Fortescue to focus on cutting debt rather than growth

Reducing debt levels and getting the most out of existing assets have become key priorities

Shares in mining giant Fortescue Metals Group (ASX: FMG) have regained some of their losses after the company announced production figures for the September quarter that were slightly below the market’s expectations.

Although the company recognised a 2% increase on its previous quarter’s production rate and an impressive 91% increase compared to its prior corresponding period, Fortescue’s production was restricted due to two conveyor tears and the tragic fatality of a contract worker at its Christmas Creek ore processing facilities.

Nevertheless, Fortescue has maintained its full-year guidance for production, whereby it expects to produce between 127 million tonnes and 133 million tonnes. Meanwhile, the miner expects to be producing at an annual rate of 155 million tonnes by the March quarter.

One of the key points for investors to take away from the report was that CEO Nev Power has put a lower priority on pursuing further growth to instead focus on reducing debt levels and getting the most out of its existing mines and infrastructure.

Power said, “There is a lot of opportunity to continue optimizing and fine tuning across our business to improve our products and our costs as we go forward… We’ll continue to look for (growth) opportunities, but over the next couple of years, the major focus will be on consolidating around the 155 (million tonnes per year rate) and deleveraging the balance sheet.”

This approach is consistent with other miners in the industry, including BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), which have both divested a number of projects to save on costs and increase productivity and efficiency at their core operations.

Fortescue managed to decrease its debt to US$9.3 billion, and UBS analysts are expecting that the company will have cut its debt level to just US$1.2 billion by the end of FY2016.

Rio Tinto also delivered its third-quarter production report earlier this week, unveiling a record quarter production result. A strong result is also expected from BHP when it delivers its report early next week.

Foolish takeaway

The price tag on iron ore has remained very resilient throughout the quarter and is expected to remain between US$110 per tonne and US$130 per tonne for most of the fourth quarter, which would prove to be very profitable for the big miners, who produce the commodity at a much cheaper rate.

Fortescue, Rio and BHP are some of Australia’s strongest companies, however, the volatility and the uncertainties in the sector still remain high, suggesting that the risks still outweigh the benefits. As such, investors would be wise to wait for a more attractive entry point in order to make the investment more worthwhile.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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