Fortescue stays positive on China after week of mixed messages

Fortescue Metals Group boss Elizabeth Gaines says China’s economic growth targets will support iron ore demand
Iron Bridge hitting “key milestones” despite cost and schedule blowout
In other news Champion Iron says its high grade iron ore expansion will be ready by the end of 2022

China’s economy is either imploding or getting ready for an upwards swing and which way you go really depends on what data you believe and who you read.

From the hymnbook of Fortescue Metals Group (ASX:FMG) CEO Elizabeth Gaines, the outlook is still rosy, even after Covid lockdowns did a number on commodity prices this week including a 9% tank in the iron ore price on Monday.

China’s property sector has also been timid, while its Government has revealed it wants crude steel production to drop again this year after a 30Mt slide in 2021.

Premier Xi Jinping moved quickly to quell economic fears, pledging later in the week to ramp up public investment in infrastructure construction.

But the big number for Gaines is the 5.5% economic growth target announced by the Communist Party in March, its lowest in years but still an ambitious yardstick against the backdrop of its aggressive Covid-Zero policy.

“We’re focused on the GDP growth target of five and a half per cent for this calendar year,” she told media on a conference call yesterday.

“We think that that is supportive of steel demand more broadly and I think encouragingly in March, as I mentioned earlier, we saw crude steel production reach that annualised rate of over a billion tonnes.

“So we think that overall, the settings are supportive of steel demand to achieve the GDP growth target.

“There’ll be further investment in property and infrastructure, all of which is supportive of steel demand and therefore demand for iron ore.”

Iron Bridge blowout

FMG suffered more than BHP (ASX:BHP) and Rio Tinto (ASX:RIO) from the slide in iron ore prices last year because its lower grade product eats bigger discounts to the benchmark 62% iron ore price.

Its realisation improved slightly from 68% to 70% in the March quarter, as a bull run for iron ore prompted buyers to support lower grade raw materials.

There is evidence there to suggest demand for FMG’s products is still strong. The Andrew Forrest-chaired firm upped its production guidance after a record year to date performance of 139.5Mt of shipments to 185-188Mt.

That stirred a big run in its share price, especially as iron ore equities recovered on better sentiment around the Chinese economy with Dalian iron ore futures recovering.

But FMG has seen inflationary pressures in areas like fuel, materials and labour bite, with cost guidance increasing from US$15-15.50/t to US$15.75-16/t and a cost upgrade in its main growth project, the Iron Bridge Magnetite Mine.

The 22Mtpa operation will produce a 67% Fe magnetite concentrate expected to draw a serious premium over both the 62% and 65% iron ore indexes.

As predicted by many analysts, FMG has updated its capex by US$300m from US$3.3-3.5b to US$3.6-3.8b, US$2.7-2.9b of which will be paid by Fortescue with the rest covered by 31% JV owner Formosa Steel.

The deadline for first production has also been delayed from December 2022 to March 2023, with a 12-18 month ramp up to follow.

Gaines said the project team was achieving “key milestones” despite labour issues related to Covid-19 and the broader tightness in the resources labour market.

“Maybe just to give it some context, the impact we’ve had directly from cases on site has resulted in around 40,000 hours of lost productivity, and I think that’s an important indication of the impacts that we’ve seen,” she said.

“But importantly, there’s a lot of key milestones that we’re about to achieve and the team are working incredibly hard to manage everything they can within their control.

“For example we’re about to see the energisation of the transmission infrastructure.

“In the September quarter, we’ll see the commissioning of the dry plant, which is primary crusher and secondary crushers.

“So there’s really key milestones still being achieved and the project is making good progress despite the fact we’ve had to deal with those challenges and we’ve revised the capital estimate and schedule accordingly.”

Champion Iron prepares for iron ore “Bloom”

Meanwhile, Canadian iron ore miner Champion Iron (ASX:CIA), owner of one of the ASX’s most memorable ticker codes, says it will hit commercial production on a planned expansion of its Bloom Lake iron ore mine that will double the scale of the high grade operation.

The update came as the Michael O’Keefe-backed company announced “robust” quarterly production of 1.87Mt of iron ore concentrate and annual production of 7.9Mt at an average grade of 66.2%.

Like its peers, Champion Iron saw FOB cash costs rise from US$43/t in March last year to US$47.40/t in March 2022 due to increases in fuel and explosive costs.

CEO David Crawford said the company is well placed to take advantage of increasing demand for high grade iron ore from the steel industry.

“Our robust operational quarterly and annual results are an ongoing testament to the commitment and professionalism of our employees and team,” he said.

“Despite the many challenges imposed by the pandemic and increased logistical complexity across the global supply chain, our Phase II expansion project nears completion with commissioning expected shortly.

“Studies are advancing on additional organic growth opportunities in order to capitalise on the rising demand for the high-purity iron ore products we produce in our sought-after stable operating jurisdiction.”