Shares of Fortescue Metals Group Limited (ASX: FMG) have surged more than 9% this morning after the iron ore miner released its quarterly production report. Since hitting a near six-year low of $1.92 earlier in the week, the shares have recovered 16% to be trading at $2.23. Here's what you need to know:
Production: In the December quarter, Fortescue mined 43.6 million tonnes (Mt) of iron ore and shipped 41.1 Mt which beat various analyst forecasts, including the 39.7 Mt of shipments predicted by RBC Capital Markets, according to The Fairfax Press. The company maintained production guidance of 155-160 Mt for the financial year.
Costs: Fortescue recognised some considerable cost improvements across the quarter. The miner said that its cost of production in the quarter had fallen by 11% (compared to the September quarter) as a result of an increase in operational efficiencies, the lower Australian dollar and lower oil prices. Its cost of production was around US$41 a tonne once shipping, administration and royalties were all accounted for.
While it has been estimated that the miner's breakeven price is around US$59, Fortescue received roughly US$63 per tonne for its ore over the quarter, showing that the company is still making a profit at the commodity's current price.
Debt: As the iron ore price has fallen, investors have grown increasingly concerned about Fortescue's ability to repay its massive debt load. Not only would the cost improvements have eased some of those concerns, the company also repaid another US$500 million in debt with net debt now sitting at US$7.5 billion. None of those repayments are due until the 2017 calendar year.
Impairments: Numerous iron ore miners, including Mount Gibson Iron Limited (ASX: MGX), have announced impairment charges for their assets recently but a review by Fortescue suggests no impairments are necessary.
In its report it said: "Fortescue has undertaken an impairment review at 31 December 2014 which confirmed recoverability of all of its assets at or above the underlying book values." This will be confirmed when the company releases its half-year financial statements next month.
Should you buy?
While investors were clearly pleased with Fortescue's production report, they need to be aware of the uncertain future facing all iron ore miners. Although the commodity has already more than halved in value since January 2014, analysts are still forecasting further falls which could seriously test Fortescue's margins. Until the high level of volatility in the sector subsides, investors would be wise to add the stock to their watchlist and focus on other compelling investment opportunities instead.
