What? Fortescue Metals Group Limited (ASX: FMG) on Thursday released its quarterly production report that surprised analysts with a reported breakeven cost of US$39 per tonne, pushed lower by the lower oil price, lower Australian dollar and operational efficiencies.
So What? With the iron ore price sitting at around US$50 a tonne, Fortescue essentially was letting the market know that it's still reasonably profitable at the current price and that it would be secure unless the ore price falls another 20%.
Analyst opinion is divided, as usual, with some commenting that they believed the breakeven price was closer to US$45 or even US$50 and that Fortescue had limited life left in it.
Taken on face value the release indicates that Fortescue could have enough margin to repay its US$1 billion debt due in 2017, but life will become increasingly difficult for the mid-cap miner if it can't refinance the majority of the US$7.4 billion in debt due by 2019.
What Now? Just when Fortescue released its report, credit agency Moody's announced that it had downgraded Fortescue's corporate family rating to Ba2 from Ba1 and given it a negative outlook. This could make refinancing its debt more difficult, especially if the iron ore price remains below, say, US$60.
Fortescue is in a volume game and its competitors Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) are winning by having lower average costs of around US$33 per tonne.
Some relief may be felt over the short term as small miners including Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI) shut or potentially shut their high-cost operations, however more supply is being added by Gina Rinehart's Roy Hill mine and various international players.
Investors would be wise to consider more secure companies that rely less on international commodity prices and have a competitive advantage over their peers so that they can pay reliable dividends.
