Filling the Gap

Fortescue Metals has received board approval to develop its Eliwana project, which is to replace the Firetail mine once it is depleted. The project’s key metrics are in line with previous guidance, including:

 

  • Capital expenditure of US$1.275bn, at the midpoint of the US$1.0–1.5bn guidance range and a touch lower than our US$1.4bn estimate;

     

  • 30Mtpa of dry processing being a direct match with the Firetail mine it replaces; and

     

  • First production targeted for December 2020.

In terms of scope, Fortescue is to build a dry processing facility that appears to be a like-for-like match with Firetail. However, we believe Eliwana’s 143km rail spur could accommodate significantly more than 30Mtpa, which would eventually allow other resources in the Western Hub to be exploited. The capital intensity for the project sits at US$42/t, which is comparable with other sustaining mine projects announced by the major miners. Specific details on the new product strategy, including volumes and other specifications, are not yet available.

 

We expect costs for the Eliwana operation to be similar to Fortescue’s current weighted average cost of about US$12/t, given the strip ratio has been outlined at 1.1x. We estimate Eliwana will need a US$43/t achieved price to generate a 15% internal rate of return. At a spot discount for 58% Fe iron ore product of US$20/t, this translates to a US$63/t benchmark (62% Fe) price. Eliwana will be used as blending feedstock (that is, blended with Christmas Creek and Cloudbreak) to produce a premium- and lower-specification product. Therefore, it will be Fortescue’s overall achieved price that will determine the project’s returns.

 

We see the development of Eliwana, along with other Western Hub assets, as pivotal in allowing Fortescue to execute on its new product strategy. The company is targeting to introduce its new high-grade product, Fortescue premium, in FY19. Previously, Fortescue was targeting the majority of its shipments at higher than 60% Fe, but we believe it will now be below this given the challenges in maintaining acceptable specifications for the lower-grade product offering.

 

We maintain our Accumulate recommendation on Fortescue with a $5.00 target price.

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