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.

http://www.afr.com/p/business/resources/mining/iron_ore/fortescue_and_rio_plot_pilbara_expansion_maf7798VCi37xs9hHptagN

Macmahon tipped for largest ever contract

PERTH (miningweekly.com) – 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.

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 SEEK.com.au

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.

http://www.theaustralian.com.au/business/mining-energy/fortescue-says-loan-will-allow-kings-restart-if-ore-prices-rise/story-e6frg9df-1226496077312

Leighton wins billion dollar Pilbara mining contract

In a reverse of the current trend, Leighton Contractors has been awarded a $1.5 billion, full service contract in the Pilbara.

The award sees its provide mining services at Fortescue’s Firetail iron ore deposit.

According to Leighton, sits mining division will provide whole of mine management at the site, including operating and maintaining the open cut mining fleet, ore handling plants, and associated infrastructure.

It will add the miner in producing around 20 million tonnes of iron ore per annum from Firetail, which forms part of the wider Solomon Hub.

Hamish Tyrwhitt, Leighton Holding’s CEO, said the contract is evidence of the group’s ability to deliver long term sustainable growth.

“Leighton Contractors has worked with Fortescue to negotiate a win-win outcome whereby they provide the bulk of the capital to purchase the mining plant and equipment, and we bring our core competency of contract mining to add value for the client,” Tyrwhitt said.

Fortescue’s CEO Nev Power the award of the contract is a “key milestone in our expansion to 115 mtpa by the end of the March quarter 2013.

“This follows the commissioning of the second train unloader at Herb Elliot Port last week.”

Craig Laslett, MD of Leighton Contractors, said this “is underpinned by our expertise in iron ore, in which we have mined and processed approximately 500 million tonnes over the last five year.

“This contract also provides the opportunity to improve efficiencies through the introduction of the latest technology in the mining industry.”

Laslett added that the contract included a commitment to use graduates of Fortescue’s indigenous training and employment program VTEC.

Leighton will be operations this month, with the contract expected to run for five years, with a two year extension option.

It will initially employ around 600 workers at the site.

http://www.miningaustralia.com.au/news/leighton-wins-billion-dollar-pilbara-mining-contra

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.

A silver lining for some mining services companies

What a difference three months has made to the outlook for the mining services sector. Back in June, metals and mining analysts expected global expenditure in their sector would peak this year and ease only slightly next year. But now, while the expectation for this year has actually increased, for next year it’s an aggregate decline of just under 10 per cent.

These numbers are based on the aggregate of consensus estimates for every metals and mining stock that has coverage.

Locally one would have had to have been living under a rock somewhere out in the unmined Fortescue tenements of the Pilbara not to have heard that BHP Billiton had deferred two $20 billion expansion projects, Woodside was not in a position to proceed with expansion at its Pluto LNG processing site and Fortescue deferred development of the Kings deposit within the Solomon mining hub, resulting in its 2012-13 financial year capital expenditure budget declining $US1.6 billion to $US4.6 billion.

Bad news grabs attention, so investors have been fixated on reports of jobs being slashed.

There is always a silver lining, however. One engineering company this analyst met this week (that still has a very rosy pipeline) concluded that the extra office space it was struggling to find in Perth would soon be more readily available. And several noted there was a welcome respite from wage rises and less staff turnover.

There must be a clear distinction made between project categories: there are the single-project mining companies that are now finding finance difficult; there are the projects that are in early stages of design such as BHP’s outer harbour that can easily be deferred; then there are the projects that big mining houses have already made significant investments in and have given a green light for construction.

BHP chief Marius Kloppers said it most succinctly a few weeks ago on the ABC: ”If you look at our capex, we spent $20 billion last year in capex. We hope to spend $22 billion this coming year. In reality, what we are talking about is just slowing the rate of capex growth.”

A 10 per cent increase in capex is not such a dismal target. And Rio Tinto does not look like it will slash capex anywhere near as savagely as it did in the wake of the financial crisis, when it was caught with too much debt. Its balance sheet is vastly improved (net debt to EBITDA has declined to 0.4 times from 4.2 times for calendar 2007) and while its coal plans have been curtailed, it’s on the record that its iron ore expansion will proceed.

Rio’s head of Pilbara iron ore operations, Greg Lilleyman, was reported to have told a mining conference during the week that the miner is in the middle of installing a 60 per cent increase to capacity.

Contract driller Boart Longyear’s recent dismal outlook commentary has highlighted the fact that it is exploration spend that most immediately turns off when miners face greater uncertainty or funding constraints. This is the most early-stage spend, with the lowest probability of payoff and is where myriad small companies with limited finances are positioned.

Movements in the S&P/ASX Small Resources Index is a lead indicator for exploration spend in Australia – there is about a 73 per cent correlation between year-on-year growth in the equity index and growth in exploration spend six months later.

Conceptually the benchmark is an indicator of the availability of finance (when it is increasing, capital-raising activity also typically increases) and also an indicator of commodity price (and project cost) expectations.

Mining services groups that aren’t exposed to the later stages of projects, and don’t have a portfolio of big resource groups as clients, and lack diversity across commodities and geographies are most at risk. This was evident in the fallout from Fortescue’s decision to pull back spending, particularly with its impact on contractors such as NRW Holdings.

Two companies that have most of the characteristics that this analyst thinks will hold them in good stead in the current environment are Ausenco and Lycopodium.

Lycopodium has entered the financial year with staffing at record levels and its activity levels for the year underpinned by four key projects with majors. Thus, while the company has not issued guidance with its results release for last financial year, we see the company being well positioned to weather short-term volatility in resource development activity.

Less than 4 per cent of Ausenco’s work on hand is from greenfield bulk commodity projects. More than 80 per cent of projects are for globally diversified and big clients; and 84 per cent of revenue and 80 per cent of work on hand is sourced outside Australia.

Martin Pretty is head of research at Investorfirst Securities. Martin has an interest in the shares of Lycopodium.

BC Iron: No Plans to cut production or staff

SYDNEY–BC Iron Ltd. (>> BC Iron Limited), which operates an iron-ore mine in Australia’s Pilbara region in a joint venture with Fortescue Metals Group Ltd. (>> Fortescue Metals Group Limited), has no plans to cut its production or staff despite such moves by other mining companies, including Fortescue, in response to falling commodity prices, the company’s managing director said Sunday.

Australian mining companies, including BHP Billiton Ltd. (BHP.AU, BHP) and Fortescue, the world’s fourth largest iron-ore miner, have recently announced cost-cutting measures and delays to growth projects after a sharp fall in commodity prices and rising capital-expenditure costs squeezed margins.

However, BC Iron will maintain production at an annualized rate of five million metric tons at its Nullagine operations in Western Australia, after increasing output from a rate of 3.5 million tons a year ago, Mike Young told Australian Broadcasting Corp. in a televised interview.

“We still have positive margins. I think [the drop in iron-ore prices] happened so fast it’s really hard to see the immediate effect,” Mr. Young said. “Obviously Fortescue had an immediate reaction to it, but in our case, it really is steady as she goes, and certainly we’ll continue to ship ore through Fortescue’s infrastructure at the five million-tons-a-year run rate.”

Fortescue last week lowered its fiscal 2013 production guidance to between 82 million tons and 84 million tons, from a previous estimate of 86.5 million tons, and reduced its expected capital expenditure to US$4.6 billion from US$6.2 billion. It also announced plans to slash staff numbers.

Mr. Young, however, confirmed BC Iron isn’t considering job cuts. “We’re not in that sort of mode,” Mr. Young said.

Iron-ore prices are at near three-year lows after falling by one-third over the past two months as Chinese steel mills ran down inventories of the key steel-making ingredient.

Fortescue shares hit three-year low

THE sell-down in mining magnate Andrew Forrest’s Fortescue Metals continued yesterday with the iron ore producer hitting a fresh three year low as hedge funds circled.

Fortescue has already started cutting jobs, a move it foreshadowed just days ago as part as efforts to save $300 million.

Short sellers have been targeting heavily indebted Fortescue as the iron ore price has fallen sharply in recent months. Iron ore fell to $US86.70 a tonne yesterday. Some 17.4 per cent of Fortescue stock is now held by short interests.

Meanwhile, China’s official news agency, Xinhua, has poured cold water on Fortescue’s hopes of a short term iron ore price recovery, flagging growing stockpiles across Chinese ports as inventories climbed another 1.86 million tonnes.

”In the short-term, the iron ore market will continue to suffer from oversupplying and the downward trend seems irreversible,” Xinhua analysts said in a report this week.

Despite Fortescue management this week reiterating that an equity raising would be a last resort, analysts say such a move would be inevitable should iron ore prices remain weak.

Shares in the company yesterday down 4.8 per cent at $2.97 in a broadly stronger market.

JP Morgan’s Lyndon Fagan said cash-strapped Fortescue was also likely to start cutting its dividends.

Mr Fagan said management had been approached by two parties who were interested in acquiring Fortescue’s interest in the Northstar Magnetite project in the Pilbara.

”We would view further asset sales as a positive in terms of bridging the funding gap should prices remain low, but it does highlight the pressure Fortescue is under,” Mr Fagan said yesterday.

Amid consensus from industry executives and many analysts that a rebound in commodity prices remains around the corner – especially if the Chinese government unleashes a much-expected round of stimulus – more bearish opinions are also gaining cachet.

The Shanghai-based economist Andy Xie, known for his often provocative predictions, said iron ore would likely hit $US50 a tonne by the middle of next year, and stay there the long term.

He said any rebound would be small and temporary because of slowing growth and the crisis in the steel industry in China. “This story will come to a crashing end.”

The pressure has already hit Fortescue, whose joint company secretary and investor relations head Rod Campbell resigned amid the mass job cuts yesterday.

Other senior staffers believed to have left the firm include external affairs chief Julian Tapp, senior members of the company’s legal team, IT staff and much of the company’s community engagement team.