Another Nail in the Coffin of the Mining Boom

SYDNEY -- In yet another sign that the mining boom maybe over, Fortescue Metals Group (ASX: FMG.AX) has deferred the development of its Kings deposit within the Solomon mining hub, as well as the full completion of its fourth berth at Herb Elliot Port, Western Australia, until iron ore prices return to more sustainable levels.

Both Chairman Andrew Forrest and CEO Nev Power have expressed their confidence that iron ore prices will return to levels around $120 per tonne. The commodity is currently trading around $90 a tonne, its lowest level since October 2009. Just two months ago, it was trading around $135 a tonne.

As a result of the company's actions, Fortescue's capital expenditure in the 2013 financial year will fall from $6.2 billion to $4.6 billion. Staff numbers and operating costs would be reduced immediately to save approximately $300 million.

The company is also in advanced negotiations to sell its Solomon power station, and it's in discussions with two investors over the partial sale of its North Star magnetite (iron ore) project. As a result of the reduced capex, production guidance has been lowered from 86.5 million tonnes to between 82 million tonnes and 84 million tonnes.

Fortescue is among the world's largest, lowest-cost iron ore producers, so it should have the ability to ride out an extended period of lower iron ore prices. Of course, company survival doesn't necessarily mean shareholders will do well. The problems for Fortescue are the roughly $8 billion in debt sitting on its balance sheet and the deadlines for interest payments -- not to mention repaying or refinancing that debt.

Analysts have also expressed concerns over the ability of smaller iron ore producers like Atlas Iron Limited, BC Iron Limited, and Mount Gibson Iron Limited to ride out the storm; some may need to raise capital to shore up their balance sheets.

The Wall Street Journal has speculated that some of the smaller miners could be ripe for takeovers, but it would take a brave buyer to wade in now.

The Foolish bottom line

The hopes and futures of many of our iron ore miners are depending on the iron ore price to rise from these levels. The only other savior could be a fall in the Australian dollar against the greenback.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, while it's still available. This article contains general investment advice only (under AFSL 400691). Authorized by Bruce Jackson.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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