Today was a busy public day in the life of Fortescue Metals Group (ASX: FMG). It produced a slide presentation to shed some light on discussions over getting into bed with a large Chinese steelmaker (after weekend speculative media reports), announcing that development of a second mine was back in action, and providing some details on still unresolved issues with shipping companies.
An announcement is expected later this week on talks with Hunan Valin and China Investment Corporation for an hybrid funding package as well on other alternatives for capital raising, including institutional placements, joint ventures and direct investments. Fortescue already has what it terms a strategic alliance with Hunan Valin.
Today's presentation said on the outlook for Chinese iron ore imports - Fortescue's only customer - that China's steel production is expected to rise above 500 million tonnes of steel this year.
The mere fact Fortescue is talking turkey with the Chinese and financial institutions is not new, as it was mooted more than two years ago by chief executive Andrew Twiggy Forrest. He then told journalists visiting the Pilbara that the next stage of expansion, involving the Christmas Creek mine, could be financed by an infrastructure consortium that could have a major equity in the railway and ship-loading and shipping facilities in Port Hedland.
Today's company presentation also said the spot market for iron ore has been firming since December, destocking of iron ore in China was largely complete, the restocking process has begun and in the last quarter steel prices in China rose by more than 20% in most products.
Since production began at Cloudbreak in May 2008 Fortescue has been advancing to its ramp up by mid 2010 to shipping 55 million tonnes per annum
How much does Fortescue want for the stage two (Christmas Creek) expansion? Some market reports suggest as much as $US3 billion, and the issue, according to the website of the Melbourne Age newspaper today, was speculation about Fortescue's debt burden (reportedly involving non-current liabilities of $A5.8 B ($US3.76 B). Since the stockmarket and commodity price meltdown Fortescue has been plagued by rumours and short selling initiatives.
Forward debt levels were not detailed by Fortescue today but it did say that its cash position at the end of December was $A439 M ($US284.5 M), that operations were generating significant cash flows on a per tonne basis, cash operating margins were improving as volumes ramp up and that the capital expenditure commitment is covered by existing cash or internally generated cash flows.
Christmas Creek, which was put on hold several months ago with the erosion of iron ore prices and the slow down on China's iron ore imports, is now back in action with the first overburden blast taking place on this second mine site last Saturday.
Clearly the action build up will be significant, as Fortescue's Head of Operations, Paul Hallam, said first ore from Christmas Creek will be transported to the Cloudbreak mine ore processing facility for blending this May.
Christmas Creek is 55 kilometres east of Cloudbreak and is a larger deposit with a reserve estimate of 997 Mt compared to Cloudbreak's 628 Mt.
The Pilbara exploration tempo is in rebuild and Hallam said a raft of encouraging results have come in from the Horatio prospect, 25 km north of BHP Billiton's mining town of Newman.
The third announcement today involved disputed shipping contracts following Fortescue suspending its 10 long-term shipping Contracts of Affreighment and Consecutive Voyage contracts on the basis of unforeseen circumstances (undoubtedly in part related to the end of a chronic shortage of ore ships with the downturn.
These contracts provide for a dispute resolution procession through arbitration and litigation in London, and Fortescue's right to suspend the contracts is being contested by the various ship owners.
Fortescue talked of uncertain variables, including whether there is any underlying liability for the claims (which is being vigorously contested), and the potential for a commercially settled outcome.
On February 4 settlement was reached with Bocimar International NV with whom Fortescue had two of the 10 contested contracts. These, Fortescue said, were the largest of the shipping contracts. This settlement included a scrip settlement for Bocimar.
These shipping contracts will remain an overhang until settled, but the Australian market is banking on is positive negotiations with Hunan Valin, assumedly a ladder already being climbed, otherwise why would mining start on Christmas Creek?