Iron ore miner Fortescue Metals has rejected suggestions that it is vulnerable because Chinese steel use is waning, saying that country’s urbanisation had more than another 20 years to run.
Fortescue’s dependence on iron ore prices was underlined by a 40 per cent drop in first half profit.
Fortescue reported a net profit of $US478 million ($A463.99 million) in the six months to December 31, down from $US801 million ($A777.52 million) in the previous corresponding period.
The company says it has had a strong start to the second half of the 2012/13 financial year, with iron ore prices returning to high $US150-plus levels following last September’s slump to below $US90 a tonne.
It will not pay shareholders an interim dividend, citing its large cash outflows on building new mines but said it would review its dividends after its full year result was announced later this year.
It also did not pay any mining tax and chief executive Nev Power says it does not expect to pay any in the future, based on expected iron ore prices.
Its shares were punished, closing 26 cents, or more than five per cent, weaker at $4.92.
The world’s biggest iron ore miner BHP Billiton – Fortescue is number four – warned on Wednesday that the Chinese economy was maturing following a period of steel-intensive, infrastructure led growth.
Fortescue was forced to secure a new $US4.5 billion ($A4.37 billion) financing deal last September when iron ore prices plunged, creating a liquidity crisis at a time that it was also committed to an $8.4 billion Pilbara expansion.
Fortescue had exited the half a stronger and more resilient company, Mr Power said.
“The Chinese economy desires to move to a consumer-driven economy but it is going to take some decades, two plus decades to achieve that,” he said.
Mr Power said the most steel-intensive period of America’s growth – iron ore was a key steel input – was when the US was 60 to 75 per cent urbanised, while China was still at only 50 per cent, auguring well for demand.
Morningstar analyst Matthew Hodge said the company’s profit was flattered by the proceeds of an asset sale to BC Iron and capitalised interest which, when taken out, left an underlying figure of $355 million, half the previous profit result.
He said it was in Fortescue’s best interests to succeed in selling down a stake in its wholly owned subsidiary The Pilbara Infrastructure (TPI), which owns and operates the miner’s port and rail assets.
Mr Power said the company wanted to sell the stake to reduce debt (currently at $12.6 billion gross) and gearing but would only do so if it realised fair value.
A fall in the iron ore price from as little as $US120 a tonne to $US110 makes a huge difference to Fortescue’s earnings.
The average price for iron ore was $US118 per dry metric tonne in the first half, down from $US160 in the previous corresponding period.
Mr Power said he believed the current supply-demand balance supported a price of at least $US120 a tonne and could be much stronger this year, with confidence in construction high in China under a new government leadership.
The company paid a dividend of four cents for the previous corresponding period.
Fortescue has maintained full year guidance of shipping between 82 million tonnes and 84 million tonnes of iron ore, aiming for production capacity of 155 million tonnes per annum by the end of calendar 2013.
