There are numerous figures floating around on Fortescue and iron ore regarding various prices and costs, which has understandably caused some confusion. Due to frequently asked questions we have formed a basic summary of what the different price and cost metrics mean within the sector
Iron ore production levels (wet vs dry)
- Production is usually quoted in terms of wet metric tonnes (wmt), and the iron ore price is based on dry metric tonnes (dmt)
- To adjust from wet to dry tonnes, an 8% reduction is applied to the wet tonnes to adjust for moisture content
- It’s important to understand whether something is being quoted in ‘dmt’ or ‘wmt’
Iron ore price – index vs realised price
- The usually quoted iron ore price seen in the media is based on the index price using a 62% ferrous content (a benchmark measure of the quality of the ore)
- The realised price iron miners get for their product is not the index price – their realised price will depend on the relative quality of their product to the index benchmark
- Fortescue’s delivered price is adjusted for its quality and lower ferrous content – it has historically been able to sell its product at an 85% discount to the index price
- So if the iron ore index price is at US$58/dmt, Fortescue will be realising a price of about US$58 x 85% = US$49.3/dmt on its iron ore
C1 Cost
The C1 cost represents the ‘direct’ production costs of iron ore and is a commonly quoted figure. However, it does not represent the full cost of production. Fortescue’s C1 cost guidance for the second half of FY15 is US$25-26/wmt.
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Delivered cost
The delivered cost includes the C1 cost, plus shipping, royalties and overhead costs. Fortescue’s delivered cost guidance for the second half of FY15 is US$35/wmt.
All-in cash cost
The all-in cash cost is the delivered cost, plus interest and sustaining capital expenditure. Fortescue’s all-in cash cost guidance for the second half of FY15 is US$41/wmt. The extra US$6/wmt above delivered cost is made up of interest at US$4/wmt and sustaining capex at US$2/wmt. It’s worth noting that interest is actually a relatively small part (<10%) of Fortescue’s overall cost of production – therefore it’s all-in cash cost is not overly sensitive to changes in its cost of funds.
Free cash flow breakeven price
- The free cash flow breakeven price generally means the index price level at which Fortescue is producing at breakeven on an all-in cash basis
- To determine the breakeven price, the first step is to adjust the all-in cost from ‘wet’ to ‘dry’ tonnes – so US$41/wmt is equivalent to US$45/dmt
- The next step is to gross up by the 85% product discount to get to an breakeven index price - so US$45/dmt / 85% = US$53/dmt which is the often quoted breakeven
- Some analysts also make a further adjustment for prepayments. This is where Fortescue has received cash upfront to deliver future tonnages
The relationship between currency and Fortescue’s costs
- Fortescue’s 2H15 cost guidance of between US$25-26/wmt assumes an average exchange rate of 0.80
- Fortescue's cash costs of production benefit from a weaker Australian dollar – so bondholders get a double benefit from a weaker Australian dollar
- The company has guided that every 1c weakening in the currency leads to a US$0.25-0.30 reduction in cash costs
- So if the currency is at 0.70, Fortescue’s C1 cost would reduce by about a further US$2.50/wmt below its 2H15 C1 cost guidance of US$25-26/wmt
The relationship between oil prices and Fortescue’s costs
- Fuel and energy costs make up approximately 12% of total C1 costs
- Lower oil prices reduced C1 costs by approximately US$0.26/wmt in the December 2014 quarter.
- Fuel and energy costs also have a significant impact on the cost of shipping which averaged US$8.50/wmt in the December 2014 quarter
For more information on Fortescue or the securities on offer you can contact your FIIG Representative