Andrew Forrest's Fortescue Metals is running at full speed, chasing the falling iron ore price with cost reductions. If the rate at which the iron ore price has fallen over the past nine months continues it will eventually bulldoze Fortescue's profits.
But the West Australian-raised entrepreneur and his management team are proving tenacious, continuing to generate cash even in this particularly tough environment, and nothing in the financial briefing from chief executive Nev Power on Thursday suggested the company had moved to DEFCON one.
The company is not pursuing asset sales to reduce debt and even more surprising it is not ruling out a dividend in 2015, although most are predicting shareholders should not be counting on one.
Thanks to some clever marketing footwork by chairman Forrest, the company's debt repayment schedule is not onerous.
Another ratcheting down of Fortescue's costs in the second (December) quarter, and the prediction they will continue to fall in the remainder of this financial year, means the group's all-in cost including interest and sustaining capex should be $US45-46 a tonne, compared with iron ore's current price of about US$63. And after applying a discount to Fortescue's particular type of iron ore, that would deliver the company about US$53.50 a tonne and a comfortable, rather than healthy, margin.
This margin is better than most analysts had built into their models.
The flip side is that the iron ore price could continue its slide and the company would need to sell assets, or at least sell part-interest in some mines. That is a lever Forrest and Power can pull if they need to.
The dilemma for investors is clear. Are we at, or near the bottom of the iron ore price cycle? If we are and the price starts to improve over the next six months, Fortescue is in a good position to capitalise and its share price, which has fallen proportionately more than other large producers, should recover.
Fortescue, like other producers, has managed its costs in part courtesy of the falling Australian dollar and cheaper oil-based energy costs.
Power takes the view - albeit one that is Robinson Crusoe-like - that the iron ore supply/demand market is in balance now. This is despite the massive addition to seaborne supply that has hit the market over the past year and will continue for a while yet.
While in China and Europe high-cost supply of iron ore is coming out of the market the Australian majors and the Brazilian Vale just keep digging up more.
Power said the price of the commodity was weakened by speculative futures trading and this must eventually turn.
Whether he proves to be prescient in his prediction lies with what the Chinese government decides to do about stimulating its economic growth.
If, for example, it allows the economy's growth to fall to less than 7 per cent this year, as some have predicted, it could be a while before iron ore prices recover.
This time a year ago Power and the team at Fortescue were pretty bullish on the outlook for the iron ore price.
But on Thursday, at least, the announcement of Fortescue's impressive production figures for the December quarter and the forecasts to reduce costs more presented investors with some reprieve, as the share price gained almost 9 per cent.
It undoubtedly silenced some Fortescue watchers, who are concerned the falling iron ore price could have pushed it into negative cash flow - or worse an existential moment.
While Forrest's personal (paper) fortune has fallen to about $2 billion, the reality is that this company has sufficient arsenal to fight, even if the iron ore price drops.
It can sell assets, even its prized infrastructure assets, if it needs to and in the worst-case scenario it could raise (highly shareholder dilutive) equity.
At this point most commodity analysts are busy downgrading their price forecasts for iron ore and no one is raising them yet.
The most bearish see the price fall to $US50 at some point in 2015 but not necessarily staying there.
Others are more optimistic on price but see lower prices lasting as long as a decade.
For Fortescue the more likely scenario is that it will continue to pay down enough debt that its all-in costs will become easily manageable. But it could take years to get to that position if the metal's price remains at these weaker levels.
From an investors' perspective it becomes a crap shoot around picking the bottom of the cycle. At this stage few are willing to take the bet, given the iron ore price continues to fall.
