Fortescue Metal Group Strategic Analysis

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  • Topic: Iron ore, Rio Tinto Group, Mining
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  • Published : May 24, 2012
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Allocated firm: Fortescue Metal Group

Memorandum

DATE: Monday 23 May, 2010
TO: The Board of FMG
FROM: Truman Chun Wai , a senior financial officer SUBJECT: Future growth strategy analysis

Dear the Board,
I am glad to present to you the future growth strategy analysis report for Fortescue Metal Group. This report had been prepared requested by the Board. The content of this report concentrated on evaluating the performance of Iron Ore Mining and providing a recommendation of any potential financial justified growth strategies for the next strategic planning horizon (3 years). Should you have any inquires in regard to this report, please do not hesitate to contact me.

Yours Sincerely,
Senior financial officer
Truman Ng

Executive summary:

Fortescue Metals Group Ltd is one of the youngest iron ore mining company operating in Australia, however, its’ growth could be seen as one of the strongest within the industry in recent years. The company was formerly known as Allied Mining and Processing Ltd, listed on the ASX since 1987. By may 2003, the first Cloudbreak tenements were acquired, mineralization was discovered in Feb 2005. The three hubs owned by FMG are allocated in Pilbara region of Western Australia, including the Chichester Hub, the Solomon Hub, and the Western Hub, valuing at $20,048 million in the market as yet. As of March 2011, resources were 9.1Bt and reserves were 1.54Bt. Production is targeted to ramp up to 55Mtpa in 2011 and 155Mt by 2014 and became the world fourth largest iron ore producer. As worth to mention, Fortescue did allocate their investment in infrastructure including rails and ports, not only assuring the logistic systems went smooth in the future and also contribute approximately 15% of total revenue.

Since China has transformed to a private sector driven economic and its integration into the global economy in recent decades, the booming domestic economy boosts up industrial and construction materials demand. In 2009, China demanded almost 60% of the world’s iron ore to produce 47% of world’s steel production. However, market starts to worry about the growth of steel industry and the price bubble might have already formed. FMG needs to encounter the above problem by offering more products and achieve higher level of diversification. FMG did face challenges from its major competitors – BHP Billiton and Rio Tinto. They are both the giant in mining industry with a much higher level of diversification in terms of product offers, customer base and asset allocation. Fortescue hence needs to improve in those aspects to maintain competitiveness and the potential for future growth. In addition, Fortescue group was facing resistance from its Australia Government as well by raising the tax rate and limit the profitability.

Several options has been raised, including techno logy improvement, invest in new mines , acquiring other companies and being taken over. The report below explains why to propose an acquisition over a GOLD-producer would be an optimal choice for GMC under the SWOT and PETS analysis.

This report also shows the forecasted financial status of FMG if the project has been taken.

Introduction

Since China has transformed to a private sector driven economic and its integration into the global economy in recent decades, the booming domestic economy boosts up industrial and construction materials demand. In 2009, China demanded almost 60% of the world’s iron ore to produce 47% of world’s steel production. FMG has anticipated the market opportunities and delivered the first shipment in May 2008. Severing around 45 customers from China and generated $USD 3,113 million in during period 2009-2010 and proved to be a great success.

However, mining industry is competitive and FMG did face challenges from its major competitors – BHP Billiton and Rio Tinto. They are both the giant in the industry with a much...
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