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Fortescue faces pipeline leaks

Fortescue Metals’ (ASX:FMG) troubled Iron Bridge export magnetite iron ore mine in WA’s Pilbara continues to cause problems and is nowhere near planned capacity at this stage.

Cost overruns, technical problems, management changes, and budget blowouts saw a $US1 billion pre-tax impairment in the June 30, 2023 year, as Fortescue battled to rightsize the budget and the operation of the project.

But now there are leaks in a vital piece of infrastructure – a 220-kilometer water supply pipeline, where more than 30% (approximately 65 kilometers) of steel pipe will need replacing.

This problem alone could cost Fortescue more than $A1.3 billion in lost sales revenue and extra costs to fix the leaks.

It’s the second time in 10 months this pipeline has disrupted the project – in March, it delayed the final work on Iron Bridge for around three months.

But according to Fortescue, Iron Bridge is doing okay, which does seem a bit at odds with the pipeline problems and the huge cost to fix it – close to $A200 million.

“Iron Bridge commissioning activities continue to progress well. A second shipment of Iron Bridge Concentrate was achieved during Q2 FY24, and three shipments in January 2024.”

“Iron Bridge FY24 shipments guidance has been revised due to the performance of the Raw Water Pipeline. Work is underway to resolve the performance issues.

Fortescue had already trimmed expected exports from Iron Bridge from 7 million tonnes in its June 30, 2023 announcement to 5 million in its September quarter production and sales report.

But Thursday’s December quarter saw yet another cut to a range of 2 to 4 million tonnes for the year to June 30 – in other words, the original 7 million tonne estimate for the year to June 30, 2024, has been slashed by more than 70% at worst.

The explanation was detailed in the quarterly report with the project’s 61.9% owner, Fortescue, up for an estimated $US100 million (or more than $A150 million) to fix the leaks.

“While the performance of the Canning Basin Raw Water Pipeline improved relative to the prior quarter, further leaks were detected during Q2 FY24, which impacted the flow rate and uptime.

“Work is underway to evaluate options to de-risk and improve the performance of the high-pressure section (65 kilometers) of the Raw Water Pipeline, where the leaks have occurred.

“It is anticipated that replacing this section of the Pipeline would not materially impact Iron Bridge’s ramp-up schedule and would require an investment of approximately US$100 million (Fortescue’s share),” Fortescue said.

The loss is substantial for Fortescue – if it had been able to make the 7 million tonnes of exports from Iron Bridge, it would have added another $US1 billion to annual revenue by June 30 (that’s at the $US144 a tonne the Iron Bridge concentrates were sold, according to the latest quarterly report).

If they manage to ship 2 million tonnes by June 30, Fortescue could forgo $US700 million of revenue. Selling four million tonnes would see the company miss revenues of more than $US400 million.

Those leaks are an expensive headache in more ways than one.