Fortescue Metals shares leaped 51 cents, or 40%, to close at $1.80 today on exuberance over an amended sales contract with a top-five Chinese mill even though the additional sales to that customer mean other customers have lowered or abandoned existing contracts with the iron ore miner.
Fortescue has long boasted that it has contracts for 100 million tonnes of production annually - nearly twice its initial production capacity of 55 million tonnes a year - meaning it cannot sign new contracts without displacing existing ones.
The amended contract with an unnamed top-five Chinese steelmaker, which was increased from 2 million tonnes to 5.5 million tonnes per year, means it will be reliant on a single customer for 10% of its annual sales.
Analysts are concerned that other customers may pull out of existing contracts and therefore Fortescue's sales next year will be below expectations.
Goldman Sachs JBWere analyst Neil Goodwill said Fortescue's achieved sales price of $US83 a tonne for its ore in the September quarter was positive, but he would reduce the price in future quarters amid concerns Fortescue will have to take a discount in the current weak market.
Fortescue's out-of-the-money shipping book could also have an impact on its future profits. Freight rates have fallen from $US50 a tonne to $US5 a tonne in recent months, and Fortescue had booked some of the vessels at the peak of the market.
"We understand that the contracts are signed with full disclosure of the freight cost to the customer who agreed before the contract was signed, but there will almost inevitably have to be some sharing in the pain as customers will be pushing back on being charged any freight cost over spot at the moment,'' said Citi analyst Clarke Wilkins. Mr Wilkins projected Fortescue would report a $137 million loss on its freight book this year.
A Fortescue spokesman, however, denied that the company would report a big loss on its freight book for this business year, adding it made a profit from freight during the September quarter alone. The $137 million full-year loss figure ''is patently false and is without foundation,'' he said.
Fortescue yesterday took the unprecedented step of releasing full financial accounts for the September quarter amid a crisis of market confidence in the iron ore miner.
Coinciding with its annual meeting in Perth yesterday, Fortescue reported a profit during the quarter - calculated by the Herald to be about $290 million, after excluding the revaluation of a subordinated note and the effects of currency fluctuations on its long-term debt but including interest payments.
The miner has accumulated enough tax losses that it does not pay taxes at the moment, and it has yet to pay any of the royalties it owes to Leucadia, although those will be backdated at a later date.
Fortescue said a $US100 million ($157 million) note held by US investor Leucadia National, which pays a 4% royalty on its revenues, was now estimated to be worth $3.2 billion, rather than the $4 billion announced at its full-year results, due to lower production forecasts and iron ore price expectations.
Fortescue yesterday said it had taken advantage of the recent weakness in bond markets to spend $US45 million purchasing notes with a face value of $US65 million - a 32% discount - to help reduce its interest charges and final debt repayments.
After the meeting, Fortescue executive director Graeme Rowley said the company was "always in talks" with potential Chinese investors about an equity injection - corroborating a report in the Herald that steelmakers had discussed the idea with Fortescue last week. At the time, a Fortescue spokesman denied any such talks had taken place.
"We have not reached an agreement yet with anybody, either in a preliminary way or in a firm way," Mr Rowley said.
"We would provide some equity, subject to some group also purchasing shares in the open market. We have never been able to conclude an arrangement ... a result of not reaching some agreement on what the responsible price or value would be."
SMH
