(Minews) - World no.4 iron ore miner Fortescue Metals Group is unlikely to follow smaller rivals by cutting output to cope with the weakest iron ore prices in more than half a decade, and still has room to cut costs or sell assets.
Fortescue will report its second-quarter production report on Thursday, with investors focusing on costs and the size of the price discount that Australia's third-biggest miner receives for its ore from Chinese buyers.
Iron ore prices have plunged 50 per cent over the past year as Fortescue and bigger rivals Rio Tinto , BHP Billiton and Vale have flooded the market with new supply just as demand growth in China slowed.
The latest drop in prices to $63.30 a tonne knocked Fortescue's shares down as much as 10 per cent on Tuesday to a six-year low, amid worries about the miner's ability to stay out of the red.
The iron ore price crash has forced high cost miners in China, west Africa, eastern Europe, and most recently Australia, to cut production and even driven some out of business, but Fortescue is in better shape, analysts and investors said.
"There are plenty of other companies that are operating in this space that should be cutting production well before Fortescue," said Ric Ronge, a portfolio manager at Pengana Capital.
Fortescue, producing close to 160 million tonnes a year, has already halved planned capital spending and axed jobs, including some board seats, and said as of October it had cut its iron ore costs, including freight to China, to $51 a tonne.
UBS estimates that based on the recent drop in freight costs and the weaker Australian dollar, Fortescue is now cash break even at a benchmark price of $58, keeping it in the black compared with Monday's price of $63.30.
Fortescue's ore fetches a discount relative to the benchmark price as its ore has lower iron content, but the discount widened last year as the mega miners produced more high quality ore.
If its cash flow is squeezed further, it could sell stakes in its mines or its valuable rail and port arm.
Before then, analysts say the company could also pare costs by digging less rock and focusing on sections in its mines with the highest concentrations of ore, although that is only seen as a sustainable strategy for one or two years.
"You won't see them shut mines, but rather reduce stripping ratios and significantly reduce costs in the short run," said Mike Harrowell, a director at broker BBY Ltd in Sydney.
"I think the market is underestimating the company's flexibility," he said.
