Khairani Afifi Noordin Thu, Jul 07, 2022
Against the backdrop of a challenging business environment coupled with volatile iron prices, iron ore concentrate producer and exporter Fortress Minerals is focusing on ramping its production capacity as well as controlling its unit costs.
“While the slump in iron ore prices does affect us, it is beyond our control. We will instead focus on things that we can control, which includes optimising unit costs and increasing our production capacity,” Catalist-listed Fortress’ executive director and CEO Ivan Chee tells The Edge Singapore.
The Malaysia-based company has announced the commencement of production at its recently acquired Cermat Aman (CASB) mine, which is estimated to have a production capacity of 20,000 wet metric tonnes (WMT) per month. CASB and Star Destiny are subsidiaries of Fortress Mengapur, acquired by the company on April 7, 2021.
Fortress Mengapur comprises the entire tenements covering approximately 935.1ha. The tenements contain inferred resources including iron ore, copper, gold and silver. However, Fortress will continue to focus on magnetite iron ore mining and intends to stockpile other minerals — if encountered during potential mining — for future processing.
The addition of the production capacity at the CASB mine is an approximate 50% increase in the total steady state production capacity for Fortress up to 70,000WMT per month from about 40,000WMT per month, says Chee. “Within almost just a year, we were able to bring CASB to production, despite the challenges that the pandemic brought on top of unfavourable weather conditions,” he adds.
Testing and commissioning of operations at CASB mine were completed in May 2022, with the commencement of production on July 1. The initial mining will take place in the oxide ore zone, focused on high-grade magnetite concentrate.
Fortress is also mitigating the challenges of volatile iron ore prices by making sure that its unit costs stay much lower than current iron ore prices, says its executive director and chief operating officer Ng Mun Fey.
On top of recession fears, iron ore prices were also affected by cloudy demand for demand from top steel producers in China, causing the essential ingredient for making steel — literally the backbone of construction and industrialisation — to experience its ninth straight session of declines.
When the pandemic started back in March 2020, iron ore was trading at barely US$80 ($112) per tonne. In tandem with the commodities boom, it shot up to as high as US$229 in May 2021. Since then, as China cuts back its appetite for this metal, prices have suffered a big drop to close at just over US$100 as of early July.
“I think the roller coaster in price will continue, which is why it is important for us to ensure that our unit costs are way below the current iron ore prices. We need to keep the unit costs low no matter what as we will be in trouble if we blow our budget,” says Ng. For 1QFY2023, Fortress’ average unit cost is US$32.08 per WMT, 25.6% higher than that in the previous corresponding quarter at US$25.6 per WMT.
Ng explains that there are many ways for the company to control costs, one being to optimise the use of diesel, which is used to power its machineries. Diesel prices have been on a rise in Malaysia, currently at RM2.15 ($0.70) per litre compared to just RM1.40 in early May 2020.
“This forced us to find ways to use less diesel, which is in hindsight a blessing in disguise. It was not easy — it took the effort of the whole team as there is a lot of optimising we have to do. However, when diesel prices go down, we will definitely use the same amount of diesel, which will benefit us in the long run,” says Ng.
Meeting the demand
Prior to Fortress Minerals, Chee was the founder and CEO of Webcom, a privately held diversified company in Malaysia. Having supported the iron ore mining industry since the early 2010s, Chee saw the opportunity to take on the mining rights of Bukit Besi mine in Terengganu, Malaysia in 2016.
He describes the mine as a quality asset, with favourable geological conditions, good infrastructure and location. The mine was also not a green field project — it was worked on the shallow surface since the early 1900s until 1960. When Fortress started working on the Bukit Besi project, several mineral deposits were exposed on surface and visible. Therefore, Fortress saved costs on prospecting by focusing on the exposed minerals.
Fortress was founded in 2017 and made its debut on the Catalist board in March 2019. The Bukit Besi Mine, with a land area of 526ha was leased by Fortress from the state government of Terengganu under a mining concession agreement expiring in 2033. The company’s iron ore concentrate is sold primarily to steel mills and trading companies in Malaysia, or exported to China and Vietnam.
Malaysia and China accounted for US$13 million and US$1.58 million respectively in 1QFY2023. Ng says that Fortress’ export to the regional steel mills will not expand exponentially in the near term, as the company is struggling to keep up with the local demand.
“The problem is we don’t have enough to sell. We cannot satisfy the local steel mills’ needs — we only supply a fraction of their entire portfolio. The demand is way larger than what we can meet,” says Ng.
He acknowledges the volatility in the market for iron ore concentrates but Ng believes there’s a baseline of demand. For one, scrap metal is unable to replace the demand for iron ore in the near future.
“Steel is required for building infrastructures, making electric vehicles and many others. We do not think that there will be major changes in the demand for steel which effectively means that we will see no major changes in the demand for iron ore.
“To add, many countries are trying to transition into a low carbon era. In this case, what they need is higher-grade iron ore, which will allow steel mills to emit less impurities and pollution. This is one of our strategies — to supply high-grade iron ore,” says Ng.
Fortress’ struggle to meet the demand this year was partly due to staff shortages, as the Covid-19 Omicron variant infected many staff members working at the mine sites. The 14-day mandatory quarantine period caused the mine site to be “very quiet”, impacting the company’s FY2022 final quarter results.
That being said, Ng clarifies that the company did not face any other major problems as the firm had taken the necessary steps to mitigate issues such as supply chain disruptions. To avoid this from affecting the business operations, Fortress increased the order of its spare parts from one month’s worth to three months’ worth, for example.
“We continue to find ways to improve the business — adversities present us with opportunities to solve them,” says Ng.
Further expansion opportunities
Moving forward, the company will focus on two key planks. First, Fortress will balance its exploration and production efforts at the Bukit Besi mine to ensure its production stability.
The second part involves Fortress Mengapur’s projects, both CASB and Star Destiny. Using the same strategy it used at the Bukit Besi mine, Fortress intends to gradually ramp up on its operations and upgrade the production facilities for Fortress Mengapur’s projects.
“We are now devising an exploration plan for the Star Destiny project, currently doing some geological works there. We will announce the exploration results and our operational plan for Star Destiny once it is ready,” says Ng.
Meanwhile, Fortress is also actively looking to fund projects or assets that suit its strategy. The company is in ongoing discussions relating to acquisitions and joint ventures that could help grow its portfolio and ensure long-term growth, says Ng. However, he adds that nothing is solid at this point.
Fortress’ share price reflects the volatility of this market it is in. It was listed back in March 27, 2019 at 22 cents, and in May 10 surged to as high as 79 cents in tandem with the spike in iron ore prices. It closed flat on July 6 at 38 cents, valuing the company at $190 million.