Twiggy Forrest slams BHP Billiton Limited and Rio Tinto Limited

Credit: Chatham House

The boss of Fortescue Metals Group Limited (ASX: FMG) has given an interview to The Australian newspaper in which he takes the opportunity to slam BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) for overproduction of iron ore.

Mr Forrest reportedly saying: “BHP and Rio are just expanding and cutting their own throats”, while claiming the two are continuing to push the iron ore price down through overproduction.

Some may level hypocrisy charges at the Fortescue boss given that Fortescue Metals itself just lifted Q1 2016 ore mined by 7% over the prior quarter, or 5% over the prior corresponding quarter.

Indeed, Forrest has also reportedly been joined in the past by another billionaire mining magnate, Gina Rinehart, in complaining to the media and government about “multinationals” over producing in Australia.

This may surprise some given that both Forrest and Rinehart have built their fortunes thanks to free markets, with Fortescue Metals in particular a company built on debt provided by capital markets. Moreover, Fortescue remains a high-risk proposition given that BHP, Rio and others are unlikely to ever relent in the quest to win market share.

Given the free falling iron ore price Fortescue’s cash production costs remain critical to ensure it can turn a profit with the company claiming it can maintain a C1 cash cost guidance of US$18 per wet metric tonne for the full financial year. C1 costs though only reflect operating costs, not other costs required in terms of capital and investment expenditure to build long-term sustainability in a capital-intensive industry.

The production cost guidance in US dollars is also sensitive to any appreciation in the Australian dollar in the first half of 2016, although this would likely be the result of a rebound in commodity prices and therefore something of a double-edged sword for investors.

Overall it seems that Fortescue remains a leveraged bet on the direction of iron ore prices with iron ore now sold for around US$38 per tonne. It seems unlikely that the major miners will be willing to surrender market share by cutting production and with China’s boom days gone it’s hard to see a sustainable return to higher iron ore prices through 2016 at least.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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