Australia's Fortescue Signs Deal for Gas Supply to Its Mines

By Rhiannon Hoyle 

SYDNEY-- Fortescue Metals Group Ltd. signed a 20-year deal to supply its mines in Australia's remote Pilbara region with natural gas instead of more-expensive diesel.

The agreement, with DUET Group and TransAlta Corp., came as resources companies scramble to shave costs in the face of a slowing global commodities boom.

Fortescue said Thurday the shift from diesel to gas would reduce operating costs at its mines in the resource-rich Pilbara region of Western Australia state.

The deal is another step toward reducing costs as the world's No. 4 iron-ore producer strives to accelerate the repayment of hefty amounts of debt that helped build its presence in the resources industry.

On Wednesday, Fortescue, founded by billionaire Andrew Forrest, said it would speed up the payback of more than a billion dollars worth of bonds.

Fortescue's share price has leapt 70% since last July, with investors gaining confidence in the company's drive to strengthen its balance sheet. The stock was up more than 3% on Thursday.

Under the new energy deal, gas will be delivered to Fortescue's mines through an existing pipeline that runs from near the Western Australia capital, Perth, to the country's northern coastline.

A new 270-kilometer pipeline will also be built to transport the gas to a power station located at Fortescue's main hub in the region. The pipeline is expected to be built sometime early next year, Fortescue said in a statement.

Mining companies including Fortescue and BHP Billiton Ltd. have taken a knife to their operating costs over the past year as they try to safeguard earnings hurt by lower commodity prices.

Fortescue was among the first to start slashing costs, doing so on the back of a rapid decline in iron-ore prices in 2012 that stretched its balance sheet and sparked emergency talks with lenders.

Iron ore was one of the few commodities whose price held up well last year, but 2014 might be different as more supply comes on stream. UBS AG forecasts prices to slip to US$126 a ton this year on average, and to US$114 in 2015. Last year, iron-ore prices averaged about US$135.

The conversion of Fortescue's 125-megawatt Solomon power station from diesel to a gas platform is expected to save the company about US$20 million a year, the company said. Natural gas prices have fallen sharply in recent years, underpinned by a shale-gas boom in the U.S.

DUET, in a separate statement, estimated the new pipeline would cost 178 million Australian dollars (US$158 million) to build. The company said it and TransAlta would pay about A$101 million toward the cost.

"These little things will chip away at its costs," said Ben Lyons, a Sydney-based portfolio manager at ATI Asset Management, which holds Fortescue shares. "If you can get someone else to put in the capital expenditure and you can benefit from a lower operating cost, then it really makes sense."

Fortescue has faced higher production costs traditionally than some of its major Australian rivals such as BHP Billiton and Rio Tinto PLC, Mr. Lyons added.

The company has made other advances in cutting costs, trimming them by 9% in the year through June, when it also brought a new low-cost mine into production.

Write to Rhiannon Hoyle at [e-mail]

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