Americans Can Get In On the Australian Minerals Boom
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Who would have thought Australia would deserve close scrutiny for investment? Not me--that is, until I visited Perth, in Western Australia. I visited in 2009, at the height of the great recession, and was immediately struck by the dynamic skyline. There were cranes everywhere; skyscrapers were being erected at an energetic pace. The population was cashed up and on the spend. Everywhere I went people were excitedly expounding on the virtues of “the minerals boom.” My interest was piqued.
I did some digging and found something very interesting: Australia's Fortescue Metals Group (NASDAQOTH: FSUMF). This company had looked like a sleeper to me. I had heard about BHP Billiton Limited (NYSE: BHP) and Rio Tinto (NYSE: RIO), but I had no idea that this quiet company is the fourth largest producer of iron ore in the world. Fotescue’s headquarters are in Perth, while its mines and infrastructure are located on the world’s richest iron ore deposits in the Pilbara district of Western Australia. The Pilbara region enjoys the cheapest shipping costs to China and Japan out of all the major iron ore deposit areas in the world, and Fortescue is the only large homegrown iron mining company in that district.
There are a number of smaller iron miners in the Pilbara district, as well as the three big ones (Rio Tinto, BHP Billiton and Fortescue Metals Group). I have made a number of trips to Western Australia since 2009, and I have to tell you, after traveling to the Pilbara, I think I know what the old American wild West must have felt like. There are 3 Km long ore trains snaking their way through the outback on their way to Port Hedland. There are wads of cash in everyone’s pockets and they don’t mind forking it out. Money is being made in all types of ways, from service industries for employees to contractors and suppliers for the mines. There is a boom-town excitement in the air that is thrilling. It didn’t take me long to realize that I needed to get a piece of that pie.
After doing some initial research, Fortescue Metals Group emerged as a good prospect, and the more I looked, the better it got. After a thorough investigation, I have to say that I am very excited about Fortescue's near and long term prospects. It has survived last fall's precipitous drop in ore prices heroically. September iron ore prices hit a low of $85 a ton and have since recovered to over $150 a ton. In October 2012 rumors abounded of Fortescue's eminent demise, and trading in the stock on the ASX was halted for several days. This is when Chairman, Andrew Forrester, made his famous emergency weekend trip to New York, coming home with a $5 billion new loan facility, lowering the company's interest costs significantly. Fortescue further controlled costs by selling non-core assets and temporarily halting construction of their Kings mine. They were able to trim costs by $300 million a year.
Fortescue will celebrate their tenth anniversary in 2013. They have built an impressive infrastructure of mines, mills, rail support and port facilities from scratch, with the goal of producing and shipping 155 million tons of high grade ore a year by the end of 2013. The restarting of the 40 mta Kings mine, set to finish by year end 2013, was announced at the end of 2012. This will put them well and truly back in the saddle. Their other expansion projects are nearly finished: the 95 mta Chichester expansion was evidently completed in December 2012, and the 20 mta Solomon Firetail mine is set to open this March.
Fortescue has mining rights with proven reserves of 12 billion tons. Mining at a rate of 155 million tons a year, gives them 77 years of production. Their current fiscal year’s shipping was 57.5 million tons, providing sales of $6.7 billion and an average sale price of $116 per ton. They have had massive capital expenditures to build up their infrastructure, their debt load is at about $10 billion, but this is small compared to the potential near term output. It looks like their cost of production may come in as low as $55 a ton. The current cost of production is just under $90 per ton, but will go down with their greater economy of scale. As of writing this, iron ore stands at over $150 per ton. Iron is a cyclical commodity and will go back down after the cyclone season, but the demand in China looks to be building to a point where the price will not bottom quite so low this year. In any case Fortescue’s run rate is high enough that they can take advantage of the current high iron prices. Consequently, I believe we will see sales for fiscal year 2013, in the range of $11 to 13 billion and if all goes well 2014 could bring sales of $16 to 20 billion.
On January 4, 2013 Fortescue announced hitting the 100 million ton per year run rate in December of 2012. They also announced that all projects are on track to hit their goal of 155 million ton per year run rate by December 2013. Most of the heavy lifting of construction and capital expenditures are nearly completed. Fortescue just looks like a money machine to me and well worth further attention.
jamesacoffman owns VALE, FMUGY and FSUMF. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!