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New production targets at Fortescue Metals

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Fortescue Metals Group has announced new plans to boost production by 35 per cent over the next quarter.

FMG has recently reached a long-term ore production goal of 155 tonnes per year, thanks to completion of the Kings Valley project, however analysts are concerned about whether the new June targets can be met.

When questioned on Wednesday about the viability of the new target, CEO Nev Power declared “absolutely it’s realistic”.

Power said that typical mild weather at this time of year will help to increase production.

“The June quarter is always a very strong quarter for us and typically we don't have any of the major shutdowns through our port assets so we are able to run at sprint rates substantially above (the annual rate of) 155 million tonnes,” he said.

But analysts remain concerned about FMG’s higher iron ore volumes, combined with BHP’s and Rio Tinto’s increased production plans, that this is going to push up supply and place pressure on prices.

Recently the iron ore price has undergone bouts of volatility, leaving analysts with little in the way of consensus on where it will be in the short to medium term, however many suggest the price may fall to $80-$90 per tonne in the next 12 months.

Fortescue has already reduced its debt by US$3.1 billion from a peak of almost $US11 billion in 2012, and increases in production will allow the company to reduce debt by another $2.5 billion.

This will help it to and reach the projected 40 per cent gearing level within the next 18 months, provided that iron ore prices stay between $US110 to $120 per tonne.

Fortescue's net debt position on March 31 was US$7.7 billion, with finance leases of US$0.3 billion.

Chief financial officer Stephen Pearce said the company has prioritised debt repayment, and will achieve its debt reduction targets in 12 to 18 months.

FMG achieved a realised iron ore price of $US107 per dry metric tonne in the March quarter as Chinese demand for the steel making ingredient remained firm.

Fortescue's break even rate was around $US75 per tonne, but costs rose six per cent in the march quarter to $US34.88 per wet metric tonne, from $US32.99 in the previous quarter.

This increase was partially caused by Increased costs reflected the start of operations at the Kings Valley project and seasonal wet weather which delayed production in the Pilbara.

Fortescue shares were up six cents to $5.39 by Thursday morning.

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