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Fortescue reviewing Iron Bridge magnetite project investment, scheduling

Iron ore mining major Fortescue Metals Group Ltd. began a detailed review of its investment and scheduling plans for its majority-owned US$2.6 billion Iron Bridge magnetite project in Western Australia. Infrastructure costs for the mine development were recently reported to be increasing by up to 25%.

The company outlined plans for the Iron Bridge review in its production report for the December 2020 quarter. It said the review will consider the ongoing impacts of the COVID-19 pandemic, the strength of the Australian dollar and other factors including access to resources and specialist skills.

SNL Image
Fortescue Metals Group's Iron Bridge magnetite iron ore mine
development in 2020.
Source: Fortescue Metals Group Ltd.

Magnetite is a primary type of iron ore, which is a key ingredient in steelmaking, and China, the world's largest steel producer, is reportedly cutting steel production in 2021.

The Ministry of Industry and Information Technology of China reiterated at a Jan. 26 press conference the importance of "ensuring a year-on-year decline in steel production in 2021" to achieve the goal of "carbon peak and carbon neutrality" in the steel sector, according to S&P Global Platts.

Platts' 62% iron ore index fell 2.28% the same day, and Fortescue was the S&P/ASX200's worst performing stock Jan. 27, shedding 6.4%. By the close of Jan. 28 trade on the ASX, the company's share price had lost more than 10% since Jan. 25.

The ASX share prices of fellow Australian iron ore majors BHP Group and Rio Tinto also fell from Jan. 25 to Jan. 27, by over 5% and over 3.8%, respectively, as iron ore prices decreased. The price of the commodity hit a nine-year high in December 2020 amid tightening supply and strong demand in China, helping Fortescue's ASX share price hit a 52-week high of A$26.40 on Jan. 8.

Fortescue said in its Jan. 28 report that engineering and process plant bulk earthworks at Iron Bridge are 90% complete and activity is "accelerating," with construction of the concentrate handling facility at Port Hedland and pipeline installation due to start in the third quarter of fiscal 2021.

Fortescue COO Greg Lilleyman told analysts on a same-day call that module fabrication for Iron Bridge is underway in Australia and China.

Though Lilleyman said there were no COVID-19 impacts on the supply of long-lead items, CEO Elizabeth Gaines said some of the company's contracting partners "rely on a labor force that largely resides on the East Coast" of Australia.

She said the pressures on contractors' labor forces created by ongoing Australian state border restrictions will be considered as part of the review.

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Noting the recent strength in the Australian dollar, Fortescue CFO Ian Wells said a 1 cent movement in the Australia-U.S. dollar exchange rate impacts the miner's direct C1 cash costs by about 13 cents.

"There's still a lot of Australian dollar-denominated costs to come, and it's probably more proportionate to the back end than the front end," Wells said of Iron Bridge's progress.

Fortescue's fiscal 2021 C1 cash cost guidance remains unchanged at US$13/t to US$13.50/t, based on an assumed Australia-U.S. dollar exchange rate of 70 cents. An Australian dollar was worth just over 76 U.S. cents Jan. 28.

Wells also told analysts that debt for Iron Bridge is still an option. Fortescue will update the market on the review Feb. 18, along with financial results for the first half of its fiscal 2021.

China steel uncertainty

Peppered with questions on China's steelmaking during the company's call, Lilleyman said the country's industry plans to further consolidate and retire some aging and less efficient capacity, which shows it still has some "levers to tackle."

Gaines said that while steelmakers' margins are being pressured by increasing coking coal prices, steel inventories are back to pre-COVID-19 levels of about 13 Mt, having peaked at about 39 Mt.

"There will be some seasonality as we head into Chinese New Year, but currently everything we're seeing continues to support ongoing [iron ore] demand, and if anything … we're still thinking there will be modest growth in crude steel production of 1%-2% this calendar year," Gaines said.

Lilleyman said continuing iron ore supply disruptions in Brazil are also supporting strong demand for Fortescue's product.