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Fortescue’s improving outlook

Iron ore miner, Fortescue Metals Group (ASX:FMG) has today reported a 12% rise in net profit to US$1.75 billion over the previous year.

With iron ore shipments up 41%, to 80.9 million tonnes, revenues jumped to US$8.1 billion, despite the average price received falling. Fortescue says it received an average price of US$114 per tonne, compared to US$131 a tonne in the previous year, while C1 cash costs continue to drop.

For the year cash costs were US$44 per tonne, 9% lower than in 2012, and improved to US$36 a tonne in the June 2013 quarter, thanks to lower strip ratios, low cost Firetail production, and stripping out of excess costs.

Thanks to the falling cash cost, Fortescue now estimates that its breakeven iron ore price is expected to be in the low US$70’s per tonne, and almost puts it in on par with iron ore giants Rio Tinto (ASX:RIO) and BHP Billiton (ASX:BHP).

The company also produced US$3 billion in operating cash flow for the year, which should be able to comfortably pay off the company’s US$12 billion in debt. The company has US$2.2 billion in cash on its balance sheet as well, and announced that it will begin to pay back some of its debts this year – despite not being required to do so.

It also means Fortescue is unlikely to proceed with any partial sale of its subsidiary The Pilbara Infrastructure (TPI) company. The sale of a minority stake in TPI could realise up to $3 billion and  allow Fortescue to rapidly reduce its debt, but improving cash flows and a stronger than expected iron ore price means there’s less pressure to execute a deal now. As a bonus, Fortescue will maintain full control of its infrastructure, including port handling and railway scheduling.

A recently announced deal, which saw Taiwan’s Formosa Plastics Group invest US$1.15 billion to develop the Iron Bridge iron ore project, will also help reduce the pressure on the balance sheet.

Foolish takeaway

Fortescue certainly appears confident it can weather any drastic drops in the iron ore price now, even declaring a 10 cent dividend. But as always, Fortescue still needs to generate enough cash flow to meet its debt repayments that begin in November 2015. If the iron ore price stays around current levels, that shouldn’t be an issue.

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

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