Fortescue Metals Group hits iron ore record, but suffers wider grade discount in September

Fortescue Metals Group (ASX:FMG) saw increased discounts for its Pilbara iron ore through the September Quarter, but bucked the trend of its rivals Rio Tinto (ASX:RIO) and BHP (ASX:BHP) to deliver a record first quarter.

Rio and BHP have disappointed in recent weeks with their production numbers, saying their Pilbara operations have been impacted by labour pressures and maintenance.

However, FMG did battle with discounts for its lower grade iron ore, selling its 45.6Mt haul at an average price of US$118.41/t, 73% realisation of the Platts 62% price and 77% realisation to contract pricing.

That compared favourably to Mineral Resources (ASX:MIN) which suffered a hit on Tuesday when it revealed it was paid just US$78/t in the September Quarter, but was below the 84% realisation FMG enjoyed in the 2021 financial year, when it paid out a US$4.7 billion dividend.

FMG also hit its cost targets, sending out its ore at US$15.25/wmt. The results place Fortescue on track to meet its FY2022 guidance of 180-185Mt at US$15-15.50/wmt cash costs.

“Across our operations, we achieved record first quarter shipments of 45.6 million tonnes and maintained our industry leading C1 cost of US$15.25 per wet metric tonne,” FMG boss Elizabeth Gaines said, noting the ramp up of the new Eliwana mine was a positive.

“Our C1 cost was in line with the previous quarter, reflecting our strong focus on cost management to mitigate inflationary pressures. Strong performance across the supply chain, together with the contribution of Eliwana continues to drive record operational performance.”

FMG iron ore prices likely to drop further in December Quarter

Gaines did not comment however, on the wider discount FMG is receiving for its product. Prices are likely to drop further in the December Quarter, with current benchmark prices around US$120/t, well below the US$162/t average in the September term.

Chinese steelmakers are increasing their focus on the grade of ore they purchase both to negate soaring coking coal costs – higher grade ores require less coke to process – and to reduce emissions amid a clampdown by the Chinese Government.

While it remained 2% higher year on year over the nine months to September 30, steel production has also dropped dramatically in China on the back of Government imposed production curbs.

The Iron Bridge magnetite project’s current capex estimate of US$3.3-3.5 billion remains on track.

Meanwhile, Fortescue is still working with authorities to investigate the circumstances surrounding the death of drill and blast employee David Armstrong on September 30 at the Solomon Hub.

“A fatality is a reminder of why safety is our most important focus and we appreciated the support shown across the mining industry,” Gaines said. “We are supporting David’s family and his team at Solomon at this very difficult time, and we are working with authorities to investigate the incident.”