Fortescue Metals Group has deferred $US1.6 billion ($1.57 billion) in spending on expansion and will cut hundreds of jobs in response to rapidly falling iron ore prices.
Fortescue's announcement of the cut to its expansion budget came just hours after WestBusiness revealed mounting speculation that the miner was to take the knife to its crucial Port Hedland harbour work.
Australia’s third-largest iron ore producer has sliced its ambitious growth target, blaming volatile commodity markets and uncertainty about future iron ore price movements.Analysts said the country’s largest iron ore producers - BHP Billiton and Rio Tinto - could follow suit.
Fortescue’s new near term growth target is 115 million tonnes of iron ore per annum, a large reduction on its previous target of 155 million tonnes per annum.
It has deferred the development of the Kings deposit within its Solomon mining hub in the Pilbara, and the full completion of its fourth berth at Herb Elliott Port, until ore prices return to more sustainable levels.
The deferrals will reduce Fortescue’s capital expenditure forecast for the 2012/13 financial year to $US4.6 billion ($A4.51 billion), down from the previous guidance of $US6.2 billion.
Production forecasts for 2012/13 have also been revised, to a range of 82 million tonnes to 84 million tonnes, down from previous guidance of 86.5 million tonnes.
Immediate cuts to operating costs and an unspecified number of jobs would save $300 million, chief executive Nev Power said.
However, Fortescue will continue expanding its Christmas Creek mine, and commission the low-cost Firetail deposit at the Solomon mine.
"These measures reflect the company’s ability to reduce and delay cash expenditures to meet market conditions and provide us with head room in the event of further deterioration of iron ore prices,” Mr Power said in a statement.
"We are confident that the underlying fundamentals of the Chinese economy are strong and we believe iron ore prices will rebound in the medium term.
"However, we have moved quickly to strengthen the balance sheet."
Mr Power last week blamed recent falls in the spot price of iron ore on Fortescue’s customers - Chinese steel mills - which were running down inventories instead of producing more steel.
BHP, Rio and Fortescue are dependent on continued Chinese demand to earn returns on the billions of dollars they have committed to expanding iron ore production in the Pilbara.
Prime Minister Julia Gillard has shrugged off reports of job cuts and deferred expansion plans at FMG, saying Australia should look at the bigger picture.
Ms Gillard said the announcement was a matter for the company.
However, Australians should not lose sight of “the whole picture - a huge resources boom, half a trillion dollars of investment projects in the pipeline”.
“We will continue to see hundreds and hundreds of millions of dollars invested in new resource projects,” she told reporters in Perth.“This great state of Western Australia (will continue to see) its economy rapidly growing because of the impact of this resources boom.”
She admitted the peak of commodity prices has passed.
The head of Rio’s Pilbara iron ore operations Greg Lilleyman said he expected Rio would benefit from FMG's decision.
Mr Lilleyman said the postponement of recent high profile projects, such as FMG’s, would help Rio in the medium term.
"This can only be a positive for the medium term supply, demand balance and therefore prices and returns on Rio Tinto’s industry leading Pilbara project,” Mr Lilleyman told the Association of Mining and Exploration Companies conference in Perth.
Mr Lilleyman said Rio Tinto’s iron ore business was travelling "pretty well” and expansion plans were on track.
"We’re managing to run at, or even above, our nameplate capacity,” he said.
The company was midway through increasing its capacity by 60 per cent, which would take the business to an annual throughput of 353 million tonnes.
"If and when we do get it right, and it’s far easier said than done, we’ll reach that target in 2015," he said.
An increase in capacity of more the 120 million tonnes per annum would make Rio Tinto’s Pilbara operations the world’s largest iron ore project and Australia’s largest mining project.
"The expansion remains on time and on budget,” he said.
City Index analyst Peter Esho said other miners could follow Fortescue’s lead of spending cuts.
"We are likely to see BHP and Rio Tinto following on from Fortescue and cautioning against the supply of their ore in order to support the iron ore price,” he said.
"Each company will have its own way of going about achieving this, not all will follow in the same way Fortescue has."
In August, Fortescue reported a 53 per cent rise in full year profit to $US1.56 billion ($A1.49 billion).
Fortescue shares had been higher after the announcement, but closed down 15 cents, 4.21 per cent, at $3.41.
In percentage terms it was the second-largest decline among all stocks in the S&P/ASX50Rio Tinto was up 52 cents at $50.37.
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