With prices of key steel-making ingredient iron continue to dip in the world market, global miners are reduced to implement drastic strategies to keep the business afloat.
After BHP Billiton, the next to announce a reduction in its programmed capital spending has been Fortescue (FMG : ASX) Metals Group Ltd, Australia's third-biggest iron ore producer.
The state government of West Australia has rejected requests by Fortescue Metals Group to delay the payment of some more than A$200 million in royalties as the iron ore miner pursues its ambitious expansion plans.
Billionaire Andrew Forrest's mining firm revealed it will cut by a quarter its capital spending as well as revise its expansion schedule on projects due to softening market triggered by weak demand from China.
The company, which said before it aims to expand annual production capacity to 155 million tonnes by June 2013, has actually set a near-term production target of 115 million metric tonnes a year, without detailing as to when it exactly wants to achieve this.
About $300 million is envisioned to be saved from the reduced capital spending, along with cuts in staff numbers. Bloomberg calculations showed the reduction translates to 26 per cent to $4.6 billion.
"This is exactly what happens when commodity prices get savaged," Sydney-based fund manager Prasad Patkar told Dow Jones. "High cost and marginal projects get deferred as miners look to conserve cash, and producers that can't remain cash-flow-positive cut production and the market balances."
"They're taking pretty clear actions that should enable them to get through the next 12 months," analyst Chris Drew said in Bloomberg News. "If this works as planned, they don't need to raise additional funds."
Projects that will be affected include the Kings deposit within its Solomon mining hub in Western Australia's Pilbara region, as well as the full completion of its fourth berth at Herb Elliott Port.
The Perth-based Fortescue, however, said it will proceed to complete the expansion of its Christmas Creek mine.
Effectively, with the suspension of the Solomon project developments, Fortescue's production in the 2012/13 financial year will slide down to between 82 million tonnes and 84 million tonnes, from a previous guidance of 86.5 million tonnes.
Fortescue's capital expenditure projections for 2012/13 likewise has been slashed by $US1.6 billion ($1.57 billion) to $US4.6 billion ($4.51 billion).
"These measures reflect the company's ability to reduce and delay cash expenditures to meet market conditions and provide us with head room in the event of further deterioration of iron ore prices," chief executive Nev Power said.
The development of its Solomon project will be completed when market conditions recover, Mr Power said, even as the company remained in advanced talks to sell the Solomon power station. Fortescue likewise said it is discussing the partial sale of its North Star magnetite project with two "major" investors.
Prices of iron ore in the world market continued to decelerate, hitting to a level as low as US$88.70 a dry metric tonne last week, its lowest since October 2009.
"In the mining sector, the recent sharp decline in commodity prices has caused profits to deteriorate significantly, such that miners are now spending more in capex than they are earning," Credit Suisse analysts Damien Boey and Atul Lele said in a note to clients.
"This is not a sustainable situation, and if commodity prices do not recover very strongly, we would expect to see (and indeed, are already seeing) projects being deferred, if not cancelled outright."
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