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 rhiannon.hoyle@wsj.com
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