Fortescue releases positive quarterly report

Pure-play iron ore miner Fortescue (ASX: FMG) joins a host of its competitors in breaking records for the amount of ore produced in its most recent quarter.

Keeping cost low was a priority and the lower Australian dollar helped the company realise a 17% discount on costs to US $36.01 per tonne. This has resulted in cost savings of $400 million since September 2012, above and beyond its target savings of $300 million. The company’s push to become a global miner has also paid off as shipments totalled 25 million tonnes in the June quarter, an increase of 25% on the prior period.

FY13 shipments totalled 80.9 million tonnes but the company believes it is on track to achieve a  production rate of 155 million tonnes annually by the end of December this year. This is largely attributed to the company’s Kings development at Solomon. It is anticipating a production and shipping guidance of between 127 and 133 million tonnes for FY14.

The company realised a cost and freight (CFR) price of US $113 per dry metric tonne and says it reflected the continued strength in the iron ore market. However, this figure is likely to go lower in coming years as supply levels trend upwards.

The company also lowered capital expenditure by US $1 billion to US $6.2 billion for FY13.

Savings are essential for Fortescue as it is facing a potentially much weaker iron ore price and increased competition from suppliers. Asset sales have been the method of choice for saving costs by many of our miners and Fortescue says commercial negotiations for a minority interest in its rail and port assets are progressing.

At June 30, it had US $2.2 billion in cash. This is a result of the company’s decrease in capital expenditure and savings from costs.

Foolish takeaway

Fortescue is debt-laden and with a 226% debt to equity ratio its balance sheets need to start catching up. A number of other more profitable miners such Rio Tinto (ASX: RIO), BHP (ASX: BHP) or even smaller iron ore play BC Iron (ASX: BCI) are perhaps more enticing. However, this Fool believes carrying the extra uncertainty of lower iron prices and huge amounts of debt makes Fortescue an unsavoury investment. The ASX is dishing up plenty of good buying opportunities and your portfolio only deserves the best, so why take the risk?

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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