Fortescue Metals Group Ltd (ASX: FMG) has long been heralded the ugly step-sister to mining's golden children BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). The company is burdened by debt as a result of its hangover from capital expenditure spend during the mining boom, resulting in many investors often overlooking Fortescue's true potential for its larger siblings, BHP and Rio.
However, recent events may prove to be Fortescue's ally yet, setting the scene for its grand reveal as the Cinderella to Australia's mining boom.
Prince Charming
Every fairy tale has a prince, and in Fortescue's story, he goes by the name of Nev Power. Power is the long term CEO of the group and has navigated the company through the treacherous aftermath of the mining boom. With the constant support of trusted sidekick, chairman and one-third owner of the company, Andrew Forrest, Power has successfully transformed the company into a sustainable low-cost producer.
The plot thickens
In 2013, Power stunned the market by announcing several cost-cutting measures and a $4.5 billion debt refinance to buy the miner more time to repay its debt in the wake of falling iron ore prices. The announcement left many calling the end of Fortescue, with analysts questioning its ability to generate free cash flows in a falling commodity market.
Nonetheless, the duo of Forrest and Power stuck to their guns and rapidly cut costs to bring the cash cost of production down to US$16.90 (per tonne) in the September 2015 quarter. The pair have set a target to cut costs to US$15 per tonne by June next year. The break-even cost of production is estimated to sit at US$39 per tonne, which provides sufficient breathing room from the benchmark iron ore price of US$47.70 per tonne (which Fortescue takes a discount on due to its quality of ore).
With this reprieve through operational efficiency, on Wednesday, Power announced a tender to buy back $750 million worth of senior unsecured notes expiring in 2019 and 2022. The move is expected to save the group between US$90 million to US$180 million, including US$33 million in interest costs each year, resulting in the miner being able to cut costs even further.
Evil step-mum
Cinderella had an evil step-mum who held her back from greatness. Likewise, Fortescue's is the iron ore price; the miner's fortunes rely on the spot price remaining above its break-even cost. Unlike BHP and Rio, Fortescue carries a higher debt load which increases its all-in cash costs, making it a riskier proposition.
Although Power's recent initiatives should support the company in the long-run (by decreasing its interest costs) the company remains captive to movements in iron ore prices.
Fairy godmother
Cinderella also had a fairy godmother to help her in her time of need. Fortescue's fairy godmother presents itself in the form of BHP's misfortunes. The recent breach of two tailings dams at BHP's Brazillian operations at its Samarco mine could have a significant impact on the global supply of iron ore.
Citibank believes the disruption could see the loss of 25 million to 30 million tonnes of high-grade iron ore from the market, buoying commodity prices in the short term. This is despite new, large-scale projects like Roy Hill coming online. This means Fortescue's midnight might not come as quickly as once thought.
Foolish takeaway
Whilst the supply loss from Samarco is yet to be fully quantified, recent events appear to have changed Fortescue's fortunes for the better.
With Prince Charming (aka Nev Power), hell bent on reducing cash costs further, and the evil step-mum (aka the iron ore price) potentially taking a breather, this mining Cinderella might still get its happily ever after!
