* Fortescue slashes capex by $1.6 billion
* Latest miner to cut back iron ore expansion plans
* To cut jobs, other measures to save $300 million
* Shares briefly rally before falling to 28-month low
By James Regan
SYDNEY, Sept 4 (Reuters) – Australia’s Fortescue Metals
Group said it will slash capital spending and wind back
its expansion plans, the latest iron ore miner to drop
big-ticket projects in the face of weaker demand from China and
tumbling prices.
The move comes just a week after Fortescue reassured
investors that it expected the decline in iron ore prices to end
within a couple of months, as it aimed to triple its production
rate to 155 million tonnes a year by mid-2013.
The world’s No 4 iron ore producer said on Tuesday it would
lop $1.6 billion ($1.6 billion) off capex spending this year,
cut back on staff and only commit to a near-term growth target
of 115 million tonnes a year.
“The question is, what has atually changed between
announcing their full-year results and today that caused the
apparent change in strategy,” said Tim Schroeders, a portfolio
manager at Pengana Capital, which does not own Fortescue shares.
“They’re basically trimming their sales for what loooks as
though it’s a changed environment,” Schroeders said.
Fortescue shares initially jumped 3 percent, but reversed
course to be down 2.8 percent at a 28-month low.
BHP Billiton BLT.L>, the world’s biggest mining
company, has already shelved a $20 billion expansion of its
Olympic Dam copper and gold mine in Australia and put all other
approvals worldwide on hold as the sector battles escalating
development costs, slumping prices and an uncertain outlook.
Investors had been nervous Fortescue would face a funding
shortfall for its $9 billion project to triple production, but
Chief Executive Nev Power said last week he was confident
Chinese demand would improve, justifying the
spending.
DEMAND DROP OFF
Credit Suisse said the recent sharp decline in commodity
prices meant miners were now spending more in capital
expenditure than they were earning.
“This is not a sustainable situation, and if commodity
prices do not recover very strongly, we would expect to see (and
indeed, are already seeing) projects being deferred, if not
cancelled outright,” analysts Damien Boey and Atul Lele said in
a note to clients.
Fortescue, the world’s no. 4 iron ore producer, which sells
most of its ore to Chinese steel mills, said staff numbers and
operating costs would be reduced immediately to save around $300
million.
These measures would lead to a slight reduction in the
current year’s production to 82-84 million tonnes from previous
guidance of 86.5 million tonnes.
Iron ore shipments to China from Australia’s Port Hedland, a
bellwether for the sector, are expected show a monthly decline
in August after falling by 7 percent in July. BHP is the port’s
biggest user, followed by Fortescue.
Until recently, the world’s top producers, including Vale
in Brazil and Rio Tinto and BHP in
Australia — together controlling 70 percent of the world’s
seaborne iron ore market — were counting on their super-sized
operations to provide economies of scale and an edge over small
competitors when demand softens.
The more each miner can dig up the lower the costs and
greater the ability to ride out a downturn.
But benchmark iron ore prices have tumbled
from a 2012 peak near $150 a tonne in April to below $90,
hitting a near three-year low last week, leading to a rethink.
In Fortescue’s case capital spending in the current fiscal
year 2013 will be cut to $4.6 billion from $6.2 billion
earmarked previously, according to the company.
“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,” Power said in a statement.
Ratings agency Standard & Poor’s said Fortescue’s credit
quality would be at risk if iron ore prices stay below $100 a
tonne through December.
“That will put significant pressure on their credit
quality,” S&P; resources corporate ratings director May Zhong
told Reuters.
“They need to do more to give them more buffer in their
rating,” she added.
Moody’s warned last week it may downgrade Fortescue Ba3
ratings.
