Fortescue Metals Group chief executive Nev Power has torn up his plan to expand iron ore production to 155 million tonnes annually by the middle of next year, admitting yesterday the miner could not afford its $6.2 billion capital budget amid a plunging iron ore price.
Launched with much fanfare in June last year, as Mr Power succeeded founding chief executive Andrew Forrest, the Fortescue push to reach its 155mtpa target a year ahead of an already aggressive timetable has now crumbled in the face of a 30 per cent fall in the steel-making commodity's price in the past nine weeks.
Yesterday's news comes less than a week after Mr Power fended off criticism of the miner's position, predicting a swift recovery of iron ore prices to above $US120/t.
Yesterday, Mr Power conceded the Chinese economy was in a worse state than earlier thought.
"While we remain very confident in the future of the iron ore price, and that it will rebound into that range of above $US120/t, clearly given the current conditions in China it is going to take some time to recover to that level," he said.
Mr Power denied suggestions his credibility had been damaged by the decision to defer the expansion and sack hundreds of staff. "That's exactly why we're doing this, because we are being responsible and disciplined about how we manage the business and responding to the market conditions," he said.
Fortescue lowered its "near term target" to 115mtpa for the foreseeable future, until iron ore prices return to "more sustainable levels".
As part of a range of measures aimed at shaving $1.6 billion in capital expenditure and $300 million in operating costs, Fortescue yesterday deferred development of the main deposits at its Solomon project, the 40mtpa Kings, and said stripping of overburden would be slowed at its original and most expensive Chichester mine, Cloudbreak, in favour of cheaper options.
Completion of the fourth berth at Port Hedland and associated infrastructure would also be pushed back, although Fortescue development director Peter Meurs later told _WestBusiness _ that work would be completed to the point where it could easily be resumed again.
Fortescue would still bring the 20mtpa Firetail at Solomon on stream next year. Cash costs at Firetail were projected to be $US25/t, according to Mr Power, about half those at Cloudbreak which had a higher waste rock-to-ore ratio.
Fortescue chief financial officer Stephen Pearce said the cost savings would "decisively" return Fortescue to profitability even if low iron ore prices prevailed. "From the action we've taken today we'll be generating approximately $15 to $20 per tonne margins, and that will move to the higher end of the range as the low cost Firetail tonnes come on stream," he said.
Fortescue shares initially jumped as high as $3.68 before ending the day down 15¢ at $3.41.