Fortescue puts two major projects on hold

On May 19, Australian iron ore company Fortescue Metals Group (Fortescue) announced that two of the company's three expansion projects, the US$9 billion Solomon and US$6 billion Western Hubs in Western Australia have been placed on hold due to the uncertain financial impact of the Australian federal government's proposed Resource Super Profits Tax (RSPT).
 
Fortescue's planned development of its flagship 160 million mt per annum project known as the Solomon Hub is to be placed on hold until the finance impact of the RSPT can be fully determined. This project has been four years in development and includes the development of the proposed new Pilbara Port at Anketell Point. To develop Solomon, Fortescue had planned to establish a debt-funded capital platform utilizing equity derived from the cash flow from the company's Chichester Hub. This financing plan will be severely impacted as a result of the new tax impost. Until the financial position is certain, the only work to continue on the Solomon Hub will be the completion of existing studies.
 
On the other hand, Fortescue's longer-term planning includes the potential development of the Western Hub to provide product for export through the proposed new Pilbara Port at Anketell Point. This project has also been put on hold.
 
The company said that the uncertainty in the financial markets caused by the proposed tax and the cash impost that RSPT payments will place on future business revenues has necessitated an urgent review of the economics surrounding the development of Fortescue's major projects. A key focus within the review process is the funding implications of a proposed retrospective imposition of a cash drain on projects that were financed prior to the RSPT.
 
Fortescue also stated that the planning for the further expansion of the Chichester Hub from 55 million metric tons to 95 million metric tons will proceed, as the financing of the project is generated from internal cash flows to be provided from existing operations over the next two years, prior to the proposed implementation of the tax in FY 2012 and payment in FY 2013.