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Fortescue misses target

Iron ore miner Fortescue Metals Group (ASX:FMG) announced today that production would be lower for the 2013 financial year than originally expected.

In a statement to the market today, Fortescue announced that production is estimated to be between 80 and 82 million tonnes, down from between 82 to 84 million tonnes. The market didn’t like the news much, punishing the shares, which fell more than 6%. Any further bad news and the shares are in danger of heading past its 52-week low of $2.81.

Fortescue also reported that the level of interest generated in its sale of Pilbara infrastructure means the company has extended the evaluation period. The company reiterated that a sale would only occur at fair market value, and expects to announce a transaction, if any, in the September quarter.

Fortescue announced that its cash costs are coming down, with costs for the June quarter of between US38 and US$40 a tonne, with full year cash costs expected to be in the range of US$45 to US$50 per tonne. The company says that with the iron ore price holding between US$110 and US$130 a tonne, as it had expected, cash flows should be strong and see the company’s cash balance swell to more than US$1.7 billion at the end of June 2013.

Taking the cash into account, Fortescue expects to have a net debt position of US$10 billion at 30 June 2013, with no debt due to be repaid until November 2015. Capital expenditure is slowing after Fortescue spent US$6.3 billion this year, with 2014 expected to see just US$1.9 billion spent.

Fortescue is on target to produce 155 million tonnes of iron ore a year in 2014, and should see the company amongst the lowest cost producers in the world. Fellow Australian miners Rio Tinto Limited (ASX:RIO) and BHP Billiton (ASX:BHP) are exceptionally low cost producers, with both ramping up production of iron ore in recent years.

Foolish takeaway

Fortescue needs to generate significant cash flows to meet its debt repayments from 2015. At this stage it appears on target, although it could be hit by falling demand and lower iron ore prices, and any slip could see the company in hot water.

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Motley Fool writer/analyst Mike King owns shares in BHP.

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