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Fortescue Metals still betting big on China

Wednesday, 4 Dec 2013 | 12:25 AM ET
Inside Fortescue's Pilbara mines
Tuesday, 3 Dec 2013 | 10:03 PM ET
As Fortescue Metals puts the finishing touches on the last of its mines in the Pilbara, CNBC's Matt Taylor was given a look inside its Solomon mine.

Despite ongoing talk of a significant economic slowdown in China, Fortescue Metals doesn't expect the world's second-largest economy to lose steam anytime soon.

Australia's number three iron ore producer opened the doors of its Solomon project in Australia's Pilbara region this week as the project begins to ramp up its iron ore production to feed China's appetite for the commodity.

(Read more: Why tapering could take iron ore to record highs)

The Solomon project completes Fortescue's suite of iron ore mines in the Pilbara and will help the miner achieve its annual target of mining 155 million tons of iron ore by March 2014.

The company has spent around A$9 billion in an exhaustive capital expenditure program to get mines up and running and as it strives to take advantage of the high iron ore prices and strong Chinese demand.

On a tour of the Solomon project, Fortescue Chief Executive Nev Power told CNBC, "Fortescue is very confident about the long-term [demand outlook] for China. With 7-8 percent [economic] growth forecast, China's urbanization will take some decades to complete and that means strong steel demand and iron ore demand going forward."

Fortescue's expansion of its Pilbara mines has taken place at a break neck pace. The Solomon project, which houses 2 mines, shipped its first ore from the Fire Tail mine just one year ago.

John W Banagan | Photodisc | Getty Images

The second of the two mines – the Kings Mine – has started the commissioning process and is expected to ramp up production by early next year, with projected annual output of 40 million tons.

To help improve efficiency, the Kings Mine site will utilize autonomous technology – essentially driverless trucks.

(Read more: What if China lands hard? SocGen outlines the scenario)

"The Kings Mine will be the main producer at Solomon, mining 40 of the 60 million tonnes we have planned and the autonomous technology will be a big help to keep the mine site going 24 hours a day," Nev Power told CNBC.

Fortescue's rapid expansion has been debt funded, which hasn't always been smooth sailing for the mining giant.

Last September the company's shares plunged after a big drop in iron ore prices prompted talk of a breach of debt covenants.

Fortescue renegotiated its debt terms and now says it's focused on repaying that debt pile, given the capital expenditure phase of its development is complete.

Stephen Pearce, Fortescue's Chief Financial Officer, told CNBC the company is in good shape: "We've got billions of dollars of cash on our balance sheet and we've started to repay our debt in excess of a billion dollars and that will continue for the next nine to twelve months" Pearce said.

(Read more: We're reassured by China reforms: World Bank)

Fortescue will also be paying closer attention to shareholder returns following the payment of its first dividend in 2011.

"We will be focused on a combination of return capital to shareholder, but the priority is reducing the debt." Pearce added.

By CNBC's Matthew Taylor. Follow him on Twitter @MattCNBC

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