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Fortescue faces cost reduction headwinds with Australian dollar, oil price increases

The risingAustralian dollar and increase in oil prices could keep Australian iron ore producerFortescue Metals Group Ltd.from hitting its goal of exiting the 2016 financial year at a US$13-per-wet-tonnecost of production.

"We'vemaintained US$13 as our guidance for our exit rate in June this year, but if youlook where the Aussie dollar has gone to at around 76 cents and the oil price today,that's probably added another [US]$1 to our cost reduction needs," CEO NevillePower told reporters April 13 following the release of Fortescue's .

"Sowe're just flagging to say that those are significant factors in our costs and we'restarting to see them go up, but we'll be doing everything we can to continue reducingour costs despite that, but very importantly we will be maintaining our relativecompetitiveness against our other suppliers."

By theend of the March quarter, Fortescue had reduced its C1 cash costs by 6% quarterover quarter and 43% year over year to US$14.79 per wet tonne.

Earlierin April, Fortescue revealed that it was takingback control of its Christmas Creek operations, part of the in Western Australia'sPilbara region, from Downer EDI, which has been the contractor since mining beganat the project.

The currentmining services contract with Downer ends Sept. 30.

AlthoughPower could not put a figure on how much Fortescue is likely to save by transitioningto owner-operator mining, he did say the cost savings will be "significant."

"We'restill working through that as we work through the transition plan and obviouslythere will be a bit of a settling in process as we pick up those operations, andwhat we'll be looking to do is leverage very hard off our existing mining operationsto make sure we're maximizing the opportunity across all of our mines so that we'reoptimizing there," he said.

"Soa little bit early to tell yet but the savings will be significant and perhaps moreimportantly it will improve our ability to respond and our agility in managing ourproduction profile."

Fortescueis also aiming to cut costs by improving the removal of alumina and silica, whichwill raise the grade of its product.

The companycurrently beneficiates around 85% of its iron ore, which Power said allows Fortescueto mine lower-grade ore.

"Thatmeans we're making much greater value of our orebodies because we're then able toupgrade that lower grade ore to product standard," he said. "That's beena great result for Fortescue and has really allowed us to leverage off the investmentthat we've made in ore processing and beneficiation."

Looking for 'best bang for thebuck'

Withthe U.S. debt markets looking a little healthier in recent times, Fortescue is againmulling its options to further reduce its debt pile.

The company'snet debt at the end of March sat at US$5.9 billion.

CFO StephenPearce said the improved U.S. debt markets provide Fortescue with a raft of optionsto lower its debt burden.

"We'vegot lots of flexibility — call-in debt, paying debt down, refinancing and a combinationof all of the above are all options on the table for us, and naturally we're goingto look to try to get the best bang for the buck as we go to execute," he toldreporters.

"AsI said before, what's important is the commitment and then the rest is just timingand tactics and we will apply that cash to debt reduction when we think it's theright time."