The end of the mining boom has forced Australia’s big mining players to get serious on cutting costs and investing wisely to improve efficiency.
That wasn’t the case up until 2012, when the focus for big miners such as BHP and Rio was on production and revenue with cost discipline something of an afterthought.
The trend has shifted in recent years though — the big miners have clearly communicated to the market their intentions to run a tighter ship.
Pure iron ore play Fortescue has joined that trend. Its annual results this morning showed a significant cut in production costs per tonne since 2012.
While the company’s efficiency has increased, this morning’s results — where net profit more than doubled — are also the by-product of strategic investments in 2012 and 2013 which helped the company to expand.
As shown here, cost reductions per metric tonne of iron ore have been steep:
Fortescue’s FY17 costs of $12.82 per metric tonne marks a 274% decrease from 2012.
While that’s an impressive fall, it’s reflective of Fortescue’s focus on capital investment in past years, which laid the groundwork for improved operations.
This chart from Fortescue’s 2015 investor presentation tells the story:
As you can see, the company spent up big in 2012 and 2013, to the tune of around $6 billion a year in capital expenditure.
That investment also allowed Fortescue to expand its operations, increasing iron ore exports to around 170 million tonnes shipped, from 35 million in 2011.
Capex costs then tailed off sharply and have remained low. The company’s results this morning showed capex of $304 million in 2016 and $716 million in 2017.
That focus on increasing scale and technical capabilities has allowed the company to be well placed when iron ore spot prices rise.
And that’s exactly what happened in the 2017 financial year, with spot prices for benchmark 62% fines climbing to an all-time high above $US94 a tonne in February this year.
While the market is subject to volatility and prices subsequently fell back below $US60 a tonne, the combination of higher prices and lower costs allowed Fortescue to more than double its net profit after tax from the previous year.
After announcing its profit results, the market’s assessment of Fortescue’s FY18 outlook has been positive.
After announcing a full-year fully franked dividend of 45 cents per share, Fortescue shares were up more than 6.5% in early trade.