the track duplication along the existing mainline track and the rail spur to the new Solomon iron ore mine.

Fortescue says loan will allow Kings restart if ore prices rise

FORTESCUE Metals Group said the completion of a $US5 billion ($4.88 billion) debt facility would allow it to consider restarting a new mine development in the Pilbara should iron ore prices continue to recover.

The world’s fourth-largest iron ore miner by output upgraded the facility to $US5 billion from $US4.5 billion to pay off existing loans and provide a liquidity buffer.

“Subject to iron ore market conditions, this additional liquidity will enable detailed consideration of the recommencement of the Kings expansion,” the company said.

The Perth-based miner in September set a near-term production target of 115 million metric tonnes a year by deferring development of its Kings deposit. It had previously targeted an expansion to 155 million tonnes of production capacity by June 2013.

Fortescue could be forced to sell Pilbara assets

Mining analysts say the Fortescue Metals Group may have to sell some more of its assets in the Pilbara to reduce its debt.

Fortescue, Australia’s third-largest iron ore miner, requested a trading halt on Friday after its shares sustained their worst loss in almost four years.

It is currently in negotiations with banks to waive debt covenants on some of its $8.5 billion of debt.

Pengana Capital fund manager Tim Schroeders says there are many assets that Fortescue could sell to bring down debt.

“Things such as air strips, rail equipment, a lot of infrastructure that’s within the company mine camps …

those can be sold to infrastructure type investors and secure funding fairly readily,” he said.

FMG has already sold a power station at its Solomon iron ore mine in the Pilbara for nearly $300 million.

The sale to Canadian power company TransAlta corporation will allow FMG to access all of the power generated from the facility for the life of the mine.

It is also in discussions regarding the partial sale of its North Star magnetite project.

Mr Schroeders says the miner has a good chance of surviving the debt talks.

“It’s not dire,” he said.

“I think the circumstances surrounding the company going to a trading halt could have been managed a lot better than what they have been …

but it’s important to note that they do have a lot of flexibility in restructuring their debt to equity profile.” FMG has also recently shed several hundred jobs of employees and contractors.

When it was announced, the company’s chief executive Nev Power said staff numbers and operating costs had to be cut.

“In particular we will be reducing staff, consultants and contractors involved in future development work and non-essential work,” he said in a briefing.

Several hundred staff and a similar number of contractors across the business have been let go.

FMG wins appeal over access to Rio and BHP Pilbara rail systems

Fortescue has won its High Court appeal over access to Rio Tinto and BHP’s iron ore rail networks in the Pilbara.

The Australian iron ore miner had been fighting for access to Rio’s Hamersley and Robe River lines, as well as BHP’s Goldsworthy and Mount Newman networks.

In 2010 the long running battle came to a head when the Australian Competition Tribunal rejected Fortescue’s push for access to BHP and Rio rail networks, and allowed the two major miners to retain full access to their own Pilbara rail lines.

The Tribunal rejected the application by Fortescue Metals and a group of junior miners to gain access to the rail lines, finding that access by these miners to Rio’s Hamersley lines and BHP’s Newman rails “would be contrary to the public interest.”

The Tribunal’s inquiry found that the actual costs in providing access had the potential of dwarfing whatever benefits might exist from avoiding duplication of lines.

However, despite this the Tribunal did find in favour of the applicants for access in regards Rio’s Robe River railway and BHP’s Goldsworthy line.

Fortecue continued in its fight to gain full access to the Pilbara network, and was granted a High Court appeal late last year.

In its appeal FMG made technical arguments about the court’s interpretation of the law.

The High Court has now found that the Tribunal’s decision was not legal, according to the ABC.

This has now allowed Fortescue to again pursue access to the Pilbara rail lines.

Graham Short, from AMEC, explained there is still some way to go before a decision on access is reached.

“There’s obviously still further negotiations to be conducted and, as I understand it, it would still need to go through various tests so that it would be considered by the Australian Competition Tribunal.”

Rio Tinto came out against the decision, however it did note that it was “pleased to note that the High Court accepted its formulation of the proper test for the threshold question of whether a facility can be economically duplicated.

“The Minister and the Tribunal both applied the wrong test in determining this threshold issue, and the Tribunal will be bound to adopt the test Rio Tinto argued for on any reconsideration.”

Rio went on to add that its “integrated operations in the Pilbara would be severely impacted if third parties were permitted to run trains on the system. As the Tribunal noted, the potential disruption and diseconomy costs would dwarf whatever benefits might exist in permitting third party access”.