What a difference a year can make for an iron ore miner. In late 2012 the iron ore price plunged from US$137 per tonne to US$87 per tonne in just five weeks, putting marginal and highly leveraged producers under immense pressure.
Fortescue under pressure
At the time Fortescue Metals Group Limited (ASX: FMG) was undertaking a massive, debt-fuelled expansion of its production capability from 55 million tonnes per annum (mtpa) to 155 mtpa, with the aim of being a low-cost producer through scale. Back then it was among the higher-cost major Australian producers with a history of cost overruns on the way to increasing production.
Lower iron ore prices and speculation that the company was having trouble financing its debt, saw its share price plunge from $6 in early 2012 to below $3 by mid-September. Options including asset sales and leasing equipment were considered to repair the debt-heavy balance sheet.
A buying opportunity
At the time, Fortescue's future was looking grim, or at least the company remained a high risk proposition should iron ore prices remain low for any sustained period. In hindsight it turned out to be a terrific time to buy the company as the share price doubled within 12 months.
The iron ore price recovered quickly to US$160 before stabilising for much of 2013 between US$130 and US$140 per tonne. This allowed the company to cut debt from a high of US$12.7 billion to US$9.6 billion by the end of March 2014. This was done by repaying all debt due in 2015 and 2016. Fortescue now has a small amount of debt due in 2017 but the vast majority is due in 2019, indicating that cashflow shouldn't be an issue as long as the iron ore price remains above the marginal price of production.
2014 outlook
Incredibly, after having major debt servicing issues only 14 months ago, Fortescue has now largely de-risked its balance sheet and given itself options moving into 2014. While debt reduction will remain the company's priority in the near term, Fortescue may once again investigate expanding production capacity from 155 mtpa to the slated maximum of 355 mtpa, or consider purchasing vital equipment to lower costs in the long run (such as the recent ore processing facility acquisition).
Repayment of debt as well as operational and scale efficiencies are believed to have reduced the company's break even cost from US$90 to around US$70, meaning that it can absorb fluctuations in the iron ore price far better than last year.
Foolish takeaway
After a few hairy moments, it appears as though Fortescue is well on its way to being a long-term giant in the iron ore industry. With cash costs falling every year and debt being constantly retired, investors will continue to gain confidence in the company and its management.
Shareholder returns could spike in coming years if iron ore prices remain buoyant and the current positive cashflow is maintained. One day soon Fortescue may be considered alongside rivals BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) as a global mining force with strong sustainable competitive advantages over smaller peers.
