FMG site tour: breakeven cost reduction is sustainable

Report summary

Fortescue Metals Group's (FMG) US dollar cash cost reductions achieved in 2015 are mostly sustainable. The drop in FMG's costs is because of a number of factors - weaker Australian dollar, lower oil prices, lower freight costs, increased volumes, and improvements to the wet ore processing facilities (OPF). The modifications to FMG's wet OPF's are most interesting as they have enabled FMG to mine and process lower grade ore while increasing mass recovery and maintaining product grades. The ability to mine lower grade ore allows FMG to use larger and lower cost truck and excavator equipment as it no longer needs to selectively mine high grade ore. Having said that, we do expect costs to creep higher because of rising strip ratios and longer haul distances. Combined with our forecast of higher oil prices, we are anticipating FMG's breakeven costs will rise between 2016 and 2019 at a rate similar to cost increases throughout the industry as a whole.