Ship loading of Pilbara iron ore kicked off late last week for Fortescue Metals Group [ASX:FMG; OTC:FSUMF], which remains dubbed by some as a junior company despite its A$26 billion ($24.8 billion) market capitalization.
By reaching this milestone, Fortescue has thrown a spanner into the works of what is essentially a duopoly between giants BHP Billiton [ASX:BHP; NYSE:BHP; LSE:BLT] and Rio Tinto [ASX:RIO; NYSE:RTP; LSE:RIO] in the Australian iron ore production industry.
How the New Player Fits Into the Australian Production Picture
BHP Billiton produced 53.6 million tonnes of Australian iron ore in the half-year ending December 2007, while Rio Tinto produced 74.4 million tonnes. Output rates for both companies grew during the December quarter thanks to completed expansions.
Overall, Australian iron ore and pellets earned the country A$16 billion in 2007 from exports of about 267 million tonnes, according to the Australian Bureau of Agricultural and Resource Economics. In recent years about half of exports have been going to China, excluding tonnages to Hong Kong and Chinese Taipei.
Total production in 2007 was slightly higher, amounting to about 299 million tonnes.
Fortescue's operation in its current base-project form has an annual production capacity of 55 million tonnes.
Cloud Break, the mine site where Fortescue ore is being sourced initially, has 120.6 million tonnes of proved reserves plus 313.4 million tonnes in the probable reserves category of JORC. Elsewhere on Fortescue's tenements, the company has 619 million tonnes in probable reserves at Christmas Creek and about 1.7 billion tonnes in inferred resources across the Solomon East and Solomon West areas.
Timing of Export Ramp-up
Fortescue Chief Executive Andrew Forrest last week said he estimated operations would become cash-flow positive within several months.
Export ramp-up plans were to reach 2 million tonnes per month over the next two to four months. Following that would be a gradual climb to a monthly rate of 3.8 million tonnes in either the last calendar quarter of 2008 or in next year's first quarter.
Whether or not it's the last quarter or the first quarter of the following year isn't that important, Forrest said.
What is important is the trend, and we will trend [towards] four, then close to five million tonnes a month by the end of next year.
All of Fortescue's base-project production capacity target has been spoken for, the company said earlier this month. According to Fortescue, all of the top 10 Chinese steel mills have signed supply contracts. The company's largest customer is Chinese steel maker Baosteel, which holds a long-term supply contract for 10 million tonnes per year, and later for 20 million tonnes annually once Fortescue has ramped up yearly production beyond the 55 million tonne mark.
Expansion Decisions Wait in the Wings
Forrest said Fortescue had been studying a number of expansion options over the past two years but wouldn't be triggering any investment decisions until ore loading and shipping processes were running very smoothly.
General expansion plans were to boost mine, rail and port operations so that production would exceed 100 million tonnes per year. This would be followed by development of a second iron-ore region, Solomon, a step that Fortescue says might see the company reach total annual iron-ore output of 200 million tonnes.
Forrest said a wide bag of options existed for funding future expansions. Examples he named included cash flow from existing operations, project financing such as leasing and direct fixed-interest borrowings, and, possibly, pre-payments from customers.
On the topic of future equity raisings to fund expansion, Forrest said: ... the idea of issuing shares at this point would need [to involve] quite some persuasion, when we do think the shares are undervalued.
Forrest 'Relieved' to Have Reached This Stage
In building Fortescue and reaching this stage of operations, Forrest has received many doses of criticism from naysayers.
Doubts dogging the company have included Forrest's ability to bust the BHPB-Rio stranglehold on Australian iron ore. The ambitious scale of Fortescue's undertakings, which required raisings in the billions of dollars, caused consternation and disbelief. And once funds were raised some observers questioned Fortescue's ability to stick to its planned schedule.
According to the company, a fund manager last year scoffed that he would happily go along with being tied to Fortescue's ore-transport railway track this month because he was sure no trains would be around to kill him.
The company also became something of a black sheep by considering using surface miner machines to extract its ore, instead of automatically falling back on traditional rock-blasting and shovelling methods.
Last year Fortescue trialed novel diamond-composite cutting tips installed on surface miners' conventional rock-cutting picks, but didn't adopt the technology in the end. While a trial involving another kind of diamond-coated-tip may get underway down the track, the company reportedly was doing well with its current surface-miner configuration.
At the moment, we are getting fantastic results using conventional tungsten carbide tips on a pick that we have designed ourselves, Fortescue's special projects manager David Mendelawitz said.
We are always trying new materials and new picks, but our focus has now moved to other areas as we have the picks 95% right.
Rather than being a challenge in the ship-loading optimization process, the surface miners were a treat, according to Forrest. He said this was because the company's ore bodies - being shallow, flat and like coal seams - were amenable to this mining method.
Despite receiving various whippings in the public arena, Forrest said he felt no sense of redemption or vindication now that his company had reached the loading of its first commercial shipment of ore.
What I have felt is an enormous sense of relief, he said.
He said the relief was that employees - who had risked their own capital and careers by leaving their positions at other companies to come and join a junior with big plans - had finally seen their faith pay off.
The pay-off for believing must feel doubly sweet to any employee holding Fortescue shares, given their approximate tripling in value since this time last year. In recent days they have been trading above A$9 ($8.60) on the Australian Securities Exchange.