SYDNEY Australia's Fortescue Metals Group (FMG.AX) said it will slash capital spending and wind back its expansion plans, the latest iron ore miner to drop big-ticket projects in the face of weaker demand from China and tumbling prices.
The move comes just a week after Fortescue reassured investors that it expected the decline in iron ore prices to end within a couple of months, as it aimed to triple its production rate to 155 million tonnes a year by mid-2013.
The world's No 4 iron ore producer said on Tuesday it would lop $1.6 billion ($1.6 billion) off capex spending this year, cut back on staff and only commit to a near-term growth target of 115 million tonnes a year.
"The question is, what has actually changed between announcing their full-year results and today that caused the apparent change in strategy," said Tim Schroeders, a portfolio manager at Pengana Capital, which does not own Fortescue shares.
"They're basically trimming their sales for what loooks as though it's a changed environment," Schroeders said.
Fortescue shares initially jumped 3 percent, but reversed course to be down 2.8 percent at a 28-month low.
BHP Billiton (BHP.AX) BLT.L>, the world's biggest mining company, has already shelved a $20 billion expansion of its Olympic Dam copper and gold mine in Australia and put all other approvals worldwide on hold as the sector battles escalating development costs, slumping prices and an uncertain outlook.
Investors had been nervous Fortescue would face a funding shortfall for its $9 billion project to triple production, but Chief Executive Nev Power said last week he was confident Chinese demand would improve, justifying the spending.
DEMAND DROP OFF
Credit Suisse said the recent sharp decline in commodity prices meant miners were now spending more in capital expenditure than they were earning.
"This is not a sustainable situation, and if commodity prices do not recover very strongly, we would expect to see (and indeed, are already seeing) projects being deferred, if not cancelled outright," analysts Damien Boey and Atul Lele said in a note to clients.
Fortescue, the world's no. 4 iron ore producer, which sells most of its ore to Chinese steel mills, said staff numbers and operating costs would be reduced immediately to save around $300 million.
These measures would lead to a slight reduction in the current year's production to 82-84 million tonnes from previous guidance of 86.5 million tonnes.
Iron ore shipments to China from Australia's Port Hedland, a bellwether for the sector, are expected show a monthly decline in August after falling by 7 percent in July. BHP is the port's biggest user, followed by Fortescue.
Until recently, the world's top producers, including Vale (VALE5.SA) in Brazil and Rio Tinto (RIO.L)(RIO.AX) and BHP in Australia -- together controlling 70 percent of the world's seaborne iron ore market -- were counting on their super-sized operations to provide economies of scale and an edge over small competitors when demand softens.
The more each miner can dig up the lower the costs and greater the ability to ride out a downturn.
But benchmark iron ore prices .IO62-CNI=SI have tumbled from a 2012 peak near $150 a tonne in April to below $90, hitting a near three-year low last week, leading to a rethink.
In Fortescue's case capital spending in the current fiscal year 2013 will be cut to $4.6 billion from $6.2 billion earmarked previously, according to the company.
"These measures reflect the company's ability to reduce and delay cash expenditures to meet market conditions and provide us with head room in the event of further deterioration of iron ore prices," Power said in a statement.
Ratings agency Standard & Poor's said Fortescue's credit quality would be at risk if iron ore prices stay below $100 a tonne through December.
"That will put significant pressure on their credit quality," S&P resources corporate ratings director May Zhong told Reuters.
"They need to do more to give them more buffer in their rating," she added.
Moody's warned last week it may downgrade Fortescue Ba3 ratings.
(Additional reporting by Sonali Paul and Victoria Thieberger; Editing by Richard Pullin)