Fortescue Plans $2b Expansion In Pilbara

Sydney Morning Herald

Saturday September 20, 2008

Jamie Freed

FORTESCUE METALS has not yet turned a profit, but the iron ore miner is confident its cash flows are so strong it can fund an expansion project costing up to $2 billion solely from internal sources by the end of next year.

The company yesterday reported a loss of $2.5 billion because it was forced to increase the expected payout associated with a $US100 million note ($124 million) held by the US investor Leucadia National to $4 billion.

The value of the payout - comprising 4 per cent of the company's revenues from its Cloud Break and Christmas Creek projects through 2019 - has risen because Fortescue is now assuming it will ramp up production to 160 million tonnes a year amid higher iron ore prices than previously forecast.

Fortescue's chief executive, Andrew Forrest, said the company was on track to reach its initial target output of 55 million tonnes a year by the first quarter next year.

The company had decided to expand production to an annual rate of 80 million tonnes by the end of next year, at an expected cost of less than $2 billion.

"That [is] ... an interim step funded only from a portion of our free cash flows," Mr Forrest said. "We have no external debt requirement at all out to 80 million tonnes."

Mr Forrest said the expansion would give Fortescue more than $5 billion of free cash flow a year, allowing it to fund further expansions to 120 million and then 180 million tonnes a year. Yesterday it boosted its reserves by 54 per cent to 1.6 billion tonnes, underpinning more than 10 years of production at its targeted levels.

He said the size of the initial expansion to 80 million tonnes was dictated by the company's ability to fund the move internally, and on the capacity of infrastructure.

Fortescue reported a "trading profit" of$72 million for last year, including eight weeks of operations covering the early commissioning stages of the Pilbara iron ore project. It shipped 1.6 million tonnes during that period and has shipped another 5.9 million tonnes since July 1.

But the "trading profit" included only production and shipping costs, royalties and depreciation. It excluded $32 million of administrative expenses and all interest and taxes.

When asked what Fortescue earned before interest and taxes, Mr Forrest said: "I couldn't comment on it."

A BBY analyst, John Veldhuizen, said it was "very unlikely" that Fortescue's operations were profitable before interest and taxes last year. But he noted the accounts were distorted because it had been ramping up production and had revalued the Leucadia note.

Last year's earnings were "immaterial", Mr Veldhuizen said. "This year is really getting to the point where you will be able to make some sort of assessment about operating costs."

Fortescue had $192 million cash as of June 30, but Mr Forrest said its cash balance had since risen to $500 million.

© 2008 Sydney Morning Herald

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