Fortescue shares are on a tear after slashing costs

Fortescue has managed to maintain a significant margin between its costs and current iron ore prices.

During the Mach quarter, Fortescue slashed 9% from the cost of producing a tonne of iron ore to $US25.90.

This is in line with the pure play iron ore miner’s earlier guidance.

Investors cheered the news, sending Fortescue shares up 7.5% to $1.99.

“Our relentless pursuit of sustainable cost reductions has ensured continued positive cash margins with closing cash increasing to $US1.8 billion, despite a volatile market impacted heavily by the threat of oversupply,” says Fortescue CEO Nev Power.

During the quarter, Fortescue managed $US48 a tonne and shipped 40.4 million tonnes of ore, up 28%. Global prices have returned to around $US50 after hitting $US47.

According to Fortescue analysis, the company’s break even price is $US39 a tonne, based on the Australian dollar at 77 cents US.

“This includes interest and sustaining capital expenditure,” Fortescue said in its March quarter report.

The company’s cost target for the 2016 financial year is $US18 per wet metric tonne as it drives savings to lower the cost of production.

Capital expenditure next financial year will be limited to ensure existing operations remain sustainable.

Sustaining capital expenditure, excluding exploration, is estimated at $US330 million in 2016 or $US$2 a tonne, as this chart shows:

Fortescue says it is continuing to look at refinancing its debt which stands at $US7.4 billion after a bid to issue bonds in the US stalled with the falling price of iron ore. The company has no debt maturing until 2017.

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