August 20, 2018 / 1:47 AM / in 2 months

UPDATE 2-Australian iron ore miner Fortescue's annual profit halves

(Recasts, adds CEO and analyst quotes)

MELBOURNE, Aug 20 (Reuters) - Australia’s Fortescue Metals said on Monday that its annual profit halved as prices for its lower quality iron ore fell, and pledged to wring further efficiencies from its low-cost operations.

The world’s fourth-largest iron ore miner said underlying net profit after tax came in at $1.08 billion, in line with expectations and down from $2.13 billion a year ago.

Fortescue has been hit by falling prices for its lower grade iron ore as Chinese steel mills have turned to higher-grade, less-polluting iron ore, but it is clamping down on costs and aiming to grow margins with a new, higher grade product.

The miner trimmed costs by 4 percent over last year and said it would rein in costs even further in 2018/19.

“We remain focused on maintaining our cost leadership position by capitalising on technology and innovation initiatives to offset inflation and optimise operating margins,” chief executive Elizabeth Gaines said in the report.

To combat the widening discount for its lower grade ore, Fortescue will also produce a 60 percent iron content product, named West Pilbara Fines, in the second half of the current year ahead of the development of its Eliwana mine and rail project.

Its also expects a pick-up in demand for its ore with 58 percent iron, which is below that of rivals Brazil’s Vale , BHP Billiton and Rio Tinto.

“The FY18 result was in line with our estimates across the board,” said broker RBC Capital in a report.

“While FMG maintain the view that current steel margins are unsustainable and that market dynamics for lower grade product will recover, the company is working to mitigate pricing discounts by improving grades,” it said.

Fortescue received $44 per wet metric tonne (wmt) in 2017/18, compared to $53 per wmt a year earlier, and realized revenue of 64 percent of the average Platts 62 CFR Index price, a percentage point lower than its guidance of around 65 percent.

Cost per wmt came in at $12.36 for the full-year that ended June 30, in line with previous guidance, even as average shipping costs jumped by 24 percent.

“The challenge for FMG will be balancing plans for a better product mix (higher grade/lower discount) with likely cost inflation over time,” RBC said.

The iron ore miner approved the new $1.3 billion Eliwana iron ore mine in May.

Fortescue declared a final dividend of A$0.12 per share, down from A$0.25 a share a year ago. Shares in Fortescue rose 0.7 percent to $4.24 by 0130 GMT. (Reporting by Melanie Burton; additional reporting by Susan Mathew in Bengaluru; Editing by Richard Pullin)

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