Fortescue Metals Group
Annual Report 2013

Plain-text annual report

2013 ANNUAL REPORT ABN: 57 002 594 872 A DECADE OF GROWTH 2003 The dream begins 2005 ASX 200 listing 2007 Construction at 70% 2009 27mt shipped 2011 Solomon Hub developed 2013 Firetail opened 2004 Cloudbreak identified 2006 Port Hedland ground-breaking 2008 First ore on ship 2010 Christmas Creek expanded 2012 57.5mt shipped www.fmgl.com.au CONTENTS • Chairman’s Statement • Chief Executive Officer’s Statement • Operations Report • Reserves and Resources Report • Corporate Social Responsibility • Corporate Governance • Financial Report • Directors’ Report • Remuneration Report • Auditor’s Independence Declaration • Financial Statements • Directors’ Declaration • • Independent Auditor’s Report to the Members Shareholder Information • Tenement Report • Corporate Directory 2 6 8 10 15 38 50 51 67 85 86 139 140 143 144 148 ‘‘ Fortescue has continually faced challenges and embraced opportunities and it is this ability, to respond quickly to a changing landscape, which has been key to its success. ‘‘ Andrew Forrest, Chairman FY13 HIGHLIGHTS Ore Shipped 80.9mt Revenue US$8.1bn EBITDA US$3.6bn NPAT US$1.7bn C1 Costs US$44/wmt EBITDA – is calculated as profit before income tax adjusted for depreciation and amortisation, impairment expense, other write offs, net finance costs and gain on refinancing. NPAT – net profit after tax. C1 – operating costs of mining, processing, rail and port on a per tonne basis. Fortescue Metals Group Limited I Annual Report 2013 I 1 Fortescue Metals Group Limited I Annual Report 2013 I 1 CHAIRMAN’S REPORT In Fortescue’s formative years, camps occupied by exploration teams, geologists, environmentalists and anthropologists were dotted across the Pilbara as we mapped, drilled, planned and consulted our great company into existence. Similarly, others city-hopped the globe, stretching credit card limits, staying at cheap hotels, doing their own washing and selling the vision to any good soul that gave them the time to listen. With an annual iron ore production in all of Australia in 2003 of a mere 180 million tonnes per annum (mtpa), not much more than Fortescue’s planned production this coming year, we were confident that Fortescue had a challenging but bright future in a market that, even though dominated by global players, lacked serious competition. Like every year at Fortescue, the next five years were nothing less than extraordinary. Our never, ever give up attitude saved the team despite multiple short term setbacks. We found huge new ore bodies that had to be pre-sold by the marketing team to the world’s steel industry to help finance our two- berth deep water port and a 300 kilometre railway line to link the entire operation to the huge Cloudbreak ore preparation plant, still the largest single plant ever built. It will only be surpassed by the Kings ore preparation plant on completion this year. Every single milestone of that first stage was reached despite the tragedy of Cyclone George and multiple other challenges and failures. Overcoming all these hurdles, our first commercial shipment of Fortescue-mined iron ore sailed out of Port Hedland on May 15, 2008. It was a defining moment. The dream that had involved so many thousands of people had been realised. Yet only a few months later, the Global Financial Crisis struck, iron ore demand collapsed and prices plummeted. We were deeply thankful that we had pushed ourselves so hard to have the operations complete in time, so strong revenues shielded us when the worst of the crisis hit. It was the hard work of the Fortescue team in maintaining strong relationships with our Chinese customers that enabled us to continue to sell every tonne of ore we could produce; no easy feat considering that many of our competitors were unable to do the same. By the end of the 2009 crisis year, we had shipped 27 million tonnes to over 45 steel mill customers across China. Through mutually difficult times we had supported and cemented our relationship with the Chinese steel industry. 2010 represented a significant turning point for Fortescue, which had matured into a strong and sustainable producer. The year saw us ship 40.1 million tonnes (a 44 per cent increase on the previous year) and planning began for the leap to 155mtpa. From only a start-up, this would cement our position as one of the world’s leading iron ore producers. Celebrating our first decade This is a defining year and decade for our stakeholders! Even though we are a company that never stands still, I want to devote this Chairman’s report to celebrating our first decade. It is worthwhile reflecting on the remarkable journey to date that has delivered a new and fundamental player into the Australian economy and has provided employment and better lifestyles to so many people. Fortescue is in good health and match fit to meet the many challenges ahead. Ten years ago Fortescue’s early pioneers sat around my kitchen table poring over maps of underexplored, huge Pilbara lands. While the evident geology was massive, those vast lands were mostly unpegged or soon would be dropped. We challenged the big companies, and some in bureaucracy, to cooperate with the intent of the mining act. While the hidden ‘geopoly’ attitude protecting the major companies was typical of the times, vast, unexplored and unutilised areas would soon become subject to Fortescue challenge. Our dream was simultaneously singular and vast - to develop massive infrastructure to be able to market previously stranded iron ore deposits, all of which we were yet to discover, and market those new ores to the global steel industry. We hoped and planned for success, back then daring only to imagine that in some 10 years, Fortescue would be operating four world class iron ore mines, boast the fastest, heaviest haul railway in the world, possess Australia’s most efficient iron ore port, enjoy strong customer relationships across the globe, and have huge untapped exploration. The vast strike lengths and potential mineralisation is of a scale that could dwarf anything that our highly successful existing programs have discovered so far. 2 I Fortescue Metals Group Limited I Annual Report 2013 1 I Fortescue Metals Group Ltd I Annual Report 2013 ‘‘A major achievement for our business during FY13 was the early achievement of our goal of awarding A$1billion in contracts to Aboriginal contractors by December 2013. ‘‘ Growth recovered at pace in the emerging economies so there was no time to relax. Fortescue had a major contribution to make in the independent, stable supply of high quality iron ore to the rapidly growing Asian economies. The US$9.0 billion expansion program was brave but would enable Fortescue to leverage existing infrastructure and its massive land holding across the Pilbara, which will eventually be judged by history as nothing more than common sense. With the 155mtpa expansion well underway, Fortescue was able to maintain its momentum in 2011 to ship 42 million tonnes. Significantly, an annualised production rate of 55mtpa was achieved and in 2012 we exceeded our target of 55 million tonnes, shipping more than 57mtpa. The past 10 years has seen an incredible effort in reaching milestones, breaking records, and development of many industry innovations by Fortescue people. FY13 performance In reviewing FY13, I am delighted with our strong financial performance, continued success in reducing operating costs and record production of 80.9 million tonnes shipped. Our CEO, Nev Power, who is doing a cracking job, will discuss this further in his report. Financial Despite a challenging period of volatility during the early part of FY13, we recorded a net profit after tax (NPAT) of US$1.7 billion on the back of a 12 per cent increase in revenue to US$8.1 billion and 9 per cent rise in EBITDA to US$3.6 billion. Increased volumes from our Chichester mines, supported by initial Firetail tonnes were the key drivers behind this performance. At the same time we reduced our C1 costs to US$44 per wet metric tonne (wmt), which is 9 per cent lower than the prior year. Operational From an operations perspective, this year is very significant as it witnessed the commissioning of our fourth mine, Firetail, and will see the completion of our fifth at Kings, all in only five years. Fortescue has shown exceptional congeniality, for which I am deeply grateful, in the high level of cooperation practiced between the often combative operations and construction teams. As a result, we are now well positioned to hit our initial targets of shipping 155mtpa of high quality iron ore to our customers. International The Fortescue/China relationship has continued to thrive. In April this year, we returned for a fifth consecutive year to the Boao Forum for Asia. Our presence and top level sponsorship of this eminent gathering of persons from government, Billion Opportunities celebration Opening of Nick Sexton Berth business and academia is a reflection of the mutual esteem in which we hold our customers and other strong supporters. Boao this year also hosted the inaugural meeting of the Australia-China Senior Business Leaders’ Forum (SBLF), the first ever permanent and high level business-to-business interaction between the two countries. This critical bilateral relationship had drifted badly, so it was exciting to witness the leadership of Australian business strengthening it back to its previous state. Asia’s economies in general continue to grow at a rate that is the envy of the rest of the world. We remain confident that China, in particular, will sustain its urbanisation and industrialisation process, switching from economic reliance on exports to internal consumption to drive demand like a self-combusting engine. This ensures the long term strength of Fortescue through our unique stable, high quality iron ore supply and strong relationships. As an example, Formosa is building the world’s largest single steel manufacturing facility of 22mtpa in Vietnam. This visionary new project, being completed by one the world’s largest manufacturing companies, signals their confidence that the Asian growth miracle does not stop at the doorstep of China. Fortescue Metals Group Limited I Annual Report 2013 I 3 Fortescue Metals Group Ltd I Annual Report 2013 I 2 CHAIRMAN’S REPORT Opening of Firetail Development It is particularly significant for Fortescue, not just for the supply of our iron ore to this facility, but also for the joint venture recently formed between Formosa and Fortescue that will lead to the development of our Iron Bridge magnetite project. Like most of the challenges that Fortescue has set itself, this project was also derided by the critics. Yet it has created an asset of major value to Fortescue and injected significant liquidity into our balance sheet. Fortescue’s now famous exploration team is also continuing its highly successful track record throughout this year, constantly discovering new opportunities for future development. Opportunities From a local perspective, I think one of our most satisfying achievements was reaching our goal of awarding A$1billion in competitive contracts to Aboriginal businesses. Our rapid expansion to 155mtpa has created many opportunities for Aboriginal businesses to actively participate in Fortescue’s growth, through direct contracts, joint ventures or sub-contracts with Fortescue’s major contractors. Our Billion Opportunities Program has set a significant benchmark for the creation of genuine opportunities for Aboriginal-owned businesses. The Leader of the Opposition, The Hon. Tony Abbott, has both thrown down the gauntlet to Australian industry to follow our example and adopted the “training directly to a guaranteed job” model of one of our most successful philanthropic efforts, GenerationOne. If elected, he pledged to follow the GenerationOne model in the Coalition’s Indigenous Policy, also guaranteeing 5,000 new training positions for unemployed indigenous people. abundant on-going training and employment opportunities to Aboriginal people. VTEC has aided Fortescue’s inexorable march to its 15 per cent indigenous participation target in our workforce by 2015. We currently sit proudly at 12.3 per cent and now we have so many first Australians in our workforce, we are commencing the push for greater indigenous participation in management and senior supervisory positions. The future The manner in which we have made these achievements over the past 10 years has made us resilient and will ensure our growth and strength into the future. Fortescue has continually faced challenges and embraced opportunities and it is this ability, to respond quickly to a changing landscape, which has been key to its success. Equally important has been the support and backing of our dedicated shareholders, loyal stakeholders, unified Board, spirited leadership and passionate workforce. All of us have been in some way Fortescue pioneers even though there are 10,000 more of us than there were around the kitchen table. It took an additional 15,000 workers like us just to build our Solomon project. For every person who has gathered Fortescue dust on their boots and joined our team in any way, I welcome you to look back in 10 years’ time knowing that you too were a Fortescue pioneer. Your determination to march with Fortescue boldly into the future is deeply appreciated. In this vein, Fortescue’s Vocational Training and Employment (VTEC) program, established in WA in 2006, is providing Andrew Forrest, Chairman 4 I Fortescue Metals Group Limited I Annual Report 2013 4 I Fortescue Metals Group Limited I Annual Report 2013 CHAIRMAN’S REPORT CHAIRMAN’S REPORT ‘‘ For every person who has gathered Fortescue dust on their boots and joined our team in any way, I welcome you to look back in 10 years’ time knowing that you too were a Fortescue pioneer. ‘‘ Andrew Forrest, Chairman Fortescue Metals Group Limited I Annual Report 2013 I 5 Fortescue Metals Group Limited I Annual Report 2013 I 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CHIEF EXECUTIVE OFFICER’S STATEMENT performance was driven by increased volumes from our Chichester operations and early production from our Firetail Mine. The increased volumes more than offset a 13 per cent reduction in realised iron ore price, which averaged US$114 per dry metric tonne (dmt) for the year. The strong financial result was also underpinned by a significant reduction in our cash costs (C1) to just over US$36 per wet metric tonne (wmt) in the June quarter. This represents a 17 per cent improvement over the March quarter and highlights the completion and commissioning of new processing facilities and beneficiation plants across our mining operations. These facilities maximise product quality and ore upgrade allowing us to significantly reduce our cut-off grades and therefore lower strip ratios at the Chichester mines. We’ve also begun blending ore from these mines with ore from Firetail to create a new product called Fortescue Blend. These initiatives, along with a continuous focus on efficiency and productivity, are playing a significant role in lowering our overall costs and, importantly, continuing to improve our already strong position on the global cost curve. With approximately 70 per cent of our operating costs denominated in Australian dollars we also benefitted from a fall in the currency against the US dollar towards the end of the year. The Australian dollar decreased from US$1.04 to US$0.99 in the June quarter, leading to a further US$1.89 reduction in our C1 costs for that period. Operational Performance Consistent improvements over the past 12 months ensured a strong finish to FY13. This includes our achievement of a record 120 mtpa shipping run rate in the month of June and the shipping of almost 81 million tonnes of ore for the full year. With the completion of the Kings mine later this year we will have spread our production across two mining hubs comprising five mines feeding five ore processing facilities. This, together with the improvement in cost, demonstrates that we are delivering against our strategic objective to be one of the world’s most reliable, efficient and low cost producers of iron ore. The performance of our operations and development teams has been impressive. Since early 2011, our teams at Christmas Creek and Cloudbreak, the Herb Eliott Port and throughout our rail operations have worked alongside one of the largest construction projects in Australia. The whole company worked together as one, highlighting the value of our strong culture to deliver world class performance in construction and operations simultaneously. This effort has ensured that we have been able to maximise output from all of our operations and deliver robust financial results during the expansion phase. Dear shareholders It is a great pleasure to provide you with an overview of our performance for FY13 and reflect on the key milestones that have brought Fortescue within sight of our annual production target of 155 million tonnes of iron ore. We emerged stronger and more resilient from the period of iron ore price volatility early in FY13 and finished the year on a fantastic note with the outstanding Fortescue team delivering record results from our world class assets. We’ve since celebrated our 10th anniversary, prompting us to pause and reflect on our extraordinary growth and look to the future with confidence and excitement. We’ve already had reason to celebrate with the completion in August of the US$2.4 billion expansion of our port facilities at the Herb Elliott Port, the official opening of the Firetail Mine at the Solomon Hub in May and the opening of the Fortescue Hamersley Line in December. We are now fast approaching the completion and commissioning of our 40mtpa Kings Mine, which represents the final component of our US$9 billion expansion that will effectively treble our production capacity. We also moved a significant step forward in the development of our world class magnetite assets with the recent announcement of a US$1.15 billion investment by the Formosa Group, Taiwan’s largest private company, in the FMG Iron Bridge Joint Venture. FMG Iron Bridge Ltd owns the North Star and Glacier Valley magnetite iron ore deposits, located about 100 kilometres south of Port Hedland. Solid Financial Results Fortescue achieved a 12 per cent increase in FY13 full year net profit to US$1.7 billion. Revenue increased 21 per cent to US$8.1 billion, while profit before income tax and finance expenses rose nine per cent to US$3.6 billion. Our strong 6 I Fortescue Metals Group Limited I Annual Report 2013 1 I Fortescue Metals Group Ltd I Annual Report 2013‘‘We set yet another production record for the June ‘‘ quarter, achieved a 120 million tonne per annum shipping run rate in the month of June and shipped almost 81 million tonnes of ore for the full year. Importantly, Fortescue’s strong commitment to safety led to a 17 per cent improvement in our Total Recordable Injury Frequency Rate (TRIFR) in FY13. Our improved safety performance is built on the principles of pragmatic safety leadership, and we have numerous programs in place aimed at providing a safe workplace for all our employees and contracting partners. Unfortunately and in spite of all of our efforts in 2013, the Fortescue family is grieving the loss of a contractor’s employee, Kurt Williams, in an accident at the Christmas Creek Ore Processing Facility on 14 August. Our thoughts and prayers are with Kurt’s partner, loving family and friends. Balance Sheet Strength We finished FY13 in a strong position in terms of our capital structure and balance sheet. The flexibility built into our debt structures enables us to manage debt well in advance of maturity dates, either through voluntary repayments or refinancing. At June 30, 2013, net debt stood at US$9.9 billion, taking into account our US$2.2 billion cash on hand, excluding finance leases of around US$600 million. It is important to note that our first debt repayment is not due until November 2015. Fortescue continues to progress initiatives, including prepayments from customers and other asset sales processes to release value for shareholders with the intention of directing proceeds towards to early repayment of debt and accelerate the balance sheet de-gearing. Even without further asset sales, we can achieve a sustainable level of gearing in the short to medium term. Our expansion projects are close to completion, on schedule and within budget, iron ore prices continue to trade within or above our expected range of US$110 to US$130 a tonne and we have every confidence demand for our products, particularly from China, will remain strong. Community As we rapidly grow our presence in the Pilbara, we continue to work closely with the communities in which we operate. Our activities in this area have a strong focus on job creation, skills transfer and furthering Aboriginal training, employment and business development. A key focus is our Vocational, Training and Employment Centres (VTEC) in Hedland and Roebourne, which have helped increase the number of Fortescue’s direct Aboriginal employees to over 12 per cent of our direct workforce at the end of June 2013. An additional 504 Indigenous people were employed by our contracting partners. In August 2013, we also celebrated the achievement of awarding more than A$1 billion in contracts to Aboriginal businesses as part of our industry-leading Billion Opportunities Progam. Our community initiatives also include the support of community partnerships with the Minderoo Foundation including the movement to end indigenous disparity, Pre-start at Firetail Roebourne working bee GenerationOne. In addition, we have focussed in 2013 on a fundraising campaign for the new Ronald McDonald House which benefits families of regional children requiring hospital treatment in Perth; sponsorship of the national men’s hockey team, the Kookaburras, and the South Hedland Swans Football Club. Fortescue’s annual working bee at Roebourne District High School was again a great success during the year. Conclusion We enter the 2014 financial year with our goal of becoming an iron ore miner of global scale firmly in our sights. We will finish the first half of 2014 with capacity to produce 155 mtpa from an integrated supply chain comprising five mines and processing facilities, the fastest, heaviest haul rail system in the world and world class port infrastructure. I congratulate all of our employees, our contracting partners and stakeholders for their contribution to our incredible journey. Thanks to the hard work and commitment of these many people, we are building a great Australian company for today and many generations to come. Nev Power, Chief Executive Officer Fortescue Metals Group Limited I Annual Report 2013 I 7 Fortescue Metals Group Ltd I Annual Report 2013 I 2OPERATIONS REPORT Total shipments for the full year were 80.9 million tonnes, an increase of 41 per cent on the previous year. Fortescue is rapidly approaching the completion of its US$9 billion expansion to 155 million tonnes per annum (mtpa) of production and export capacity following the achievement of a number of outstanding results in FY13. We finished the year on an exceptional note, with production records established across our port, rail and mining operations and a significant reduction in cash costs (C1). As these results demonstrate, Fortescue is realising the benefits of its investment in mining and infrastructure and is delivering on its strategy of becoming a world class, low cost producer of iron ore. Our rapid growth in FY13 led to the celebration of a number of milestones, including: • The commissioning of our second ore processing facility at Christmas Creek in October 2012. • The first train departing the Solomon Hub bound for Port Hedland on the Fortescue Hamersley Line in December 2012. • The formal opening of the Firetail Mine at Solomon in May 2013. Importantly, Fortescue achieved these results while maintaining a strong commitment to safety. This led to a significant 17 per cent improvement in our Total Recordable Injury Frequency Rate (TRIFR) in FY13 through strong emphasis on field leadership, coaching programs designed to reinforce key safety behaviours and the successful operation of the Major Hazards and Contractor Management Program. Tragically, early in FY14 a contract worker at our Christmas Creek Mine was fatally injured while undertaking maintenance work. We are deeply saddened by this incident and offer our sincere condolences to the deceased worker’s family, friends and workmates. Production Fortescue finished FY13 on a positive note, shipping a record 25mt for the June quarter to take total shipments for the full year to 80.9mt, 41 per cent higher than the previous year. A record operating performance in the month of June led to a 120mtpa shipping run rate, 5mtpa ahead of expectations. Ore mined during the June quarter increased to 34.3mt, 35 per cent higher than the previous quarter largely due to a fall in strip ratios and a continued focus on operational efficiencies. Significantly, this was achieved despite unseasonal wet weather which impacted the production performance of the port and mines during the June quarter. Fortescue is reaping the benefits of its investment in mining and ore processing facilities (OPFs) which maximise product quality and improve efficiency to deliver sustainable lower operating costs. Commissioning of the wet plants at our Chichester Hub during FY13 enabled the mining of lower cut off grades while maintaining product quality. The addition of Firetail ore from Solomon to produce the new Fortescue Blend underpins ongoing product and cost benefits. This new blended product, which was formally launched in August 2013, realises the benefits of the low impurity Chichester ore and higher iron content Firetail products. The ramp up of the second OPF at Christmas Creek in the December quarter underpinned an annualised shipping run rate of more than 100mtpa for the month of December while the commissioning of the 20mtpa Firetail Mine in the first half of FY13 increased Fortescue’s nameplate production capacity to 115mtpa. Fortescue announced in December 2012 that it would complete the nearby 40mtpa Kings Mine at Solomon by the end of calendar year 2013. Fortescue had deferred the 8 I Fortescue Metals Group Limited I Annual Report 2013 ‘‘‘‘ development in September 2012 in response to volatile market conditions. The completion of Kings will mark the final leg of Fortescue’s US$9 billion expansion to 155mtpa across the supply chain by the end of December and underpin sustainable production at a run rate of 155mtpa after the wet season at the end of March quarter 2014. Port and rail Fortescue’s integrated rail and port operations continued to exceed expectations with 25.1mt of ore delivered to the port during the June 2013 quarter, an increase of 22 per cent on the 20.6 mt delivered during the March quarter. Rail capacity is growing in line with rapidly increasing volumes from Fortescue’s mining operations with the completion of turns outs and passing sections on both the mainline and the new Fortescue Hamersley Line in the June quarter. The full scope of work for track and signals and communications will be completed in the first quarter of FY14 while the commissioning of the new digital train control system is underway. Two further rakes of ore cars are due for delivery during December 2013 quarter. Fortescue achieved a major milestone at Herb Elliott Port in July 2013 with the delivery of first ore on ship from its fourth berth, named the Nick Sexton Berth after a much-loved member of the Fortescue Family who passed away early in 2013. The berth was formally opened by WA Treasurer and Minister for Transport Troy Buswell in August. It represents the last major component of Fortescue’s US$2.4 billion expansion to lift export capacity at Herb Elliott Port to 155mtpa. C1 costs reductions Fortescue’s overall C1 costs for FY13 were US$44.09 per wet metric tonne (wmt), a nine per cent improvement over FY12. Although C1 costs fluctuated during the course of FY13 significant improvements were achieved during the March and June quarters as a result of sustained reductions in strip ratios, operational efficiencies and a continuous focus on cost reductions. C1 costs decreased to US$36.01wmt in the June quarter, a 17 per cent reduction on the March quarter. In Q3, C1 costs were US$43.61 / wmt, 14 per cent lower than the December quarter. In the first half of FY2013, a stronger Australian dollar, coupled with higher strip ratios, ramp up in production and higher cost inventories, had elevated C1 costs to US$50.48 / wmt in the December quarter from US$49.44 / wmt during the September 2012 quarter. OPERATIONS REPORT Exploration and tenements Fortescue continues development studies to optimise the potential of the increased resources arising from exploration activities. Exploration activity during the June 2013 quarter focussed on defining extensions to known mineralisation around the greater Solomon area and targeting known mineralised channel iron deposit (CID) systems. Modest exploration and drilling targeted the Western hub during the March quarter with one rig focussed on defining extensions to known mineralisation at Eliwana in both the Brockman Iron and Marra Mamba Iron formations. Visual estimates displayed encouraging mineralisation in both targeted horizons. FMG Iron Bridge Fortescue took a significant step towards the development of its magnetite assets in the Pilbara with the announcement in August 2013 of a US$1.15 billion investment by Formosa. Formosa is Taiwan’s largest private company. Fortescue owns an 88 per cent interest in FMG Iron Bridge Ltd with the remaining 12 per cent interest held by a subsidiary of Baosteel Group Corporation, one of China’s largest steel mills. FMG Iron Bridge Ltd owns the world class North Star and Glacier Valley iron ore deposits, located about 100 kilometres south of Port Hedland. Iron Bridge has a land access agreement in place with the Njamal people and Stage One of the project has achieved major environmental approvals. Fortescue Metals Group Limited I Annual Report 2013 I 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 ORE RESERVES AND MINERAL RESOURCES ‘‘ The 2013 combined Chichester and Solomon Ore Reserve is a total of 2,344 million dry tonnes (Mt) at an average Fe grade of 57.7per cent, a 12 per cent tonnage increase from 2012 at a slightly lower ore quality. ‘‘ Ore Reserves – Operating Properties The 2013 combined Chichester and Solomon Ore Reserve is a total of 2,344 million dry tonnes (Mt) at an average iron (Fe) grade of 57.7 per cent, a 12 per cent tonnage increase from 2012 at a slightly lower ore quality. The Ore Reserve is quoted as at June 30, 2013. Company production and sales reporting is based on wet tonnes with a typical free moisture content of 9 per cent, as shipped. The 2013 Ore Reserve estimates have all been updated over the previous year to incorporate the impacts of: • Updates to the various resource models. • On-going reconciliation with ore sales. • The long term marketing and product strategy. • • Impacts of ore beneficiation through wet processing plants. Synergies arising from producing a blended product from multiple sites and ore types. In addition to the tonnage increase, the proportion of higher confidence Proved Ore Reserve has increased significantly. This is a result of on going in-fill drilling at both Solomon and the Chichester deposits. Increases in Chichester Mineral Resource confidence initially reported in 2012 were not recognised in the 2012 Ore Reserve because it was produced by depletion of the prior year’s estimate. The Chichester Hub contained 1,517 Mt at an average Fe grade of 57.6 per cent Fe, with 30 per cent of the tonnage in the Proved Ore Reserve category. The Ore Reserve estimate for the Solomon Hub is 827 Mt at an average Fe of 57.8 per cent, with 12 per cent of the tonnage in the Proved Ore Reserve category. Ore Reserves for the operating properties, including the Chichester and Solomon hubs, are stated on a dry product basis and exclude stockpiles. The Solomon Hub Ore Reserve was quoted on an in-situ basis in 2012. 10 I Fortescue Metals Group Limited I Annual Report 2013 ORE RESERVES AND MINERAL RESOURCES ORE RESERVES AND MINERAL RESOURCES Ore Reserves – as at June 30 2013 Ore Reserves – as at June 30 2012 Category Product Tonnes (Mt) Iron Silica Alumina Phos Fe% SiO2% Al2O3% P% Loss On Ignition LOI% Product Tonnes (Mt) Iron Silica Alumina Phos Fe% SiO2% Al2O3% P% Loss On Ignition LOI% Proved 449 Probable 1,069 Total 1,517 Proved Probable Total 98 729 827 57.6 57.6 57.6 58.5 57.7 57.8 5.01 4.74 4.82 5.10 6.59 6.42 2.27 2.47 2.41 1.79 2.58 2.48 Chichester Hub 0.045 0.048 0.047 8.1 7.9 8.0 31 1,464 1,495 Solomon Hub 0.076 0.066 0.068 8.8 8.3 8.4 - 592 592 Combined 59.9 58.2 58.3 - 58.4 58.4 3.41 5.13 5.09 - 6.10 6.10 1.85 2.24 2.24 - 2.35 2.35 0.061 0.052 0.052 - 0.073 0.073 8.1 7.6 7.6 - 8.3 8.3 Proved 547 Probable 1,797 Total 2,344 57.8 57.7 57.7 5.02 5.49 5.38 2.18 2.52 2.44 0.050 0.055 0.054 8.2 8.1 8.1 31 2,056 2,087 59.9 58.3 58.3 3.41 5.41 5.38 1.85 2.28 2.27 0.061 0.058 0.058 8.1 7.8 7.8 Tonnage figures have been rounded and as a result the figures may not add up to the totals quoted. Ore Reserve table notes: a) The Chichester Ore Reserve includes the Cloudbreak and Christmas Creek deposits; the Solomon Hub Ore Reserve includes the Firetail, Kings and Queens deposits. b) c) d) e) The diluted mining models used to report the 2013 Ore Reserves are based on updated Chichester Mineral Resource models reported in 2012 and revised Solomon Mineral Resource models completed this year. Diluted mining models are validated by reconciliation against historical production. The increase in Proved Ore Reserve for both hubs reflects the increase in the proportion of higher confidence Measured Mineral Resource associated with on-going in-fill drilling. Overall Ore Reserve tonnage has increased by 12 per cent (at slightly lower grade) after taking into account FY13 mining depletion. Slightly lower Ore Reserve quality was a result of the product strategy and quality synergies associated with blending Firetail and Chichester products. Typical feed upgrade factors through Chichester wet ore processing facilities (OPF’s) are Fe 1.025, silica 0.80, alumina 0.75 with a mass yield of 84 per cent. The Solomon deposits include multiple ore types (channel iron, bedded iron and detritals) with variable processing responses. Average Solomon feed upgrade factors are Fe 1.037, Silica 0.80, alumina 0.80 with a mass yield of 84 per cent. f ) The June 2012 Solomon Hub Ore Reserve was reported on an in-situ basis. It is re-stated here on a product basis to allow direct comparison. Fortescue Metals Group Limited I Annual Report 2013 I 11 Fortescue Metals Group Ltd I Annual Report 2013 I 2 ORE RESERVES AND MINERAL RESOURCES Mineral Resources – Operating Properties Mineral Resources for the operating properties including the Chichester and Solomon hubs are stated on a dry in-situ basis. The Mineral Resources stated are inclusive of the Ore Reserves. As of June 30, 2013, the total Mineral Resource for the Chichester and Solomon hubs was 5,226 mt at an average Fe grade of 56.4 per cent, essentially unchanged from that stated in the prior year. This was accompanied by a steady increase in the proportion of higher confidence Measured and Indicated Mineral Resource mineralisation from 63 per cent to 66 per cent as a result of on-going in-fill drilling. The Chichester Hub Mineral Resource totalled 3,222 mt at an average Fe grade of 56.6 per cent Fe, with 69 per cent of the tonnage in the Measured and Indicated Mineral Resource categories. The Solomon Hub Mineral Resource totalled 2,003mt at an average Fe grade of 56.1 per cent, with 59 per cent of the tonnage in the Measured and Indicated Mineral Resource categories. Mineral Resources – as at June 30 2013 Mineral Resources – as at June 30 2012 Category In-situ Tonnes (Mt) Iron Silica Alumina Phos Fe% SiO2% Al2O3% P% Loss On Ignition LOI% In-situ Tonnes (Mt) Iron Silica Alumina Phos Fe% SiO2% Al2O3% P% Loss On Ignition LOI% Measured 668 Indicated 1,569 Inferred 985 Total 3,222 Measured 133 Indicated 1,053 Inferred Total 818 2,003 Measured 801 Indicated 2,622 Inferred 1,802 Total 5,226 56.7 56.6 56.3 56.6 57.8 56.2 55.6 56.1 56.9 56.4 56.0 56.4 6.08 5.90 6.32 6.07 5.80 7.56 7.80 7.54 6.04 6.57 6.99 6.63 3.09 3.37 3.29 3.29 2.13 3.15 3.41 3.19 2.93 3.28 3.35 3.25 Chichester Hub 0.048 0.051 0.058 0.053 8.2 8.0 7.8 8.0 420 1,891 1,068 3,379 Solomon Hub 0.085 0.073 0.075 0.074 0.054 0.060 0.065 0.061 9.0 8.3 8.6 8.5 Combined 8.4 8.1 8.1 8.2 108 791 846 1,745 527 2,681 1,915 5,123 56.7 56.6 56.4 56.6 58.4 56.6 56.0 56.4 57.1 56.6 56.2 56.5 6.15 5.94 6.29 6.08 5.43 7.05 7.51 7.17 6.00 6.27 6.83 6.45 3.05 3.31 3.28 3.27 2.03 3.03 3.28 3.09 2.84 3.23 3.28 3.21 0.045 0.051 0.057 0.052 0.082 0.073 0.073 0.074 0.053 0.058 0.064 0.060 8.2 8.0 7.8 8.0 8.5 8.3 8.5 8.4 8.2 8.1 8.1 8.1 Tonnage figures have been rounded and as a result the figures may not add up to the totals quoted. Mineral Resource table notes: (a) The Chichester Mineral Resource includes the Cloudbreak and Christmas Creek deposits while the Solomon Mineral Resource includes the Firetail, Kings and Queens deposits. (b) The June 2012 Solomon Hub Mineral Resource has been re-stated to only include the operational properties. (c) The increase in the Solomon Measured and Indicated Mineral Resources as a result of in-fill drilling has more than offset reductions in the Chichester deposits due to FY13 mining depletion 12 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013ORE RESERVES AND MINERAL RESOURCES Mineral Resources – Development Properties Mineral Resources – as at June 30 2013 Mineral Resources – as at June 30 2012 Category In-situ Tonnes (Mt) Iron Silica Alumina Phos Fe% SiO2% Al2O3% P% Loss On Ignition LOI% In-situ Tonnes (Mt) Iron Silica Alumina Phos Fe% SiO2% Al2O3% P% Loss On Ignition LOI% Chichester Other Hub 222 473 695 50.0 54.1 52.8 10.89 7.58 8.64 6.83 4.86 5.49 0.060 0.066 0.064 8.0 7.5 7.7 222 473 695 50.0 54.1 52.8 10.89 7.58 8.64 6.83 4.86 5.49 0.060 0.066 0.064 8.0 7.5 7.7 Solomon Other Hub 1,501 1,501 56.8 56.8 7.00 7.00 3.71 3.71 0.080 0.080 7.3 7.3 1,501 1,501 56.8 56.8 7.00 7.00 3.71 3.71 0.080 0.080 7.3 7.3 Western Hub 58.7 58.7 59.6 58.1 57.2 57.4 59.6 55.8 56.9 56.8 31.9 30.2 30.4 5.44 5.44 3.56 4.52 5.00 4.87 3.56 6.28 6.01 6.04 39.9 40.8 40.7 3.06 3.06 2.21 2.95 3.36 3.25 0.091 0.091 0.139 0.148 0.147 0.147 6.6 6.6 624 624 58.7 58.7 5.44 5.44 3.06 3.06 0.091 0.091 6.6 6.6 Nyidinghu 8.0 8.6 8.8 8.8 2,013 2,013 57.5 57.5 4.97 4.97 3.26 3.26 0.145 0.145 Total Hematite Goethite Mineral Resources 2.21 4.0 3.60 3.65 2.0 2.5 2.4 0.139 0.124 0.108 0.110 0.099 0.100 0.100 8.0 8.4 7.9 7.9 Magnetite 7.2 8.3 8.1 222 4,611 4,833 102 672 2,463 3,237 Total Mineral Resources 50.0 57.1 56.7 32.7 31.9 32.3 32.2 10.89 5.96 6.19 39.14 39.74 39.18 39.30 6.83 3.54 3.70 1.78 1.94 1.84 1.85 0.060 0.108 0.106 0.102 0.096 0.100 0.099 102 894 7,074 8,070 8.6 8.6 8.0 7.8 7.8 6.5 7.4 7.9 7.8 Tonnage figures have been rounded and as a result the figures may not add up to the totals quoted. Fortescue Metals Group Limited I Annual Report 2013 I 13 Measured Indicated Inferred Total Measured Indicated Inferred Total Measured Indicated Inferred Total 624 624 Measured 23 Indicated 580 Inferred Total 1,860 2,463 Measured Indicated Inferred Total 23 802 4,458 5,283 Measured Indicated 720 Inferred Total 4,484 5,205 Measured 23 Indicated 1,522 Inferred 8,942 Total 10,488 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013ORE RESERVES AND MINERAL RESOURCES Mineral Resource table notes: (a) All Mineral Resources are quoted on an in-situ basis after applying an appropriate cut-off for each deposit. Details relating to the cut-off’s were provided when the Mineral Resource was first announced. (b) The Magnetite Mineral Resource estimation was completed by Golder Associates using data supplied by Fortescue. For details refer to the ASX release; ‘FMG Iron Bridge Resource increases to 5.2 billion tonnes, 12th December 2012’. (c) The Total Mineral Resources are quoted as tonnages only. It is not appropriate to quote average grades as Hematite-Goethite Resources are a very different mineralisation type to Magnetite Resources. Competent Persons Statement The detail in this report that relates to Mineral Resources is based on information compiled by Mr Stuart Robinson, Mr Clayton Simpson, Mr Nicholas Nitschke and Mr David Frost-Barnes. Messrs Robinson, Simpson, Nitschke and Frost-Barnes are all full-time employees of Fortescue and provided technical input for Mineral Resources estimations and compilations of exploration results. Estimated Ore Reserves for the Chichester and Solomon Hubs for fiscal 2013 were compiled by Mr Ross Oliver, a full time employee of Fortescue. Mr Robinson is a Fellow of, and Messrs Simpson, Nitschke and Oliver are Members of, the Australasian Institute of Mining and Metallurgy. Mr Frost-Barnes is a member of the Institute of Materials, Minerals and Mining. Messrs Robinson, Simpson, Nitschke, Oliver and Frost-Barnes have sufficient experience relevant to the type of mineralisation and type of deposit under consideration to each be qualified as a Competent Person as defined in the JORC Code. Messrs Robinson, Simpson, Nitschke, Frost-Barnes and Oliver have each consented to the inclusion in this report of the matters based on their information in the form and context in which it appears. 14 I Fortescue Metals Group Limited I Annual Report 2013 14 I Fortescue Metals Group Limited I Annual Report 2013 ORE RESERVES AND MINERAL RESOURCES CORPORATE SOCIAL RESPONSIBILITY ‘‘Fortescue aspires to be a corporate citizen of that host its activities. ‘‘ choice that is welcomed by the communities Our priorities Safety Environment Robust and resilient operations Shareholder value creation Result Profitable and sustainable growth Talented, engaged and productive workforce Management of risks and performance measurement Operational efficiency and reduced costs People Local Communities Governance Bruce Bung director Nyiyaparli Engineering Mine Maintenance Service (NEMMS) signs contract under Billion Opportunities program Fortescue Metals Group Limited I Annual Report 2013 I 15 Fortescue Metals Group Limited I Annual Report 2013 I 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013CORPORATE SOCIAL RESPONSIBILITY Corporate Social Responsibility Fortescue aspires to be a corporate citizen of choice that is welcomed by the communities that host its activities. What Corporate Social Responsibility means to us At Fortescue we aim to enhance communities, behave with respect and care for people and the environment, take broad responsibility for the effects of our presence and do what we say we will do. To achieve this Vision, we are committed to operating in a way that integrates Corporate Social Responsibility (CSR) principles into everything we do. We believe that applying integrated thinking and practices will generate long-term value for all of our stakeholders. This approach will ensure that we protect our people and our business partners, respect our local communities and minimise our impact on the environment. Our approach to managing and reporting on our CSR performance Our governance framework and management systems are the basis upon which we make our decisions, proactively identify and manage our risks and continuously improve our performance. We strive to effectively align our activities with our Vision of being the lowest cost, most profitable iron ore producer, and our Values of Integrity, Family, Enthusiasm, Empowerment, Determination, Generating Ideas, Frugality and Stretch Targets. Our Vision and Values underpin both our management of financial and non-financial risks and the accomplishment of the opportunities that they provide. We firmly believe that proactive management of our CSR performance will generate value and will contribute to our business resilience over the long term. This report provides an overview of how we approach the management of our CSR performance. Our fourth CSR report continues to align with the Global Reporting Initiative (GRI) G3 Guidelines and the Mining Sector Supplement and has been independently confirmed as GRI B application level. A copy of our GRI level check is available at www.fmgl.com. au. Our whole of business approach to audit and assurance is outlined in the Corporate Governance section of this report. Our greenhouse gas emissions and energy data have been independently assured. Each year we strive to improve our performance disclosures. The International Council on Mining and Metals (ICMM) Sustainable Development Principles have helped to shape the content of this year’s report. In April 2013, we became a signatory to the UN Global Compact (UNGC). The UNGC is a set of 10 universal principles in the areas of human rights, enviroment and anti-corruption. Where possible we have commenced reporting on progress aligning our operations and strategies with the UNGC Principles. Our first full and official Communication on Progress (COP) with regard to the UNGC will be contained in our 2014 CSR report. In developing the content of this CSR report we have used the GRI guidelines, the ICMM Principles, the UNGC Principles, our risk management activities and internal processes. This approach ensures that our communication to stakeholders is clearly linked to our CSR priorities, the creation of shareholder value and our performance results. 16 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Our CSR scorecard and key programs to deliver on our commitments Our Commitments Key Initiatives for FY14 Our Targets Business ethics and governance • Upgrade our Extranet system to ensure that we clearly communicate our ethics and governance expectations with our business partners and suppliers. • Proactively engage with our supply chain on human rights performance. Compliance with ASX Governance Principles. Integration of Sustainability into Risk Management Programs. Consideration of ICMM Sustainable Development Principles in our management systems. Integration of the UN Global Compact principles into the way we do business and report on our progress. KPI Performance 2010 2011 2012 2013 Achieved Achieved Achieved Achieved NA NA Underway Achieved NA NA NA Underway NA NA NA Underway Disclosure of Sustainability Performance in accordance with GRI Level B. Achieved Achieved Achieved Achieved • Eliminate high risk HS Zero fatalities. incidents. • Reduce injury / illness. • Increase level of HS compliance. Total Recordable Injury Frequency Rate to reduce year-on-year. Have year-on-year improvements in Aboriginal participation rates for employees and contractors. 0 NA 1 14.2 0 9.2 0 7.6 NA NA Achieved Achieved We will clearly articulate our ethical business principles and practices and implement sound systems of corporate governance. We will identify and manage our business risks and incorporate CSR into our decision- making processes. We will implement effective engagement and communication practices with our key stakeholder groups. We will transparently report on our performance to our stakeholders. A safe, healthy and engaged workforce We will foster a safety culture that aligns with our core Values and achieves a safe workplace for our employees and contractors. We will value and look after the well being of everyone in the Fortescue family. We will nurture our high performance culture and aim to provide a workplace that is diverse, fair and empowering. 600 Indigenous employees by the end FY13. NA NA 403 461 Voluntary employee turnover less than 15%. 15.6% 15.0% 14.2% 9.7% Employee engagement scores to be ≥80%. NA NA Achieved Not Achieved Improving the capability of our leaders. NA NA Achieved Achieved Contribute to community services and facilities each year. Achieved Achieved Achieved Achieved Maintain local procurement of goods and services for operations over 75%. NA NA Achieved Achieved Award $1 billion in contracts with Aboriginal contractors and joint ventures’ (cumulative totals). 100 people to graduate from VTEC training programs in FY 2013. NA $129m $404M $1.11 billion 60 102 162 105 Building community capacity and respecting cultures We will contribute to the social, economic and institutional development of the communities in which we operate. We will be the corporate citizen of choice that is welcomed by the communities that host our activities. We will respect the culture and traditions of Indigenous people affected by our activities and strive to positively impact their lives. • Undertake awareness raising and training on our Human Rights Policy. • Implementing Cultural Heritage Research Projects with our Native Title partners. • Award a further $180 million in contracts to Aboriginal Businesses. Reducing our environmental impact • We are committed to managing our environmental impacts and meeting our licence requirements. We take a precautionary approach to the environment and will invest in initiatives and technologies that not only make good business sense but also reduce our environmental impact. Investigate the viability of tyre and waste oil recycling at our mine sites. Zero level 3 environmental incidents. Achieved Achieved Achieved Not Achieved • Progress stage 2 rehabilitation program at Cloudbreak mine site. Zero discharge to land of excess dewatering. Not Achieved Achieved Achieved Achieved Trial at least one renewable or carbon free energy source at each Fortescue project. NA NA Achieved Achieved Fortescue Metals Group Limited I Annual Report 2013 I 17 CORPORATE SOCIAL RESPONSIBILITY Business ethics and governance We will clearly articulate our ethical business principles and practices and implement sound systems of corporate governance. We will identify and manage our business risks and incorporate CSR into our decision-making processes. We will implement effective engagement and communication practices with our key stakeholder groups. We will transparently report on our performance to our stakeholders. Our governance systems Fortescue is committed to implementing and maintaining ethical business practices, sound systems of corporate governance and engaging with our stakeholders openly and honestly. Detailed information on our approach to governance and stakeholder engagement can be found in the Corporate Governance section of this report. We have a number of specific CSR Policies in place which help us to govern our business activities and to clearly articulate our expectations with regard to business behaviours. These Policies are supported by established management systems which assist the business in the day-to-day management of CSR performance. In 2012, we made a commitment to review and strengthen governance systems to reflect the greater global focus of the business. This review resulted in the revision of existing and the development of a number of new policies and processes. This included an update of the Code of Conduct and the launch of the newly-developed Unethical Behaviour Control Framework. A number of our policies are available at www.fmgl.com.au. To assist in ensuring compliance with these Policies is achieved we have established a whistleblower hotline. This independent and anonymous service is made available to all of our employees, contractors and business partners. It assists us to effectively deal with governance related breaches such as unethical, corrupt or fraudulent behaviour. Any investigations arising from whistleblower reports will be dealt with through our newly developed Unethical Behaviour Control Framework. Adoption of global CSR governance frameworks In 2012, we made a commitment to consider the ICMM Sustainable Development Principles in our management systems. While we are not currently a signatory to the ICMM, we believe that the Principles reflect industry best practice. The review of our current practices against these Principles has assisted Fortescue to focus on industry specific issues in both our management practices and our reporting. We will continue to use the ICMM principles and the supporting guidance to drive performance improvements into the future. As a signatory of the UN Global Compact, we are committed to aligning our business strategy, our culture and day-to- day operations to the principles. It also further commits us to working closely with our business partners and our supply chain. We have commenced an assessment to identify where the UNGC Principles are not already integrated into our operations. This review will continue over the short and medium term. Integration of CSR into our risk management framework Our Audit and Risk Management Committee (ARMC) is responsible for oversight of our risk management performance. This includes establishing the risk management Policy and Framework, monitoring risk management activity, monitoring changes in the risk profile of the business at a whole of business level and monitoring effectiveness of the 18 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE SOCIAL RESPONSIBILITY business control environment. The ARMC is a Committee of the Board, and is comprised of mostly independent members. The activities of the Committee are set out in a Charter approved by the Board. The ARMC together with senior executives, drive the implementation of Fortescue’s Risk Management Program (RMP). The RMP sets a framework which aligns risk management activity at all levels of the business and consists of several standards which drive identification, evaluation and rating of risk. Material business risks identified through this process are assigned to relevant business units for management and mitigation where required. In this way, there is direct accountability for effective management of risk. Our CSR risks are integrated into Fortescue’s company-wide RMP. Collaboration between our risk team and our various technical functions allows us to implement risk management strategies that are based on valid data and accurate science. This alignment in approach and integration of financial and non- financial risks into one streamlined program enables us to manage and reduce risk over the longer term. Integration of CSR into our decision-making processes Fortescue is working to ensure that CSR considerations are integrated into our corporate decision-making processes. As such, our procurement, planning and operational management decisions can help to drive CSR performance improvements. During the year we focused on reviewing our procurement frameworks and our supply chain. We updated our Procurement Policy to ensure that it aligned with our Human Rights Policy contained in the Code of Conduct. Our standard purchase order and long form contract terms and conditions were also updated to clearly articulate our commitment to business ethics and good governance. To support these policy and governance updates, and to deliver on the commitment we made last year, we engaged with all of our suppliers through a formal communication process to seek information on their Human Rights performance. We also undertook a detailed risk and spend analysis of our current procurement profile. This analysis helped us to better understand human rights and governance risks in our supply chain. The outcomes will also help to shape how we evaluate supplier performance in the future. CORPORATE SOCIAL RESPONSIBILITY Zero tolerance towards forced labour Fortescue has a business-wide policy in place to prevent, detect and remediate forced labour within our own operations, and the operations of our suppliers and business partners. The elimination of forced and compulsory labour is among the 10 principles of the UNGC. The foundation of the Fortescue policy is our Code of Conduct, which establishes the essential standards of personal and corporate conduct and behaviour expected of all who work for or with Fortescue, including directors, employees, contractors, suppliers and business partners. The Code clearly states that we recognise, respect and uphold the human rights of every individual, being at a minimum those protected by the Universal Declaration of Human Rights. We will actively seek to ensure we are not complicit in human rights abuses committed by others. Our zero tolerance policy on forced labour is reflected in our Procurement Policy and contracts. Our Procurement Policy states that “to meet our commitments we will have a zero tolerance for modern slavery, forced labour and human trafficking in our supply chain.” All Fortescue contracts for supply include a clause on forced labour and slavery, where the Contractor warrants that it has thoroughly investigated its labour practices, and those of its direct suppliers, to ensure there is no forced labour or slavery anywhere in the Contractors business or by any of the direct suppliers of the company; and that it has put in place processes, procedures, investigations and compliance systems to ensure that that this will remain the case at all times.Suspected breaches can be reported via the whistleblower hotline. Fortescue proactively seeks to understand and identify risk in its supply chains. Supply chain mapping has been undertaken to identify areas of most risk. Depending on the level of risk identified, different oversight processes are put in place. Where necessary, we have audited suppliers and worked with suppliers to ensure problems are identified and remediated. In addition, we have clearly communicated our expectations to employees and suppliers regarding zero tolerance for forced labour. This is done through our Supply Policy, the requirement of the Statutory Declaration and the contractual clause. Where issues are identified these are quickly followed up at the highest level, and steps taken to address the situation. Fortescue Metals Group Limited I Annual Report 2013 I 19 CORPORATE SOCIAL RESPONSIBILITY Case Study: Managing waste as a resource Our day-to-day operational decisions can positively influence our CSR and environment performance. Over the past year our Infrastructure Services team has taken over the management of waste at all of our sites. This streamlining of management has generated both efficiencies and cost gains for the business. Many of our waste materials have commercial value and we have adopted a new approach to managing waste. As a business we now view waste as a resource. This change in thinking has led to the implementation of effective management strategies to segregate our waste. Recycling rates at our mines have increased from less than 20 per cent of waste up to approximately 80 per cent. This change in recycling has also resulted in financial gains for the business via the sale of this material to third parties. The funds generated are used to support our community investment program. This demonstrates that proactive integration of CSR into the way we do business not only benefits our business, it also has a positive impact on the environment and our communities. A safe, healthy and engaged workforce We will foster a safety culture that aligns with our core Values and achieves a safe workplace for our employees and contractors. We will value and look after the well-being of everyone in the Fortescue family. We will nurture our high performance culture and aim to provide a workplace that is diverse, fair and empowering. Driving safety performance Fortescue continues to foster a safety culture that aligns with our business Values and our Safety Policy. As a business we are committed to continuous improvement of our safety performance and to providing a safe workplace for all of our employees, business partners and contractors. We proactively engage with our key stakeholders on the importance of safety and we have developed thorough systems and risk management practices which help us to drive our safety culture. During the year we continued to implement the Future State safety culture and action plan. This is built on the principles of pragmatic safety leadership, doing things safely, a risk-based approach, consistent verified standards and clear expectations. 20 I Fortescue Metals Group Limited I Annual Report 2013 Our Major Hazard Management Program is designed to eliminate fatality risk in our business. We continued to monitor improvements in compliance with the Major Hazard Control Standards through our audit programs at each site. We also have regular independent safety management system audits for all of our operational sites. These annual audits will help to ensure that we continuously improve and refine our standards, our culture and safety in the workplace. During the year we continued to implement our contractor management system. To drive further improvements and to increase awareness of Fortescue’s requirements we also expanded the program to cover our next tier of contractors. At our sites we also focused on behavioural-based field leadership practices. Effective and consistent leadership is a key component of delivering on our safety culture objectives. In previous years we have reported on both our Lost Time Injury Frequency Rate (LTIFR) and our Total Recordable Injury Frequency Rate (TRIFR). Moving forward, and in line with industry reporting trends, we will report only on TRIFR performance. It is however worth noting that LTIFR performance was in line with the previous year. CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Case Study: Improving well-being for our FIFO workforce In 2013, Fortescue implemented a number of strategies and events to improve the health and well- being of our Fly in, Fly Out (FIFO) workforce and families. Workers were encouraged to participate in several programs throughout the year including “Movember”, the flu vaccine program and City to Surf marathon activities. Programs are coordinated by dedicated Health and Wellness Specialists and backed by our Fortescue Chaplains who are members of every on-site community. In 2013, Fortescue continued our relationship with Act Belong Commit, a community-based campaign that encourages people to take action to improve their mental health and well-being. Building relationships is crucial to the program’s success. Fortescue maintains relationships with commercial and not- for- profit organisations including, NIB, Luxottica, Act Belong Commit and Kinetic Health. During FY13 we did not experience any fatalities and our employee and contractor TRIFR performance improved by 17 per cent to 7.6. Our safety performance over time is presented in the graph below. Fortescue was not issued with any safety related fines or penalties during the reporting period. Driving improvement in our safety performance will be a continued area of focus for the business over the short, medium and long term. Fortescue and Contractor Safety Performance r e b m u N / e t a R 16 14 12 10 8 6 4 2 0 TRIFR Fatalities Iron Ore Industry LTIFR Average 2010-2011 2011-2012 2012-2013 Fortescue Metals Group Limited I Annual Report 2013 I 21 CORPORATE SOCIAL RESPONSIBILITY Case Study: Supporting women in Fortescue Metals Group SWIFT (Supporting Women In Fortescue Together) was initiated in March 2013 by a small group of Fortescue women, keen to enhance the networking and mentoring opportunities available to women within Fortescue. The SWIFT committee recognised early that reaching Fortescue’s diverse staff would require engagement with support from both women and men at different levels within the organisation; acknowledging that supporting women is not just a woman’s job. The SWIFT Inaugural Breakfast was a great success, with more than 120 attendees filling the venue to capacity. Speeches by Elizabeth Gaines (Fortescue board member) and Danielle Bancroft (2012 winner of the Chamber of Minerals & Energy of WA “People’s Choice Award” for Women in Resources) were well received, providing insight into the challenges faced by women at different levels, working in varied disciplines. As an extension of the inaugural event, attendees were asked to provide their thoughts on what they hoped to gain through involvement with SWIFT. These insights have been applied to a strong vision statement. Our workforce profile As at the end of FY2013, Fortescue directly employed 3,752 people, with our contractors employing a further 14,536 people. We would like to acknowledge the efforts of all Fortescue people to build this company. And we thank those no longer with the business for playing their role in the ongoing transformation of Fortescue. Workforce equality and diversity During the reporting year Fortescue updated its Code of Conduct and developed an Unethical Behaviour Control Framework. These policies and frameworks work together to ensure that we provide a fair and equal workplace that is free from discrimination. Workplace diversity is important to Fortescue and we are committed to providing a balanced and inclusive working environment. We have a documented Diversity Policy and Plan that is built on our values and aligns with ASX requirements. Implementation of our Diversity Plan continued during 2013 and we were delighted to appoint our first female Director to the Fortescue Board. We maintained the proportion of women in our workforce at 20 per cent. Women currently comprise 17.5 per cent of the managers in our business, however there are currently no women on our executive management team. 22 I Fortescue Metals Group Limited I Annual Report 2013 Since our inception we have maintained a long-term commitment to increasing Aboriginal participation in the workforce through providing opportunities within our business. This approach contributes to strengthening the resilience of the communities where we operate. Our commitment has the co-benefit of driving diversity and inclusiveness in our workforce. We are happy to report that we have continued to be successful in increasing Aboriginal participation rates in the Fortescue workforce. The percentage of Aboriginal employees in our business increased again this year to 12.3 per cent against our target of 15 per cent by 2015. We have a number of mechanisms in place to help drive performance against this target – one of these, the “Five Star Program”, is explained in further detail in the case study on page 32. CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY ‘‘We remain committed to our growth targets. ‘‘ in-house trainee and apprenticeship programs to ensure we meet our future topics across the business. A total of 137 cultural awareness training sessions were held which provided 2,833 employees and contractors with essential information on our approach to cultural heritage and our local communities. We remain committed to our in-house trainee and apprenticeship programs to ensure that we are geared to meet our future growth targets. During the year we recruited 40 individuals for our mainstream apprentice program. We are well progressed towards achieving our goal of 65 mainstream apprentices by March 2014. We also welcomed a further 38 people into our trades up-skill program and 45 people into our nationally recognised (non-trades) qualification program. Our traineeships cover a variety of functions within our business, including the areas of Warehouse Operations and Process Plant Operations (Iron Ore Processing). Of the above 123 people, 74 were existing employees and 49 were new employees. Nurturing our high performance culture As a business, Fortescue continues to focus on a culture of achievement, challenging the norm and setting and achieving stretch targets. We want to ensure that our workplace culture is not only innovative, but also fully engaged and highly effective. Essential training of our employees and contractors continued throughout the year. General and role specific inductions remained a focus for the business and our commitment to essential training on safety, environment and cultural awareness was continued. This training is crucial to ensuring that our employees and contractors are well equipped to successfully and effectively deliver on their work expectations. Cost constraints on our ability to invest in non-essential training and development programs for our employees is represented by reduced investment of 2 per cent of payroll spend on training and development, compared to 4.9 per cent last financial year. During the year more than 18,735 users were added to our employee and contractor online induction system, while a total of 60,004 online inductions were completed. Safety training undertaken during the year covered topics including Job Hazard Analysis, fatigue, incident investigation and safety observations. We also continued to deliver quarterly Toolbox talks to raise awareness of key environmental issues. During the year we delivered 6,070 talks on various environmental Fortescue Metals Group Limited I Annual Report 2013 I 23 CORPORATE SOCIAL RESPONSIBILITY Case Study: “Have A Crack” campaign In August 2012, a competition was launched to find innovative and creative ideas to make Fortescue a more competitive and successful business. For employees who had yet to witness the full force of Fortescue’s innovation culture, “Have A Crack” showed them what we are all about. The competition was open to everyone. Ideas could be submitted by people working on a Fortescue site, friends, relatives and everyone else in- between. It was defined by innovation, creativity and audacity. It was about direct communication. Whether you were on the shop floor or in the corporate office, your idea went straight to the “Have A Crack” nerve centre. This meant we could shine a spotlight on the best and the brightest ideas, no matter who suggested them. More than 2,700 ideas were generated. Prizes were offered for ideas that reduced costs, but also for the most audacious and innovative. “Have A Crack” was a great way for the business to collect new ideas that solved real business problems. It also had the added benefit of generating engagement from our workforce. Fortescue continued to offer employees support for further education and training through our education assistance program. Courses covered include Certificate IV, Diplomas, Advanced Diplomas, Undergraduate Degrees and Postgraduate Qualifications including Masters’ degrees. We also offer graduate programs and leadership development programs. During the year we put our first round of leaders through a newly tailored Leadership Development Program for Fortescue’s 300+ Operational Supervisors, across Mines, Port and Rail. The program is designed to continuously develop the skills and capabilities of Fortescue’s frontline operational leaders, whilst emphasising what skills, knowledge and behaviours are required to be an effective, consistent and respected leader. A feature of this program has been a customised 360 degree feedback tool, which has highlighted the enthusiasm from Supervisors for development and feedback opportunities, provided strong feedback and encouragement for high performers, and provided a meaningful opportunity for Supervisors to collaborate with their Superintendents to achieve their key learning goals as they progress through the seven-month program. Measuring engagement Fortescue measures employee satisfaction through a number of mechanisms. Two key measures are employee turnover and employee engagement. Retaining talented employees within the context of Fly-in Fly-Out (FIFO) operations remains a challenge to our business. External economic conditions have however changed over the past year which has resulted in less competition for talent in the marketplace. Fortescue has had a lower than industry average voluntary turnover rate of 22 per cent for a number of years. This year our reported voluntary turnover rate was 9.7 per cent which is in line with our target of less than 15 per cent. This figure demonstrates that our employees are committed to the business and our future. We concluded Future Forums for employees during FY13 and a second company-wide Fortescue Values Survey was conducted during the year to track employee engagement. 24 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Case Study: Oldest evidence of traditional ancestors in the Pilbara During the year our Heritage Team made a historic and significant discovery. A rock shelter near Fortescue’s Christmas Creek mine was found to contain evidence of the oldest known Aboriginal occupation in the Pilbara. Using carbon dating analysis, archaeologists were able to ascertain that charcoal pieces excavated from the rock shelter are at least 41,000 years old. Fortescue has worked closely with the traditional owners, the Nyiyaparli People and their heritage consultants since 2006 to identify and protect significant heritage sites in the region. More than 430 square kilometres have been surveyed so far. This work has identified and recorded more than 1,800 sites, including 45 rock shelters. During 2012, Fortescue committed to funding a heritage research project with the Nyiyaparli People aimed at promoting the results of heritage work carried out on Fortescue sites to the wider community. Building community capacity and respecting cultures We will contribute to the social, economic and institutional development of the communities in which we operate. We will be the corporate citizen of choice that is welcomed by the communities that host our activities. We will respect the culture and traditions of indigenous people affected by our activities and strive to positively impact their lives. What we believe in Fortescue has a long-standing and demonstrated commitment to building community capacity. It is our aim to develop, strengthen and empower the communities within which we operate. Our efforts and the programs that we initiate aim to leave a legacy of sustainable community resilience. The social, environment, infrastructure, people and economic programs outlined on page 26 touch our local communities in some way. Over the longer term these programs aim to build capacity and generate sustained value for our local communities. To ensure that we maintain our social licence to operate, it is important that the entire Fortescue family behaves with respect and care for our local communities, in particular the cultural heritage of Aboriginal People. It is also important for us to do what we say we will do. We have a large number of community stakeholders who are either impacted by, or who influence the way that we operate. These include our people, Federal, State and local governments, communities, traditional owners of land, suppliers, customers, non- government organisations, pastoral leaseholders, investors and media. For Fortescue to remain successful in achieving our community goals, it is important that we proactively and transparently engage with all stakeholder groups. Fortescue Metals Group Limited I Annual Report 2013 I 25 CORPORATE SOCIAL RESPONSIBILITY We partner to build community capacity Host Communities and Fortescue Social • Advancing Indigenous Australians • Business incubation • Culture/arts • Fortescue Foundation • Australian Employment Covenant • Enabling Indigenous Lore tradition • VTEC • Land compensation • “I’ll Give a Day Mate” • Variety WA • Doctor housing Economic • Employment • Local business capacity building • Licences • Local content • Fees • Royalties Natural Environment • Re-investing water opportunities • Weed control • Obligations agreed with government • Heritage opportunities • Dust control Aboriginal Engagement Fortescue has had a long term commitment to reduce the disparity between Indigenous and non-Indigenous Australians and to improve the economic capacity of Aboriginal Australians. We enter into comprehensive Land Access Agreements with Traditional Landowners which provide for best practice cultural heritage management and maximise the opportunities for training, employment and business creation. Respecting Traditional Owners and cultural heritage Our business is built on respecting the culture, heritage and traditions of the Aboriginal people and communities who are affected by our activities. Our Code of Conduct formalises our commitment to enhancing the wellbeing of communities along with behaving with respect and care for people and the environment. It also commits everyone in the Fortescue family to taking responsibility for the effects of our presence, and to do what we say we will do. To ensure that all of our employees and contractors are aware of our approach everyone is required to undertake cross-cultural awareness training. Such training helps to build appreciation, respect and collaboration across our 26 I Fortescue Metals Group Limited I Annual Report 2013 People • Apprenticeships • Traineeships • Local hiring policies • Leading safe behaviours • Cultural awareness training • FIFO support from Port Hedland, Roebourne, Fitzroy Crossing and Carnarvon Built Infrastructure • Renewable energy • Residential housing in three communities • Increased accommodation capacity • The Marquee Park Cafe • Variety WA entire workforce. To ensure that our workplace is respectful, inclusive and supportive we also have Aboriginal mentors and Indigenous Development Coordinators located at our sites. Our established Land Access Agreements, along with our management practices help us to uphold fundamental human rights and respect for Aboriginal communities touched by our activities. This approach is in keeping with Fortescue’s Human Rights Policy, and is aligned with the United Nations Guiding Principles on Business and Human Rights, the UNGC, the ICMM Principles and reflects applicable domestic laws within the jurisdictions within which we operate. We have Land Access Agreements in place with seven Traditional Owner groups in the Pilbara, comprising the Palyku, Kariyarra, Nyiyaparli, Bunjima, Eastern Guruma, Puuti Kunti Kuruma Pinikura and Njamal People. CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Case Study: UN visit to North Star recognises historic nature of Fortescue’s agreement with the Njamal People In August 2012 Fortescue, in partnership with the Njamal People, hosted a visit to the remote North Star magnetite project by the United Nations Special Rapportuer on the rights of Indigenous People, Dr James Anaya, and a delegation from Australia’s National Congress of First People’s. The visit was instigated by the Njamal people and followed Fortescue’s participation in the inaugural Extractive Industries Roundtable Symposium organised by the Congress and the UN. The intention was to provide Dr Anaya with insight into the unique agreement reached between Fortescue and the Njamal People. It also provided the Njamal with an opportunity to explain the importance of the relationship with Fortescue, both in terms of ensuring that mining development on Njamal traditional lands occurs with Njamal consent and that the Njamal receive long-term sustainable benefits from the development. Under the agreement, the Njamal people will joint-venture with Fortescue in a mining operation on Njamal traditional lands. Promoting economic development in our Aboriginal Communities Fortescue believes that sustainable economic development is generated by supporting Aboriginal businesses and developing economic capacity within Native Title Groups. Our Land Access Agreements support this goal by setting benchmarks for local Aboriginal content across our operations and incentivising Aboriginal business development activities. Internally, we have a number of frameworks and programs in place to assist us in meeting these commitments, such as: • Our Procurement Policy drives local content and preferences contracting arrangements with Aboriginal businesses that meet performance and price standards; • Our tender and contractor documentation requires all proposals to contain an Aboriginal Engagement Strategy, including binding commitments to Aboriginal employment, training, and local Aboriginal business capacity building. Additionally, our unique A Billion Opportunities Program aims to develop the economic capacity of Native Title Groups by delivering on business development, mentoring and training goals. Fortescue Metals Group Limited I Annual Report 2013 I 27 During the year we concluded a further 30 heritage agreements for exploration activities with other Traditional Owner groups across the Pilbara. We proactively manage cultural heritage through a team of people located across our operations including Perth, Port Hedland and at our Christmas Creek, Solomon and exploration sites. Our team includes representatives of the Traditional Owners who help Fortescue manage their heritage. The identification and management of culturally important sites is fundamental to Fortescue’s approach to sustainable operations. We have identified over 5,000 heritage sites, during extensive archaeological and anthropological surveys. Our approach ensures that Fortescue‘s operational and expansion activities comply with statutory obligations under the Aboriginal Heritage Act 1972 (AHA) and our commitment to heritage management made in our Land Access and heritage agreements. CORPORATE SOCIAL RESPONSIBILITY Billion Opportunities The Billion Opportunities Program proactively supports Aboriginal businesses that provide real job opportunities for Aboriginal people. The program has demonstrated tangible economic outcomes for Aboriginal groups. Through the program Fortescue delivered on a commitment to award $1 billion of contracts to Aboriginal contractors and joint ventures by December, 2013. These contracts enable Aboriginal businesses to participate in Fortescue’s growing operations and builds each business’ capacity and capabilities to provide jobs to Aboriginal people. Since 2010, Fortescue has awarded 102 contracts/sub- contracts worth a total of $1.11 billion to Aboriginal businesses, thus achieving our target six months’ ahead of schedule. ) ) D U A D M U $ A ( M e u $ l ( a e V u t l c a a V r t t n c a o r C t n o C d e d d r a e w d A r a s w t c A a s r t t c n a o r C t n o C D U A M $ Billion Opportunities - Contract Value Billion Opportunities - Contract Value Aboriginal Contractors Aboriginal Contractors Traditional Owners Traditional Owners Native Title Groups Native Title Groups 2010-2011 2011-2012 2012-2013 2010-2011 2011-2012 2012-2013 Billion Opportunities - Contracts Awarded Billion Opportunities - Contracts Awarded Aboriginal Contractors 2010-2011 2011-2012 2012-2013 2010-2011 2011-2012 2012-2013 Aboriginal Business Spend Aboriginal Contractors Traditional Owners Traditional Owners Native Title Groups Native Title Groups Contractor Spend Fortescue Direct Spend 800 800 600 600 400 400 200 200 0 0 60 60 50 50 40 40 30 30 20 20 10 10 0 0 300 250 200 150 100 50 0 2011-2012 2012-2013 28 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Case Study: Traditional Owners boost economic independence Martu Idja Banjima (MIB) of the central Pilbara is expanding its business offering to the mining industry, demonstrating why economic participation is better than mining handouts. A year after joining with Morris Corporation to provide catering and facilities management at Solomon, MIB purchased 25 per cent of construction signage company Corsign and established its own traffic management business which undertook work on the Fortescue Hamersley Line. “Economic participation opens up possibilities for Aboriginal businesses to use profits and skills gained from running a business to build capacity and move towards genuine economic independence that can outlast the life of a mine. The old model of mining companies paying money into trusts for disbursement by the few, rather than delivering meaningful jobs and economic participation to the many, has failed to address the disparity suffered by Aboriginal people” – Fortescue CEO, Nev Power. “Fortescue is bringing Aboriginal people and contractors to the table, which is exactly what Aboriginal businesses need. The rest is up to us to build our capacity and invest our profits into new development opportunities.” – MIB Director, Carmen Murdock. Driving local and Aboriginal employment Fortescue has a long-standing commitment to providing employment opportunities within our local communities. A regionally based workforce has benefits for Fortescue and local community economies. Many of our employees are locally-based in the Pilbara. As a business Fortescue is committed to increasing participation of Aboriginal People in employment, and this commitment is embedded in our Land Access Agreements. We actively contribute to the goals of Generation One (www. generationone.org) and have an overall target to increase the number of Aboriginal employees working in our business to 15 per cent by 2015. Our Vocational Training and Employment Centres (VTEC) provide a pathway to employment for Aboriginal People through support and training. More information on VTEC is presented in the case study on page 30. We currently employ a total of 461 Indigenous people compared to 403 in 2012. % 100 80 60 40 20 0 Percentage of Indigenous Employees Non-indigenous Employees Indigenous Employees 2011-2012 2012-2013 Fortescue Metals Group Limited I Annual Report 2013 I 29 CORPORATE SOCIAL RESPONSIBILITY Case Study: VTEC We believe strongly that Aboriginal communities should benefit from our operations through local employment. We established the Vocational Training and Employment Centres (VTEC) in 2006 to provide a pathway to employment at Fortescue and with our contractors through training and support. VTEC is a “welfare-to-work” model catering to those people with little or no work history who have been passed over by the mining industry previously. VTEC has assisted over 1,000 people with training and support since inception. We recognise the challenges facing Aboriginal People making the transition into full-time employment. The VTEC model provides a holistic approach aimed at addressing barriers to employment including driver’s licence issues, health issues, housing and personal issues, while delivering job specific training. Most importantly, we guarantee that if the trainee successfully completes the VTEC program they are assured of a job with Fortescue or one of our contractors. In 2013 we had a target to facilitate 100 graduates from VTEC training programs. This target was exceeded with a total of 105 graduates gaining employment through VTEC. Driving value through our procurement activities As a business we purchase large volumes of goods and services to support our operations at all locations. We believe we can positively contribute to regional and local communities through our procurement activities. We have been committed to driving local procurement activities for a number of years. This commitment aims to proactively build economic capacity within the Pilbara communities in which we operate. As part of this commitment we undertake the following activities: • Facilitation of tender submissions with local Pilbara businesses. • Active engagement with our major contractors to promote local business development activities through the tender process. • Development of partnerships with Federal, State and local government agencies and non-government agencies to facilitate and implement projects and initiatives on local economic development, regional issues and community capacity-building. • Development of agreed local content targets for each operation. This year was the second in which we measured and analysed our procurement spend. Whilst our overall project-based expenditure with suppliers has peaked as we head toward project completion, we will continue our commitment to supporting the Pilbara and Australian economies through our operational spend. This performance aligns with the commitment made last year to provide local Pilbara community businesses with opportunities to provide goods and services to our Chichester Hub, Port and Rail network operations. Fortescue Supplier Spend Profile Local Suppliers - Pilbara Overseas Suppliers Australian Suppliers s n o i l l i B $ D U A 12 10 8 6 4 2 0 30 I Fortescue Metals Group Limited I Annual Report 2013 FY11/12 FY12/13 CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Our Procurement Policy underpins our proactive engagement with contractors that demonstrate a commitment to the employment and capacity development of Aboriginal people. Their performance is also monitored through the Aboriginal Engagement Strategy that each contractor needs to submit to us as part of the tendering process. This approach leads to beneficial outcomes for both parties and is in alignment with our values to engage contractors that share our vision for Aboriginal employment. Our contractors currently employ a further 528 Aboriginal people bringing the total to 989 across our workforce. 700 600 500 400 300 200 100 0 Jan- Mar 2011 Apr- Jun 2011 Jul- Sept 2011 Oct- Dec 2011 Jan- Mar 2012 Apr- Jun 2012 Jul- Sep 2012 Oct- Dec 2012 Jan- Mar 2013 Apr- Jun 2013 Aboriginal Employed - Contractors 115 174 304 478 544 630 527 301 427 528 Aboriginal Employed - Fortescue 259 287 308 327 356 397 406 422 428 461 Investing in and developing our communities Fortescue is committed to aligning our community partnerships and investment activities with our own goals and those of our regional and local communities. As a result, all of our activities have a strong focus on local employment, capacity and infrastructure building, and Aboriginal development. At an organisational level we support community partnerships with GenerationOne and the Australian Children’s Trust (ACT). The goals of these two organisations are strongly aligned with Fortescue’s goals to end the disparity between Indigenous and non-Indigenous Australians. Fortescue is a foundation partner of GenerationOne and a key contributor to the success of the ACT. More information can be found on these programs and their missions at www.generationone.org.au and www.australianchildrenstrust.org.au. During the year we made a commitment to support the construction of the re-developed Ronald McDonald House in Perth. We are supporting this charity because of the wonderful assistance it provides to regional families whose children are required to attend Perth for hospitalisation and treatment. Personal commitments of $2 million and $400,000 were made by the Forrest and Meurs families respectively. Fortescue has a fundraising campaign in place to match this generous contribution by 2015. Ronald McDonald House will provide much needed support to our regional employees and communities when their children require medical treatment in the future. More information can be found at www.rmhc.org.au/building-new-house. At a regional level we actively support the Western Australian Government’s Pilbara Cities Vision and our development and infrastructure investment activities closely link to this initiative. The Pilbara Cities Vision focuses on developing a residential workforce, local employment and the training and development of Aboriginal people. We have made a number of key investments through funding of the following initiatives: • Investing over $100 million in the construction of new houses in Port Hedland and budgeting for a five year housing construction program. Fortescue has also invested in existing lots in South Hedland, Tom Price and Roebourne. We continue to seek additional lots to support our Pilbara residential workforce requirements. • Contributing funds to enable the upgrade of 36 kilometres of road in the Shire of East Pilbara. • Helping a children’s charity to build a house in Port Hedland, with the profit from the sale to be used by Variety WA towards its programs for local children. • Establishing a world class iron ore metallurgical testing plant at Newman that will help increase local employment opportunities and local community business opportunities. • Establishing and maintaining Vocational Training and Employment Centres at South Hedland and Roebourne, which provide work readiness, skills training, employment programs and support to assist Aboriginal people to move into jobs with Fortescue. Fortescue Metals Group Limited I Annual Report 2013 I 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CORPORATE SOCIAL RESPONSIBILITY Case Study: Five Star Program Our Five Star Program helps us to deliver on our long-standing goal of ending the disparity between Aboriginal and non- Aboriginal Australians. The program provides opportunities for Aboriginal people, in particular our Aboriginal employees and those with whom we have Land Access Agreements, to obtain skills training and education. The Program consists of five schemes which are: • Fortescue Aboriginal Scholarship Scheme, providing secondary education support. • Fortescue Aboriginal Vocation Scheme, a school-based traineeship during which recipients are encouraged to complete years 11 and 12 while completing a Certificate II. • Fortescue Aboriginal Cadetship Scheme, linking students enrolled at university with Fortescue to provide work placements and ongoing employment once they finish their studies. • Fortescue Aboriginal Leadership Scheme, including a Frontline Manager Program and a Leadership Recognition Award. • Fortescue Tertiary and Vocational Scholarship Scheme. We currently have 24 participants in the Five Star program and we aim to increase this to 40 in FY14. We believe this program will help us to further support Aboriginal Australians while contributing positively to our culture. • Supporting a government housing initiative to attract and retain more doctors to Port Hedland. • Sponsorship of the Hockey Australia National Indigenous Program, initially piloted at Roebourne, which is assisting the local school to deliver positive school student performance and behavioural change through sport. • Sponsorship of the South Hedland Swans Football Club to help provide positive behavioural change to potential candidates of the VTEC program through sport. We also have an active Community Support program Fortescue Helping Others, which supports projects, groups and initiatives that have a positive impact in the community. Grants of up to $5,000 are available to eligible applicants to support community projects within the Council boundaries of the Town of Port Hedland, the Shire of East Pilbara, and the Tom Price area. We focus on support of community projects which embrace: • Education and training • Improving quality of life • Encouraging healthy living • Indigenous capacity building • Empowering community members and leaders • Encouraging community involvement • Opportunities and development for children and youth • Connect residents to their community • Community safety • Environmental responsibility Last year we committed to provide grants to community organisations within Port Hedland, Tom Price and Newman. During the year we provided a total of almost $100,000 in community grants to Pilbara organisations under the Fortescue Helping Others Program. Eligibility is determined based on established criteria, which are outlined by our Community Support policies available at www.fmgl.com.au. Case Study: Supporting the Royal Flying Doctor Service Fortescue has long recognised the importance of the Royal Flying Doctor Service (RFDS) in providing primary health care and 24- hour emergency services to those who live, work and travel in rural and remote communities within the Pilbara, and wider Australia. During the year Fortescue donated more than $93,000 to the RFDS. This was achieved through the joint fundraising efforts of our Solomon team, our Christmas Creek expansion project safety program, and the sale of recyclable scrap metal at our operational sites. The funds raised by Fortescue will be used by the RFDS to purchase a portable critical care monitor, an infant incubator and three video laryngoscopes. 32 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Case Study: Rolling up our sleeves More than 30 representatives from Fortescue and Pilbara Institute rolled up their sleeves and put their handyman skills to work during the company’s inaugural working bee at the Minurmarghali Mia campus in Roebourne. The campus is Pilbara Institute’s major training and education facility in Roebourne as well as the Roebourne arm of Fortescue’s VTEC. Volunteers helped to tidy up the grounds, improve the gardens and replace damaged fencing and paving. The Roebourne working bee was inspired by Fortescue Chief Executive Nev Power’s recent involvement in a similar event in Aurukun in western Cape York, Queensland. Mr Power, along with a number of business and political leaders, swapped his suit for a polo shirt and working boots to help rebuild a library for the local Aurukun school. Case Study: Building safer roads In late 2012, Fortescue delivered the Port Hedland community a safer, more efficient way of crossing the company’s railway on the Great Northern Highway. This was achieved through the construction of a new vehicle overpass. This infrastructure project reflects Fortescue’s ongoing commitment to the community of Port Hedland. It will remove long delays waiting for Fortescue trains to cross the Great Northern Highway. The overpass was built in collaboration with Main Roads Western Australia and followed a period of community consultation in 2011. A public observation platform was also constructed to enable tourists and the community to view Fortescue at work. The existing section of the Great Northern Highway that was disturbed during the construction process was rehabilitated in line with Fortescue’s commitment to the environment. Case Study: Recognition of our support During the year, Fortescue was honoured to receive Lifeline WA’s ”Corporate Contribution Award”at the 25th Lifeline WA Report to the People. The award recognises outstanding efforts in raising awareness and funds to support people in crisis and suicide prevention. Lifeline’s major fundraising event for last year was the Walk for Hope, instigated by one of our mine operators from Cloudbreak who was personally touched by the tragedy of suicide. The long walk of 1000kms from Carnarvon to Perth raised $120,000 for suicide awareness and prevention. Lifeline WA delivers services that aim to prevent suicide, support people in crisis and create opportunities for emotional wellbeing. They provide 24/7 telephone crisis support, education programs, information and resources for help seekers and caregivers and more, all of which are dependent on community contributions, corporate partnerships and fundraising. For more information on Lifeline WA visit www.lifelinewa.org.au. Fortescue Metals Group Limited I Annual Report 2013 I 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013CORPORATE SOCIAL RESPONSIBILITY Reducing our environmental impact We are committed to managing our environmental impacts and meeting our licence requirements. We take a precautionary approach to our environmental challenges and will invest in initiatives and technologies that not only make good business sense but also reduce our environmental impact. During the year we published our fifth Public Environment Report. The report provides a detailed synopsis of our performance in the areas of approvals and compliance, energy and greenhouse, waste management, water management, air quality, habitats protected and restored, environmental training and awareness, and our research. The highlights are summarised in this report and the full report is available at www.fmgl.com.au. Environmental management systems Our Environment Policy outlines our mission to maintain sound environmental management procedures to minimise our impact. The overall objectives of this Policy are achieved with the implementation of our management system and subject matter specific management plans. Our environmental commitments also align with those required by the ICMM and UNGC Principles. Last year we committed to the continued implementation of our ISO 14001 aligned environmental management system. This system helps to provide all of our operations with effective environmental management that is built on the principles of assessment, control and monitoring. We have worked to embed environmental management into each stage of our project life cycle. As a business we will remain focused on using technology to reduce our environmental impacts and to leverage business and cost efficiency gains. Environmental approvals and compliance Fortescue’s operations are governed by the conditions set out in the Ministerial statements, licences and approvals issued by various government bodies. These conditions require us to meet standards of effective environmental management, planning and performance. Management Plans that assist us to meet these conditions are available at www.fmgl.com.au. During 2012 there were a small number of non-compliances with monitoring and reporting obligations. These were either addressed with regulators at the time of occurrence or summarised in annual report submissions to various authorities including the Office of the Environmental Protection Authority and the Department of Environment Regulation. None of these non-compliances resulted in fines or regulatory sanctions. 34 I Fortescue Metals Group Limited I Annual Report 2013 Greenhouse and energy Fortescue is committed to complying with all greenhouse and energy legislation and regulatory requirements, and has had robust reporting processes in place for several years. Fortescue reports its performance annually under the Australian Federal Government’s National Greenhouse and Energy Reporting (NGER) Act. It is also a participant in the Federal Government’s Energy Efficiency Opportunities (EEO) program, designed to identify energy savings and efficiency measures. The EEO program fits well with Fortescue’s existing culture of frugality in seeking to run our operations as efficiently and cost-effectively as possible. Each year our total emissions, energy use and energy production’s independently audited. Fortescue is most affected by the Australian Government’s carbon pricing mechanism via the reduction in the fuel tax credit offered to offroad users of liquid fuels, in particular diesel fuel used across our mining operations. We are also affected by the pricing impact on third party electricity generators, passed through to Fortescue in locations where we purchase electricity from the grid. Fortescue’s Greenhouse Gas (GHG) and energy use performance is reported to the Federal Government on a financial year basis. Fortescue’s total Scope One and Two GHG emissions for the 2012-2013 reporting period were 1.43 million tonnes of carbon dioxide equivalent (CO2e) which was a net increase of 27 per cent over the previous 12 months. Although our total GHG emissions increased over the year, of particular note is the impressive reduction of both the Energy Use and GHG intensities associated with the Company’s operations. Both intensity indicators decreased by almost seven per cent during the year which is attributed to the commencement of operations at Solomon project, the ramp up of production at our Chichester mines and the overall increase in utilisation and efficiencies of supporting infrastructure. Mainline rail duplication has increased the effective delivery of ore to the two new inload circuits at our port while revised mining methods at the Chichester’s – to significantly reduce our strip ratios – has assisted in the reduction of emission intensities. Our performance over time is presented in the graphs below. In the next few years intensities are expected to decrease further as mining operations and supporting functions continue to refine processes and deliver efficiencies. CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Energy Use Intensity 35,000 30,000 25,000 20,000 ,15,000 10,000 5,000 0 f o s e n n o t n o i l l i m / d e m u s n o c y g r e n e f o J G i d e p p h s d n a d e l i a r , d e s s e c o r p , d e n m i l a i r e t a m 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 GHG Emissions Intensity Scope 2 intensity (EMM) Scope 1 intensity (EMM) 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 i d e p p h s d n a d e l i a r , d e s s e c o r p 2,500 3,000 1,5000 1,000 500 0 , d e n m i l a i r e t a M f o s e n n o t n o i l l i m / e 2 O C f o s e n n o T Water Groundwater management is an integral part of Fortescue’s mining operations. Groundwater abstraction is required to lower the water level, allow access to the ore body and meet water use requirements for the mine. At the Chichester Operations, dewatering substantially exceeds the mine water use requirements. A managed aquifer recharge system called Papa Warringka (Nyiyaparli for Water in the Ground), which effectively returns excess water to the groundwater system, is employed to conserve valuable brackish water and mitigate potential environmental impacts associated with surface discharge of water and groundwater level drawdown. In operation since 2008 at Cloudbreak and expanded to Christmas Creek in 2011, Papa Warringka currently abstracts approximately 100 GL/a and returns 70 GL/a to the groundwater system, with a net abstraction of approximately 30 GL/a. This innovative achievement has been recognised by the International Water Association’s prestigious Global Innovation Award for Water Management and Infrastructure, and is highly regarded by government regulators and Indigenous stakeholders as an example of best practice. Construction water supply activities are planned to transition to operational dewatering and mine water supply activities in late 2013. Fortescue Metals Group Limited I Annual Report 2013 I 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CORPORATE SOCIAL RESPONSIBILITY Case Study: Driving progress on rehabilitation It is our objective to integrate corporate responsibility and environmental thinking into the way we do business. In the past year we have had great success through this integrated thinking and decision-making in the area of rehabilitation. Land clearance for rail infrastructure results in a number of “borrow pits” being generated. These pits of temporarily disturbed land are used for earthworks during construction. As part of our new rail construction contract we integrated the requirement for rehabilitation into our payment milestones. This upfront thinking has driven 90 per cent completion of rehabilitation during construction activity rather than leaving the work to be completed at the end of the process. Biodiversity management and research Fortescue is committed to conserving the biodiversity of plant and animal life in the regions within which we operate. We also use integrated land management approaches in our planning to ensure that our rehabilitation practices are integrated throughout the stages of our mining life-cycle. Fortescue’s land impact includes exploration drilling to identify and measure the presence of mineral deposits, excavation of operational mining pits, and land clearance for infrastructure and transport development. Because land clearance for infrastructure purposes is long-term or permanent, we ensure that we place our support infrastructure in locations that will minimise the need to disturb existing habitats. Rehabilitation is typically undertaken using topsoil and waste rock stockpiles removed at the time of initial land disturbance. Using this approach we remove the need to transport additional materials to the site of rehabilitation. 2012 saw the execution of approximately two years of research into material characterisation and landform design with the commencement of large scale rehabilitation at our Cloudbreak mine site. Three waste rock dumps were re- profiled to engineered designs in stage one of our progressive rehabilitation plans. Stage two rehabilitation programs, which include the replacement of growth medium and drainage infrastructure, are planned for delivery in 2013. 36 I Fortescue Metals Group Limited I Annual Report 2013 Prior to construction and development of any major mine site or individual operation, specialist consultants are engaged to undertake flora and fauna surveys and catalogue the species present in the region. During operation, risks to local flora and fauna are managed by Fortescue via a number of management plans and monitoring programs to assess long term biodiversity in the region. In 2012, we continued to fund and participate in research via partnerships with the University of Western Australia and Commonwealth Scientific and Industrial Research Organisation (CSIRO). Our research is focused on the unique waterways and vegetation in the local areas around our mine sites. The Fortescue Marsh forms a large part of this area. Through our research we are seeking to better understand the natural environmental balance that exists in the region and whether our operational and environmental management activities are likely to have an impact or benefit. This research will lead to a better understanding on how to focus our environmental management. It also acts as a monitoring indicator on the health of the region to ensure that we do not adversely affect the local environment. Significant funding was also provided directly to the Department of Environment and Conservation to support research programs into threatened fauna including the Northern Quoll and the Greater Bilby. CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY Case Study: Supporting Local Wildlife Management The Kanyana Wildlife Rehabilitation Centre is a not-for-profit organisation in Perth that is renowned for its commitment to caring for sick, injured, orphaned and displaced native wildlife. The Centre treats more than 2,000 animals each year with support from 307 volunteers and just two full-time employees. In addition to their outstanding work with wildlife, Kanyana received the Bethanie Medallion in November 2011. The Bethanie Medallion is an honorary citation presented in recognition of an individual or organisation having a history of consistently delivering an exceptional standard of service in an area of the aged care sector. It has been demonstrated at Kanyana that victims of Alzheimer’s disease achieve an improvement in their condition when working with animals. Fortescue donated over $30,250 to the Centre through funds raised from Fortescue’s scrap metal recycling program. The funds will be used to refurbish the Centre’s reptile room. Case Study: Samphire Research North Western Australia has many diverse and abundant populations of Samphire species, with some being unique to the region and having limited documented knowledge. Fortescue has a long-term research funding partnership with the University of Western Australia to develop an increased knowledge base on Samphire species in the vicinity of the Fortescue Marsh. Our Samphire research has been ongoing since as early as 2008. The results of this series of research have been undertaken as a UWA PhD thesis. Fortescue’s Samphire studies aim to document the general characteristics of Pilbara Samphire species and make specific research on the tolerance of Samphire to stresses caused by changes to the water level and salinity in the surrounding environment. This research informs our environmental risk assessments when determining safe levels of groundwater quality that will support local vegetation. It also seeks to identify “early warning indicators” of vegetation stress to enable Fortescue to identify if and when vegetation is deteriorating and take appropriate action where possible. Fortescue Metals Group Limited I Annual Report 2013 I 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013CORPORATE GOVERNANCE Contents • Overview of Governance at Fortescue • Board of Directors • Board Committees • Engagement with Stakeholders • Risk Management • Conduct of Business • Market Disclosures • Compliance with Corporate Governance Standards 38 39 44 46 47 48 48 48 1. Overview of Governance at Fortescue The essential elements of Corporate Governance at Fortescue are: Transparency Being clear and unambiguous about the company’s structure, operations and performance, both externally and internally, and maintaining a genuine dialogue with, and providing insight to, legitimate stakeholders and the market generally Corporate accountability Ensuring that there is clarity of decision making within the company, with processes in place to ensure that the right people have the right authority for the company to make effective and efficient decisions, with appropriate consequences delivered for failures to follow those processes Stewardship Developing and maintaining a company-wide recognition that the company is managed for the benefit of its members, taking reasonable account of the interests of other legitimate stakeholders Integrity Developing and maintaining a corporate culture committed to ethical behaviour and compliance with the law. The governance structure at Fortescue is represented by the following diagram. 38 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE GOVERNANCE CORPORATE GOVERNANCE CORPORATE GOVERNANCE Shareholders Board of Directors Ensures appropriate Corporate Governance Practices are in place Board Remuneration and Nominations Committee Responsible for remuneration policy and practice and Board Member Nominations Board Audit and Risk Management Committee Responsible for all matters related to financial reporting, audit and risk management Chief Executive Officer The Board delegates authority to the CEO for all matters that are not reserved for the Board or one of its committees Executive Committee Fortescue Corporate Governance practices are driven by the extensive experience and diverse capabilities of our Board and Executive Team. They are informed by our commitment to long term sustainability, our obligations to stakeholders including regulatory authorities, and clear delegations of authority. This is all underpinned by our culture and supported by policies relevant to occupational health and safety, the environment and social and governance responsibilities. Alignment with our Corporate Governance Practices is assured by independent internal and external audit functions, dedicated health and safety and environmental compliance functions and well defined accountability and reporting lines. 2. Board of Directors 2.1 Role and Responsibilities The Board is responsible to the shareholders for the performance of the Group. The Board’s focus is to enhance and protect the interests of shareholders and other key stakeholders and to ensure that the Group is properly managed. The Board understands the critical importance of a strong and healthy working relationship between it and the executive management team and works hard to foster and grow that relationship. The Board ensures that the management team is appropriately qualified and experienced to discharge their responsibilities. The Board has established a Statement of Matters Reserved for the Board which states that the key responsibilities of the Board are as follows: • • • • • • • • • Appointing, evaluating the performance of, rewarding and if necessary removing the Chief Executive Officer (CEO); Developing corporate objectives and strategies with management and approving plans, new investments, major capital and operating expenditures and major funding activities proposed by management; Monitoring performance against defined performance expectations and reviewing operational information to understand at all times the state of health of the Group; Overseeing management of business risks, including safety and occupational health risks, environmental management issues and community development issues arising from our interaction with the several communities living or located in our geographic areas of operation; Satisfying itself that the annual financial statements of the Group fairly and accurately disclose the financial position and financial performance of the Group; Satisfying itself that there are appropriate reporting systems and controls in place and gain acceptable levels of assurance that proper operational, financial, compliance, risk management and internal control processes are in place and functioning appropriately. Further, approving and monitoring financial and other reporting; Gaining assurance that appropriate audit arrangements are in place; Ensuring that the Group acts legally and responsibly on all matters and gaining assurance that the Group has adopted an appropriate Code of Conduct and that Group practice is consistent with that Code; and Reporting to and advising shareholders. Fortescue Metals Group Limited I Annual Report 2013 I 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013CORPORATE GOVERNANCE The Board has also established Delegations of Authority for matters delegated to the authority of the CEO and hence the CEO remains accountable to the Board through those delegations for the performance of the Group. Whilst the CEO remains accountable to the Board, he is free to make whatever decisions he believes are appropriate for the business within the boundaries established by the Board. A key focus of Board meetings is monitoring the decisions of the CEO. Appropriate time is allocated during Board meetings for consideration of the CEO’s report to the Board on key operational issues and progress towards achievement of corporate objectives. The Board has established the key performance indicators against which the performance of the CEO is evaluated. These KPI’s are discussed in the Remuneration Report in this Annual Report. Both the Statement of Matters Reserved for the Board and the Delegations of Authority are reviewed annually to assess continued relevance and to identify any areas requiring improvement or change. Where changes are required to these documents, such changes are approved by the Board. The Board and each of its two primary committees have established a process to evaluate their performance annually. The process is based on a formal questionnaire with the Chair in each case leading the evaluation process supported by the Company Secretary. The results and recommendations from the evaluation of the committees are reported to the Board for further consideration and action where required. At Board level the entire Board agrees improvement actions where appropriate and these are acted upon utilising support from the Company Secretary. The individual performance of directors is considered during the Board and Committee performance evaluation process in addition to ongoing consultation between the Chairman, Deputy Chairman and the relevant directors as required. 2.2 Board Composition Under the company’s Constitution, the Board must have a minimum of three and a maximum of twelve directors. No director, other than a managing director, may retain office without re-election for more than three years or past the third annual general meeting following the director’s appointment, whichever is the longer. Additionally, any new director, with the exception of the Managing Director, appointed by the Board must retire and may seek re-election in the year of appointment. The Board believes that its composition represents an appropriate balance of executive and non-executive directors to achieve the promotion of shareholder interests and governance of the business effectively. The Board also has access to senior executives who attend Board meetings and Board Committee meetings by invitation and who are available at other times as required by Board members. The directors of the Group during the year were: Name Andrew Forrest (Chairman) Herb Elliott (Deputy Chairman, Lead Independent Director) Graeme Rowley Geoff Brayshaw Period of Office Full Year Full Year Full Year Full Year Owen Hegarty Mark Barnaba Geoff Raby Herbert Scruggs Neville Power Cao Huiquan Elizabeth Gaines Peter Meurs Ken Ambrecht Full Year Full Year Full Year Full Year Full Year Full Year From 22 February 2013 From 22 February 2013 To 14 November 2012 Retiring and seeking re-election in 2013 No No No Retiring and will not be seeking re-election at the 2013 AGM No Yes No No N/A No Yes Yes N/A 40 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE GOVERNANCE CORPORATE GOVERNANCE Changes to the composition of the Board during the year are summarised below: • • • Ken Ambrecht retired as a director of the company on 14 November 2012; Elizabeth Gaines was appointed as a non-executive director on 22 February 2013; Peter Meurs was appointed as an executive director on 22 February 2013; The primary driver for the Board in seeking new directors has been, and continues to be, the skills, experience, knowledge and other important attributes which are relevant to the needs of the Board in discharging its responsibilities to shareholders. As with all roles in the company, our policy is to recruit the best person for each role regardless of race, gender, age, physical ability, sexuality, nationality, religious beliefs, or any other factor not relevant to their competence and performance. The Board is committed to ensuring that an environment of equal opportunity is in place and that all decisions are based on merit. The Board has implemented a diversity policy and measurable objectives which reflect Fortescue’s commitment to ensuring that there are no impediments to diversity at any level of the company. The policy can be accessed through the corporate governance section of the company’s web site. Fortescue’s workforce gender profile is summarised below: Whole of Fortescue Senior Executive Board Members Female 750 1 1 Female % 20.0 3.2 8.3 Male 3,001 30 11 Male % 80.0 96.8 91.7 The measurable diversity objectives established for the 2013 financial year and their current status is summarised below: Objective Area Objective Measure Current Status Governance Implement an Equity and Diversity Policy that complies with Legislative requirements. Policy developed and communicated to the business. Policy loaded on intranet and communicated to employees. Implement a Complaints Procedure that is compliant with Fortescue’s Values and meets Legislative requirements. Complaints procedure in place. Whistleblower hotline reporting procedure in place. Investigation process for EEO, Harassment and Bullying in place. Prepare and submit annual EOWA Report for Fortescue. Quality report submitted on time annually. EOWA Report submitted. Leadership Training Establish Executive Mentoring Programs for groups with minorities in leadership roles Integrate Equity and Diversity Training into Induction Programs for employees and contractors. Mentoring Program in place. Training incorporated into induction programs. Create an online Equity and Diversity Training package for leaders and employees. Online training package for leaders and employees operational. Communicate and reinforce the Equity and Diversity Policy to the whole workforce. Workforce and contractors have attended a training session. Five Star program implemented for Aboriginal up and coming leaders in the business. RESPECT training program now included in all formal training and induction process. RESPECT online training program being developed. RESPECT training program now taught to over 1,100 employees. Policy and Procedure Develop and implement flexible working arrangement guidelines. Policy developed and approved. Flexible Work Arrangement Guidelines developed, to be implemented. Develop and implement a paid parental leave policy. Policy developed and approved. Parental Leave Policy introduced 1 January 2013. Fortescue Metals Group Limited I Annual Report 2013 I 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CORPORATE GOVERNANCE 2.3 Skills, Knowledge and Experience of Directors The Board believes that a diverse and relevant range of skills, backgrounds, knowledge and experience is necessary at Board level to ensure effective governance of the business. This means that the Board maintains a focus on its composition, thereby working to ensure that the executive and non-executive directors continue to have an appropriate balance of skills, experience and independence. Retention of corporate knowledge is also important to the Board, so there is also a focus on achieving an appropriate level of retention of corporate knowledge whilst gaining access to new ideas and experience that are relevant to the business. 2.4 Terms of Appointment Directors, with the exception of the Managing Director, are required to retire by rotation at least once every three years and are able to offer themselves for re-election. The Board has adopted a letter of appointment that contains the terms on which directors are appointed, including the basis of remuneration. The letter can be accessed through the corporate governance section of the company’s web site. Directors are expected to contribute to the Company primarily relating to the matters set out in Statement of Matters Reserved for the Board, which can also be accessed through the corporate governance section of the company’s web site. In addition, directors are expected to contribute to the business of the Board committees where they are members of a Board committee. It is recognised that directors have a diverse range of skills, experience and knowledge and they are expected to contribute their considerable expertise at the boardroom table and at other times as required. Directors are expected to act independently by challenging the status quo constructively, to act ethically in all dealings and assist in setting standards for the Group, as well as being involved and contributing to all important decisions before the Board. Directors are expected to comply with all requirements imposed upon them by the Corporations Act 2001, ASX Listing Rules and the company’s Constitution, a copy of which can be obtained from the corporate governance section of the company’s web site. The letter of appointment also provides clear direction about the amount of time that directors are required to commit in order to adequately discharge their responsibilities as directors. It is Fortescue practice to allow its non-executive directors to accept appointments outside the group with prior approval of the Board. The commitments of non-executive directors are considered by the Board prior to a director’s appointment to the Board and are reviewed annually. Prior to appointment, or offering themselves for re-election, non-executive directors are required to specifically acknowledge that they have the time available to fully discharge their responsibilities to the Group. 2.5 Chairman The Chairman of the Group has a primary responsibility to lead the Board and promote the interests of the Group, both internally and in the broader business context. A key part of the Chairman’s role is to develop a cohesive Board which operates effectively in protecting shareholders interests and maintaining strong relationships with the CEO and his executive team. Andrew Forrest, the founder of Fortescue, was appointed to the role of Non-Executive Chairman by the Board in August 2011. Mr Forrest succeeds Mr Herb Elliott as Chairman and was previously the CEO. Mr Forrest, whilst being a non-executive director, is not an independent director due to his previous role as CEO and his significant shareholding in the company. Mr Herb Elliott is the lead independent director in the role of Deputy Non-Executive Chairman. 2.6 Independence All Fortescue Directors have an obligation to be independent in judgment and actions. The Board believes that having a majority of independent directors is important in order to ensure that the interests of shareholders are always at the forefront when important decisions are made by the Board. Directors are considered to be independent if they satisfy established criteria, including the following: • They are a non-executive director of the company. Any fees paid to them by the Group for services provided are not of such amounts that could make the director reliant on such remuneration. Directors must have no other material contractual relationships with the Group other than as directors of the Group; 42 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE GOVERNANCE CORPORATE GOVERNANCE • They are not a substantial shareholder of the company, this being defined in the Corporations Act as holding more than 5% of the voting shares of the company; • They have not been employed in an executive capacity by the Group or there has been a period of three years between ceasing such employment and serving on the board • They have not, within the last three years, been a principal of a material adviser or consultant to the Group; • They are not a material supplier of the group, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; and • They are free from any interest which could reasonably be perceived to materially interfere with their ability to act in the best interests of the Group. In essence the above guidance is designed to ensure that all directors are able to act in the best interests of the Group at all times. Directors are required to disclose circumstances that may affect, or be perceived to affect, their ability to exercise independent judgement so that the Board can make regular assessments of independence. If a circumstance arises whereby a director may be required to consider a matter in which the director has a material personal interest, that director ceases to be involved in the decision making regarding that matter. The Board has ten non-executive directors. Of the ten non-executive directors, based on the above criteria, seven are considered to be independent and three are considered to be non-independent. The Board believes that it has independent directors involved in all areas of Board activity where director independence is critical, including chairmanship via the deputy chair and involvement in the various Board committees. The table below shows directors who are considered to be independent and non-independent: Director Andrew Forrest Herb Elliott Geoff Brayshaw Owen Hegarty Cao Huiquan Elizabeth Gaines Independent (Yes/No) No Yes Yes Yes No Yes Director Graeme Rowley Mark Barnaba Geoff Raby Herbert Scruggs Nev Power Peter Meurs Independent (Yes/No) No Yes Yes Yes No No As Deputy Chairman, Mr Elliott has been appointed as the Lead Independent Director to represent the interests of shareholders where the Chairman is unable to do so due to his non-independent status. The Deputy Chairman’s role includes the following responsibilities: • Chairing the Board and shareholder meetings when the Chairman is unable to do so; • Representing the Board as the Senior Independent Director when the Chairman is unable to do so due to his non independent status; • Acting as principle liaison between the Independent Directors and the Chairman; and • Approval of meeting agendas and quality of information provided to the board. Transactions during the year which are classified as related party transactions with directors or director related entities pursuant to International Financial Reporting Standards are disclosed in the notes to the financial statements. 2.7 Use of Information The Board has implemented a Code of Conduct designed to ensure that all directors and employees of the Group act ethically and do not use confidential information for personal gain. 2.8 Independent Advice Directors and Board committees, in connection with the discharge of their responsibilities, have the right to seek independent professional advice at the expense of the company. Prior written approval of the Chairman is required in these circumstances, but such approval cannot be unreasonable withheld. Fortescue Metals Group Limited I Annual Report 2013 I 43 CORPORATE GOVERNANCE 2.9 Remuneration Details of the remuneration policies and the remuneration paid to directors (executive and non-executive) are set out in the Remuneration Report in this Annual Report. 2.10 Meetings The Board meets as often as necessary to fulfil its role. Directors are required to allocate sufficient time to the Group to discharge their responsibilities effectively, including adequate time to prepare for Board and Board committee meetings and in joining visits to the Group’s operational sites. During the current year the Board met sixteen times. Generally Board meetings are of one day’s duration and Board committee meetings precede Board meetings on the previous day. In addition, Board members hold meetings with management as required. 2.11 Company Secretary The Company Secretary is appointed and removed by the Board and is responsible for establishing and maintaining appropriate support mechanisms to enable the Board to function effectively. The Company Secretary is also responsible for ensuring that Board procedures are complied with and advising the Board on governance matters. All directors have access to the Company Secretary for advice and support services as required. In addition to these responsibilities, the Company Secretary is also responsible for oversight of the share registry services provided by Link Market Services. 3. Board Committees The Board has established committees to assist in the execution of its duties and to ensure that important and complex issues are given the detailed consideration they require. The primary committees of the Board are the Remuneration & Nominations Committee and the Audit & Risk Management Committee. The Board has also formed a Finance Committee that meets as required to provide guidance and oversight for management on behalf of the Board, when major financing initiatives are underway or being finalised. The primary committees have their own Charters approved by the Board, and under which authority is delegated by the Board. Each Committee is required to report the outcomes of its deliberations to the Board so that the Board is fully informed on all important matters before matters are resolved. The Company Secretary provides support services to each committee. Committee meeting agendas, papers and minutes are made available to all Board members. 3.1 Remuneration & Nomination Committee The Remuneration & Nominations Committee met five times during the year. Details of committee members are shown in the table below: Name Mark Barnaba (Chairman) Herb Elliott Andrew Forrest Owen Hegarty Herbert Scruggs Ken Ambrecht Term Member for full year Member for full year Member for full year Member for full year Member for full year Member to 14 November 2012 Status Independent non-executive director Independent non-executive director Non-independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Meetings Held Attended 5 5 5 5 5 3 5 4 4 5 5 2 44 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE GOVERNANCE CORPORATE GOVERNANCE The role of the committee is to assist the Board in its oversight of remuneration policy and practice and Board member nominations. The committee considers a diverse range of matters related to its role, including: • Senior executive remuneration policy; • Short term and long term incentive plans; • Chief Executive Officer, non-executive and executive director remuneration policy; • Succession planning; • Recruitment, retention and termination policies; • Nominations for Board positions and review of applicants for Board positions; and • Board Committee appointments. Full details of the committee’s activities on behalf of the Board related to remuneration matters are set out in the Remuneration Report. 3.2 Audit & Risk Management Committee The Audit & Risk Management Committee met five times during the year. Details of committee members are shown in the table below: Name Geoff Brayshaw (Chairman) Mark Barnaba Graeme Rowley Herbert Scruggs Ken Ambrecht Term Member for full year Member for full year Status Independent non-executive director Independent non-executive director Member from 8 November 2011 Non-Independent non-executive director Member from 8 November 2011 Member to 14 November 2012 Independent non-executive director Independent non-executive director Meetings Held Attended 5 5 5 5 3 5 5 5 5 2 The role of the committee is to assist the Board in its oversight responsibilities for all matters related to financial management and reporting, external audit, internal audit and risk management of the Group. The committee monitors management processes in relation to preparation of financial reports, including the annual financial statements, and the processes in relation to external and internal audit. The committee also assists the Board in regard to compliance with the ASX Listing Rules, the ASX Corporate Governance Principles & Recommendations and the Corporations Act requirements. This means that the committee reviews the annual financial statements, the adequacy of the financial control environment, applicable financial management and reporting policies (including policies relating to potential fraud and misappropriation) and developments in international financial reporting standards. The committee also monitors enterprise risk management activity and its impact on mitigating material risks to the business. The committee also monitors the work of the external and internal auditors. In accordance with the Corporations Act, the Group has appointed external auditors whose primary role is to form an opinion as to the truth and fairness of the annual financial statements. The Group appoints an external auditor who demonstrates quality of service and independence. Shareholders passed a special resolution at the 2012 AGM to appoint PricewaterhouseCoopers (PwC) as auditor of the company. The transition to PwC has been without problem. It is PwC’s policy to rotate audit engagement partners every five years in accordance with the Corporations Act. PwC attend committee meetings by invitation and report annually to the committee on its independence and the outcomes of its audit. The committee reviews the scope of the annual audit plan and related audit fees. The committee believes that a robust and risk based internal audit function is a critical part of ensuring that a strong financial risk and control environment is maintained across the Group. The committee has decided that an outsourced internal audit function best suits the needs of the Group and has appointed KPMG, Chartered Accountants, to provide the service. KPMG has been providing this service for five years. The committee approves the annual internal audit plan and monitors findings from internal audit reviews, including actions proposed by management to address issues reported by the internal auditors. Fortescue Metals Group Limited I Annual Report 2013 I 45 Fortescue Metals Group Limited I Annual Report 2013 I 45 CORPORATE GOVERNANCE 3.3 Finance Committee The Finance Committee met three times during the year. Details of committee members are shown in the table below: Name Geoff Brayshaw (Chairman) Mark Barnaba Ken Ambrecht Term Member for full year Member for full year Member to 14 November 2012 Status Independent non-executive director Independent non-executive director Independent non-executive director Meetings Held Attended 3 3 3 3 3 3 The role of the committee is to meet as required to provide guidance and oversight for management, on behalf of the Board, when major financing initiatives are underway or being finalised. 4. Engagement with Stakeholders 4.1 Shareholders The Board represents the group’s shareholders and is accountable to them for delivering value through achievement of strategic objectives and performance excellence. Shareholders are encouraged to attend the Annual General Meeting, which is the forum for shareholders to vote on key business issues, including election of directors, changes to the company’s Constitution, adoption of the Group’s annual financial statements and incentive arrangements. The Company has implemented a Continuous Disclosure and Market Communications Policy which is available on the corporate governance section of the company website. The board uses various formal and informal measures to ensure that it communicates effectively with shareholders throughout the year including; • A team of dedicated investor and media relations resources; • Regular briefings to the investment community and investor representatives; • Presentations and question and answer sessions at industry forums and conferences • Periodic newsletters, production reports and media announcements that are available either through the ASX platform or through the Company’s website; and • An email alert system that allows interested parties to register for automated alerts of ASX lodgements. 4.2 Stakeholders At Fortescue we aspire to be the corporate citizen of choice that is welcomed by communities that host our activities. To achieve this effective communication and proactive engagement with our stakeholders is critical. We communicate using a number of mechanisms that include engaging community relations professionals that are resident in communities, preferring one-on-one conversations, providing presentations to target community groups, holding displays, issuing newsletters and publishing media advertorials. Our stakeholders include our people, Federal, Western Australian and local governments, communities, traditional owners of land, suppliers, customers, non-government organisations, investors and the media. Together with our stakeholders, we align to positively manage change and secure opportunities for people, economies, the natural environment, the built environment and society. Fortescue has a strong engagement with Aboriginal people in the Pilbara, through the Native Title process as well as our Aboriginal Heritage and Vocational Training and Employment Centre teams. The company has a long-standing policy in relation to the active employment of Aboriginal people. This policy arose because of demands by Aboriginal people to gain a greater share of the opportunities presented by the mining industry. These demands have been expressed consistently by Aboriginal people and are enshrined in the seven Native Title agreements that we have established across the Pilbara. In exchange for their consent to our mining operations, Fortescue provides significant assistance to Aboriginal people in securing a job in the company. In addition Fortescue made a commitment to award $1 billion worth of contracts to Aboriginal contractors and joint ventures by the end of 2013, this commitment was achieved six months ahead of target. 46 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE GOVERNANCE CORPORATE GOVERNANCE 5. Risk Management 5.1 Risk Management Methodology The Board believes that effective management of risk and opportunity is essential to Fortescue’s success and future growth. The challenges of rapid growth, including the future expectations of stakeholders, are evident in all parts of the business. As an emerging major player in the global iron ore market, the company has developed a structured approach to the management of risk across the whole business. In essence, this approach means that all material business risks are assigned to the relevant business unit for management and accountability. This means that the enterprise risk management team is focused on working with each part of the business to assist them to identify, assess and better manage their risks and to align efforts across the entire organisation to facilitate a whole of business risk profile. Assessment of risk and development of mitigating controls are driven by what is required to achieve identified key objectives in each part of the business. These actions are driven by a desire to maintain business risks within tolerable levels. The Risk Management Programme (RMP) approved by the Audit & Risk Management Committee provides the structure within which the Group undertakes these activities. The RMP is a group wide framework comprised of six standards which are the key drivers for a consistent approach to the identification, evaluation and rating of risk. In addition, the standards provide the context and structure within which control activity is identified and evaluated. The RMP sets a framework which aligns risk management activity at all levels of the business with a three tiered focus as described below: • Achievement of the Group’s strategic, operational, developmental and corporate objectives; • Maintaining a sustainable business that meets the group’s obligations for health & safety, the environment, heritage and community; and • Building and maintaining a resilient business that is capable of achieving critical objectives in the face of extreme events which may impact business as usual conditions 5.2 Risk Management Governance The primary focus of the Group’s risk management governance structure and internal control systems is to identify, assess and mitigate material business risks with the aim of enhancing value to shareholders and protecting assets. The key forum for risk management at Fortescue is the Audit & Risk Management Committee (ARMC). The role of the Audit & Risk Management Committee has been explained earlier in this Corporate Governance Statement, including its responsibilities for enterprise risk management. 5.3 Annual Executive Declarations In accordance with the requirements of ASX Principle 7 “Recognise and manage risk” and section 295(A) of the Corporations Act 2001, an extensive annual certification process is undertaken at executive level. The process requires declarations from the most senior executives in the business to support the certifications to the Board by the Chief Executive Officer and the Chief Financial Officer pursuant to ASX Principle 7 and Section 295(A) of the Corporations Act 2001. The executive declarations are broad and consider the key elements of the control environment. In addition to providing the support for the CEO and CFO certifications as noted above, the Board, through the Audit & Risk Management Committee, uses this process as a means of identifying areas of the control environment where there are opportunities for improvement. Improvement actions identified through this process are monitored by the Committee until actions are completed. The ASX Principle 7 and Section 295(A) Corporations Act 2001 certifications by the CEO and CFO were received by the Board prior to consideration and approval of the annual financial statements for the year ended 30 June 2013. Fortescue Metals Group Limited I Annual Report 2013 I 47 CORPORATE GOVERNANCE 6. Conduct of Business 6.1 Employee Code of Conduct The Group actively promotes ethical and responsible decision making through our values and the code of conduct that embodies these values. The code can be accessed on the corporate governance section of the company’s web site. Everyone who works for or with Fortescue, including directors, employees, contractors, suppliers and business partners is expected to comply with the Code. In addition they are required to ensure that employees, contractors, suppliers and any other parties under their supervision or direction with whom we do business are aware of and comply with the Code. New employees are required to read and acknowledge the requirements of the code in writing before they commence with the company. In addition to Codes of Conduct, the Group operates a Whistleblower hotline and all matters reported are treated seriously and automatically referred to an appointed independent party for follow up. People who report incidents of misconduct in good faith will be granted the full protection of the Board of Fortescue. Unauthorised disclosure of the identity, or information from which the identity of a person who has made a report can be determined, is a breach of the Code of Conduct. 6.2 Securities Trading The Board has established a Securities Trading Policy which outlines the policy for directors and employees when trading in shares of the company. Under the policy certain people are identified as designated persons and they are required to comply with the policy with regard to explicit non-trading periods which are set around reporting periods. All other employees are subject to the normal insider trading restrictions with the policy containing a recommendation of the preferred trading periods. The policy sets out a brief summary of the law on insider trading and other relevant laws and also sets out the restrictions on dealing in securities by people who work for, or are associated with Fortescue. 7. Market Disclosures The Board understands the importance of keeping shareholders and other stakeholders fully informed of material information in relation to the Group’s activities on a timely basis. For this purpose the Group has established a Continuous Disclosure and Market Communications Policy, a copy of which is available on the corporate governance section of the company’s web site. This Continuous Disclosure and Market Communications Policy summarises the processes that have been adopted to ensure Fortescue complies with its disclosure obligations. A Disclosure Committee is responsible for the implementation of the policy. This policy applies to all directors, employees, contractors, suppliers and business partners and is reviewed annually to ensure that it remains effective in guiding disclosure in accordance with Fortescue’s disclosure obligations. With regard to general disclosures at media briefings or public presentations, only the Chairman, the CEO or their delegated person/s are authorised to issue public comments on behalf of the Group or provide journalists and members of the investment community with information. Copies of announcements to the ASX, investor briefings, half yearly financial statements, quarterly production results, the Annual report and other relevant information are posted to the company’s web site at www.fmgl.com.au. 8. Compliance with Corporate Governance Standards Unless otherwise disclosed in this Corporate Governance Statement, Fortescue complies with the ASX Corporate Governance Principles and Recommendations. 48 I Fortescue Metals Group Limited I Annual Report 2013 CORPORATE GOVERNANCE ‘‘ With the completion of the Kings mine later this year we will have spread our risk across two mining hubs comprising five mines feeding five processing facilities. ‘‘ Nev Power, CEO Fortescue Metals Group Limited I Annual Report 2013 I 49 Fortescue Metals Group Limited I Annual Report 2013 I 49 FINANCIAL REPORT Contents • Directors’ Report • Remuneration Report • Auditor’s Independence Declaration • Financial Statements • Directors’ Declaration • Independent Auditor’s Report to the Members 51 67 85 86 139 140 50 I Fortescue Metals Group Limited I Annual Report 2013 50 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013DIRECTORS’ REPORT Directors’ report Your Directors submit their report on the Fortescue consolidated group, consisting of Fortescue Metals Group Limited (the Company or Fortescue) and the entities that it controlled during the financial year (the Group or the Fortescue Group). Directors The Directors of the Company in office during the financial year and until the date of this report are as follows (Directors were in office for the entire period unless otherwise stated). Non-Executive Mr Andrew Forrest (Chairman) Mr Herb Elliott Mr Mark Barnaba Mr Geoff Brayshaw Mr Owen Hegarty Mr Cao Huiquan Executive Mr Neville Power (Chief Executive Officer) Information on directors Dr Geoff Raby Mr Graeme Rowley Mr Herbert (Bud) Scruggs Ms Elizabeth Gaines (appointed 22 February 2013) Mr Ken Ambrecht (retired 14 November 2012) Mr Peter Meurs (appointed 22 February 2013) Mr Andrew Forrest (Chairman, Non-Executive Director) Term of Office Mr Forrest was appointed Chairman of the Company in July 2003. He became Chief Executive Officer in 2005 before resigning to take up non-executive responsibilities again as Chairman (elect) in July 2011. Experience Mr Forrest is the founder, Chairman and member of the Company’s Remuneration and Nomination Committee. He is also Non-Executive Chairman of Poseidon Nickel Limited and the Australian Children’s Trust that operates, among other initiatives, GenerationOne, The Australian Employment Covenant and Walk Free, a new global campaign to end modern slavery (see WalkFree.org). Since the inception of Fortescue in 2003, Mr Forrest led the Company to its current A$13 billion market capitalisation and status as the fourth largest global iron ore exporter. As a start-up company, Fortescue’s investment in the Australian resources sector is without parallel, having spent or committed up to the present day, some US$18 billion. He is an Adjunct Professor of the China Southern University and a long standing Fellow of the Australian Institute of Mining and Metallurgy. His previous executive roles include founding Chairman, Chief Executive Officer and Deputy Chairman of Minara Resources Limited and Chairman of the Murrin Murrin Joint Venture. Non-executive roles previously included Director of the Australian Export Finance and Insurance Corporation, Director of the West Australian Chamber of Minerals and Energy and President of Athletics Australia. He has also founded and chaired a number of charities being the Australian Employment Covenant, Generation One, the Australian Children’s Trust and Walk Free. Mr Forrest has been a Trustee of the SAS Resources Trust since July 2011. Mr Forrest has extensive experience in the mining sector and has won multiple global finance awards as well as The Australian Sports Medal, The Australian Centenary Medal, the Australian Medical Society’s (WA) 2012 President’s Award and the Western Australian Governor’s Award for Citizen of the Year for Regional Development. Other current directorships (ASX listed entities): Poseidon Nickel Limited (Chairman and Non-Executive Director since July 2007). Former directorships in last 3 years (ASX listed entities): None. Fortescue Metals Group Limited I Annual Report 2013 I 51 Fortescue Metals Group Ltd I Annual Report 2013 I 2NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013DIRECTORS’ REPORT Mr Herb Elliott AC, MBE (Deputy Chairman, Non-Executive Director) Term of Office Mr Elliott was appointed as a Non-Executive Director of the Company in October 2003, Deputy Chairman in May 2005 and Chairman in March 2007. He retired as Chairman on 18 August 2011 and remains on the Board as Deputy Chairman and Lead Independent Director. Experience Mr Elliott resides as a member of the Remuneration and Nomination Committee. He was a member of the Audit Committee until he resigned from the committee in May 2011. Mr Elliott has been Chairman of Telstra Foundation Ltd and is a former Director of Ansell Ltd and Pacific Dunlop Ltd. He was the Inaugural Chairman of the National Australia Day Committee, a Commissioner of the Australian Broadcasting Commission and Deputy Chairman of the Australian Sport Commission. Mr Elliott was also a Director of the World Olympians Association. Previous executive roles include President of PUMA North America. Mr Elliott is a Doctor of the Queensland University of Technology. Other current directorships (ASX listed entities): None. Former directorships in last 3 years (ASX listed entities): None. Mr Neville Power (Chief Executive Officer) Term of Office Mr Power was appointed Chief Executive Officer of Fortescue Metals Group on 18 July 2011 after joining the company in February 2011. On 1 September 2011, Mr Power accepted an invitation of the Board to serve as an Executive Director. Experience Mr Power has an extensive background in the mining, construction and steel industries. Mr Power was previously Chief Executive Australia Operations with Thiess, where he was responsible for some of Australia’s most significant projects, with a turnover of A$4 billion per annum and 3,500 staff. He also spent over ten years in senior executive positions at Smorgon Steel Group, leading steel making, downstream processing, and distribution businesses in Australia and overseas. Mr Power has a bachelor’s degree in Engineering from the University of Southern Queensland and an MBA from the University of Queensland. Other current directorships (ASX listed entities): None. Former directorships in last 3 years (ASX listed entities): None. 52 I Fortescue Metals Group Limited I Annual Report 2013 52 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT DIRECTORS’ REPORT Mr Mark Barnaba (Non-Executive Director) Term of Office Mr Barnaba was appointed as a Non-Executive Director in February 2010. Experience Mr Barnaba serves as both Chairman of Macquarie Group, Western Australia and as Chairman, Global Resources Group, Macquarie Capital. He is also Chairman of The University of Western Australia’s Business School Board and an Adjunct Professor in Investment Banking & Finance at the UWA Business School. Mark is the Chairman of Black Swan State Theatre Company, co-founder (and previously co-executive Chairman) of Azure Capital and previously has been the Chairman of Western Power, Edge Employment Solutions, the West Coast Eagles Football Club and Alinta Infrastructure Holdings. He was also appointed by the Premier to chair the WA Steering Committee of the Commonwealth Business Forum for CHOGM in 2011. Mark attended The University of Western Australia and received a Bachelor of Commerce degree with first class honours, being awarded the JA Wood University medal for top graduate of his year. He then directly entered Harvard Business School receiving an MBA, graduating with high distinction as a Baker Scholar. Post Business School Mark spent the majority of his time with McKinsey and Company, overseas, before returning to Australia in the mid 1990s. In 2002, Mark was the joint winner of the inaugural WA Business News award for the most outstanding business leader in the State of Western Australia under the age of 40 and in 2009, was the recipient of the WA Citizen of the Year Award in Industry and Commerce. In 2012, Mark received an Honorary Doctor of Commerce from The University of Western Australia and was granted the Honorary designation FCPA from CPA Australia. Mark is a Fellow of the Australian Institute of Company Directors. Other current directorships (ASX listed entities): None. Former directorships in last 3 years (ASX listed entities): Adept Solutions Ltd. Mr Geoff Brayshaw AM (Non-Executive Director) Term of Office Mr Brayshaw was appointed as a Non-Executive Director and Chairman of the Audit & Risk Management Committee in July 2007. Experience Mr Brayshaw was formerly an audit partner with a large international accounting firm until he retired in June 2005. He has held a number of positions in commerce and with professional bodies including National President of the Institute of Chartered Accountants in 2002, Independent Director and Audit Committee Chairman of AVEA Insurance Limited, Board member of the Small Business Development Corporation and was formerly the Chairman of a Trustee Company of an Aboriginal Corporation. Mr Brayshaw is also a Non-Executive Director, Chairman of the Audit Committee of Poseidon Nickel Limited and a Fellow of the Institute of Company Directors. Other current directorships (ASX listed entities): Poseidon Nickel Limited (since February 2008). Former directorships in last 3 years (ASX listed entities): None. Fortescue Metals Group Limited I Annual Report 2013 I 53 Fortescue Metals Group Limited I Annual Report 2013 I 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT Mr Owen Hegarty (Non-Executive Director) Term of Office Mr Hegarty was appointed as a Non-Executive Director in October 2008. Experience Mr Hegarty has some 40 years experience in the global mining industry, including 25 years with the Rio Tinto group where he was Managing Director of Rio Tinto Asia and Managing Director of the Group’s Australian copper and gold business. He was the founder and CEO of the Oxiana Ltd Group (now OZ Minerals Ltd), which grew from a small exploration company to a multi-billion dollar Australia, Asia and Pacific focused base and precious metals producer, developer and explorer. Mr Hegarty was awarded the AusIMM Institute Medal in 2006 and the G.J. Stokes Memorial Award in 2008 for his achievements in the mining industry. Mr Hegarty is Executive Vice Chairman of Hong Kong listed G-Resources Group Ltd, a gold mining company. Mr Hegarty is also Chairman of Tigers Realm Minerals Pty Ltd, a private Melbourne based mining company and a Non-Executive Director of ASX listed Tigers Realm Coal Ltd. He is Chairman of EMR Capital, a private equity investment manager focussed on resources. He is a Director of The AusIMM and a member of a number of Government and industry advisory groups. Other current directorships (ASX listed entities): Tigers Realm Coal Limited (appointed as Non-Executive Director in October 2010), Highfield Resources Limited (appointed as Non-Executive Director in August 2013). Former directorships in last 3 years (ASX listed entities): None. Mr Cao Huiquan (Non-Executive Director) Term of Office Mr Cao Huiquan joined the Board as a Non-Executive Director on 27 February 2012 as the nominated director on Fortescue’s Board from Hunan Valin Iron and Steel Group Company Ltd. Experience Mr Cao graduated from Department of Physics, Beijing University in 1988 and obtained his Master Degree of Metal Physics from University of Science and Technology Beijing in 1991. He was an on-the job Ph.D. of Engineering of Central Iron & Steel Research Institute, and was enrolled in the EMBA programme, China Europe International Business School in 2009. In 1991, he joined Hunan Xiangtan Iron and Steel Co., Ltd and was appointed as General Manager in 2003. In 2005, he was appointed as General Manager of Hunan Valin Iron & Steel Co., Ltd (formerly Hunan Valin Steel Tube & Wire Co., Ltd), and then concurrently held the position of General Manager of Lianyuan Iron and Steel Group Co., Ltd since 2010. He is now the Chairman of Hunan Valin Iron and Steel Group Co., Ltd, the Chairman and CEO of Valin Iron & Steel Co., Ltd and General Manager of Valin Xiangtan Iron & Steel Group Co., Ltd. Other current directorships (ASX listed entities): None. Former directorships in last 3 years (ASX listed entities): None. 54 I Fortescue Metals Group Limited I Annual Report 2013 54 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT DIRECTORS’ REPORT Dr Geoff Raby (Non-Executive Director) Term of Office Dr Raby was appointed as a Non-Executive Director on 18 August 2011. Experience Dr Geoff Raby was Australia’s Ambassador to the People’s Republic of China (2007-2011). Prior to that, he was a Deputy Secretary in the Department of Foreign Affairs and Trade (DFAT). He has extensive experience in international affairs and trade, having been Australia’s Ambassador to the World Trade Organisation (1998-2001), Australia’s APEC Ambassador (2003-2005), Head of DFAT’s Office of Trade Negotiations and Head of the Trade Policy Issues Division at the OECD, Paris. Between 1986 and 1991 he was Head of the Economic Section at the Australian Embassy, Beijing. He has been the Chair of DFAT’s Audit Committee and served as an ex officio member of the Boards of Austrade and EFIC (Export Finance and Insurance Corporation). Other current directorships (ASX listed entities): OceanaGold Corporation and SmartTrans Holdings Limited since July 2011, Yancoal Australia Limited. Former directorships in last 3 years (ASX listed entities): None. Mr Graeme Rowley AM (Non-Executive Director) Term of Office Mr Rowley was appointed as an Executive Director in May 2003. Following his retirement from executive duties with Fortescue, Mr Rowley became a Non-Executive Director of the Company in March 2010. Experience Mr Rowley was an executive with Rio Tinto plc and previously held senior positions with Hamersley Iron and Argyle Diamonds. Mr Rowley’s previous directorships have included the Dampier Port Authority, the Pilbara Development Commission, the Council for the West Pilbara College of TAFE and the Western Australian State Government’s Technical Advisory Council. Mr Rowley is currently Chairman of the National Centre for Excellence in Desalination and he is also a Non-Executive Director of the Allied Healthcare Group. Mr Rowley has extensive experience in operational management of both iron ore ship loading facilities and heavy haul railway within the unique Pilbara environment. Other current directorships (ASX listed entities): Non-Executive Director of Allied Healthcare Group Limited. Former directorships in last 3 years (ASX listed entities): None. Fortescue Metals Group Limited I Annual Report 2013 I 55 Fortescue Metals Group Limited I Annual Report 2013 I 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT Mr Herbert (Bud) Scruggs (Non-Executive Director) Term of Office Mr Scruggs joined the Fortescue Board in August 2011 as a Non-Executive Director. Experience Mr Scruggs in an expert in corporate recoveries and step change business improvement. A lawyer by training (BYU 1984), he has held a number of corporate, government, political and civic positions including Chief of Staff to the Governor of Utah and Chairman of the University of Utah Board of Trustees. Mr Scruggs served on a number of boards of public as well as privately held companies including American Investment Bank, Barbados Light & Power, Deseret Morning News, Empire Insurance, MK Gold and Sangart – including service on multiple audit and executive committees. Mr Scruggs served as CEO of Huntsman Financial Corporation as well as the Huntsman Cancer Foundation and previously worked as President of the Leucadia Asset Management Group. He was instrumental in Leucadia’s original decision to invest alongside Andrew Forrest in Fortescue. From July 2011 through December 2013, he provided, among other activities, management services to The Metal Group and the Australian Children’s Trust, where he continues to serve as a board member. Other current directorships (ASX listed entities): Alternate Non-Executive Director, Poseidon Nickel Board since September 2012. Former directorships in last 3 years (ASX listed entities): None. Ms Elizabeth Gaines (Non-Executive Director) Term of Office Ms Gaines was appointed as a Non-Executive Director on 22 February 2013. Experience Ms Gaines is an Executive Director and the Chief Operating Officer & CFO of Jetset Travelworld Limited. Prior to this, Ms Gaines was the Chief Financial Officer of the Stella Group, Chief Finance and Operations Director of UK-based Entertainment Rights Plc and was previously Chief Executive Officer of Heytesbury Pty Limited. Ms Gaines has held senior treasury and finance roles at BankWest in Australia and Kleinwort Benson in the UK and qualified as a Chartered Accountant with Ernst & Young. Ms Gaines is a member of the Institute of Chartered Accountants in Australia and the Australian Institute of Company Directors and holds a Bachelor of Commerce degree and Master of Applied Finance degree. Other current directorships (ASX listed entities): Jetset Travelworld Limited. Former directorships in last 3 years (ASX listed entities): None. 56 I Fortescue Metals Group Limited I Annual Report 2013 56 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT DIRECTORS’ REPORT Mr Peter Meurs (Executive Director) Term of Office Mr Meurs was appointed as an Executive Director of Fortescue Metals Group on 22 February 2013. Experience Mr Meurs is currently the Director Development for Fortescue. His responsibilities span from exploration through studies and project development through to delivery of major capital expansion projects. As part of this he has direct responsibility for the delivery of Fortescue’s current 100mt expansion and development of the plans for future developments. The current expansion includes the development of the new Solomon Mines, adding another Ore Processing Facility (OPF) to expand the capacity of the Chichester mine and the addition of port and rail infrastructure to take Fortescue’s production capacity to 155mtpa. Prior to Mr Meurs commencing with Fortescue in May 2010, he held the position of Managing Director at WorleyParsons. He was a key contributor to the growth and development of WorleyParsons after joining the company in 1988. During his time at WorleyParsons, Peter functioned in project management and company development roles including establishment of the foundations of the process business, the establishment and growth of alliance and integrated services contracts in Hydrocarbons and Minerals & Metals and the development of the New Zealand business. Mr Meurs has a Bachelor Degree in Mechanical Engineering, a Fellow of the Institution of Engineers Australia and is also a member of the Australian Institute of Company Directors. Other current directorships (ASX listed entities): None. Former directorships in last 3 years (ASX listed entities): None. Company Secretary Mr Mark Thomas Term of Office Mr Thomas was appointed Company Secretary in June 2010. Experience Mr Thomas joined Fortescue in April 2004 in the role of Group Financial Controller and went on to become Head of Finance and IT and then Group Manager Finance. With more than 15 years experience in the mining and professional services industries, Mr Thomas has also held senior finance positions with the Goldfields Australia Group and with a number of professional service providers. He has extensive experience in accounting and finance, IT and business administration in the mining and professional services industries. Mr Thomas has a Bachelor of Commerce from the University of Western Australia, Graduate Diploma in Applied Corporate Governance, a Masters of Business Administration and is a Certified Practising Accountant and a Fellow of Chartered Secretaries Australia. Fortescue Metals Group Limited I Annual Report 2013 I 57 Fortescue Metals Group Limited I Annual Report 2013 I 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT Directors’ meetings The number of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 30 June 2013, and the number of meetings attended by each Director were: Mr Andrew Forrest Mr Herb Elliott Mr Neville Power Mr Mark Barnaba Mr Geoff Brayshaw Mr Owen Hegarty Mr Cao Huiquan1 Dr Geoff Raby Mr Graeme W Rowley Mr Herbert Scruggs Ms Elizabeth Gaines Mr Ken Ambrecht Mr Peter Meurs Board meetings Audit Attended 12 15 16 16 16 14 3 14 12 16 4 6 5 Held 16 16 16 16 16 16 16 16 16 16 5 10 5 Attended * * * 5 5 * * * 5 5 * 2 * Held * * * 5 5 * * * 5 5 * 3 * Committee meetings Remuneration Held 5 5 * 5 * 5 * * * 5 * 3 * Attended 4 4 * 5 * 5 * * * 5 * 2 * Finance Attended * * * 3 3 * * * * * * 3 * Held * * * 3 3 * * * * * * 3 * * Not a member of the relevant committee. 1 Mr Cao Huiquan was unable to attend numerous meetings during the year due to potential conflict of interest in his role as Chairman Valin Iron and Steel Co Ltd. Operating and financial review Group overview Fortescue is an independent iron ore producer operating in the Pilbara region of Western Australia. Fortescue is a young company that proudly celebrated its tenth anniversary in July 2013 with first ore shipped to China in May 2008. In November 2010, the Company announced a major expansion program to increase its production capacity from 55 million tonnes per annum (mtpa) to 155mtpa. As Fortescue is now nearing completion of the expansion program, it is beginning to realise the benefits of its significant investment in the integrated mine and infrastructure projects through increased production output, operating efficiencies, enhanced processing capacity and the integration of low cost Solomon mines. Fortescue is currently operating three mine sites and is continuing the development of the Kings mine at Solomon. With the Christmas Creek operation fully ramped up during the year, Fortescue’s Chichester Hub is now operating at full capacity. This, together with the Firetail commissioning in May 2013, allowed Fortescue to achieve an annualised run rate of 120mtpa in the month of June 2013, 5mtpa ahead of target. Operations Safety On 14 August 2013, a contract worker at Fortescue’s Christmas Creek mine was fatally injured whilst undertaking maintenance work. The Fortescue family is deeply saddened by the incident and is providing support and counselling to employees and family members. An investigation into the incident is currently being undertaken by Fortescue together with the relevant civil and mine authorities. Safety remains a key focus for Fortescue and we continued to foster our safety culture to achieve a safe workplace for our employees and contractors. During the year Fortescue achieved a 17.4 per cent reduction in the total recordable injury frequency rate (TRIFR) from 9.2 to 7.6 through strong emphasis on field leadership, coaching programs designed to reinforce key safety behaviours and the successful operation of the Major Hazards and Contractor Management Program. 58 I Fortescue Metals Group Limited I Annual Report 2013 58 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT DIRECTORS’ REPORT Aboriginal engagement Fortescue is committed to provide training, employment and business development opportunities to Aboriginal people. At the end of June 2013, Fortescue employed 461 Aboriginal people, approximately 12 per cent of its workforce, with an additional 528 employed by its contracting partners. In early August 2013 Fortescue proudly celebrated achieving its target of awarding A$1.0 billion in contracts to Aboriginal businesses, an initiative launched in December 2011. Since then, Fortescue has awarded 102 contracts and subcontracts to more than 50 Aboriginal businesses. To be included in the program, a business had to be at least 25 per cent owned by an Aboriginal person or group. Of the contracts awarded, more than 80 per cent were to Aboriginal businesses that were at least 50 per cent Aboriginal-owned. The target was achieved six months ahead of schedule, demonstrating Fortescue’s determination, size and ability to move quickly relative to its peers. Production and shipping Record operational results were delivered during the year, transforming Fortescue into a mining company of global scale. Continued strong performance across the integrated mine, rail and port supply chain during the year has resulted in record tonnes shipped of 80.9 million tonnes (mt) (2012: 57.5mt) including a record 10.0mt shipped in the month of June, an annualised rate of 120mtpa, 5mtpa ahead of expectations. Production and shipments on a wet metric tonne basis were as follows: 12 months to 30 June (millions of tonnes) Ore mined Overburden removed Ore processed Ore shipped including third party product 2013 94.6 364.5 76.1 80.9 2012 64.6 276.8 53.9 57.5 Movement 46% 32% 41% 41% Mining, processing and shipping Shipments during the financial year were 41 per cent higher than the prior year and comprised 77.8 million Fortescue equity tonnes and 3.1 million third party tonnes. Total ore mined increased to 94.6mt, 46 per cent higher than the prior year, as strip ratios declined and operations continued to focus on efficiencies. These record output results were achieved despite unseasonal wet weather which impacted the production performance of the port and mines during the June quarter. Fortescue’s significant investment in mining and ore processing facilities (OPFs) provide for the maximisation of product quality and improve efficiency to deliver sustainable lower operating costs. Commissioning of wet plants at the Chichester mines have enabled mining of lower cut off grades whilst maintaining product quality. This, together with the introduction of Solomon ore to produce the Fortescue blend, is a key element of the revised product strategy and underpins ongoing product and cost benefits. Work is continuing on a revision to the life of mine plans at the Chichester and Solomon Hubs which are expected to deliver strip ratios of 3.5x and 1.4x respectively, consistent with current results and the associated revised five year mine plan. Combined OPF output increased by 41 per cent from the prior year to 76.1mt while commissioning the wet plants, addressing asset reliability issues at the Chichester mines, completing construction and ramping up at Firetail. Ancillary in-pit crushing was also used during the year to supplement ore production. Fortescue’s integrated rail and port operations continued to exceed expectations with 81.6mt of ore delivered to the port during the year, an increase of 42 per cent compared to the prior year. Loading capacity at the port increased during June 2013 to 120mtpa from three berths and two shiploaders and increased to 155mtpa when the fourth berth (AP4) and third shiploader were commissioned in July 2013. Fortescue Metals Group Limited I Annual Report 2013 I 59 Fortescue Metals Group Limited I Annual Report 2013 I 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013DIRECTORS’ REPORT Production costs Fortescue refers to the operating costs of mining, processing, rail and port on a per tonne basis as C1. This measure is used internally and during other external results presentations to communicate Fortescue’s operating cost performance. During the year, Fortescue’s C1 costs reduced by nine per cent to US$44.09 per wet metric tonne (wmt). Importantly, C1 costs were declining through the year reaching US$36.01/wmt in the June 2013 quarter. The key factors supporting consistent cost improvements were commissioning of wet plants at the Chichester mines enabling mining of lower cut off grades to decrease strip ratios, incorporation of low cost Solomon ore and maintaining focus on operational efficiencies and cost reductions. During the financial year Fortescue experienced significant market volatility where iron ore prices fell sharply in August and September 2012. In response to the difficult market conditions Fortescue implemented a number of cost savings initiatives that delivered a total of US$0.4 billion in savings between September 2012 and June 2013, US$0.1 billion in excess of the initial internal targets. These measures, together with the strong operational performance, have put Fortescue in a strong position to withstand future volatility. Expansion program 55mtpa to 155mtpa Fortescue’s 155mtpa expansion and development program has delivered a number of key milestones during the course of financial year 2013 enabling the delivery of an annualised shipping rate of 120mtpa during the month of June. This has been achieved through the completion of processing facilities and mining activity at Christmas Creek – Phase 2 expansion area (Christmas Creek 2), development of rail and port infrastructure and the ramp up of the 20mtpa Firetail mine and processing facility. Completion of the expansion projects is expected to occur on time in the December 2013 quarter as the 40mtpa Kings mine and OPF are ramped up to full operating capacity. The expansion remains on target for completion within the revised budget of US$9.0 billion. Key elements of the expansion program delivered during financial year 2013 are set out below. Christmas Creek – Phase 2 expansion Construction of the OPF at Christmas Creek 2 was complete in September 2012, 14 months after construction commenced, and was ramped up to full operational capacity during the December 2012 quarter. The Jigs plant, which removes shale, providing additional ore upgrade, has been completed and is currently ramping up to full production. All major infrastructure works have now been completed at Christmas Creek 2 and the mining contract was awarded to Macmahon Holdings Ltd. Solomon Hub First ore from Solomon’s Firetail mine was achieved in December 2012 together with commissioning of stockyards, stackers and the reclaimer. Mine development and construction of the Firetail OPF progressed in line with expectations although wet weather and minor engineering issues delayed commissioning of the OPF until May 2013. The crushing circuit and OPF subsequently achieved full design capacity of 20mtpa by the end of the year. Significant progress has been made at Kings which is now the key area of construction focus. All Kings OPF modules are on site with construction of the OPF well underway and expected to be complete in October 2013. Ramp up of the OPF to its operating capacity of 40mtpa will occur during the December 2013 quarter. Leighton Contractors Pty Ltd have been awarded the mining contracts for both Firetail and Kings mines and will also manage operations of the OPFs, stockyards and rail load out facilities. 60 I Fortescue Metals Group Limited I Annual Report 2013 60 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013DIRECTORS’ REPORT DIRECTORS’ REPORT Port During the year the second and third train unloaders were commissioned increasing Port in-load capacity by 120mtpa to 180mtpa. Construction of associated conveyor, stacker and re-claimer infrastructure was also completed enabling a record outload performance of 120mtpa to be achieved during the month of June. First ore on ship was achieved from Berth 4 in July 2013, integrating the third ship loader with the third outload circuit from the stockyards. This major milestone completes the main expansion of the Port facilities, which now comprises three train unloaders, three stackers, three reclaimers and three ship loaders across four berths to deliver a 155mtpa run rate. All approvals have been put in place for Berth 5 and construction is scheduled to commence towards the end of calendar 2013 year. Rail The rail expansion projects continued to complete turnouts and passing sections on both the mainline and Fortescue Hamersley lines. The commissioning of the East Turner duplication close to Port and the Christmas Creek “Jones Siding” have added considerable additional flexibility to the mainline rail as capacity continues to grow in line with production requirements. Signalling works have continued together with rail handovers and several new communication and trackside control sites were completed and put into operation. The full scope of work for track, signalling and communications is scheduled for completion during September 2013. Commissioning of the new digital train control system has commenced and is expected to be fully operational by December 2013. A new automated ore car maintenance workshop has been commissioned, significantly improving ore car maintenance efficiency. Two further rakes of ore cars are due for delivery by the end of calendar 2013, increasing the total number of operational train sets to 13. Market Iron ore markets and prices experienced significant volatility during the 2013 financial year. However, the demand for Fortescue products remained strong with the average realised price for the year of US$114/dmt (2012: US$131/dmt), based on an average 62 per cent Platts CFR index price of US$127/dmt (2012: US$151/dmt). Record levels of crude steel production in China were maintained during the June quarter, actual June steel output of 64.7mt (2.2mt per day) following a record 67.0mt in May (2.2mt per day), according to the China Iron & Steel Association. January to June 2013 crude steel output was up 7.4 per cent to 389.9mt which equates to an annualised rate of 779.8mt, compared to actual production of 716.5mt in 2012. These high levels of steel production, improving steel prices and the current low level of iron ore inventory held by the steel mills have resulted in recent iron ore re-stocking and stability of iron ore prices. The formal introduction of Fortescue’s new upgraded product (58.3 per cent Fe) called ‘Fortescue Blend’, will occur during August. This blended product fully realises the benefits of the low impurity Chichester and higher iron content Firetail products. Fortescue Metals Group Limited I Annual Report 2013 I 61 Fortescue Metals Group Limited I Annual Report 2013 I 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013DIRECTORS’ REPORT Financial results, cash flows and financial position Financial results Profit after tax for the year ended 30 June 2013 increased by 12 per cent to US$1,746 million. Key factors contributing to current year performance are discussed below. Operating sales revenue increased by 21 per cent to US$8,120 million during the year, primarily due to the 41 per cent increase in iron ore shipments, but was partially offset by a 13 per cent decrease in realised iron ore prices. Total cost of sales increased by 28 per cent to US$5,140 million for the full year, consistent with higher production volumes. Importantly, total costs per tonne decreased by nine per cent from the previous financial year reflecting operational efficiencies and a continuous drive to reduce costs. As part of the expansion project Fortescue is now realising the benefits through the significant investment in mining and ore processing facilities which maximise product quality and improve efficiency to deliver lower sustainable operating costs. Other non-operating events forming part of the financial result include the following: • Refinancing through establishing a senior secured term loan facility of US$5.0 billion and retiring of all existing unsecured bank facilities and repayment of unsecured loan notes. The net gain on refinancing was US$23 million. • Sale of 25 per cent of the Nullagine Iron Ore Joint Venture, reducing Fortescue’s share in the joint venture from 50 per cent to 25 per cent and realising a gain of US$124 million. • Net finance expenses for the year of US$553 million (2012: US$505 million), including capitalised interest on expansion projects of US$342 million (2012: US$196 million). Income tax expense of US$720 million (2012: US$704 million) was recognised during the year, at an effective tax rate of 29 per cent. Total income tax paid for the year was US$695 million together with an additional amount of US$427 million in royalties paid to Western Australian State Government. No MRRT was paid or is expected to be paid. Basic earnings per share for the year was 56.07 cents compared to 50.07 cents in previous year. The number of shares on issue at 30 June 2013 was 3.1 billion and remained unchanged since last year. Cash flows Cash and cash equivalents at 30 June 2013 were US$2,158 million compared to US$2,343 million at 30 June 2012. Cash balances were maintained during a period of significant capital expenditure as net cash flow from operating activities increased by seven per cent to US$3,004 million for the full year after income tax payments of US$695 million and US$396 million proceeds from customer prepayments. Net cash outflow from investing activities was US$6,166 million (2012: US$5,990 million) and predominantly comprised expenditure on T155 expansion projects. Net cash flows from financing activities were US$2,989 million (2012: US$2,793 million), including net movements in borrowings of US$4,098 million mainly as a result of refinancing completed in October 2012, offset by interest payments of US$893 million and a US$131 million final 2012 dividend payment. Financial position The key factors affecting Fortescue’s financial position at 30 June 2013 were driven by capital expenditure on T155 expansion program, resulting in a 51 per cent increase in the net book value of property, plant and equipment to US$17,159 million and the associated financing, increasing total debt by 49 per cent to US$12,691 million at the end of the financial year. At 30 June 2013, Fortescue’s net debt was US$10,533 million. Outlook Fortescue’s key focus is completion of the T155 expansion projects and delivery of its production targets. 62 I Fortescue Metals Group Limited I Annual Report 2013 62 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013DIRECTORS’ REPORT DIRECTORS’ REPORT The majority of Fortescue’s revenue is generated from customers in China. Expectations are that China’s GDP will grow at approximately 7.5 per cent per annum and will increasingly generate domestic consumption growth as it continues to develop and urbanise. This growth is estimated to support increases in steel production requiring higher levels of seaborne iron ore to be imported. China will remain Fortescue’s core market, however, opportunities to diversify its customer base into alternative regions are being explored. From an operations perspective Fortescue will continue to search for opportunities to drive costs down further. This will naturally occur as the lower cost mines at Solomon are brought online and ramped up to full production. There will continue to be a focus on operational efficiencies and development of Fortescue’s enhanced processing capacity, reduction in strip ratios and lowering of total mining costs. The flexibility contained within Fortescue’s debt capital structure provides a number of options to reduce debt. This may be achieved through the sale of a minority interest in Fortescue’s rail and port infrastructure assets or through the significant increase in operational cashflows as production levels reach 155mtpa and capital expenditure levels reduce following completion of the expansion projects. In addition, alternative cash generating initiatives such as customer prepayments and other asset sales, such as the sale of 31 per cent interest in the magnetite tenements through establishing a joint venture with Formosa Plastics Group completed in August 2013, continue to be evaluated. As debt is paid down and credit quality improves Fortescue plans to move to a dividend payout ratio of 30 per cent to 40 per cent over time. Fortescue continues to evaluate its portfolio of high value assets and exploration tenements to identify high value, low capital intensive growth opportunities to take advantage of its existing integrated supply chain. Environmental regulation and performance Fortescue is committed to minimising the impact of its operations on the environment. The Board takes seriously the need for continuous monitoring of environmental matters and compliance with environmental regulations. Fortescue’s exploration, mining, rail and port activities are subject to various environmental regulations under both State and Commonwealth legislation. Fortescue manages compliance with its environmental responsibilities and sets its objectives and targets through its Environmental Management System. Fortescue identifies risks of environmental impact from its projects and operations and sets improvement plans for the highest environmental risks. The Group measures its environmental performance against its regulatory requirements and corporate targets. The Group’s environmental performance is reported to a hierarchy of management. As a part of the Environmental Management System, Fortescue also conducts internal environmental reviews, audits and inspections to identify and quantify potential risks to Fortescue and to review compliance with its environmental obligations. The fundamental aim of each activity is to minimise or prevent adverse environmental consequences and to promote a culture of compliance. Fortescue strives to continually improve its environmental performance by a systematic review of its environmental risks. During the financial year, certain aspects of the Fortescue’s operations were routinely inspected by the Department of Environment Regulation (DER) (previously the Department of Environment and Conservation) and the Department of Sustainability, Environment, Water, Population and Communities (DSEWPC). Work continued to resolve a number of potential non-compliances relating to works approvals and licences identified and reported to the DER in 2012. During the financial year, Fortescue has submitted numerous environmental reports and statements to regulators detailing Fortescue’s environmental performance and level of compliance with relevant instruments. This includes the Fortescue’s Compliance Assessment Reports dated March 2013, which were provided to the Office of the Environmental Protection Authority, and the Annual Environmental Reports submitted to the Department of Mines and Petroleum and the Department of State Development. Fortescue Metals Group Limited I Annual Report 2013 I 63 Fortescue Metals Group Limited I Annual Report 2013 I 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT Greenhouse gas and energy reporting Fortescue complies with the Australian government National Greenhouse and Energy Reporting Act 2007 (Cth) and the Energy Efficiency Opportunities Act 2006 (Cth). Fortescue is committed to proactively managing energy consumption and greenhouse gas emissions wherever practical and is guided by a formal internal policy. The total Scope 1 and Scope 2 greenhouse gas emissions for the most recent reporting period were 1.43 million tonnes of carbon dioxide equivalents. Fortescue’s greenhouse emissions are almost entirely related to combustion of diesel fuel and, therefore, the Company was not considered a liable entity under the Clean Energy Legislation carbon scheme. Fortescue will continue to pay the carbon price through reduced diesel rebates and will maintain a watching brief for any potential amendments to the Clean Energy legislation in order to understand and prepare for their influence on the Group’s management or reporting requirements. Directors’ interests The relevant interest of each Director in the shares and options issued by the Company as notified by the Directors to the Australian Securities Exchange in accordance with section 5205G(1) of the Corporations Act 2001, at the date of this report are as follows: Director A Forrest H Elliott N Power M Barnaba G Brayshaw O Hegarty C Huiquan G Raby G Rowley H Scruggs E Gaines P Meurs Ordinary shares 1,020,690,915 2,167,938 1,111,690 - 52,149 40,000 - 8,000 17,644,951 - - 25,924,523 Options - - - - - - - - - - - 7,500,000 Performance rights - - 341,158 - - - - - - - - 164,514 Unissued shares under options and performance rights Details of the options and performance rights outstanding at 30 June 2013 are as follows: Exercise price A$ 2.50 5.00 5.69 Nil Nil Balance at the end of the year Number 600,000 7,500,000 400,000 1,300,551 803,296 Vested and exercisable at the end of the year Number 600,000 - - - - Remaining contractual life Months 7 22 27 6 30 10,603,847 600,000 Employee options 2009 Employee options 2010 Employee options 2011 Short term performance rights 2013 Long term performance rights 2013 64 I Fortescue Metals Group Limited I Annual Report 2013 64 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT DIRECTORS’ REPORT Directors and officers indemnities and insurance Since the end of the previous financial year, the Company has paid premiums to insure the Directors and Officers of Fortescue. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the Officers in their capacity as Officers of the Fortescue Group, and any other payments arising from liabilities incurred by the Officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the Officers or the improper use by the Officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Fortescue Group. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. Conditions of the policy also preclude disclosure to third parties of the amount paid for the policy. Non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor has relevant expertise and experience and where the auditor’s independence is not compromised. Details of the amounts paid or payable to the auditor PricewaterhouseCoopers Australia and related entities for audit and non- audit services provided during the year are set out in note 25 to the Financial Statements. The Board of Directors has considered the position and, in accordance with advice received from the Audit & Risk Management Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the Audit & Risk Management Committee to ensure they do not impact the impartiality and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. Fortescue Metals Group Limited I Annual Report 2013 I 65 Fortescue Metals Group Limited I Annual Report 2013 I 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT Dividends On 22 August 2013, the Directors declared a final fully franked dividend of ten Australian cents per ordinary share payable on 4 October 2013. Events occurring after the reporting period In August 2013 Fortescue and Formosa Plastics Group (Formosa) entered into a joint venture agreement to develop the FMG Iron Bridge magnetite project. The joint venture remains subject to Australian Foreign Investment Review Board and Taiwan Investment Commission approval. Under the arrangement, Formosa, through its subsidiary Formosa Steel IB Pty Ltd, will: • Acquire a 31 per cent unincorporated joint venture interest in FMG Iron Bridge Join Venture for US$123 million. • • • • Fund the first US$527 million of capital expenditure on the FMG Iron Bridge Project development. This funding covers construction of Stage One which will commence on completion of the transaction at an estimated capital cost of US$340 million. Participate in Stage Two of the FMG Iron Bridge Project, subject to receipt of relevant Government approvals and Joint Venture sanction. If approved, Stage Two would be funded by the balance of the Formosa’s initial funding, a contribution of the next US$1,050 million from FMG Iron Bridge Limited, followed by proportional contributions (31 per cent Formosa, 69 per cent FMG Iron Bridge Limited). Agree to purchase up to three mtpa of iron ore at market prices to supply Formosa Ha Tinh Steel mill when commissioned. Elect to prepay US$500 million upfront to The Pilbara Infrastructure Pty Ltd to access Fortescue port facilities at Herb Elliott Port under separate infrastructure access agreements. This report is made in accordance with a resolution of Directors. Mr Andrew Forrest Chairman Dated at Perth this 22nd day of August 2013. 66 I Fortescue Metals Group Limited I Annual Report 2013 66 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 DIRECTORS’ REPORT REMUNERATION REPORT The Directors of Fortescue Metals Group Limited (‘the Company’ or ‘Fortescue’) are pleased to present the Remuneration Report for the year ended 30 June 2013. This report forms part of the Directors’ Report and has been audited in accordance with section 308 (3c) of the Corporations Act 2001. The report is outlined in the following sections: a) Who this report covers b) FY13 overview and year ahead c) Governance of our remuneration d) Executive remuneration strategy e) Executive remuneration structure f ) Key components of Executive remuneration g) How Fortescue performed over the past five years h) Securities trading policy i) Executive contract terms j) Detailed remuneration for Executives k) Non-Executive director remuneration Whilst the functional and reporting currency of Fortescue is in US dollars, it is the Directors’ view that presentation of the information in Australian dollars provides a more accurate and fair reflection of the remuneration practices of Fortescue, as all Directors, Executives and employees are remunerated in Australian dollars. Fortescue Metals Group Limited I Annual Report 2013 I 67 Fortescue Metals Group Limited I Annual Report 2013 I 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013REMUNERATION REPORT a) Who this report covers This report outlines the remuneration arrangements for Fortescue’s Key Management Personnel (KMP). KMP are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether Executive or otherwise) of that entity. The KMP of Fortescue for FY13 were: NON-EXECUTIVE DIRECTORS A Forrest H Elliott K Ambrecht M Barnaba G Brayshaw E Gaines O Hegarty C Huiquan G Raby G Rowley H Scruggs EXECUTIVE DIRECTORS N Power P Meurs EXECUTIVES J Frankcombe S Pearce D Woodall Chairman Deputy Chairman and Lead Independent Director Non-Executive Director – Retired 14 November 2012 Non-Executive Director Non-Executive Director – Retiring at 2013 AGM Non-Executive Director – Appointed 22 February 2013 Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Chief Executive Officer Executive Director Developments – Appointed 22 February 2013 Director Operations – Resigned 26 January 2013 Chief Financial Officer Director Operations – Appointed 14 January 2013 There were no changes to KMP after the reporting date. b) FY13 overview and year ahead Fortescue’s remuneration strategy seeks to build a performance orientated culture by attracting and retaining the best possible people to align with driving increased shareholder value. Fortescue’s Board and Remuneration and Nomination Committee (R&NC) are committed to continued review and refinement of the remuneration strategy to ensure it meets the changing needs of the organisation, maintains market competitiveness, and aligns to shareholder interests. In support of the remuneration strategy, the following table highlights key changes made in FY13: 68 I Fortescue Metals Group Limited I Annual Report 2013 68 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT REMUNERATION REPORT Change made Rationale Introduction of a long term incentive plan (LTI) delivering rights to Fortescue shares that vest subject to the achievement of absolute return on equity (AROE) targets measured over a three year performance period. Participants’ Executive and Senior Staff Incentive Plan (ESSIP) opportunity has been reduced by 25 per cent to accommodate the introduction of the LTI grant. Replaced the Relative Total Shareholder Return performance objective under the ESSIP with an AROE performance objective. To enhance the longer-term strategic alignment of executive remuneration with shareholder interests through the introduction of a performance measure that reflects shareholder returns. AROE is a critical measure of Fortescue’s performance and ensures that Executives have a more holistic focus on and are incentivised by shareholder returns on both a short-term and long-term basis. For details of the plan, see section (e) of this report. As a result of the introduction of the LTI plan, the overall remuneration mix has been rebalanced with a 25 per cent reduction in maximum ESSIP opportunity and potential LTI upside, based on performance exceeding AROE targets, of up to four times the value of the ESSIP reduction. AROE is a critical measure of Fortescue’s performance and ensures that Executives have a more holistic focus on and are incentivised by shareholder returns on both a short-term and long-term basis. FY13 Remuneration Outcomes – Linking Performance and Pay The following explains how fixed and variable remuneration outcomes were driven by company performance in FY13. Fixed Remuneration In consideration of market fixed remuneration rates, current business climate and enhancing the emphasis on ‘at risk’ remuneration, no change was made to Executive fixed remuneration. Fixed remuneration remains at July 2011 levels. Variable Remuneration FY13 Executive and Senior Staff Incentive Plan Awards made in relation to the FY13 ESSIP reflect the achievement of two of three company performance objectives, delivering a significant improvement in safety performance and reduction in C1 costs, the achievement of Company growth objectives including AROE and efficiency of reserves mined and individual performance objectives. Refer to section (e) for more detail. The outcome represents an average payment of 78 per cent of maximum opportunity compared with an average payment of 49 per cent of maximum opportunity in FY2012. FY13 Long Term Incentive Plan (LTI) LTI grants were made in December 2012, replacing 25 per cent of the ESSIP opportunity to further enhance the longer term ‘at risk’ remuneration mix for Executives. The performance period for the 2013 LTI is 1 July 2012 to 30 June 2015 and final award outcomes for the 2013 LTI plan will be reported in the 2015 remuneration report. Fortescue Metals Group Limited I Annual Report 2013 I 69 Fortescue Metals Group Limited I Annual Report 2013 I 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013REMUNERATION REPORT Executive Total Earnings in 2013 Details of remuneration received by the Chief Executive Officer and executives prepared in accordance with statutory requirements and accounting standards are detailed on page 31. The table below sets out the total earnings for the Chief Executive Officer and executives in FY13 – sometimes referred to as ‘actual’ pay. The table includes fixed remuneration, the cash component of the ESSIP earned for FY13 performance and the value of the share component of the FY13 ESSIP that vested. Name N Power S Pearce J Frankcombe2 P Meurs D Woodall3 Fixed remuneration1 1,800,000 1,050,000 597,288 1,050,000 419,384 FY 13 ESSIP Cash Paid 708,770 276,617 n/a 174,830 101,726 FY13 ESSIP4 Shares Awarded 453,559 177,013 n/a 261,049 65,098 Total Actual Remuneration Earned in 2013 2,962,329 1,503,630 597,288 1,485,879 586,208 1 Fixed remuneration includes cash salary, paid leave, superannuation, and non-monetary benefits 2 Mr Frankcombe resigned on 26 January 2013 3 Mr Woodall commenced on 14 January 2013 4 ESSIP share value for FY13 is the value of the participant’s elected weighting in shares (minimum 50 per cent of the total award) divided by the VWAP of Fortescue Shares for the first five trading days of the plan year (A$4.9464) multiplied by the 5 day VWAP of Fortescue shares for the first five trading days of FY14 (A$3.1653). c) Governance of our remuneration At Fortescue, we believe that robust governance is critical to underpinning the effectiveness of our remuneration strategy. The Remuneration and Nomination Committee operates under a Board-approved charter. This includes responsibility for renewing and reporting to the Board on Executive remuneration policy and practices such as remuneration levels and incentive plans. It also includes recruitment, retention, performance management, succession planning and termination policies and managing Board nomination, including determining candidate criteria and addressing skills and experience requirements for Board position vacancies. A copy of the charter is available under the Corporate Governance section of the Fortescue Website. The R&NC in FY13 consisted solely of Non-Executive Directors. The Chief Executive Officer and others may be invited to attend meetings by the Committee Chairman as required, but have no vote on matters before the Committee. 70 I Fortescue Metals Group Limited I Annual Report 2013 70 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT REMUNERATION REPORT The process and accountabilities in determining remuneration are shown below: Remuneration consultants May be engaged directly by the Board or Remuneration and Nomination Committee to provide advice or information relating to KMP that is free from influence of management. Board of Directors Responsible for: • Approving the remuneration of non-executive directors and the CEO; and • Ensuring remuneration practices are competitive and align with the attraction and retention policies of the Company. Remuneration and Nomination Committee Advises the Board on: • Remuneration policies and practices; • Non-executive director remuneration; and • Executive remuneration. Human Resources Management Responsible for: • Implementation of remuneration policies and practices; • Advising the Remuneration and Nomination Committee of changing statutory market conditions; • Provides relevant information to the Remuneration and Nomination Committee to assist with decisions. Remuneration consultants Will be engaged directly by management other than in respect of KMPs to provide advice and market data to ensure Fortescue’s remuneration position remains competitive. Use of remuneration consultants During the year, Egan Associates provided external remuneration advice to the R&NC. During financial year 2013, Egan Associates provided the following remuneration recommendations (as defined in the Corporations Act 2001): • Review of company incentive structure The above remuneration recommendations were provided to the R&NC as an input into decision making only. The R&NC considered the recommendations, along with other factors, in making its remuneration decisions. The total fees paid for the remuneration recommendations was A$10,250 (ex GST). Other services provided by Egan Associates included other advisory services and the fees for all other services was $24,925 (ex GST). The following arrangements were made to ensure that the advice was free of undue influence by members of the KMP: • • • Egan Associates was engaged by the Chairman of the R&NC of the Board; Fortescue Management were not involved in the formulation of any remuneration recommendations, but provided factual information to assist Egan Associates; and Egan Associates provided the remuneration recommendation only to the Chairman of the R&NC. Due to the implementation of these measures, the Board and R&NC are satisfied that the advice provided was free from undue influence from members of Fortescue’s KMP and Egan Associates have provided a written statement to this effect. Fortescue Metals Group Limited I Annual Report 2013 I 71 Fortescue Metals Group Limited I Annual Report 2013 I 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT d) Executive remuneration strategy Fortescue’s reward strategy seeks to build a performance orientated culture that supports the achievement of our strategic vision and to attract, retain and motivate its employees by providing market competitive fixed remuneration and incentives. The reward strategy also supports Fortescue’s extraordinary growth and progression as one of the world’s leading producers of iron ore through: • • • being well positioned to deliver fair and market competitive rewards; supporting a clear performance focus; and alignment to the long-term goals of the organisation. Fortescue is committed to providing competitive remuneration packages to our Executives and senior employees. Fortescue benchmarks remuneration components against major indices such as the ASX 100 Resources and ASX 30 and also seeks input from independent remuneration consultants regarding Executive remuneration as detailed in section (b). The overall intent is to ensure the executive remuneration program is appropriately positioned to motivate, attract and retain key Executives and senior employees to deliver on the current and long term strategic activities of the Company. How remuneration practices align with our reward strategy Remuneration strategy principle Purpose Practice High levels of share ownership Drive alignment of employee and shareholder interests LTIP awarded as shares. A minimum 50 per cent of the ESSIP paid in shares with Executives able to elect up to 100 per cent in shares Market competitive remuneration Attract and retain key talent and be competitive against relevant companies Remuneration is benchmarked against the ASX 100 Resources and ASX 30 Indices Performance focus Fit for purpose Strategic alignment Provide fair reward in line with individual and company achievements Executive remuneration mix targets a minimum of 63 per cent of the total opportunity ‘at risk’ Include flexibility to reflect clear linkage to business strategy Business strategy is prioritised; market practice is only one input in determining the relevant framework Support delivery of long-term business strategy and growth aspirations Incentives are measured on financial and non-financial performance to support sustainable growth Shareholder and Executive alignment Introduction of a LTI (to apply from FY13) rewarding sustained performance over a three year period A significant portion of executive remuneration granted as performance rights vesting subject to short and long-term performance hurdles 72 I Fortescue Metals Group Limited I Annual Report 2013 72 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013REMUNERATION REPORT REMUNERATION REPORT e) Executive remuneration structure Executive remuneration has a fixed component and a variable ‘at risk’ component, the payment of which is dependent on the achievement of Company performance and growth targets and individual objectives. The key components of the executive remuneration structure for the FY13 comprised: • • • Total Fixed Remuneration (TFR); Executive & Senior Staff Incentive Plan (ESSIP); and Long Term Incentive Plan (LTI). Remuneration may also include participation in the Salary Sacrifice Share Plan (SSSP). Total remuneration comprising each of these components is benchmarked against the market taking into account the Company’s position as the world’s fourth largest iron ore producer and explorer and its ranking in the top twenty listed Australian companies. Remuneration is benchmarked against companies in the ASX 100 Resources Index, with total remuneration targeted at the third quartile. Total reward opportunities are intended to provide Executives the opportunity to earn 75th percentile rewards for outstanding performance against stretch targets set. Information provided by Egan Associates revealed that current total remuneration levels are generally consistent with this policy. Remuneration Mix The table below demonstrates the revised remuneration mix for performance at stretch, which is reflective of the introduction of the LTI, and reduction in ESSIP opportunity, for KMPs for FY13: TFR ESSIP (at risk) LTI (at risk) CEO – FY12 40% 60% CEO – FY13 28% 31% CEO Direct Reports – FY12 50% 41% 50% CEO Direct Reports – FY13 36% 27% 37% 0% 20% 40% 60% 80% 100% * Note: the table above represents the target remuneration mix for the CEO and CEO direct reports in 2013 and does not take into consideration options granted to Mr Meurs at the start of his employment or his voluntary participation in the Executive Loan Plan. The above table clearly illustrates the significantly increased ‘at-risk’ components of the new remuneration structure compared to the corresponding FY2012 structure. The new structure serves to reinforce the pay-for-performance alignment desired by shareholders and their representatives / advisers. Fortescue Metals Group Limited I Annual Report 2013 I 73 Fortescue Metals Group Limited I Annual Report 2013 I 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT Clawback Policy Fortescue operates a Clawback Policy. Clawback will be initiated where in the opinion of the Board: 1) an Award, which would not have otherwise vested, vests or may vest as a result directly or indirectly of: a) b) the fraud, dishonesty or breach of obligations (including, without limitation, a material misstatement of financial information) of any person; or any other action or omission (whether intentional or inadvertent) of any person, the Board may make a determination to ensure that no unfair benefit is obtained by any Participant; or 2) an Award, which may otherwise have vested, has not vested as a result directly or indirectly of any circumstance referred to in paragraphs (1)(a) or (b) above, the Board may reconsider the level of satisfaction of the applicable Conditions and reinstate and vest any Award that may have lapsed to the extent that the Board determines appropriate in the circumstances. f) Key components of Executive remuneration Total Fixed Remuneration TFR is made up of base salary, cash allowances (such as site-based or location allowances), employee benefits and superannuation. The level of TFR is based on the Executive’s responsibilities, experience and qualifications. Company and individual performance are considered during the annual remuneration review process. Executive & Senior Staff Incentive Plan The purpose of the ESSIP is to incentivise and reward key Fortescue Executives (including KMP) for achieving Company and individual performance objectives that drive shareholder value. An Executive’s ESSIP potential award is linked 50 per cent to Company objectives, and 50 per cent to individual performance, linking Executive remuneration to Company performance during the Plan Year. A maximum incentive opportunity is established at the beginning of the financial year for each Executive. The incentive is delivered as a minimum of 50 per cent in ordinary shares, and a maximum of 50 per cent in cash. The plan allows participants to elect to receive up to 100 per cent of the incentive in shares. The maximum incentive opportunity for KMPs in 2013 is shown below: Chief Executive Officer CEO Direct Reports 112.5 per cent of TFR* 75 per cent of TFR* 1 participant 3 participants * Note that the maximum possible value of awards under the ESSIP will be determined by the number of objectives achieved and the value of the Fortescue shares at time of vesting. * Due to the introduction of the LTI plan in FY13, there has been a corresponding reduction in maximum ESSIP opportunity from FY13. The maximum ESSIP opportunities for FY13 have been reduced by 25 per cent. Individuals who leave during the year (i.e. before 30 June) are not eligible to receive an ESSIP award, unless by specific R&NC approval. On receipt of such approval, the ESSIP is pro-rated based on service during the period, and made at the usual payment date, which is around September of each year, post release of audited and approved full year results. Individuals who commence during the year similarly will have awards under the ESSIP pro-rated based on service during the performance period. ESSIP performance objectives ESSIP awards are made based on an assessment of Company and individual performance. Company performance comprises company annual performance and company growth performance, and is designed to provide both a short and long-term perspective on performance, and protect the long-term interests of the shareholder by seeking to ensure efficient processing of reserves mined and that financials objectives are met. 74 I Fortescue Metals Group Limited I Annual Report 2013 74 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT REMUNERATION REPORT The performance objectives in 2013 are shown below: Company Annual Performance Production(2) Safety(2) Cost(1) Company Growth Performance Growth(2) Financial(1,3) Physical(2) Target tonnes shipped Target percentage reduction (15 per cent) in Total Recordable Injury Frequency Rate (TRIFR) Target cost per tonne shipped Deliver agreed actions from the 2012 Board Strategic Planning Workshop Achieve target annual Absolute Return on Equity (AROE) of >15 per cent Target percentage of reserves mined is converted (after processing losses) to product, inclusive of quality measurement (e.g. grade expectations and real mined tonnage) Weighting 8 8 8 8 10 Results per cent Not met Met Met Partially met Met 8 Met Outcome per cent 0 8 114 2 10 8 Individual Performance 4 objectives based on the business plan at 12.5 per cent each 50 Partially met avg 39 (1) Financial Targets (2) Non-Financial Targets (3) The 2012 Remuneration Report stated Relative Total Shareholder Return as a growth performance measure for the 2013 ESSIP. Its replacement with AROE was approved by the Board after the report was lodged. (4) A key element of our culture is to set challenging stretch targets and strive to outperform those targets. In the 2013 year we set ourselves a number of key targets in respect of cost reduction across all operating and support functions. These cost reduction targets are a high priority for the Board and they have approved an above target award to reflect the degree of outperformance by the business in this area. This is contrasted with the production measure where the business fell marginally short of the stretch target and received no award for this element. The CEO’s Individual Performance Objectives for the reporting period related to: • • • • specific deliverables for the T155 Expansion Project; funding options for future growth opportunities; specific projects related to operating costs; and strengthening and maintaining Fortescue’s differentiating culture. Payment of ESSIP awards are made in September after the release of the Company’s audited results and with final approval from the Board. How the ESSIP works: an example The ESSIP is designed so that participants are generally rewarded the same result as a Fortescue investor over the financial year. Example: Executive A has an incentive opportunity of $100,000. The minimum value of the share component of this incentive opportunity is $50,000. At the beginning of the year, the share component is divided by the volume weighted average price (VWAP) of Fortescue shares over the first five trading days of the year (eg in July 2012). In July 2012, the relevant VWAP was A$4.95. This results in an award of 10,108 shares at the end of the year to Executive A provided the performance conditions are met. Executive A may elect to receive up to 100 per cent of the incentive opportunity in shares. Fortescue Metals Group Limited I Annual Report 2013 I 75 Fortescue Metals Group Limited I Annual Report 2013 I 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT Historical ESSIP performance Due to the rigorous annual incentive program and challenging hurdles set by the Board, the conditions for incentive awards have not been fully met in a number of years. Accordingly, senior management, including KMPs, have not fully received their incentive in the majority of the last five years. The table below outlines the actual results of the FY2012 ESSIP against the targets that were set: Company Annual Performance Production Safety Cost Company Growth Performance Physical Achieve: budgeted tonnes shipped Achieve: 15 per cent reduction in Total Recordable Injury Frequency Rate (TRIFR) Achieve: target cost per tonne shipped Financial Achieve: target % of reserves mined converted (after processing losses) to product, inclusive of quality measurement (e.g. grade expectations and real mined tonnage). Achieve: Relative TSR > 50th percentile benchmarked against ASX100 Resources index. 50 per cent payment @ 50th percentile progressing to 100 per cent at 75th percentile. Individual Performance 4 objectives based on the business plan at 12.5 per cent each Weighting 10 10 10 10 10 50 Results per cent Not met Met Not met Outcome per cent 0 10 0 Not met 0 Partially met 5.4 Partially met avg 43 ESSIP performance in FY13 Performance rights granted under the ESSIP at the beginning of FY13 are shown below. All the performance rights issued convert to ordinary shares if all ESSIP objectives are met. The third column details the actual number of share rights that will be converted to ordinary shares based on actual performance: Executive N Power S Pearce J Frankcombe1 P Meurs D Woodall ESSIP performance rights issued 204,695 79,604 79,604 111,445 31,219 ESSIP performance rights lapsed 61,404 23,681 - 28,973 10,653 ESSIP performance rights forfeighted - - (79,604) - - Performance rights to convert to shares for FY13 ESSIP performance 143,291 55,923 - 82,472 20,566 1 Mr Frankcombe resigned on 26 January 2013. Unvested share rights lapse once the outcome of the ESSIP is determined. 76 I Fortescue Metals Group Limited I Annual Report 2013 76 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT REMUNERATION REPORT The table below details the maximum ESSIP cash and share awards against the actual outcomes for the 2013 year. The share components are based on the share weighting election of each Executive: TFR 2013 A$ Executive Directors N Power Key Management Personnel S Pearce P Meurs D Woodall 1,050,000 1,050,000 900,000 1,800,000 (per cent of TFR) 112.5 75 75 75 Maximum ESSIP Service Maximum opportunity Weighting pro-rata in shares (per cent) applicable) opportunity (if ESSIP Cash ESSIP Maximum outcome awarded (per cent opportunity of TFR) ESSIP Shares ESSIP Cash awarded ESSIP Shares1 50 50 70 50 - 1,012,500 1,012,500 79 708,770 453,559 - - 0.46 393,750 236,250 154,418 393,750 551,250 154,418 53 56 49 276,617 174,830 101,726 177,013 261,049 65,098 1 ESSIP share value for FY13 is the value of the participant’s elected weighting in shares (minimum 50 per cent of the total award) divided by the VWAP of Fortescue shares for the first five trading days of the Plan year (A$4.9464) multiplied by the five day VWAP of Fortescue shares for the first 5 days of FY2014 (A$3.1653). 2 Mr Woodall commenced on 14 January 2013. Long Term Incentive Plan As stated previously, the Board resolved to introduce a new LTI plan in 2013 with awards considered annually. The purpose of the LTI is to reinforce the criticality of AROE as Fortescue progresses from a multi-project focus to one of the largest producers of iron ore in the world. The Board believes that the introduction of the LTI at this time will continue to support the retention and motivation of our Executives and other key talent, increase the long-term focus of the incentive schemes and reinforce alignment with shareholder interests. LTI awards to executives are made under the employee share option plan and are delivered in the form of Performance Rights (Rights). Each Right entitles the holder (subject to achievement of the specified performance conditions) to a maximum of four fully paid ordinary shares in the Company for nil consideration. The number of Rights issued to each participant under the FY13 LTI is based on the amount equal to the 25 per cent reduction in ESSIP (Base Award). The Executive has the ability to earn up to four times the Base Award should the average AROE achieved over the three year performance period exceed target. There is no opportunity to retest LTI performance. The Company uses AROE as the performance measure for the LTI. AROE was selected as the LTI performance measure for the following reasons: • • AROE is one of the most important value metrics reflecting profit earned relative to shareholders equity (the amount of capital invested by shareholders); and AROE performance in excess of the Company’s cost of equity capital will deliver shareholder value A minimum 15 per cent (FY14: 20 per cent) annual AROE hurdle rate was selected for the following reasons: • • • 15 per cent exceeds the Company’s cost of equity; the average AROE for the ASX 100 Resources Index from 2008 to 2012 is 5.3 per cent; and the 80th percentile AROE for the ASX 100 Resources Index from 2008 to 2012 is 21 per cent. Fortescue Metals Group Limited I Annual Report 2013 I 77 Fortescue Metals Group Limited I Annual Report 2013 I 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT The vesting schedule is as follows: Average AROE FY13 <15% 20% 25% 30% + FY14 <20% 23% 26.67% 30% + Conversion Factor Nil 2x the base award 3x the base award 4x the base award Rights will convert to shares at the end of the three year vesting period if 15 per cent per annum (FY14: 20 per cent per annum) average AROE is achieved, increasing (on a linear scale) to a maximum of 4 times the base award when an average AROE of 30 per cent per annum or more is achieved. The average AROE over three years will be measured as the sum of AROE for years 1, 2 and 3 divided by 3. Average AROE of less than 15 per cent per annum will see no award. In the event of a change of control of the Company, the performance period end date will generally be brought forward to the date of the change of control and awards will vest over this shortened period, subject to ultimate Board discretion. The Clawback Policy also applies to this plan. Salary Sacrifice Share Plan Executives may nominate an amount (up to A$5,000 per annum) of pre-tax salary to acquire ordinary shares under the SSSP. Provided ordinary shares are kept in the SSSP, income tax on the acquisition of these ordinary shares can be deferred by the Executive for up to seven years. Disposal restrictions apply while the shares remain in the SSSP. Shares acquired under this plan are not subject to performance conditions becuase they are issued in lieu of salary which would otherwise be payable and are subject to a monetary limited of $5,000 per annum. g) How Fortescue performed over the past five years Fortescue continues to build on its performance over the past five years, showing strong growth in revenue and net profit to deliver shareholder wealth. In considering Fortescue’s performance and benefits for shareholder wealth, the Board have regard to the following indices in respect of the current financial year and the previous four financial years. In FY13, Fortescue’s share price was impacted by volatility in global capital and commodity markets, decreasing from the FY2012 closing price of A$ $4.85 to A$3.04 at the end of 2013. This represents a 37 per cent reduction compared with the ASX100 Resource Index which fell 6 per cent over the corresponding period. Revenue from iron ore operations – US$millon Net profit/(loss) – US$million A$ dividends paid A$ change in share price per cent change in share price 2013 8,057 1,746 $0.10 $(1.81) (37) 2012 6,681 1,559 $0.08 $(1.45) (23) 2011 5,442 1,022 $0.03 $2.23 54 2010 3,220 581 - $0.43 12 2009 1,831 508 - $(8.11)* (68) An explanation of how fixed and variable remuneration outcomes were driven by company performance in FY13 is included in section(b). h) Securities trading policy Fortescue’s Securities Trading Policy provides clear guidance on how company securities may be dealt with. The Securities Trading Policy details acceptable and unacceptable periods for trading in Company Securities including detailing potential civil and criminal penalties for misuse of confidential information. 78 I Fortescue Metals Group Limited I Annual Report 2013 78 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT REMUNERATION REPORT Fortescue’s Security Trading Policy provides guidance on acceptable transactions in dealing in the Company’s various securities, including shares, debt notes and options. The policy also sets out a specific governance approach for how the Chairman and Directors can deal in company securities. The Company’s Security Trading Policy can be accessed from the Corporate Governance section of the Fortescue Website. Executive contract terms i) Remuneration and other terms of employment for Executives are formalized in a service agreement. The CEO and Executives are employed on a rolling basis with no specified fixed term. The CEO and Executives are remunerated on a total fixed remuneration (TFR) basis inclusive of superannuation and allowances. The major terms of the agreements relating to remuneration are set out in the table below: Position Chief Executive Officer Executive Mr Neville Power Maximum Maximum ESSIP LTIP opportunity opportunity (per cent of TFR) 150 (per cent of TFR) 112.5 TFR* (A$) 1,800,000 Chief Financial Officer Mr Stephen Pearce 1,050,000 Director Development Mr Peter Meurs 1,050,000 Director Operations Mr David Woodall 900,000 75 75 75 100 100 100 Termination clause Three months written notice (or three months TFR in lieu) Three months written notice (or three months TFR in lieu) Three months written notice (or three months TFR in lieu) Three months written notice (or three months TFR in lieu) * Total Fixed Remuneration as of 30 June 2013. Reviewed annually by the R&NC. Remains at July 2011 levels. All Executives are required to provide written notice of three months to terminate their service agreement. Should Executives not provide sufficient notice they will forfeit the monetary equivalent (calculated based on TFR) of any shortfall in the notice period. If an Executive resigns and leaves the Company prior to 30 June in any year, the Executive will forfeit all entitlement to any payment under the ESSIP. If an Executive retires, is made redundant or leaves the Company as a result of a negotiated termination, the R&NC Committee at its sole discretion may elect to make a pro-rata ESSIP payment based on service up to the termination date. If the Executive resigns and leaves the Company prior to 30 June in the year of vesting under the LTI, the Executive will forfeit all entitlement to any award under the LTI. If an Executive retires, is made redundant or leaves the Company as a result of a negotiated termination prior to 30 June in the year of vesting under the LTI, the R&NC Committee at its sole discretion may elect to make a pro-rata LTI award based on service up to the termination date. Termination benefits for KMP comply with the limits set by the Corporations Act that do not require shareholder approval. Fortescue Metals Group Limited I Annual Report 2013 I 79 Fortescue Metals Group Limited I Annual Report 2013 I 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT j) Detailed remuneration for Executives Executive Remuneration for year ending 30 June 2013 Short-term employee Benefits Post Employment Benefits End of Service Share-based payments Total Maximum Maximum ESSIP Cash value for ESSIP Share value for 2013 Plan Plan Year1 benefits uation entitlements Year2 $A Non- 2013 monetary rann- Supe- Accrued leave $A $A $A $A LTIP Share value perfor- mance rights2 Options3 payments4 Total Other share- based $A $A $A $A Cash Salary and fees $A 1,768,000 708,770 7,000 25,000 - 820,827 640,466 - - 3,970,063 1,018,000 582,705 1,018,000 404,817 276,617 - 174,830 101,726 7,000 25,000 14,583 7,000 25,000 2,917 11,650 - 45,532 - - 319,212 - 446,894 152,973 249,071 - - 1,894,900 - 642,820 - - 249,071 5,371,4777 853,272 8,145,544 738,313 64,230 - - 2013 Executive Directors N Power Executives S Pearce J Frankcombe5 P Meurs D Woodall6 1 ESSIP cash value payable in respect to FY13 to be paid in September 2013. 2 3 4 The value of ESSIP and LTIP performance rights was assessed using trinomial pricing model that takes into account the price of Fortescue shares at the grant date, expected price volatility of the underlying share, the term of the right, the expected divided yield, estimated share conversion factor and the risk-free interest rate for the term of the right and represents the accounting value expensed in FY13. The fair value of options is determined at grant date using either or trinomial lattice option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the effect of additional market conditions, the expected dividend yield, estimated conversion factor and the risk free interest rate for the term of the option. Other share based payments relate to financial assistance by way of guarantee provided to Mr Meurs by The Metal Group Pty Ltd to purchase Fortescue shares under an approved arrangement. The fair value at grant date was determined using a Monte Carlo simulation model, which takes into account the following inputs: the life of the instruments, the price of the underlying share, the expected volatility of the underlying share price, the dividends expected on the underlying share, the risk-free interest rate for the life of the instruments, the loan value per share, the interest, fees and charges on the loan and the terms of the margin call. 5 Mr Frankcombe resigned on 26 January 2013. 6 Mr Woodall commenced on 14 January 2013. 7 Once vested, the options are subject to a further share price performance condition. Half of the options require a share price of $7.00 with the second half requiring a minimum share price of $8.00 before they can be exercised. The exercise price of each option is $5.00 and the expiry date is 13 May 2015. The graph below represents the actual remuneration mix for KMP in FY13. 16% 39% 45% 13% 31% 31% 55% 100% 80% 60% 40% 20% 0% 9% 34% 57% 10% 66% 3% 8% 15% N Power S Pearce TFR ESSIP (at risk) LTI (at risk) P Meurs Options (at risk) D Woodall Other (at risk) 80 I Fortescue Metals Group Limited I Annual Report 2013 80 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT REMUNERATION REPORT Executive Remuneration for year ending 30 June 2012 Short-term employee Benefits Post Employment Benefits End of Service Share-based payments Total ESSIP Cash value for 2012 Cash Salary and fees Plan Year $A $A ESSIP Share value for 2012 Non- monetary Plan benefits uation entitlements Year2 $A Accrued leave Supe- rann- $A $A $A Other share- based Options3 payments4 $A $A Total $A 2012 Executive Directors A Forrest5 N Power6 Key Management Personnel S Pearce P Hallam7 J Frankcombe9 P Meurs 130,216 1,755,442 1,020,083 170,903 461,977 999,250 - - 17,677 7,000 17,784 - 37,558 - 1,214,679 - - - - - 165,677 3,014,679 343,350 - 150,185 146,948 7,000 1,224 - 7,000 25,000 - 263,910 - (91,930)8 15,049 - 2,749 22,917 - - 115,437 47,917 - 263,547 5,833,96810 - - - 853,272 1,659,343 97,995 750,516 8,151,902 1 ESSIP cash value is a minimum of 50% of the estimated award. 2 ESSIP estimated share value for 2012 Plan Year is the value of the participant’s elected weighting in shares (minimum 50 per cent of the total estimated award) divided by the VWAP of Fortescue shares for the first five trading days of the Plan year ($6.44) multiplied by the five day VWAP of Fortescue shares for the first 5 days of FY13 ($4.95). The fair value of options is determined at grant date using a trinomial lattice option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the effect of additional market conditions, the expected dividend yield and the risk free interest rate for the term of the option. Other share based payments relate to financial assistance by way of guarantee provided to Mr. Meurs by The Metal Group Pty Ltd to purchase Fortescue shares under an approved arrangement. The fair value at grant date was determined using a Monte Carlo simulation model, which takes into account the following inputs: the life of the instruments, the price of the underlying share, the expected volatility of the underlying share price, the dividends expected on the underlying share, the risk-free interest rate for the life of the instruments, the loan value per share, the interest, fees and charges on the loan and the terms of the margin call. Mr Forrest commenced as Chairman on 18 July 2011, ceasing to be an Executive Director at this time. The amounts above include the full year earnings as CEO and Chairman. Non-monetary benefits include occasional private use of the Company aircraft taking into account the individual’s contribution towards usage. Mr Power commenced as Chief Executive Officer on 18 July 2011, prior to this he held the position of Chief Operating Officer. The amounts above include the full year earnings as CEO and COO. 3 4 5 6 7 Mr Hallam retired on 4 September 2011. 8 Mr Hallam forfeited 300,000 options on retirement. 9 Mr Frankcombe commenced on 16 January 2012. 10 Once vested, the options are subject to a further share price performance condition. Half of the options require a share price of $7.00 with the second half requiring a minimum share price of $8.00 before they can be exercised. The exercise price of each option is $5.00 and the expiry date is 13 May 2015. Fortescue Metals Group Limited I Annual Report 2013 I 81 Fortescue Metals Group Limited I Annual Report 2013 I 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT Share-based remuneration Options over equity instruments granted as remuneration During the year ending 30 June 2012, the Board of Fortescue Metals Group Limited consented to The Metal Group Pty Ltd, an entity controlled by the Chairman, to offer an arrangement to provide financial assistance to allow certain senior executives of Fortescue to purchase the Company’s shares on market. The arrangement was effected through a number of separate transactions and appropriate disclosures made via lodgment of an Appendix 3Y as required by the ASX Listing Rules. The arrangement constitutes a share-based payment transaction and has been measured with reference to the fair value of the benefit received by the executives and is recognised as an expense on a straight-line basis over a four-year vesting period, in line with the service conditions. The fair value was determined at grant date using Monte-Carlo simulation model. Total share-based payment expense in relation to the arrangement for the financial year ended 30 June 2013 was A$925,453 (2012: A$925,453). The purpose was to provide an opportunity for a limited number of senior individuals critical to Fortescue’s performance to be incentivised and remunerated through increased direct share ownership (reinforcing alignment with shareholder interests), and further enhance Fortescue’s ability to retain these individuals over the long term. Details of share based payments relating to LTI The following table provides details of the number of share rights granted under the LTI during the financial year ended 30 June 2013. The value of the rights has been determined using the amount of the grant date fair value. Name N Power S Pearce J Frankcombe2 P Meurs D Woodall Grant Date Rights Performance Granted Period 10/12/12 1/7/13 to 30/6/15 136,463 53,069 10/12/12 1/7/13 to 30/6/15 53,069 10/12/12 1/7/13 to 30/6/15 53,069 10/12/12 1/7/13 to 30/6/15 20,813 08/02/13 1/7/13 to 30/6/15 No. Share Value per Value of share Rights at right1 Grant Date $15.40 $2,101,530 $15.40 $15.40 $15.40 $18.84 % Performance Achieved Determined in 2015 $817,263 Determined in 2015 $817,263 $817,263 Determined in 2015 $392,117 Determined in 2015 n/a Forfeited/ Lapsed - - 53,069 - - Vested n/a n/a n/a n/a n/a 1 The value of LTI performance rights was assessed using a trinomial pricing model that takes into account the price of Fortescue shares at the grant date, expected price volatility of the underlying share, the term of the right, the expected divided yield, estimated conversion factor and the risk-free interest rate for the term of the right. 2 Mr Frankcombe resigned on 26 January 2013. Details of share based payments relating to LTI. Legacy Incentive Option Scheme (IOS) Details of options over ordinary shares in the Company that were granted under the legacy Incentive Option Scheme (IOS) as remuneration to KMP are set out below. The plan has now been discontinued; however some grants still remain on foot and continue to vest. All options refer to options over ordinary shares of the Company, which are exercisable on a one for one basis under the IOS. Options granted under the plan carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share. 82 I Fortescue Metals Group Limited I Annual Report 2013 82 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT REMUNERATION REPORT The terms and conditions of each grant of options affecting KMP remuneration in the current or future reporting periods are set out below. The IOS provided eligible employees with options subject to share price performance and time conditions determined by the Board. These awards were typically targeted at KMP at the time of appointment, or to retain selected individuals critical to the Company’s development. The options typically vested in 3 tranches over a 36 month period. When exercisable, each option is convertible into one ordinary share of Fortescue Metals Group Limited. Name Directors of Fortescue Metals Group Limited Other key management personnel of the Company P Meurs1 Number of options vested 2013 2012 2,187,500 2,187,500 1 Once vested, the options are subject to a further share price performance condition. Half of the options require a share price of $7.00 with the second half requiring a minimum share price of $8.00 before they can be exercised. The exercise price of each option is $5.00 and the expiry date is 13 May 2015. The options were provided at no cost to the recipients. All options expire on the earlier of their expiry date or termination of the individual’s employment. Once performance hurdles (share price performance and time conditions) are met, the options are exercisable evenly on an annual basis over the four years from grant date. The assessed fair value of options at grant date will be granted to individuals equally over the grant to vesting date period. The amount is included in the remuneration tables above. The fair values at grant date are determined using the trinomial lattice or binomial option pricing models that take into account the exercise price, the term of the option, the impact of dilution, the share price at grant date, expected price volatility of the underlying share, the effect of additional market conditions, the expected dividend yield and the risk free interest rate for the term of the option. There were no amendments to the terms and conditions of options awarded as remuneration since their award date. Exercise of options granted as remuneration No options were exercised in 2013. k) Non-Executive director remuneration Non-Executive directors fees are not ‘at-risk’, to reflect the nature of their responsibilities. Non-Executive directors receive fees for both Board and Committee membership. The maximum aggregate remuneration payable to non-Executive directors is $2.0m, which was approved by shareholders at the annual general meeting on 19 November 2010. There have been no changes to the aggregate fee pool over the last 12 months. The current fees (inclusive of superannuation) are outlined in the table below: Position Board Chairman* Board Deputy Chairman Non-Executive Director Audit & Risk Management Committee Chairman Audit & Risk Management Committee Member Remuneration & Nomination Committee Chairman Remuneration & Nomination Committee Member China Advisory Board Member Finance Sub-Committee Member Fee (A$) 120,000 210,000 140,000 40,000 15,000 15,000 7,500 60,000 6,000 * The Board Chairman has elected to receive an annual fee significantly below market and other Fortescue director norms. Fortescue Metals Group Limited I Annual Report 2013 I 83 Fortescue Metals Group Limited I Annual Report 2013 I 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT As confirmed by Egan Associates, in aggregate, each individual non-Executive director’s total fees are below the market median for non-Executive directors of similarly sized companies (e.g. companies ranked on the ASX50 or ASX100 Resources). 2013 A Forrest H Elliott G Rowley G Brayshaw K Ambrecht1 O Hegarty C Huiquan2 G Raby H Scruggs M Barnaba E Gaines3 Base fees $A 109,091 190,909 127,273 127,273 52,037 127,273 - 140,000 140,000 127,273 44,865 Committee Chairman Committee fees - - - 36,364 - - - - - 13,636 - fees 6,818 6,818 13,636 5,455 10,593 6,818 - 60,000 22,500 19,091 - Other benefits 11,093 - 7,000 - - - - - - - - Superann- uation 11,591 19,773 14,091 16,909 - 13,409 - - - 16,000 4,487 1 Mr Ambrecht retired on 14 November 2012. 2 Mr Huiquan has elected not to receive board fees in his role as Hunan Valin’s representative on Fortescue’s Board. 3 Ms Gaines commenced on 22 February 2013. 2012 H Elliott G Rowley G Brayshaw K Ambrecht I Burston1 O Hegarty L Xiaowei2 C Huiquan3 G Raby4 H Scruggs5 M Barnaba R Scrimshaw6 Base fees $A 170,919 115,152 115,152 126,667 15,918 115,152 80,000 46,667 111,269 108,639 115,152 19,349 Committee Chairman Committee fees 1,344 21,212 - - - - - - - 9,090 - fees 4,545 5,972 1,818 16,167 663 5,303 - - 52,301 10,639 9,737 - Other benefits - - - - - - - - - - - (91,930) Superann- uation 17,681 12,112 13,818 - - 12,045 - - - - 13,398 2,017 Total 138,593 217,500 162,000 186,001 62,630 147,500 - 200,000 162,500 176,000 49,352 Total 194,489 133,236 152,000 142,834 16,581 132,500 80,000 46,667 163,570 119,278 147,377 (70,564) 1 Dr Burston resigned on 18 August 2011. 2 Mr Li resigned on 29 February 2012. 3 Mr Cao commenced on 1 March 2012 and has elected not to receive board fees in his role as Hunan Valin’s representative on Fortescue’s Board. 4 Dr Raby commenced on 18 August 2011. 5 Mr Scruggs commenced on 25 August 2011. 6 Mr Scrimshaw resigned as Non-Executive Director on 27 August 2011. 84 I Fortescue Metals Group Limited I Annual Report 2013 84 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 REMUNERATION REPORT AUDITOR’S INDEPENDENCE DECLARATION Auditor’s Independence Declaration As lead auditor for the audit of Fortescue Metals Group Limited for the year ended 30 June 2013, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Fortescue Metals Group Limited and the entities it controlled during the period. Nick Henry Partner PricewaterhouseCoopers Perth 22 August 2013 PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO Box D198, PERTH WA 6840 T: +61 8 9238 3000, F: +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Fortescue Metals Group Limited I Annual Report 2013 I 85 Fortescue Metals Group Limited I Annual Report 2013 I 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013FINANCIAL STATEMENTS Contents • Consolidated income statement and consolidated statement of comprehensive income • Consolidated statement of financial position • Consolidated statement of cash flows • Consolidated statement of changes in equity • Notes to the consolidated financial statements • Directors’ declaration 87 88 89 90 91 139 86 I Fortescue Metals Group Limited I Annual Report 2013 86 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CONSOLIDATED INCOME STATEMENT AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2013 Consolidated income statement Notes Operating sales revenue Cost of sales Gross profit Other income Other expenses Profit before income tax and net finance expenses Finance income Finance expenses Profit before income tax Income tax expense Profit for the year after income tax Profit for the year is attributable to: Equity holders of the parent Non-controlling interest Profit for the year after income tax Consolidated statement of comprehensive income Profit for the year after income tax Other comprehensive income Items that may be reclassified to profit and loss (Losses)/gains on cash flow hedges taken to equity Gains transferred to the initial carrying amount of hedged items Total comprehensive income for the year, net of tax Total comprehensive income for the year is attributable to: Equity holders of the parent Non-controlling interest Total comprehensive income for the year, net of tax Earnings per share for profit attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share 4 6 5 7 8 8 9 2013 US$m 8,120 (5,140) 2,980 291 (252) 3,019 33 (586) 2,466 (720) 1,746 1,746 - 1,746 2012 US$m 6,716 (4,008) 2,708 171 (111) 2,768 60 (565) 2,263 (704) 1,559 1,559 - 1,559 Notes 2013 US$m 2012 US$m 1,746 1,559 21(a) 21(a) (80) (35) 109 (87) 1,631 1,581 1,631 - 1,631 1,581 - 1,581 Notes Cents Cents 32(a) 32(a) 56.07 56.05 50.07 50.06 The above consolidated income statement and consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. Fortescue Metals Group Limited I Annual Report 2013 I 87 Fortescue Metals Group Limited I Annual Report 2013 I 87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2013 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Current tax receivable Total current assets Non-current assets Trade and other receivables Property, plant and equipment Intangible assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings and finance lease liabilities Provisions Deferred income Current tax payable Total current liabilities Non-current liabilities Trade and other payables Borrowings and finance lease liabilities Provisions Deferred tax liabilities Deferred income Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Equity attributable to equity holders of the Company Non-controlling interest Total equity Notes 2013 US$m 2012 US$m 10 11 12 13 11 14 15 16 17 18 16 17 18 19 20(b) 21(a) 2,158 2,343 409 961 126 8 588 617 102 - 3,662 3,650 6 17,159 40 17,205 20,867 37 11,357 19 11,413 15,063 1,043 1,182 205 128 38 - 283 100 - 551 1,414 2,116 155 12,486 387 805 331 14,164 15,578 5,289 1,291 (49) 4,043 5,285 4 5,289 225 8,218 516 221 5 9,185 11,301 3,762 1,293 41 2,428 3,762 - 3,762 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 88 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 1 I Fortescue Metals Group Ltd I Annual Report 2013 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2013 Notes 2013 US$m 2012 US$m Cash flows from operating activities Cash receipts from customers Payments to suppliers and employees Income tax paid Net cash inflow from operating activities 34 Cash flows from investing activities Payments for property, plant and equipment Movement in deposits and guarantees Proceeds from disposal of plant and equipment and partial sale of jointly controlled assets Interest received Net cash outflow from investing activities Cash flows from financing activities Proceeds from borrowings and finance leases Repayment of borrowings and finance leases Interest and finance costs paid Proceeds from customer deposits Repayment of customer deposits Dividends paid Purchase of shares by employee share trust Transactions with non-controlling interest Net cash inflow from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year Non-cash investing and financing activities 10 34 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 8,725 (5,026) (695) 3,004 6,625 (3,694) (123) 2,808 (6,355) (6,044) 3 155 31 (70) 71 53 (6,166) (5,990) 7,330 (3,232) (893) - (80) (131) (20) 15 3,638 (15) (584) 100 (95) (251) - - 2,989 2,793 (173) 2,343 (12) 2,158 (389) 2,663 69 2,343 Fortescue Metals Group Limited I Annual Report 2013 I 89 Fortescue Metals Group Limited I Annual Report 2013 I 89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2013 Attributable to equity holders of the Company Contributed equity US$m US$m Reserves earnings Total Retained Non-con- trolling Total interest equity US$m US$m US$m US$m Balance at 1 July 2011 Profit for the year Other comprehensive income Total comprehensive income for the year, net of tax Transactions with owners in their capacity as owners, net of tax: Issue of share capital Purchase of shares under employee share plans Employee share awards exercised net of employee contributions Forfeited options Equity settled share-based payment transactions Dividends paid Balance at 30 June 2012 Balance at 1 July 2012 Profit for the year Other comprehensive income Total comprehensive income for the year, net of tax Transactions with owners in their capacity as owners, net of tax: Purchase of shares under employee share plans Employee share awards exercised net of employee contributions Equity settled share-based payment transactions Dividends paid Transactions with non-controlling interest 1,295 13 1,126 2,434 - - - 1 (14) 11 - - - - 22 22 1,559 1,559 - 22 1,559 1,581 - - - (1) 7 - - - - - - 1 (14) 11 (1) 7 (257) (257) 1,293 41 2,428 3,762 1,293 41 2,428 3,762 - - - (20) 18 - - - - 1,746 1,746 (115) - (115) (115) 1,746 1,631 - - 14 - 11 - - - (20) 18 14 (131) (131) - 11 Balance at 30 June 2013 1,291 (49) 4,043 5,285 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. - - - - - - - - - - - - - - - - - - - 4 4 2,434 1,559 22 1,581 1 (14) 11 (1) 7 (257) 3,762 3,762 1,746 (115) 1,631 (20) 18 14 (131) 15 5,289 90 I Fortescue Metals Group Limited I Annual Report 2013 90 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2013 • 1 • 2 CONTENTS of the notes to the consolidated financial statements Summary of significant accounting policies 92 Critical accounting estimates and judgements • 3 Segment information • 4 Operating sales revenue • 5 Other income • 6 Cost of sales • 7 Other expenses • 8 • 9 Finance income and finance expenses Income tax expense • 10 Cash and cash equivalents • 11 Trade and other receivables • 12 Inventories • 13 Other current assets • 14 Property, plant and equipment • 15 Intangible assets • 16 Trade and other payables • 17 Borrowings and finance lease liabilities • 18 Provisions • 19 Deferred tax liabilities • 20 Contributed equity • 21 Reserves • 22 Financial risk management • 23 Dividends • 24 Key management personnel disclosures • 25 Remuneration of auditors • 26 Contingencies • 27 Commitments • 28 Related party transactions • 29 Subsidiaries and transactions with non- controlling interests • 30 Deed of cross guarantee • 31 Interests in joint ventures • 32 Earnings per share • 33 Share-based payments • 34 Reconciliation of profit after income tax to net cash inflow from operating activities • 35 Parent entity financial information 104 106 106 106 107 107 107 108 109 109 110 110 111 112 112 113 116 117 118 118 119 124 125 128 129 129 130 131 132 133 134 135 136 137 • 36 Events occurring after the reporting period 138 Fortescue Metals Group Limited I Annual Report 2013 I 91 Fortescue Metals Group Limited I Annual Report 2013 I 91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. These financial statements cover the consolidated group consisting of Fortescue Metals Group Limited (the Company) and its subsidiaries, together referred to as Fortescue or the Group. Fortescue is a for-profit entity for the purposes of preparing these financial statements. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board (AASB), including Australian Interpretations, and the Corporations Act 2001. (i) Compliance with IFRS The consolidated financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. (ii) Historical cost convention These financial statements have been prepared under the historical cost convention, except for certain financial instruments, which have been measured at fair value. (iii) Critical accounting estimates The preparation of financial statements requires management to use certain critical accounting estimates and to exercise their judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. (iv) Rounding of amounts The Company is of a kind referred to in Class order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest million dollars, unless otherwise stated. (b) Principles of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved when the Company has the power to govern the financial and operating policies of the entity, generally accompanying a shareholding of more than one half of the voting rights. Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated income statement and consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. The financial statements of subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. All intercompany balances and transactions, including unrealised profits and losses arising from intra-group transactions, have been eliminated in full. The acquisition method of accounting is used to account for the Group’s business combinations. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position respectively. 92 I Fortescue Metals Group Limited I Annual Report 2013 92 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (c) Joint ventures – jointly controlled assets The Group undertakes a number of business activities through joint ventures. Joint ventures are established through contractual arrangements that require the unanimous consent of each of the venturers regarding the strategic financial and operating policies of the venture (joint control). When a Group entity undertakes its activities under joint venture arrangements directly, the Group’s share of jointly controlled assets and liabilities incurred jointly with other venturers are recognised in the financial statements of the relevant entity and classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accruals basis. Income from the sale or use of the Group’s share of the output of jointly controlled assets, and its share of joint venture expenses, are recognised when it is probable that the economic benefits associated with the transactions will flow to or from the Group and the amount can be measured reliably. All such amounts are measured in accordance with the terms of each agreement, which is usually in proportion to the Group’s interest in the jointly controlled assets. The transactions, balances and unrealised gains on transactions between the Group and joint ventures are eliminated to the extent of the Group’s ownership interest. (d) Employee share trust The Group has formed a trust to administer its employee share schemes. The trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. Shares held by the share trust are disclosed as treasury shares and deducted from contributed equity. (e) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. (f) Foreign currency translation (i) Functional and presentation currency The financial statements are presented in United States dollars, which is the Group’s reporting currency and the functional currency of the parent and the majority of its subsidiaries. (ii) Transactions and balances Transactions in foreign currencies have been converted at rates of exchange ruling at the date of those transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the year end translation of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in other comprehensive income as qualifying cash flow hedges. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. Fortescue Metals Group Limited I Annual Report 2013 I 93 Fortescue Metals Group Limited I Annual Report 2013 I 93 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (iii) Foreign operations The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • • assets and liabilities are translated at the closing foreign exchange rate at the date of the balance sheet; income and expense items are translated at average exchange rates for the periods presented (unless exchange rates fluctuated significantly during the period, in which case the exchange rates at the dates of the transactions are used); and all resulting exchange differences are recognised in other comprehensive income and accumulated in equity. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings designated as hedges of the investment, are recognised in other comprehensive income. Should a foreign operation be sold or any borrowings forming part of the net investment be repaid, a proportionate share of the exchange difference is reclassified to profit or loss, as part of the gain or loss on sale where applicable. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. (g) Revenue recognition Revenue is measured at the fair value of the gross consideration received or receivable. Fortescue recognises revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. (i) Sale of products Revenue from the sale of products is recognised when persuasive evidence exists, usually in the form of an executed sales agreement, indicating that there has been a transfer of risks and rewards of ownership to the customer, no further work or processing is required by the Group, the quantity and quality of the products have been determined with reasonable accuracy, the price can be reasonably estimated and collectability is reasonably assured. Fortescue recognises revenue from the sale of iron ore when the risks and rewards of ownership transfer to the buyer. The sales price is determined on a provisional basis and adjustments to the sales price may subsequently occur depending on movements in quoted market or contractual iron ore prices to the date of final pricing and final product specifications. The date of final pricing is typically when a notice of readiness is received when the vessel has arrived at its final destination. Revenue is recognised based on the estimated fair value of the total consideration receivable. The fair value of the final consideration is re-estimated at each reporting date and any changes in the fair value are recognised as an adjustment to revenue. (ii) Services revenue Revenue from the provision of services is recognised in the accounting period in which the services are rendered. (iii) Interest income Interest income is accrued using the effective interest rate method. (h) Deferred income Deferred income represents payments collected but not earned at the end of the reporting period. These payments are recognised as revenue when the goods are delivered or services are provided. 94 I Fortescue Metals Group Limited I Annual Report 2013 94 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) Income tax (i) The income tax expense for the year is the tax payable on the current year’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the taxation laws enacted or substantially enacted at the end of the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the taxation authorities. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for future deductible temporary differences and carry forward of unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amounts and tax bases of investments in foreign operations where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not be reversed in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legal right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the Group has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit and loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Fortescue has implemented the tax consolidation legislation as of 1 July 2002 and is therefore taxed as a single entity from that date. The head entity, Fortescue Metals Group Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, the Company also recognises the current tax liabilities (or assets) and the deferred tax assets it has assumed from unused tax losses and unused tax credits from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements within the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Any differences between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. All the entities in the tax consolidated group have entered into a valid and current tax sharing agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of an income tax obligation default by the head entity. Fortescue Metals Group Limited I Annual Report 2013 I 95 Fortescue Metals Group Limited I Annual Report 2013 I 95 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (j) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and other short-term highly liquid investments that are subject to an insignificant risk of changes in value, and are readily convertible to known amounts of cash. (k) Trade receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. An allowance for impairment of trade receivables is established when there is objective evidence that Fortescue will not be able to collect all amounts due. Collectability of trade receivables is reviewed on a monthly basis. When there is objective evidence that Fortescue will not be able to collect all amounts due according to the original terms, an allowance for impairment of trade receivables is raised. Total receivables which are known to be uncollectible are written off by reducing the carrying amount directly. Significant financial difficulties of the customer, probability that the customer will enter bankruptcy or financial re-organisation and default or delinquency in payments are considered indicators that the trade receivable may not be collected. The amount of the impairment allowance is the difference between the trade receivable’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment allowance is recognised in profit and loss within other administration expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other administration expenses. Inventories (l) Raw materials and stores, work in progress and finished goods are stated at the lower of cost and net realisable value. Cost for raw materials and stores is determined as the purchase price. For partly processed and saleable iron ore, cost is based on the weighted average cost method and includes: • • • • labour costs, materials and contractor expenses which are directly attributable to the extraction and processing of iron ore; production overheads, including attributable mining and manufacturing overheads; the depreciation of mine development assets and of property, plant and equipment used in the extraction, processing and transportation of iron ore; and transportation expenditure in bringing such inventories to their existing location and condition, together with an appropriate portion of fixed and variable overhead expenditure. Iron ore stockpiles represent iron ore that has been extracted and is available for further processing or sale. Quantities are assessed primarily through internal and third party surveys. Where there is an indication that inventories are obsolete or damaged, these inventories are written down to net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (m) Financial assets Fortescue classifies its financial assets into loans, receivables and financial assets at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. 96 I Fortescue Metals Group Limited I Annual Report 2013 96 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and include trade receivables. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. (ii) Financial assets through profit or loss This category comprises only derivative financial instruments. They are carried in the balance sheet at fair value with changes in fair value recognised in profit or loss. (n) Financial liabilities (i) Trade payables Trade and other payables are initially recognised at fair value and subsequently measured at amortised cost. These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group has an obligation to make future payments in respect of the purchase of these goods and services. (ii) Borrowings Borrowings are initially recognised at fair value of the consideration received, less directly attributable transaction costs. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the liabilities are derecognised. (iii) Finance lease liabilities The Group has finance lease liabilities in relation to certain items of property, plant and equipment. Finance lease liabilities are initially recognised at the fair value of the underlying assets or, if lower, the estimated present value of the minimum lease payments. Each lease payment is allocated between the liability and finance cost and the finance cost is charged to profit and loss over the lease period to reflect a constant periodic rate of interest on the remaining balance of the liability for each period. (o) Derivatives and hedge accounting Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives such as forward contracts and non-derivative instruments as hedges of foreign exchange risk associated with the cash flows of highly probable forecast transactions. The effective portion of changes in the fair value of hedged instruments that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is immediately recognised in profit or loss within other income or other expense. The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. When the forecast transaction that is being hedged results in the recognition of a non-financial asset, the gains and losses previously deferred in other comprehensive income are transferred from equity and adjust the cost of the asset. When a hedging instrument expires, is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss. Fortescue Metals Group Limited I Annual Report 2013 I 97 Fortescue Metals Group Limited I Annual Report 2013 I 97 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (p) Property, plant and equipment (i) Recognition and measurement Each class of property, plant and equipment is stated at historical cost less, where applicable, any accumulated depreciation and impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the assets. The cost of self-constructed assets includes the cost of materials and direct labour and any other costs directly attributable to bringing an asset to a working condition ready for its intended use. Assets under construction are recognised in exploration, evaluation and development expenditure. Upon commissioning, which is the date when the asset is in the location and condition necessary for it to be capable of operating in the manner intended by management, the assets are transferred into property, plant and equipment or development assets, as appropriate. Cost may also include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Borrowing costs related to the acquisition or construction of qualifying assets are capitalised. When separate parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Purchased software that is integral to the functionality of the related equipment is capitalised as part of the equipment. (ii) Subsequent costs Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with these subsequent costs will flow to Fortescue and the cost of the item can be measured reliably. Ongoing repairs and maintenance are recognised as an expense in profit and loss during the financial period in which they are incurred. (iii) Depreciation Depreciation on assets, other than land which is not depreciated, is calculated using the straight-line method or units of production method, net of residual values, over estimated useful lives. Depreciation commences on the date when an asset is available for use, that is, when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Assets acquired under finance leases are depreciated over the shorter of the individual asset’s useful life and the lease term. Gains and losses arising on disposal of property, plant and equipment are recognised in profit or loss and determined by comparing proceeds from the sale of the assets to their carrying amount. Straight-line method Where the useful life is not linked to the quantities of iron ore produced, assets are generally depreciated on a straight-line basis over the estimated useful lives of the assets as follows: • • • • Buildings Rolling stock Plant and equipment Furniture, fittings and equipment 20 – 25 years 25 – 30 years 5 – 20 years 3 – 8 years The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period with the effect of any changes in estimate accounted for on a prospective basis. Units of production method Where the useful life of an asset is directly linked to the extraction of iron ore from a mine, the asset is depreciated using the units of production method. The units of production method is an amortised charge proportional to the depletion of the estimated proven and probable reserves at the mine. 98 I Fortescue Metals Group Limited I Annual Report 2013 98 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (iv) Exploration, evaluation and development expenditure Exploration and evaluation activities involve the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of an identified resource. Exploration and evaluation expenditure incurred is accumulated in respect of each identifiable area of interest. Exploration and evaluation expenditure is capitalised and carried forward to the extent that: • • rights to tenure of the identifiable area of interest are current; and at least one of the following conditions is also met: (i) the expenditure is expected to be recouped through the successful development of the identifiable area of interest, or alternatively, by its sale; or (ii) where activities in the identifiable area of interest have not at the reporting date reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and activities in, or in relation to, the area of interest are continuing. Exploration and evaluation assets are reviewed at each reporting date for indicators of impairment and tested for impairment where such indicators exist. If the test indicates that the carrying value might not be recoverable, the asset is written down to its recoverable amount. These charges are recognised as impairment expense in profit and loss. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in previous years. Once the technical feasibility and commercial viability of the extraction of mineral resources in an area of interest are demonstrable, exploration and evaluation assets attributable to that area of interest are first tested for impairment and then reclassified from exploration and evaluation expenditure to development expenditure. Development expenditure includes capitalised exploration and evaluation costs, pre-production development costs, development studies and other expenditure pertaining to that area of interest. Costs related to surface plant and equipment and any associated land and buildings are accounted for as property, plant and equipment. Development costs are accumulated in respect of each separate area of interest. Costs associated with commissioning new assets in the period before they are capable of operating in the manner intended by management, are capitalised. Development costs incurred after the commencement of production are capitalised to the extent they are expected to give rise to a future economic benefit. When an area of interest is abandoned or the Directors decide that it is not commercially or technically feasible, any accumulated cost in respect of that area is written off in the financial period that decision is made. Each area of interest is reviewed at the end of each accounting period and the accumulated costs written off to profit and loss to the extent that they will not be recoverable in the future. Amortisation of development costs capitalised is charged on a unit of production basis over the life of estimated proven and probable reserves at the mine. Fortescue Metals Group Limited I Annual Report 2013 I 99 Fortescue Metals Group Limited I Annual Report 2013 I 99 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (q) Development stripping costs Overburden and other mine waste materials are often removed during the initial development of a mine in order to access the mineral deposit. This activity is referred to as development stripping and the directly attributable costs, inclusive of an allocation of relevant overhead expenditure, are capitalised as development costs. Capitalisation of development stripping costs ceases and amortisation of those capitalised costs commences upon commercial extraction of ore. Amortisation of capitalised development stripping costs is determined on a unit of production basis for each area of interest. Development stripping costs are considered in combination with other assets of an operation for the purpose of undertaking impairment assessments. Waste removal costs incurred during the production stage of mine, referred to as deferred stripping costs, are expensed as incurred and form part of operational costs. (r) Leases Leases of assets where Fortescue, as lessee, has substantially all the risks and rewards of ownership, are classified as finance leases. Assets acquired under finance leases are capitalised at the lower of the fair value of the underlying assets or the present value of the future minimum lease payments. The corresponding finance lease liability is classified as borrowings. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leases in which a significant portion of the risks and rewards of ownership are not transferred to Fortescue as lessee are classified as operating leases. Payments made under operating leases are recognised as an expense in profit and loss on a straight-line basis over the period of the lease. (s) Rehabilitation provision Provisions are recognised when Fortescue has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. The mining, extraction and processing activities of Fortescue give rise to obligations for site rehabilitation. Rehabilitation obligations can include facility decommissioning and dismantling, removal or treatment of waste materials, land rehabilitation and site restoration. The extent of work required and the associated costs are estimated using current restoration standards and techniques. Provisions for the cost of each rehabilitation program are recognised at the time that environmental disturbance occurs. Rehabilitation provisions are initially measured at the expected value of future cash flows required to rehabilitate the relevant site, discounted to their present value. The judgements and estimates applied for the estimation of the rehabilitation provisions are discussed in note 2. When provisions for closure and rehabilitation are initially recognised, the corresponding cost is capitalised into the cost of the related assets and is amortised using the units of production method. The value of the provision is progressively increased over time as the effect of discounting unwinds, creating an expense recognised in finance costs. At each reporting date the rehabilitation liability is re-measured to account for any new disturbance, updated cost estimates, inflation, changes to the estimated reserves and lives of operations, new regulatory requirements, environmental policies and revised discount rates. Changes to the rehabilitation liability are added to or deducted from the related rehabilitation asset and amortised accordingly. 100 I Fortescue Metals Group Limited I Annual Report 2013 100 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) Impairment of non-financial assets (t) Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Group conducts an internal review of asset values bi-annually, which is used as a source of information to assess for any indications of impairment. External factors, such as changes in expected future prices, costs and other market factors are also monitored to assess for indications of impairment. If any such indication exists, an estimate of the asset’s recoverable amount is calculated, being the higher of fair value less direct costs to sell and the asset’s value in use. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. Fair value for mineral assets is generally determined using independent market assumptions to calculate the present value of the estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal. These cash flows are discounted using an appropriate discount rate to arrive at a net present value of the asset. Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal, discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Value in use is determined by applying assumptions specific to the Group’s continued use and does not take into account future development. In testing for indications of impairment and performing impairment calculations, assets are considered as collective groups and referred to as cash generating units. Cash generating units are the smallest identifiable groups of assets and liabilities that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impaired assets are reviewed for possible reversal of the impairment at each reporting date. (u) Intangible assets Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation or cost reduction are capitalised as software. Costs capitalised include external direct costs of materials and consultants services, direct payroll and payroll related costs of employees’ time spent on the project. IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where Fortescue has an intention and ability to use the asset. Intangible assets are amortised on a straight-line basis over periods generally ranging from 3 to 5 years. (v) Finance costs Finance costs comprise interest expense, excluding interest expenses incurred for the construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, unwinding of the discount on provisions and impairment losses recognised on financial assets. Interest expense and other borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. Where funds are used to finance an asset form part of general borrowings, the amount capitalised is calculated using a weighted average of rates applicable to relevant general borrowings during the period. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. Fortescue Metals Group Limited I Annual Report 2013 I 101 Fortescue Metals Group Limited I Annual Report 2013 I 101 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (w) Employee benefits (i) Wages and salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables and accruals in respect of employee services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. (ii) Long service leave The liability for long service leave is recognised in other payables and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on Australian Government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. The liability for long service leave for which settlement within 12 months of the reporting date cannot be deferred is recognised in the current provision for employee benefits. The liability for long service leave for which settlement can be deferred beyond 12 months from the reporting date is recognised in the non-current provision for employee benefits. (x) Share-based payments Share-based remuneration benefits are primarily provided to employees via the Fortescue Metals Group Incentive Option Scheme (FMGIOS) and Performance Rights Plan (PRP). Information relating to these schemes is set out in note 33. The fair value of options granted under the FMGIOS and PRP are recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. The fair value at grant date is determined using a trinomial option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date, expected price volatility of the underlying share, the effect of additional market conditions, the expected dividend yield, estimated share conversion factor and the risk free interest rate for the term of the option or right. The fair value of the options and rights granted is measured to reflect expected market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each reporting date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in profit and loss with a corresponding adjustment to equity. (y) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Company, on or before the end of the reporting period but not distributed at the end of the reporting period. (z) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing profit for the year after income tax attributable to the ordinary shareholders by the weighted average number of ordinary shares on issue during the financial year. 102 I Fortescue Metals Group Limited I Annual Report 2013 102 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) (ii) Diluted earnings per share Diluted earnings per share is calculated by dividing profit for the year after income tax attributable to the ordinary shareholders by the weighted average number of ordinary shares on issue during the financial year, after adjusting for the effects of all potential dilutive ordinary shares that were outstanding during the financial year. (aa) Goods and Services Tax (GST) Revenue, expenses and assets are recognised net of the amount of associated GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which is disclosed as an operating cash flow. (ab) Comparatives Where applicable, certain comparatives have been adjusted to conform with current year presentation. (ac) New accounting standards and interpretations (i) New and amended standards adopted by the Group New standards and amendments to standards that are mandatory for the first time for the financial year beginning 1 July 2012 have not affected the amounts recognised in the current period or any prior period and are not likely to affect future periods. However, amendments made to AASB 101 Presentation of Financial Statements effective 1 July 2012 now requires the statement of comprehensive income to separately disclose other comprehensive income between items that may be reclassified to profit or loss if certain conditions are met and those that are not permitted to be reclassified to profit or loss. (ii) New accounting standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2013 reporting periods. These standards and interpretations have not been early adopted. • • • • AASB 9 Financial Instruments and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective for annual reporting periods beginning on or after 1 January 2015). AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities. Fortescue has determined that AASB 9 will have no impact on the way the Group accounts for its financial instruments. AASB 10 Consolidated Financial Statements (effective for the annual reporting periods commencing on or after 1 January 2013). AASB 10 introduces certain changes to the consolidation principles, including the concept of de facto control and changes in relation to special purpose entities. Fortescue has determined that AASB 10 will have no impact on the Group’s current composition. AASB 11 Joint Arrangements (effective for the annual reporting periods commencing on or after 1 January 2013). AASB 11 changes the classification and accounting for joint arrangements based on the specified rights and obligations of the agreement. Fortescue has determined that AASB 11 will have no impact on accounting for its existing joint arrangements. AASB 12 Disclosure of Interests in Other Entities and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Venture Arrangements Standards (effective 1 January 2013). AASB 12 sets out the required disclosures for entities reporting under AASB 10 and AASB 11. Application of this standard by Fortescue will not affect any amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Group’s investments. Fortescue Metals Group Limited I Annual Report 2013 I 103 Fortescue Metals Group Limited I Annual Report 2013 I 103 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 1 Summary of significant accounting policies (continued) • • AASB 13 Fair Value Measurement (effective for annual reporting periods commencing on or after 1 January 2013). AASB 13 establishes a single framework for measuring fair value of financial and non-financial items recognised at fair value. Fortescue is continuing to assess the impact of AASB 13 and has yet to determine which, if any, of its current measurement techniques will have to change as the result of the new guidance. Based on the preliminary analysis, no material impact is expected. IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective for the annual reporting periods commencing on or after 1 January 2013). IFRIC 20 will be adopted by Fortescue from 1 July 2013. It addresses the accounting for deferred stripping costs and requires the capitalisation of the component of waste removal costs that provides an improved access to the ore body. Fortescue has determined that, given the nature of its iron ore reserves and extraction methods used, the benefit of waste removal during the production stage of a mine is realised solely in the form of iron ore inventory produced. IFRIC 20, therefore, will have no material impact on the way waste removal costs are currently being recognised. There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. 2 Critical accounting estimates and judgements The preparation of the consolidated financial statements requires management to make judgements and estimates and form assumptions that affect how certain assets, liabilities, revenue, expenses and equity are reported. At each reporting period, management evaluates its judgements and estimates based on historical experience and on other factors it believes to be reasonable under the circumstances, the results of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Fortescue has identified the following critical accounting policies where significant judgements and estimates are made by management in the preparation of these financial statements. Income taxes (i) The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is required in determining the provisions for income taxes. There are certain transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination may be subject to change. Fortescue estimates its tax liabilities based on the Group’s understanding of the tax law. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. Fortescue recognises deferred tax assets relating to carried forward tax losses to the extent they can be utilised. The utilisation of the tax losses depends on the ability of the entities to generate sufficient future taxable profits. Iron ore reserve estimates (ii) Iron ore reserves are estimates of the amount of product that can be economically and legally extracted from Fortescue’s current mining tenements. In order to calculate ore reserves, estimates and assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand, commodity prices and exchange rates. Estimating the quantity and grade of ore reserves requires the size, shape and depth of ore bodies or fields to be determined by analysing geological data such as drilling samples. This requires complex and difficult geological judgements and calculations to interpret the data. 104 I Fortescue Metals Group Limited I Annual Report 2013 104 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 2 Critical accounting estimates and judgements (continued) As economic assumptions used to estimate reserves change and as additional geological data is generated during the course of operations, estimates of reserves may vary from period to period. Changes in reported reserves may affect Fortescue’s financial results and financial position in a number of ways, including the following: • • • asset carrying values may be affected due to changes in estimated future cash flows; depreciation and amortisation charges in profit and loss may change where such charges are determined by the units of production basis, or where the useful economic lives of assets change; and the carrying value of deferred tax assets may change due to changes in estimates of the likely recovery of tax benefits. (iii) Exploration and evaluation expenditure Fortescue’s accounting policy for exploration and evaluation expenditure results in expenditure being capitalised for an area of interest where it is considered likely to be recoverable by future exploitation or sale or where the activities have not reached a stage which permits a reasonable assessment of the existence of reserves. This policy requires management to make certain estimates as to future events and circumstances, in particular whether an economically viable extraction operation can be established. Any such estimates and assumptions may change as new information becomes available. If, after having capitalised the expenditure under the policy, a judgement is made that recovery of the expenditure is unlikely, the relevant capitalised amount will be written off to profit and loss. (iv) Development expenditure Development activities commence after commercial viability and technical feasibility of the project is established. Judgement is applied by management in determining when a project is commercially viable and technically feasible. In exercising this judgement, management is required to make certain estimates and assumptions as to the future events. If, after having commenced the development activity, a judgement is made that a development asset is impaired, the relevant capitalised amount will be written off to profit and loss. (v) Property, plant and equipment – recoverable amount The determination of fair value and value in use requires management to make estimates about expected production and sales volumes, commodity prices, reserves (see ‘iron ore reserve estimates’ above), operating costs, rehabilitation costs and future capital expenditure. Changes in circumstances may alter these projections, which may impact the recoverable amount of the assets. In such circumstances, some or all of the carrying value of the assets may be impaired and the impairment would be charged to profit and loss. (vi) Rehabilitation Fortescue’s accounting policy for the recognition of rehabilitation provisions requires significant estimates including the magnitude of possible works required for the removal of infrastructure and of rehabilitation works, future cost of performing the work, the inflation and discount rates and the timing of cash flows. These uncertainties may result in future actual expenditure differing from the amounts currently provided. Fortescue Metals Group Limited I Annual Report 2013 I 105 Fortescue Metals Group Limited I Annual Report 2013 I 105 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 3 Segment information Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. The internal reporting is provided to the chief operating decision maker on a consolidated basis. No operating segments have been aggregated to form the above consolidated information. (a) Geographical information Fortescue operates predominantly in the geographical location of Australia, and this is the location of the vast majority of the Group’s assets. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Revenues from external customers China Other 2013 US$m 7,933 187 8,120 2012 US$m 6,479 237 6,716 (b) Major customer information Revenue from one customer amounted to US$1,274 million (2012: US$1,022 million), arising from the sale of iron ore and related shipment of the product. 4 Operating sales revenue Sale of iron ore Sale of third party product Other revenue 5 Other income Gain on disposal of interest in joint venture Net foreign exchange gain Re-estimation of unsecured loan notes Net gain on refinancing Other 106 I Fortescue Metals Group Limited I Annual Report 2013 106 I Fortescue Metals Group Limited I Annual Report 2013 2013 US$m 7,889 168 63 8,120 2013 US$m 124 96 34 23 14 291 2012 US$m 6,489 192 35 6,716 2012 US$m - - 156 - 15 171 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 6 Cost of sales Mining costs Rail costs Port costs Operating leases Shipping costs Government royalty Depreciation and amortisation Other operating expenses 2013 US$m 2,851 182 181 133 769 499 437 88 2012 US$m 2,202 139 125 145 672 366 260 99 5,140 4,008 Total employee benefits expense included in cost of sales and administration expenses is US$635 million (2012: US$492 million). 7 Other expenses Administration expenses Impairment (i) Exploration, development and other Depreciation and amortisation 2013 US$m 110 71 45 26 252 2012 US$m 104 1 - 6 111 (i) Fortescue recognised an impairment charge of US$71 million in relation to specific items of mining equipment that were identified as obsolete. 8 Finance income and finance expenses Net finance expenses Finance income Interest income Finance expenses Interest expense on borrowings and finance lease liabilities Interest capitalised (i) Other Net finance expenses 2013 US$m 2012 US$m 33 33 892 (342) 36 586 553 60 60 731 (196) 30 565 505 (i) For specific borrowings, interest has been capitalised at the rate of interest applicable to specific borrowings that finance assets under construction, net of interest income from temporary investments on these borrowings. For general borrowings, the interest capitalised is calculated using a weighted average of rates applicable to relevant general borrowings during the period. For the year ended 30 June 2013, the capitalisation rate used for specific borrowings was 6.88 per cent (2012: 6.45 per cent) and 7.09 per cent (2012: nil) for general borrowings. Fortescue Metals Group Limited I Annual Report 2013 I 107 Fortescue Metals Group Limited I Annual Report 2013 I 107 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 9 Income tax expense (a) Income tax expense Current tax Deferred tax (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit before income tax Tax at the Australian tax rate of 30.0% (2012: 30.0%) Research and development Foreign exchange variations and other translation adjustments Share-based payments Net tax outcome of internal restructure Adjustments in respect of income tax expense of prior periods Other items Income tax expense 2013 US$m 136 584 720 2013 US$m 2,466 740 (20) 9 2 1 (5) (7) 2012 US$m 583 121 704 2012 US$m 2,263 679 (9) 1 4 16 13 - 720 704 (c) Tax consolidation legislation The Company and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The accounting policy in relation to this legislation is set out in note 1(i). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Fortescue Metals Group Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate the Company for any current tax payable assumed and are compensated by the Company for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the Company under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as non-current intercompany receivables or payables. 108 I Fortescue Metals Group Limited I Annual Report 2013 108 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 9 Income tax expense (continued) (d) MRRT On 19 March 2012, the Australian Government passed through the Senate, the Minerals Resource Rent Tax Act 2012, with application to certain profits arising from the extraction of iron ore and coal in Australia. MRRT is considered to be income tax for Australian accounting purposes, is imposed on a project-by-project basis to upstream operations only and is applied from 1 July 2012. The effective tax rate is 22.5 per cent. At 30 June 2013 Fortescue has a net deferred tax asset balance of US$3,765 million (2012: US$3,505 million) in relation to MRRT, and it is not probable that future taxable amounts will be available for their offset. Accordingly, these deferred tax assets have not been recognised. 10 Cash and cash equivalents Cash at bank Short-term deposits 11 Trade and other receivables Trade debtors GST receivables Security deposits Other receivables Total current receivables Other receivables Total non-current receivables 2013 US$m 690 1,468 2,158 2012 US$m 129 2,214 2,343 2013 US$m 2012 US$m 171 46 166 26 409 6 6 262 104 186 36 588 37 37 Information about Fortescue and its exposure to foreign currency risk, interest rate risk and price risk are disclosed in note 22. The carrying value of the receivables approximates their fair value. Disclosures relating to receivables from related parties are set out in note 28. Fortescue Metals Group Limited I Annual Report 2013 I 109 Fortescue Metals Group Limited I Annual Report 2013 I 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 11 Trade and other receivables (continued) As at 30 June 2013, trade receivables of US$4 million (2012: US$6 million) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: Less than 30 days Between 30 and 60 days Greater than 60 days 2013 US$m 2012 US$m 2 1 1 4 2 - 4 6 Receivables that are classified as past due are those that have not been settled within the normal terms and conditions that have been agreed with the customer. None of the receivables past due in the above table are impaired. All other receivables within trade and other receivables are not impaired as it is expected that these amounts will be received when due. 12 Inventories Iron ore stockpiles Raw materials and stores 2013 US$m 646 315 961 2012 US$m 470 147 617 Raw materials and iron ore stockpiles are stated at cost. Inventories expensed through cost of sales, including depreciation, during the year ended 30 June 2013 amounted to US$3,784 million (2012: US$2,871 million). 13 Other current assets Prepayments Derivative instruments held at fair value Joint venture cash and cash equivalents 2013 US$m 108 12 6 126 2012 US$m 90 2 10 102 110 I Fortescue Metals Group Limited I Annual Report 2013 110 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 14 Property, plant and equipment Plant and Land and Exploration and Assets under equipment buildings evaluation development Development Notes US$m US$m US$m US$m US$m Total US$m Year ended 30 June 2012 Opening net book value Transfers of assets Additions Capitalised interest 8 Foreign exchange gains reclassified from reserves 21(a) Disposals Depreciation Changes in restoration and rehabilitation estimate 18(b) Impairment Closing net book value At 30 June 2012 Cost Accumulated depreciation Net book value Year ended 30 June 2013 Opening net book value Transfers of assets Additions Capitalised interest 7 8 Foreign exchange gains reclassified from reserves 21(a) Disposals Depreciation Changes in restoration and rehabilitation estimate 18(b) Impairment Other 7 7 1,575 1,377 16 - - (31) (166) - - 96 55 - - - (18) (6) - - 2,771 127 3,146 (375) 2,771 2,771 6,025 224 - - (43) (358) - (71) (1) 143 (16) 127 127 520 - - - (3) (12) - - - Closing net book value 8,547 632 At 30 June 2013 Cost Accumulated depreciation Net book value 9,397 (850) 8,547 668 (36) 632 142 (19) 158 - - - - - (1) 280 280 - 280 280 (51) 67 - - (2) - - - (30) 264 264 - 264 1,904 (1,987) 5,904 196 (87) - - - - 1,376 5,093 572 14 - - - (90) 377 - (2) 6,092 196 (87) (49) (262) 377 (1) 5,930 2,249 11,357 5,930 2,517 12,016 - (268) (659) 5,930 2,249 11,357 5,930 (6,959) 6,101 342 (35) - (76) - - (13) 2,249 424 2 - - (19) (97) (132) - (1) 11,357 (41) 6,394 342 (35) (67) (543) (132) (71) (45) 5,290 2,426 17,159 5,290 2,702 18,321 - (276) (1,162) 5,290 2,426 17,159 Transfers of assets at cost were made between the categories of property, plant and equipment, intangible assets and exploration, evaluation and development expenditure. Property, plant and equipment includes assets held under finance leases of US$662 million (2012: US$278 million). The details of the finance leases under which these assets are held are disclosed in note 17. Fortescue Metals Group Limited I Annual Report 2013 I 111 Fortescue Metals Group Limited I Annual Report 2013 I 111 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 2013 US$m 2012 US$m 19 41 (20) 40 68 (28) 40 21 2 (4) 19 27 (8) 19 2013 US$m 372 73 598 2012 US$m 616 81 485 1,043 1,182 129 26 155 201 24 225 15 Intangible assets Opening net book value Transfers of assets Amortisation Closing net book value Computer software Accumulated amortisation Closing net book value 16 Trade and other payables Trade payables Customer deposits Other payables and accruals Total current payables Customer deposits Other payables and accruals Total non-current payables 112 I Fortescue Metals Group Limited I Annual Report 2013 112 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 17 Borrowings and finance lease liabilities Current Senior unsecured notes Senior secured credit facility Finance lease liabilities Preference shares Unsecured loan notes Syndicated lease facility Non-current Senior unsecured notes Senior secured credit facility Finance lease liabilities Preference shares Unsecured loan notes Unsecured bank facility Syndicated lease facility Total borrowings and finance lease liabilities 2013 US$m 2012 US$m 121 52 29 3 - - 205 6,970 4,776 613 127 - - - 126 - 12 3 127 15 283 6,956 - 170 138 770 100 84 12,486 8,218 12,691 8,501 Fortescue Metals Group Limited I Annual Report 2013 I 113 Fortescue Metals Group Limited I Annual Report 2013 I 113 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 17 Borrowings and finance lease liabilities (continued) (a) Summary of movements in borrowings and finance lease liabilities Movements in borrowings and finance lease liabilities during the financial year are set out below: Senior Senior secured unsecured credit facility US$m notes US$m Finance leases/ facilities US$m Unsecured Unsecured Preference shares US$m loan notes US$m bank facility US$m 30 June 2012 Balance at 1 July Initial recognition Interest expense Interest and finance lease repayments Re-estimation of unsecured loan notes Foreign exchange gain Balance at 30 June 2012 30 June 2013 Balance at 1 July Initial recognition Interest expense Interest and finance lease repayments Re-estimation of unsecured loan notes Foreign exchange gain Repayment 3,565 3,462 374 (319) - - 7,082 7,082 - - - - - - - - 209 99 15 (29) - (13) 281 281 - 4,844 1,502 510 (501) - - - 206 (184) - - 74 (66) - (39) (38) (1,110) Balance at 30 June 2013 7,091 4,828 642 154 - 11 (13) - (11) 141 141 - 13 (13) - (11) - 130 Total US$m 4,872 3,661 731 (583) (156) (24) - 100 - - - - 100 8,501 100 1,230 15 (12) - - 8,501 7,576 892 (893) (34) (50) 944 - 331 (222) (156) - 897 897 - 74 (117) (34) - (820) (1,333) - - (3,301) 12,691 Information about Fortescue’s exposure to interest rate risk and foreign exchange rate risk can be found in note 22. (b) Refinancing In October 2012 Fortescue established a senior secured credit facility of US$5.0 billion. The proceeds from the facility were used to repay the unsecured loan notes, refinance all existing secured bank facilities and provide Fortescue with additional liquidity. As a result a net gain of US$23 million was recognised in profit and loss. 114 I Fortescue Metals Group Limited I Annual Report 2013 114 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 17 Borrowings and finance lease liabilities (continued) (c) Key terms of borrowings and finance lease liabilities The key terms of borrowings and finance lease liabilities are summarised below. (i) Senior unsecured notes The Group’s senior unsecured notes are held in its wholly-owned subsidiary FMG Resources (August 2006) Pty Limited and comprise the following tranches which have earlier repayment options with interest repayable bi-annually: US$m Currency Senior unsecured notes Senior unsecured notes Senior unsecured notes Senior unsecured notes Senior unsecured notes Senior unsecured notes USD USD USD USD USD USD Interest rate 7.000% 6.375% 6.875% 8.250% 6.000% 6.875% Date of issue Date of maturity 8 November 2010 1 November 2015 15 December 2010 1 February 2016 15 December 2010 1 February 2018 25 October 2011 1 November 2019 19 March 2012 19 March 2012 1 April 2017 1 April 2022 Face value 2,040 600 900 1,500 1,000 1,000 7,040 Carrying value 2,038 614 921 1,505 1,006 1,007 7,091 (ii) Senior secured credit facility Fortescue established a senior secured credit facility of US$5.0 billion during October 2012, which is repayable at any time at Fortescue’s option. The facility’s coupon rate is LIBOR plus 4.25 per cent with a LIBOR floor of one per cent representing the minimum LIBOR base used to calculate the coupon rate. Principal repayments of 0.25 per cent are made quarterly with the final residual principal repayment at maturity in October 2017. The facility is secured by a first priority perfected lien on all of the assets of the Company and certain of its subsidiaries subject to certain limited exceptions. (iii) Finance lease liabilities The Group’s finance lease liabilities relate to contractual commitments associated with Fortescue’s OPFs at Christmas Creek and the Solomon Power Station. In the event of default, the assets revert to the lessor. The future minimum lease payments represent the Group’s commitments in relation to the finance leases. Finance lease liabilities include the effect of discounting as summarised below: 30 June 2012 Future minimum lease payments Effect of discounting Present value of minimum lease payments 30 June 2013 Future minimum lease payments Effect of discounting Present value of minimum lease payments Between one year and five years US$m Within one year US$m 49 (17) 32 95 (72) 23 228 (55) 173 393 (263) 130 After five years US$m 84 (8) 76 972 (483) 489 Total US$m 361 (80) 281 1,460 (818) 642 Fortescue Metals Group Limited I Annual Report 2013 I 115 Fortescue Metals Group Limited I Annual Report 2013 I 115 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 17 Borrowings and finance lease liabilities (continued) (iv) Preference shares In September 2008 Fortescue issued 1,400 fully paid non-convertible redeemable preference shares at A$100,000 per share, with a term of 8.5 years. A dividend coupon rate of nine per cent is payable bi-annually either in cash or by issue of additional preference or ordinary shares, as elected by Fortescue. A holder of preference shares is not entitled to share in the distribution of any surplus assets of the Company beyond its redemption amount. The preference shares rank in priority to Fortescue’s ordinary shares for the payment of distributions, have limited voting rights, and are repayable at Fortescue’s option. 18 Provisions Employee benefits Restoration and rehabilitation Total current provisions Employee benefits Restoration and rehabilitation Total non-current provisions (a) Provision for employee benefits Movements in the provision for employee benefits during the financial year are set out below: Carrying amount at 1 July Changes in employee benefits provision Amounts paid Carrying amount at 30 June (b) Provision for restoration and rehabilitation Movements in rehabilitation provision during the financial year are set out below: Carrying amount at 1 July Changes in restoration and rehabilitation estimate (i) Unwinding of discount on the rehabilitation provision Payments for rehabilitation activities Carrying amount at 30 June 2013 US$m 2012 US$m 121 7 128 6 381 387 2013 US$m 102 122 (97) 127 2013 US$m 514 (132) 7 (1) 388 100 - 100 2 514 516 2012 US$m 80 86 (64) 102 2012 US$m 132 377 5 - 514 (i) A provision for restoration and rehabilitation has been recognised in relation to Fortescue’s iron ore operations. The provision has been made in full for all disturbed areas at the reporting date based on current estimates of costs to rehabilitate and for the costs of infrastructure removal, discounted to their present value based on expected timing of future cash flows. 116 I Fortescue Metals Group Limited I Annual Report 2013 116 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 19 Deferred tax liabilities The composition and movement of deferred tax assets and (liabilities) is as follows: Exploration expenditure Development Property, plant and equipment Consumables Balance 1 July 2011 US$m (41) (67) (228) (26) Unrealised foreign exchange losses / (gains) 20 Senior notes Unsecured loan notes Accruals Provisions Other financial liabilities Other items - 217 1 25 - (1) Charged/ (credited) Charged/ (credited) to profit to equity or loss US$m US$m Balance 30 June 2012 US$m Charged/ (credited) Charged/ (credited) to profit to equity or loss US$m US$m Balance 30 June 2013 US$m (39) (286) 174 (18) (13) (6) (13) - 159 (80) 1 - - - - - - - - - - - - (80) (353) (54) (44) 7 (6) 204 1 184 (80) - (221) 1 160 (531) (81) (38) 6 (204) - (27) 116 14 (584) - - - - - - - - - - - - (79) (193) (585) (125) (31) - - 1 157 36 14 (805) Assets Liabilities Net assets / (liabilities) (100) (121) 2013 US$m 2012 US$m Exploration expenditure Development Property, plant and equipment Consumables Unrealised foreign exchange losses / (gains) Senior notes Unsecured loan notes Accruals Provisions Other financial liabilities Other items - 75 54 - 2 - - 15 157 95 21 419 2013 US$m (79) (268) (639) (125) (33) - - (14) - (59) (7) - 15 92 - 7 1 204 10 184 - 2 515 (1,224) 2012 US$m (80) (368) (146) (44) - (7) - (9) - (80) (2) (736) 2013 US$m (79) (193) (585) (125) (31) - - 1 157 36 14 2012 US$m (80) (353) (54) (44) 7 (6) 204 1 184 (80) - (805) (221) Fortescue Metals Group Limited I Annual Report 2013 I 117 Fortescue Metals Group Limited I Annual Report 2013 I 117 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 20 Contributed equity (a) Share capital Ordinary shares fully paid (b) Movements in ordinary share capital Date Details 1 July 2011 Opening balance Exercise of options Purchase of shares under employee share plans 30 June 2013 Number 3,113,798,151 30 June 2012 Number 3,113,798,151 Number of shares 3,113,498,151 300,000 (2,678,467) Issue price $2.64 $5.55 $4.27 $4.95 $4.45 US$m 1,295 1 (14) 11 1,293 1,293 (20) 18 1,291 Employee share awards exercised net of employee contributions 2,678,467 30 June 2012 Closing balance 1 July 2012 Opening balance Purchase of shares under employee share plans 3,113,798,151 3,113,798,151 (4,001,750) Employee share awards exercised net of employee contributions 4,001,750 30 June 2013 Closing balance 3,113,798,151 (c) Ordinary shares Fully paid ordinary shares entitle the holder to participate in dividends and to one vote per share at meetings of the Company. Ordinary shares participate in the proceeds on winding up of the Company in proportion to the number of shares held. 21 Reserves (a) Reserves Hedging reserve Share-based payments reserve Capital reserve 118 I Fortescue Metals Group Limited I Annual Report 2013 118 I Fortescue Metals Group Limited I Annual Report 2013 2013 US$m (90) 29 12 (49) 2012 US$m 25 15 1 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 21 Reserves (continued) Hedging reserve Balance at 1 July (Losses)/gains on cash flow hedges taken to equity Gains transferred to the initial carrying amount of hedged items Balance at 30 June Share-based payments reserve Balance at 1 July Forfeited options Share-based payment expense Balance at 30 June Capital reserve Balance at 1 July Transactions with non-controlling interest Balance at 30 June 2013 US$m 2012 US$m 25 (80) (35) (90) 15 - 14 29 1 11 12 3 109 (87) 25 9 (1) 7 15 1 - 1 (b) Nature and purpose of reserves (i) Hedging reserve The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The cumulative deferred gain or loss on the hedge is recognised as an adjustment to the initial cost of non-financial hedged items. (ii) Share-based payments reserve The share-based payments reserve primarily records items recognised as expenses on valuation of employee share options and rights. The movement in the share-based payments reserve is disclosed in the statement of changes in equity. (iii) Capital reserve The capital reserve records equity contributions by the holder of the non-controlling interest and revaluations of non-current assets held at fair value. 22 Financial risk management Fortescue has a risk management programme that provides a structured approach to the management of risks across the business. The programme incorporates active management of financial risks arising from Fortescue’s activities to ensure that such risks are maintained within tolerable levels as required by the Board of Directors. Financial risks include market risk, credit risk and liquidity risk. The Board of Directors, through the Audit & Risk Management Committee (ARMC), has ultimate responsibility for oversight of the Fortescue Risk Management Programme (RMP) and for setting appropriate risk tolerance levels. Day-to-day management responsibility for execution of the RMP has been delegated to the CEO and the CFO. Periodically the CFO reports to the ARMC on risk management performance, including management of financial risks. The key elements of financial risk are further explained below. Fortescue Metals Group Limited I Annual Report 2013 I 119 Fortescue Metals Group Limited I Annual Report 2013 I 119 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 22 Financial risk management (continued) (a) Market risk Market risk arises from Fortescue’s exposure to commodity price risk and the use of interest bearing and foreign currency financial instruments. It is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates (foreign currency exchange risk), iron ore prices (commodity price risk) or interest rates (interest rate risk). (i) Foreign currency exchange risk Fortescue operates internationally and is exposed to foreign currency exchange risk arising from various currency exposures primarily with respect to the Australian dollar and Euro. Fortescue is exposed to foreign currency exchange risk on cash reserves, trade and other receivables, borrowings, trade and other payables, derivatives held at fair value and other financial assets and liabilities. Fortescue’s policy is, where possible, to allow Group entities to settle liabilities denominated in their functional currency with the cash generated from their own operations in that currency. Fortescue’s exposure to foreign currency exchange risks is measured using sensitivity analysis and cash flow forecasting. Fortescue’s risk management policy is to target specific levels at which to convert United States dollars to Australian dollars by entering into either spot or short-term forward exchange contracts and to hedge a portion of anticipated cash flow in relation to the 155mtpa expansion program in Australian dollars. All of the projected cash flows related to the expansion program qualify as highly probable forecast transactions for hedge accounting purposes. The carrying amounts of the Group’s financial assets and liabilities are primarily denominated in three currencies as set out below: 30 June 2012 Financial assets Cash and cash equivalents Trade and other receivables Other financial assets Derivatives held at fair value Total financial assets Financial liabilities Borrowings and other financial liabilities Trade and other payables Total financial liabilities 30 June 2013 Financial assets Cash and cash equivalents Trade and other receivables Derivatives held at fair value Other financial assets Total financial assets Financial liabilities Borrowings and other financial liabilities Trade and other payables Total financial liabilities 120 I Fortescue Metals Group Limited I Annual Report 2013 120 I Fortescue Metals Group Limited I Annual Report 2013 USD US$m AUD US$m EURO US$m Total US$m 1,146 282 10 2 1,194 208 - - 1,440 1,402 8,178 393 8,571 1,497 145 12 - 1,654 12,224 380 12,604 323 1,114 1,437 660 223 - 6 889 467 816 1,283 3 1 - - 4 - - - 1 1 - - 2 - 2 2 2,343 491 10 2 2,846 8,501 1,507 10,008 2,158 369 12 6 2,545 12,691 1,198 13,889 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 22 Financial risk management (continued) (ii) Commodity price risk The Group is exposed to commodity price risk through iron ore price movements. Fortescue has not entered into any forward commodity price contracts at 30 June 2013 (2012: nil) and is currently fully exposed to commodity price movements as follows: Trade receivables Derivative held at fair value Unsecured loan notes 2013 US$m 171 12 - 183 2012 US$m 262 - (897) (635) (iii) Interest rate risk It is Fortescue’s policy to reduce interest rate risk over the cash flows on its long-term debt finance within tolerable levels set by ARMC through the use of fixed rate instruments whenever appropriate. Fortescue’s main interest rate risk arises from floating rates on the senior secured credit facility and changes in rates on short-term investments. The Group’s fixed rate borrowings are carried at amortised cost and are not subject to interest rate risk as defined in AASB 7 Financial Instruments: Disclosures. Other financial instruments of the Group are non-interest bearing and are also not subject to interest rate risk as defined in AASB 7. At 30 June 2013, Fortescue had the following variable rate financial assets and liabilities: Cash and cash equivalents Senior secured credit facility Syndicated finance lease facility Unsecured bank facility 2013 US$m 2,143 (4,828) - - 2012 US$m 2,303 - (99) (100) (2,685) 2,104 Management analyses the Group’s interest rate exposure on a regular basis by simulation of various scenarios taking into consideration refinancing, renewal of existing positions, alternative financing options and hedging. (iv) Summarised sensitivity analysis The Group has used ranges of rate and price fluctuations that approximate the rates observed over the reporting period to estimate its sensitivity to market rates. The Group’s main interest rate exposures are to LIBOR and Australian short-term interest rates; its foreign exchange risk is to the Australian Dollar and Euro rates and commodity price risk is due to spot iron ore prices. Fortescue Metals Group Limited I Annual Report 2013 I 121 Fortescue Metals Group Limited I Annual Report 2013 I 121 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 22 Financial risk management (continued) The following table summarises the Group’s financial assets and liabilities’ exposure to the various elements of market risk. Interest rate risk -10 bps +10 bps Foreign exchange risk +5% -5% Commodity price risk -15% +15% Carrying Pre-tax Other Pre-tax Other Pre-tax Other Pre-tax Other Pre-tax Other Pre-tax Other equity profit profit equity amount profit US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m equity profit profit equity equity equity profit At 30 June 2012 Financial assets Cash and cash equivalents Trade and other receivables Other financial assets Derivatives held at fair value Financial liabilities Borrowings and other financial liabilities Trade and other payables Total (decrease) / increase At 30 June 2013 Financial assets Cash and cash equivalents Trade and other receivables Derivatives held at fair value Other financial assets Financial liabilities Borrowings and other financial liabilities Trade and other payables Total (decrease) / increase 2,343 (2) 491 10 2 8,501 1,514 - - - - - (2) 2,158 (2) 369 12 6 - - - 12,691 (5) 1,198 - (7) - - - - - - - - - - - - - - 2 - - - - - 2 2 - - - 5 - 7 - - - - - - - - - - - - - - (60) (10) - - (16) (56) (142) (33) (11) - - (23) (41) (108) - - - - - - - - - - - - - - 60 10 - - 16 56 142 33 11 - - 23 41 108 - - - - - - - - - - - - - - - (40) - - 135 - 95 - (22) (2) - - - (24) - - - - - - - - - - - - - - - 40 - - (135) - (95) - 22 2 - - - 24 - - - - - - - - - - - - - - 122 I Fortescue Metals Group Limited I Annual Report 2013 122 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 22 Financial risk management (continued) (b) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to Fortescue and is managed on a consolidated basis. Credit risk arises from cash and cash equivalents at bank, derivative financial instruments, deposits with banks and financial institutions and receivables from customers. Fortescue is exposed to a concentration of risk with the majority of its iron ore customers being located in China. This risk is mitigated by a policy of only trading with creditworthy counterparties and Fortescue further mitigates its credit risk by obtaining security in the form of letters of credit on receipt of a bill of lading covering approximately 95 per cent of the value of iron ore shipped. Fortescue has not recognised any bad debt expense from trading counterparties in the financial years ended 30 June 2013 and 30 June 2012. The exposure to the credit risk from cash and short-term deposits held in banks is managed by the treasury department and monitored by the Board of Directors. Fortescue minimises the credit risks by holding funds with a range of financial institutions with the credit ratings approved by the Board. The analysis of receivables past due is presented in note 11. Fortescue does not consider there to be any potential impairment loss on these receivables. (c) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. The Group manages liquidity risk by maintaining adequate cash reserves and banking facilities, by continuously monitoring actual and forecast cashflows and by matching the maturity profiles of financial assets and liabilities. The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the period to the contracted maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Less than 6 months US$m Between 6 and 12 months US$m Between 1 and 2 years US$m Between 2 and 5 years US$m 1,261 448 7 1,716 999 345 159 1,503 - 399 11 410 - 301 154 455 29 929 21 979 26 606 307 939 116 6,233 164 6,513 119 6,003 5,452 11,574 Over 5 years US$m - 5,041 5 5,046 - 3,933 - 3,933 Total contractual cash flows US$m Carrying amount US$m 1,406 13,050 208 14,664 1,144 11,188 6,072 18,404 1,406 8,403 199 10,008 1,144 7,917 4,828 13,889 30 June 2012 Non-interest bearing Fixed rate Variable rate Total 30 June 2013 Non-interest bearing Fixed rate Variable rate Total Management monitors rolling forecasts of the Group’s cash and overall liquidity position on the basis of expected cash flows. Fortescue Metals Group Limited I Annual Report 2013 I 123 Fortescue Metals Group Limited I Annual Report 2013 I 123 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 22 Financial risk management (continued) (d) Fair values All financial assets and financial liabilities, with the exception of derivatives, are initially recognised at the fair value of the consideration paid or received, net of directly attributable transaction costs. Subsequently, the financial assets and financial liabilities, other than derivatives, are measured at amortised cost. The carrying values of the financial assets and liabilities approximate their fair values, with the exception of the senior unsecured notes and senior secured credit facility with the fair values of US$7,087 million and US$4,988 million respectively. These fair values are determined with reference to quoted prices in active markets. (e) Capital management Fortescue’s capital management policy provides a framework to maintain a strong capital structure to sustain the future development and expansion of the business and to provide consistent returns to its equity shareholders. The capital structure of the Group consists of net debt (borrowings and other financial liabilities as detailed in note 17 offset by cash and bank balances) and the equity of the Group (comprising issued capital, reserves and retained earnings as detailed in the statement of changes in equity). Fortescue has built significant flexibility in its debt capital structure. This flexibility allows Fortescue to manage debt through voluntary repayment or refinancing to extend maturity dates to match the Group’s long life assets. The Group monitors capital using financial and non-financial indicators. Financial indicators include, but are not limited to, gearing, interest coverage and leverage ratios. Target ranges for ratios are provided dependent upon the investment and commodity cycle. During periods of intensive investment, for example expansion programmes, or a commodity cycle downturn, the capital policy contemplates interim ratio levels moving to a targeted longer term level. Interim levels acknowledge and consider the requirements, in certain circumstances, for remedial action to be taken. 23 Dividends (a) Dividends paid during the year Final fully franked dividend for the year ended 30 June 2012: A$0.04 per share (30 June 2011: A$0.04 per share) Interim fully franked dividend for the half-year ended 31 December 2012: nil (2012: A$0.04 per share) (b) Dividends proposed and not recognised as a liability Final fully franked dividend: A$0.10 per share (2012: A$0.04 per share) 2013 US$m 2012 US$m 131 - 131 2013 US$m 282 282 123 134 257 2012 US$m 131 131 (c) Franking credits At 30 June 2013, franking credits available were US$652 million (2012: US$13 million). The payment of the final dividend for the year ended 30 June 2013 will reduce the franking account balance by US$121 million. 124 I Fortescue Metals Group Limited I Annual Report 2013 124 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 24 Key management personnel disclosures (a) Key management personnel remuneration Short-term employee benefits Share-based payments Equity compensation benefits 2013 US$m 2012 US$m 8 9 - 17 5 7 2 14 Detailed remuneration disclosures are provided in the remuneration report. Apart from the details disclosed in this note, no Director has entered into a material contract with the Company or Fortescue since the end of the previous financial year and there were no material contracts involving Directors’ interests existing at 30 June 2013. Fortescue Metals Group Limited I Annual Report 2013 I 125 Fortescue Metals Group Limited I Annual Report 2013 I 125 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 24 Key management personnel disclosures (continued) (b) Equity instrument disclosures relating to key management personnel (i) Options and performance rights The movement during the reporting period in the number of options and performance rights over ordinary shares in the Company held directly, indirectly or beneficially, by each of the Key Management Personnel, including their related parties, is as follows: 2012 Balance at start of the year Exercised / converted Granted* - - 600,000 - - - - - - - - - Name Directors of Fortescue A Forrest N Power R Scrimshaw G Rowley H Elliott K Ambrecht G Brayshaw O Hegarty M Barnaba G Raby H Scruggs C Huiquan Other key management personnel of Fortescue P Hallam S Pearce P Meurs J Frankcombe - 419,255 - - - - - - - - - - 450,000 - 7,500,000 - - 81,522 114,131 37,076 - - (300,000) - - - - - - - - - (150,000) - - - Exercised / converted 2013 Balance at start of the year Granted* Name Directors of Fortescue - A Forrest 419,255 N Power - G Rowley - H Elliott - K Ambrecht** - G Brayshaw - O Hegarty - M Barnaba - C Huiquan - H Scruggs - G Raby - E Gaines P Meurs 7,614,131 Other key management personnel of Fortescue S Pearce D Woodall J Frankcombe** - 341,158 - - - - - - - - - - 164,514 132,673 52,032 132,673 81,522 - 37,076 Forfeited / lapsed Balance at end of the year Vested Unvested exercisable Not - - (300,000) - - - - - - - - - - 419,255 - - - - - - - - - - - - - - - - - - - - - - - 419,255 - - - - - - - - - - - 419,255 - - - - - - - - - - (300,000) - - - - 81,522 7,614,131 37,076 - - 4,375,000 - - 81,522 - 81,522 3,239,131 7,614,131 37,076 37,076 Forfeited / lapsed Balance at end of the year Vested Unvested exercisable Not - (245,369) - - - - - - - - - - (53,242) - (173,886) - - - - - - - - - - - 341,158 - - - - - - - - - - (60,889) 7,664,514 - - - - - - - - - - - - - 341,158 - - - - - - - - - - 6,562,500 1,102,014 - 341,158 - - - - - - - - - - 7,664,514 (53,316) - (23,398) (28,206) - (146,351) 132,673 52,032 - - - - 132,673 52,032 - 132,673 52,032 - * Performance rights were granted in accordance with the short term and long term performance rights plans, as disclosed in note 33. ** Mr Ambrecht and Mr Frankcombe resigned during the current financial year. 126 I Fortescue Metals Group Limited I Annual Report 2013 126 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 24 Key management personnel disclosures (continued) (ii) Share holdings The numbers of shares in the Company held during the financial year by each Director of Fortescue and other key management personnel of the Group, including their related parties, are set out below: 2012 Held at 1 July 2011 Received on conversion of rights 964,848,823 7,590,055 2,167,938 50,000 - 52,149 - 20,000 - - - 19,144,951 - - 6,303,030 Name Ordinary Shares Directors of Fortescue A Forrest R Scrimshaw H Elliott N Power M Barnaba G Brayshaw O Hegarty I Burston L Xiaowei I Cumming G Raby G Rowley C Huiquan H Scruggs K Ambrecht Other key management personnel of Fortescue S Pearce P Hallam P Meurs J Frankcombe 2013 45,613 246,667 8,152,882 - - - - - - - - - - - - - - - - - - - - Received on conversion of rights Name Ordinary Shares Directors of Fortescue A Forrest H Elliott N Power M Barnaba G Brayshaw O Hegarty G Raby G Rowley C Huiquan H Scruggs E Gaines K Ambrecht P Meurs Other key management personnel of Fortescue S Pearce D Woodall J Frankcombe 1,010,690,915 2,167,938 866,321 - 52,149 40,000 - 18,144,951 - - - 5,183,030 25,871,281 - - 245,369 - - - - - - - - - 53,242 328,988 - 19,571 53,316 - 23,398 Held at 1 July 2012 Issued Purchases Sales Transfers Other** Held at 30 June 2012 12,840 - - 24,839 - - - - - - - - - - - 45,829,252* - - 791,482 - - 40,000 - - - - - - - - - - - - - - - - - - - (1,000,000) - - (1,120,000) 85,785 - 197,590 - 85,785 17,632,614 19,571 - - - - - - - - - - - - - - - - - - - - - - - - - 1,010,690,915 - 2,167,938 866,321 - 52,149 40,000 - - - - 18,144,951 - - 5,183,030 (7,590,055) - - - - - (20,000) - - - - - - - - (246,667) - - 328,988 - 25,871,281 19,571 Issued Purchases Sales Transfers Other** Held at 30 June 2013 - - - - - - - - - - - - - - - - 10,000,000 - - - - - 8,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (500,000) - - - - - - 1,020,690,915 2,167,938 - 1,111,690 - - - 52,149 - 40,000 - - 8,000 17,644,951 - - - - - - - (5,183,030) - 25,924,523 - - - - - - (42,969) 382,304 - - Includes 16,632,614 shares in which A Forrest and P Meurs both have a beneficial interest. * ** Reflects resignation or retirement. Fortescue Metals Group Limited I Annual Report 2013 I 127 Fortescue Metals Group Limited I Annual Report 2013 I 127 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 24 Key management personnel disclosures (continued) (c) Other transactions with key management personnel Mr Meurs is a participant in the financial arrangement provided by The Metal Group Pty Limited, as disclosed in note 28. Under this arrangement The Metal Group Pty Limited provided Mr Meurs with financial assistance by way of guarantees for the acquisition of 16,632,614 ordinary shares in the Company. The benefit received by Mr Meurs for the financial year ended 30 June 2013 was US$908,634 (2012: US$908,634). Mr Barnaba is a Non-Executive Director of Fortescue and is also the Chairman of Macquarie Group WA. Dr Raby is a Non-Executive Director of Fortescue and is also a Vice Chairman of Macquarie Group China. During the financial year Fortescue entered into a financing arrangement with Macquarie Bank Limited in relation to short term insurance contracts for US$22,095,000. The total amount payable by Fortescue in relation to the financing arrangement at 30 June 2013 is US$4,009,000. In addition, Fortescue incurred A$1,225,000 in relation to consulting services provided by Macquarie during the year. Total amount payable by Fortescue in relation to the consulting services at 30 June 2013 is A$1,225,000. 25 Remuneration of auditors (a) PricewaterhouseCoopers Australia Audit and other assurance services Audit and review of financial statements Other assurance services Other services Other consulting services Total remuneration of PricewaterhouseCoopers Australia (b) Network firms of PricewaterhouseCoopers Australia Audit and other assurance services Audit and review of financial statements Total remuneration of network firms of PricewaterhouseCoopers Australia (c) Other audit firms Audit and other assurance services Audit and review of financial statements – BDO Audit (WA) Pty Ltd Audit and review of financial statements – other firms Other services Other consulting services – BDO Audit (WA) Pty Ltd Total remuneration of other audit firms 2013 US$’000 2012 US$’000 668 82 461 1,211 - - - - 2013 US$’000 2012 US$’000 43 43 - - 2013 US$’000 2012 US$’000 - - - - 523 299 180 1,002 Total auditors’ remuneration 1,254 1,002 128 I Fortescue Metals Group Limited I Annual Report 2013 128 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 26 Contingencies Fortescue had no material contingent liabilities or contingent assets at 30 June 2013 or at the date of this report. Fortescue occasionally receives claims arising from its activities in the normal course of business. In the opinion of the Directors, all such matters are covered by insurance or, if not covered, are without merit or are of such a kind or involve such amounts that would not have a material adverse impact on the operating results or financial position if settled unfavourably. 27 Commitments 30 June 2012 Within one year Between one and five years Total 30 June 2013 Within one year Between one and five years Total Capital US$m 4,312 27 4,339 574 9 583 Operating leases US$m 127 159 286 72 104 176 Total US$m 4,439 186 4,625 646 113 759 (i) At 30 June 2013 Fortescue had contractual commitments to capital expenditure not recognised as liabilities. (ii) Fortescue leases various offices and other premises under non-cancellable operating leases expiring within one to seven years. The leases have varying terms, escalation clauses and renewal rights. The terms of the leases are renegotiated on renewal. Fortescue also leases mobile equipment, plant and machinery and office equipment under non-cancellable operating leases. The leases have varying terms. Fortescue Metals Group Limited I Annual Report 2013 I 129 Fortescue Metals Group Limited I Annual Report 2013 I 129 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 28 Related party transactions (a) Subsidiaries Interests in subsidiaries are set out in note 29. (b) Key management personnel Disclosures relating to key management personnel are set out in note 24. (c) Transactions with other related parties The following amounts originated from the provision of third party port access to the joint venture. 50 per cent of these amounts were eliminated on consolidation for the six months ending December 2012, and 25 per cent since January following the sale of 25 per cent share in the Nullagine Iron Ore Joint Venture. Revenue Current receivables 2013 US$m 2012 US$m 91 19 64 21 No other transactions have occurred with related parties other than subsidiaries, entities with joint control, Directors or key management personnel as disclosed above. (d) Guarantees issued The Metal Group Pty Ltd, an entity controlled by Andrew Forrest, has entered into arrangements to provide financial assistance by way of guarantee to certain of Fortescue’s Executives to purchase the Company’s shares. The arrangement, which constitutes a share-based payment transaction, has been measured with the reference to the fair value of the benefit received by the Executives and is recognised as an expense on a straight-line basis over a four-year vesting period, in line with the service conditions. The fair value was determined at grant date using a Monte-Carlo simulation model. The total share-based payment expense in relation to the arrangement for the financial year ended 30 June 2013 was US$985,499 (2012: US$985,499). 130 I Fortescue Metals Group Limited I Annual Report 2013 130 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 29 Subsidiaries and transactions with non-controlling interests (a) Significant investments in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following principal subsidiaries in accordance with the accounting policy described in note 1(b): Controlled entities The Pilbara Infrastructure Pty Limited FMG Pilbara Pty Limited Chichester Metals Pty Limited FMG Resources (August 2006) Pty Limited Pilbara Mining Alliance Pty Limited Karribi Developments Pty Limited FMG Magnetite Pty Limited FMG North Pilbara Pty Limited FMG Pacific Limited FMG International Pte Limited Pilbara Housing Services Pty Limited FMG Solomon Pty Limited Masters Way Homes Pty Limited FMG Iron Bridge Limited FMG Iron Bridge (Aust) Pty Limited FMG Air Pty Limited FMG Capital Pty Limited Glacier Valley Management Company Pty Limited Pilbara Water and Power Pty Limited FMG Exploration Pty Limited FMG Minerals Pty Limited Pilbara Iron Ore Pty Limited Fortescue Services Pty Limited FMG Personnel Pty Limited VTEC Services Pty Limited FMG IOC Pty Limited FMG Mining Services Pty Limited FMG Training Pty Limited International Bulk Ports Pty Limited FMG Resources Pty Limited FMG America Finance, Inc. FMG Nyidinghu Pty Limited Pilbara Power Pty Limited Pilbara Ports Pty Limited Pilbara Gas Pipeline Pty Limited FMG JV Company Pty Limited FMG Ashburton Pty Limited African Fortescue, Limitada Country of incorporation Class of shares Australia Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary New Zealand Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Mozambique Ordinary Singapore Australia Australia Australia Hong Kong Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia USA Australia Australia Australia Australia Australia Australia Equity holding 2012 2013 % % 100 100 100 100 100 100 100 100 100 100 100 100 100 88 100 88 100 100 100 100 100 100 100 100 100 100 100 88 100 88 100 100 100 100 100 94 100 88 100 100 100 100 50 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 - 100 - 100 - 100 - 100 - 100 - 100 - 100 Investment 2013 US$ 1 1 1 1 1 1 1 1 1 209,053 1 1 1 43,557,023 108 1 1 1 1 1 1 1 1 1 1 1 1 1 1 339 1 1 1 1 1 1 1 1 2012 US$ 1 1 1 1 1 1 1 1 1 209,053 1 1 1 27,861,023 108 1 1 1 1 1 1 1 1 1 1 1 1 1 1 339 - - - - - - - - (b) Transactions with non-controlling interests In July 2012, a third party contributed US$15 million to Fortescue’s subsidiary FMG Iron Bridge Limited in exchange of shares issued by the subsidiary, representing 12 per cent of its share capital. Fortescue Metals Group Limited I Annual Report 2013 I 131 Fortescue Metals Group Limited I Annual Report 2013 I 131 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 30 Deed of cross guarantee Fortescue Metals Group Limited and certain of its subsidiaries are parties to a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare a financial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. Holding Entity • Fortescue Metals Group Limited Group Entities • • • • • • • FMG Pilbara Pty Limited Chichester Metals Pty Limited FMG Resources (August 2006) Pty Limited FMG Resources Pty Limited International Bulk Ports Pty Limited The Pilbara Infrastructure Pty Limited FMG Solomon Pty Limited (a) Consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position and summary of movements in consolidated retained earnings The consolidated income statement, consolidated statement of comprehensive income and summary movements in consolidated statement of changes in equity for the year ended 30 June 2013 along with the consolidated statement of financial position as at 30 June 2013 for the closed group and the extended closed group represented by the above companies are materially the same as that of the consolidated group. 132 I Fortescue Metals Group Limited I Annual Report 2013 132 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 31 Interests in joint ventures (a) Jointly controlled assets Fortescue, through its wholly owned subsidiary FMG Pilbara Pty Limited, holds a participating interest in the Nullagine Iron Ore Joint Venture (the joint venture). The joint venture’s activity is the production of iron ore in the Pilbara region of Western Australia, with Fortescue entitled to receive joint venture output consistent with its participating interest in the joint venture. During the year, Fortescue sold 50 per cent of its share in the joint venture, reducing its participating interest from 50 per cent to 25 per cent. A gain of US$124 million was recognised on the disposal of Fortescue’s interest in the joint venture. Fortescue retains joint control and the Group’s interests in the assets employed in the joint venture are included in the consolidated statement of financial position, in accordance with the accounting policy described in note 1(c), under the following classifications: Current assets Cash and cash equivalents – included in other current assets Inventories Other current assets Non-current assets Property, plant and equipment Share of assets employed in joint venture Current liabilities Trade payables and accruals Non-current liabilities Loans and borrowings Provisions Share of liabilities employed in joint venture Net assets (b) Fortescue’s share of joint venture commitments Contracted but not provided for in the financial statements and payable: Within one year Between one and five years 2013 US$m 2012 US$m 6 3 1 10 38 38 48 13 13 1 1 2 15 33 10 4 2 16 74 74 90 29 29 21 1 22 51 39 2013 US$m 2012 US$m - - - 9 2 11 Fortescue Metals Group Limited I Annual Report 2013 I 133 Fortescue Metals Group Limited I Annual Report 2013 I 133 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 32 Earnings per share (a) Earnings per share Basic Diluted (b) Reconciliation of earnings used in calculating earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic and diluted earnings per share (c) Weighted average number of shares used as denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Potential ordinary shares 2013 Cents 56.07 56.05 2012 Cents 50.07 50.06 2013 US$m 2012 US$m 1,746 1,559 2013 Number 2012 Number 3,113,784,294 3,113,680,118 1,443,267 783,453 Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 3,115,227,561 3,114,463,571 (d) Information on the classification of securities (i) Options and rights Options and rights granted to employees under the Fortescue incentive plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. Details relating to the options are set out in note 33. 134 I Fortescue Metals Group Limited I Annual Report 2013 134 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 33 Share-based payments (a) Employee Option and Performance Rights Plans During the financial year Fortescue issued 1,504,533 short term performance rights and 939,284 long term performance rights to employees and senior executives. The short term performance rights are convertible to one ordinary share per right and vest over the first financial year. The long term performance rights are convertible to a maximum of four ordinary shares per right and vest over three financial years. The vesting of both the short term and long term plans are subject to non-market vesting conditions imposed for each individual participating in the performance rights plans. Outstanding at 1 July Granted during the year Forfeited / lapsed during the year Exercised / converted during the year Weighted average exercise price 2013 A$ 4.51 Nil Nil Nil 3.89 Number of options and rights 2013 Number 9,151,984 2,443,817 (616,629) (375,325) 10,603,847 Weighted average exercise price 2012 A$ 4.60 Nil 2.50 2.50 4.51 Number of options and rights 2012 Number 9,550,000 651,984 (600,000) (450,000) 9,151,984 The weighted average fair value of performance rights granted during the year ended 30 June 2013 was A$4.03 per right for short term performance rights and A$15.50 per right for long term performance rights. The estimated fair value was determined using a trinomial option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date, expected price volatility of the underlying share, the effect of additional market conditions, the expected dividend yield, estimated share conversion factor and the risk-free interest rate for the term of right. Details of the options and performance rights outstanding at 30 June 2013 are presented in the following table. Employee options 2009 Employee options 2010 Employee options 2011 Short term performance rights 2013 Long term performance rights 2013 Exercise price A$ 2.50 5.00 5.69 Nil Nil Balance at the end of the year Number 600,000 7,500,000 400,000 1,300,551 803,296 Vested and exercisable at the end of the year Number 600,000 - - - - Remaining contractual life Months 7 22 27 6 30 10,603,847 600,000 (b) Other share-based payments The arrangement between certain of Fortescue’s Executives and The Metal Group Pty Ltd, as described in note 28, constitutes a share-based payment. The assessed fair value of this share-based payment at grant date was US$3,941,996, including US$985,499 expensed during the financial year (2012: US$985,499). The fair value at each grant date was determined using a Monte-Carlo simulation model that takes into account the four-year life of the instruments, the share prices at each grant date, the expected price volatility of the underlying share, the expected dividend yield, risk-free interest rate for the life of the instruments, the loan value per share, the loan interest rate and the terms of the margin call. Fortescue Metals Group Limited I Annual Report 2013 I 135 Fortescue Metals Group Limited I Annual Report 2013 I 135 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 33 Share-based payments (continued) (c) Employee expenses Total expenses arising from share-based payments transactions recognised during the period as part of employee benefit expense were as follows: Share-based payment expense 2013 US$m 14 2012 US$m 7 34 Reconciliation of profit after income tax to net cash inflow from operating activities 2013 US$m 1,746 720 463 71 45 14 (34) (98) 586 (33) (124) (18) (280) 190 (244) 2012 US$m 1,559 704 266 1 - 7 (156) 21 565 (60) - (7) 176 (67) (201) 3,004 2,808 2013 US$m (223) 26 (197) 2012 US$m (99) - (99) Profit for the year after income tax Income tax expense Depreciation and amortisation Impairment Exploration, development and other Share-based payment expense Re-estimation of unsecured loan notes Net foreign exchange loss Interest expense disclosed within financing activities Interest income disclosed within investing activities Gain on disposal of interest in joint venture Other non-cash items Working capital adjustments (Decrease)/increase in payables and provisions Decrease/(increase) in receivables Increase in inventory Net cash inflow from operating activities Non-cash financing and investing activities Acquisition of plant and equipment through finance leases Other Total non-cash financing and investing activities 136 I Fortescue Metals Group Limited I Annual Report 2013 136 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 35 Parent entity financial information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity Profit for the year* Total comprehensive income for the year 2013 US$m 657 5,480 6,137 156 568 724 2012 US$m 258 4,744 5,002 950 202 1,152 5,413 3,850 1,291 21 4,101 5,413 1,690 1,690 1,293 15 2,542 3,850 797 797 * Profit for the year includes dividends received from subsidiaries of US$1,600 million (2012: US$800 million). (b) Guarantees entered into by the parent entity The parent entity has not provided any financial guarantees other than the cross guarantees given by Fortescue Metals Group Limited, as described in note 30. No liability was recognised by the parent entity or the consolidated entity in relation to the cross guarantees. (c) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2013 or 30 June 2012, other than as disclosed in note 26. For information about guarantees given by the parent entity, please see above. Fortescue Metals Group Limited I Annual Report 2013 I 137 Fortescue Metals Group Limited I Annual Report 2013 I 137 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 36 Events occurring after the reporting period On 22 August 2013, the Directors declared a final fully franked dividend of ten Australian cents per ordinary share payable on 4 October 2013. In August 2013 Fortescue and Formosa Plastics Group (Formosa) entered into a joint venture agreement to develop the FMG Iron Bridge magnetite project. The joint venture remains subject to Australian Foreign Investment Review Board and Taiwan Investment Commission approval. Under the arrangement, Formosa, through its subsidiary Formosa Steel IB Pty Ltd, will: • • • • • Acquire a 31 per cent unincorporated joint venture interest in FMG Iron Bridge Joint Venture for US$123 million. Fund the first US$527 million of capital expenditure on the FMG Iron Bridge Project development. This funding covers construction of Stage One which will commence on completion of the transaction at an estimated capital cost of US$340 million. Participate in Stage Two of the FMG Iron Bridge Project, subject to receipt of relevant Government approvals and Joint Venture sanction. If approved, Stage Two would be funded by the balance of the Formosa’s initial funding, a contribution of the next US$1,050 million from FMG Iron Bridge Limited, followed by proportional contributions (31 per cent Formosa, 69 per cent FMG Iron Bridge Limited). Agree to purchase up to three million tonnes per annum of iron ore at market prices to supply Formosa Ha Tinh Steel mill when commissioned. Elect to prepay US$500 million upfront to The Pilbara Infrastructure Pty Ltd to access Fortescue port facilities at Herb Elliott Port under separate infrastructure access agreements. 138 I Fortescue Metals Group Limited I Annual Report 2013 138 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2013 DIRECTORS’ DECLARATION In the Directors’ opinion: (a) the financial statements and notes set out on pages 86 to 138 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2013 and of its performance for the year ended on that date, and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in note 30 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 30. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of Directors. Mr Andrew Forrest Chairman Dated at Perth this 22nd day of August 2013. Fortescue Metals Group Limited I Annual Report 2013 I 139 Fortescue Metals Group Limited I Annual Report 2013 I 139 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS TO THE MEMBERS Independent auditor’s report to the members of Fortescue Metals Group Limited Report on the financial report We have audited the accompanying financial report of Fortescue Metals Group Limited (the company), which comprises the statement of financial position as at 30 June 2013, the income statement and statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for the Fortescue Metals Group Limited Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the consolidated entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO Box D198, PERTH WA 6840 T: +61 8 9238 3000, F: +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 140 I Fortescue Metals Group Limited I Annual Report 2013 140 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS Auditor’s opinion In our opinion: (a) the financial report of Fortescue Metals Group Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity's financial position as at 30 June 2013 and of its performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the remuneration report included in pages 67 to 84 of the directors’ report for the year ended 30 June 2013. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of Fortescue Metals Group Limited for the year ended 30 June 2013, complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Nick Henry Partner Perth, WA 22 August 2013 Fortescue Metals Group Limited I Annual Report 2013 I 141 Fortescue Metals Group Limited I Annual Report 2013 I 141 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013‘‘ The past ten years has seen an incredible effort in reaching milestones, breaking records, and development of many industry innovations by Fortescue people. ‘‘ Andrew Forrest, Chairman 142 I Fortescue Metals Group Limited I Annual Report 2013 142 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013SHAREHOLDER INFORMATION TENEMENT REPORT Information as at 16 September 2013 Information as at 31 July 2013 Top 20 Holders of Ordinary Shares Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 TOTAL The Metal Group Pty Ltd HSBC Custody Nominees (Australia) Limited Valin Investments (Singapore) Pte Ltd J P Morgan Nominees Australia Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited Valin Resources Investments (Singapore) Pte Ltd Emichrome Pty Ltd Quinambo Nominees Pty Limited Citicorp Nominees Pty Limited Valin Mining Investments (Singapore) Pte Ltd The Metal Group Pty Ltd JP Morgan Nominees Australia Limited BNP Paribas Noms Pty Ltd Citicorp Nominees Pty Limited AMP Life Limited Mr William Graeme Rowley AMNL Financing Pty Ltd The Minderoo Foundation Pty Ltd Neweconomy Com Au Nominees Pty Limited Substantial Shareholders Units 932,177,650 301,989,129 228,007,497 220,555,980 178,280,840 156,371,468 154,267,590 94,685,358 91,452,228 73,614,563 70,546,904 60,305,142 25,948,777 22,563,330 15,041,902 13,576,657 11,644,951 10,135,135 9,874,500 9,585,315 2,680,624,916 Name The Metal Group Pty Ltd And John Andrew Henry Forrest Hunan Valin Iron And Steel Group Total Shares 1,020,690,915 458,405,492 Range of Shares Range 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and Over Total Unmarketable Parcels Total Holders 25,997 24,388 5,887 3,918 352 60,542 Units 13,709,501 63,697,427 45,685,131 97,894,455 2,892,811,637 3,113,798,151 % of issued Capital 29.94% 9.70% 7.32% 7.08% 5.73% 5.02% 4.95% 3.04% 2.94% 2.36% 2.27% 1.94% 0.83% 0.72% 0.48% 0.44% 0.37% 0.33% 0.32% 0.31% 86.09% % of issued Capital 32.78% 14.72% % of issued Capital 0.44% 2.05% 1.47% 3.14% 92.90% 100.00% There were 2,506 members holding less than a marketable parcel of shares in the company. Fortescue Metals Group Limited I Annual Report 2013 I 143 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 TENEMENT REPORT As at 23 September 2013 Western Australia Tenure Status: Granted E 46/567-I E 46/666 E 45/2652-I E 46/595-I E 47/1388-I FMG Mineral rights status: 100% all mineral rights E 46/518-I E 46/413-I E 46/612-I E 46/601-I Holder: Chichester Metals Pty Ltd E 45/2708 E 45/2497-I E 45/2498-I E 45/2499-I E 45/2593-I E 45/2651-I E 46/600-I E 46/569-I E 46/568-I E 46/566-I E 46/590-I E 46/664-I E 47/1434-I E 47/2177-I M 45/1082-I M 45/1083-I M 45/1084-I M 45/1085-I E 47/1320-I E 47/1387-I E 46/675-I M 45/1086-I M 45/1087-I M 45/1088-I M 45/1089-I M 45/1090-I M 45/1091-I M 45/1092-I M 45/1093-I M 45/1094-I M 45/1102-I M 45/1103-I M 45/1104-I M 45/1105-I M 45/1106-I M 45/1107-I M 45/1124-I M 45/1125-I M 45/1126-I M 45/1127-I M 45/1128-I M 45/1138-I M 45/1139-I M 45/1140-I M 45/1141-I M 45/1142-I M 46/292-I M 46/293-I M 46/314-I M 46/315-I M 46/316-I M 46/317-I M 46/318-I M 46/319-I M 46/320-I M 46/321-I M 46/322-I M 46/323-I M 46/324-I M 46/325-I M 46/326-I M 46/327-I M 46/328-I M 46/329-I M 46/330-I M 46/331-I M 46/332-I M 46/333-I M 46/334-I M 46/335-I M 46/336-I M 46/337-I M 46/338-I M 46/339-I M 46/340-I M 46/341-I M 46/342-I M 46/343-I M 46/344-I M 46/345-I M 46/346-I M 46/347-I M 46/348-I M 46/349-I M 46/350-I M 46/351-I M 46/352-I M 46/353-I M 46/354-I M 46/355-I M 46/356-I M 46/357-I M 46/401-I M 46/402-I M 46/403-I M 46/404-I M 46/405-I M 46/406-I M 46/407-I M 46/408-I M 46/409-I M 46/410-I M 46/411-I M 46/412-I M 46/413-I M 46/414-I M 46/415-I M 46/416-I M 46/417-I M 46/418-I M 46/419-I M 46/420-I M 46/421-I M 46/422-I M 46/423-I M 46/424-I M 46/449-I M 46/450-I M 46/451-I M 46/452-I M 46/453-I M 46/454-I M 47/1461 E 46/519-I E 46/623-I E 46/467-I E 46/610-I E 46/516-I E 46/611-I Holder: Chichester Metals Pty Ltd E 46/413-I Status: Granted FMG Mineral rights status: 100% iron ore rights Holder: Chichester Metals Pty Ltd L 46/35 L 45/152 G 46/7 L 46/55 L 46/54 L 46/53 L 47/193 L 46/36 L 46/112-I L 46/36 L 46/56 L 47/197 Status: Granted L 46/37 L 46/57 L 47/198 L 46/40 L 46/58 L 46/46 L 46/62 FMG Mineral rights status: n/a L 46/47 L 46/64 L 46/48 L 46/66 L 46/49 L 46/99 L 46/51 L 46/100 L 46/52 L 46/111-I Holder: Chichester Metals Pty Ltd M 45/1147 M 45/1148 M 45/1149 M 45/1150 M 46/525 Status: Application FMG Mineral rights status: 100% all mineral rights Holder: Chichester Metals Pty Ltd L 47/204 L 46/60 L 47/653 L 47/654 Status: Granted L 47/655 L 47/656 L 47/657 FMG Mineral rights status: n/a L 47/658 L 47/659 L 47/660 Status: Granted E 45/3386-I E 45/3399-I E 45/3402 Holder: FMG Pilbara Pty Ltd E 08/1585-I E 08/1623-I E 08/1440-I E 08/1547-I E 08/1548 E 08/2061-I E 08/2062-I E 08/2063 E 08/2117-I E 08/2118-I E 08/2403-I E 08/2404-I E 08/2405-I E 45/2841-I E 45/2842-I E 45/2855-I E 45/2856-I E 45/2857-I E 45/2858-I E 45/2860-I E 45/2870-I E 45/2945-I E 45/2946-I E 45/2971-I E 45/2972-I E 45/3366-I E 45/3369 E 45/3428-I E 45/3429-I E 45/3430-I E 45/3431-I E 45/3433-I E 45/3535-I E 45/3536-I E 45/3545-I E 45/3469-I E 45/3473 E 45/3641-I E 45/3650-I E 45/3654-I E 45/3659-I E 45/3663-I E 45/3764-I E 45/3767-I E 45/3816-I E 45/3866-I E 45/3760 E 46/517-I E 45/4134-I E 45/4135-I E 45/4148 E 45/4125 E 46/704-I E 46/703-I E 46/702-I E 46/701-I E 46/700-I E 46/735-I E 46/729-I E 46/728-I E 46/727-I E 46/726-I E 46/872-I E 46/871-I E 46/870-I E 46/862-I E 46/861-I E 46/980 E 46/967-I E 47/1136-I E 46/975-I E 46/974-I E 47/1302-I E 47/1319-I E 47/1349 E 47/1351-I E 47/1355-I E 47/1391-I E 47/1392-I E 47/1393-I E 47/1419-I E 47/1420-I E 47/1532-I E 47/1533-I E 47/1479-I E 47/1480-I E 47/1500 E 47/1651-I E 47/1652-I E 47/1653-I E 47/1654-I E 47/1655-I E 47/1681-I E 47/1682-I E 47/1684-I E 47/1685-I E 47/1686-I E 47/1761-I E 47/1762 E 47/1763-I E 47/1764-I E 47/1772-I E 47/1920-I E 47/1921-I E 47/1923-I E 47/1927-I E 47/1944-I E 47/2056-I E 47/2062-I E 47/2080-I E 47/2085-I E 47/2119-I E 47/2173-I E 47/2174-I E 47/2229-I E 47/2234-I E 47/2235-I E 47/2244-I E 47/2285-I E 47/2331-I E 47/2333-I E 47/2334-I E 47/2470-I E 47/2475-I E 47/2476-I E 47/2490-I E 47/2466 E 47/2579-I E 47/2584 E 47/2585-I E 47/2619-I E 47/2632-I E 47/2735-I E 52/1759-I E 52/1760-I E 52/1779-I E 52/1788-I E 52/2114-I E 52/2264-I E 52/2277-I E 52/2290-I E 52/2311-I E 52/2382-I E 52/2393-I E 52/2414-I E 52/2415-I E 52/2416-I E 52/2594-I E 52/2620-I E 52/2626-I E 52/2637-I E 52/2696-I E 08/1624-I E 08/2193-I E 45/2843-I E 45/2861-I E 45/2973 E 45/3412-I E 45/3438-I E 45/3561-I E 45/3664-I E 45/3845 E 46/621-I E 46/706-I E 46/741-I E 46/878-I E 47/1155-I E 47/1357-I E 47/1423-I E 47/1543-I E 47/1656-I E 47/1687-I E 47/1808-I E 47/1988-I E 47/2137-I E 47/2237-I E 47/2336 E 47/2496-I E 47/2637-I E 52/1789-I E 52/2333-I E 52/2470-I E 52/2699-I FMG Mineral rights status: 100% all mineral rights E 45/3442 E 08/1762-I E 08/1831-I E 08/2194-I E 08/2195-I E 45/2850-I E 45/2844 E 45/2862-I E 45/2863-I E 45/3191-I E 45/3270-I E 45/3413-I E 45/3414-I E 45/3441 E 45/3570-I E 45/3591-I E 45/3697-I E 45/3698-I E 45/4001-I E 45/3938 E 46/695-I E 46/694-I E 46/711-I E 46/708-I E 46/776-I E 46/743-I E 46/882-I E 46/889-I E 47/1194-I E 47/1195-I E 47/1361-I E 47/1363-I E 47/1446-I E 47/1447-I E 47/1579-I E 47/1611-I E 47/1665-I E 47/1668-I E 47/1688-I E 47/1690-I E 47/1809-I E 47/1821-I E 47/2020-I E 47/2026-I E 47/2138-I E 47/2143-I E 47/2238-I E 47/2239-I E 47/2369-I E 47/2378-I E 47/2506-I E 47/2507-I E 47/2638-I E 47/2647-I E 52/1790-I E 52/1937-I E 52/2340-I E 52/2341-I E 52/2486-I E 52/2521-I E 52/2725-I E 52/2731-I E 08/1942-I E 08/1943-I E 08/1959-I E 08/2196-I E 08/2218-I E 08/2286-I E 45/2851-I E 45/2852-I E 45/2853-I E 45/2864-I E 45/2865-I E 45/2866-I E 45/3310-I E 45/3318-I E 45/3328-I E 45/3417-I E 45/3421-I E 45/3422-I E 45/3443 E 45/3448-I E 45/3445 E 45/3600-I E 45/3606-I E 45/3608-I E 45/3699-I E 45/3711-I E 45/3739-I E 45/4040-I E 45/4050-I E 45/4077 E 46/698-I E 46/697-I E 46/696-I E 46/724-I E 46/716-I E 46/715-I E 46/832-I E 46/805-I E 46/799-I E 46/958-I E 46/965-I E 46/964-I E 47/1196-I E 47/1299-I E 47/1300-I E 47/1370-I E 47/1372-I E 47/1373-I E 47/1448-I E 47/1449-I E 47/1453-I E 47/1612-I E 47/1613-I E 47/1614-I E 47/1673-I E 47/1674-I E 47/1675-I E 47/1702-I E 47/1703-I E 47/1728-I E 47/1832-I E 47/1843-I E 47/1846-I E 47/2036-I E 47/2037-I E 47/2046-I E 47/2146-I E 47/2157-I E 47/2160-I E 47/2240-I E 47/2241-I E 47/2242-I E 47/2379-I E 47/2442-I E 47/2459-I E 47/2513-I E 47/2538-I E 47/2546-I E 47/2664-I E 47/2665-I E 47/2717-I E 52/1977-I E 52/2034-I E 52/2035-I E 52/2342-I E 52/2347-I E 52/2353-I E 52/2522-I E 52/2527-I E 52/2555 E 52/2738-I E 52/2739-I E 52/2748-I E 08/2060-I E 08/2287-I E 45/2854-I E 45/2867-I E 45/3360-I E 45/3426-I E 45/3463-I E 45/3611-I E 45/3746 E 45/4083-I E 46/699-I E 46/725-I E 46/859-I E 46/966-I E 47/1301-I E 47/1390-I E 47/1455-I E 47/1623-I E 47/1679-I E 47/1741-I E 47/1855-I E 47/2055-I E 47/2172-I E 47/2243-I E 47/2465-I E 47/2575-I E 47/2718-I E 52/2113-I E 52/2380-I E 52/2576-I E 52/2749-I 144 I Fortescue Metals Group Limited I Annual Report 2013 144 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 TENEMENT REPORT As at 23 September 2013 TENEMENT REPORT As at 23 September 2013 Western Australia Tenure (continued) E 52/2924 P 45/2749 E 52/2857-I Status: Granted P 45/2721-I P 45/2748 FMG Mineral rights status: 100% all mineral rights E 52/2928 Pilbara Pty Ltd E 52/2776-I E 52/2793-I E 52/2829-I E 52/2830-I E 52/2856-I E 52/2929 E 77/2054-I E 77/2074-I M 47/1431-I M 47/1433 M 47/1434 M 47/1453-I M 47/1466 M 47/1474-I P 08/617-I P 08/622-I P 45/2786-I P 47/1257-I P 47/1269-I P 47/1270-I P 47/1278-I P 47/1279-I P 47/1287-I P 47/1304-I P 47/1305-I P 47/1306-I P 47/1307-I P 47/1391-I P 47/1392-I P 47/1393-I P 47/1394-I P 47/1395-I P 47/1403-I P 47/1404-I P 47/1405-I P 47/1406-I P 47/1407-I P 47/1468-I P 47/1469-I P 47/1470-I P 47/1513-I P 47/1514-I P 47/1581-I P 47/1582-I P 47/1583-I P 47/1604-I P 47/1605-I P 47/1614-I P 47/1615-I P 47/1616-I P 47/1617-I P 47/1618-I P 47/1640-I P 47/1641-I P 47/1642-I P 47/1643-I P 47/1644-I P 47/1668-I P 47/1669-I P 47/1670-I P 47/1671-I P 47/1672-I P 47/1696-I P 52/1415 P 45/2838-I P 45/2862-I P 47/1281-I P 47/1282-I P 47/1309-I P 47/1315-I P 47/1397-I P 47/1398-I P 47/1409-I P 47/1410-I P 47/1537-I P 47/1545-I P 47/1607-I P 47/1608-I P 47/1626-I P 47/1633-I P 47/1646-I P 47/1647-I P 47/1674-I P 47/1675-I P 45/2787-I P 47/1280-I P 47/1308-I P 47/1396-I P 47/1408-I P 47/1536-I P 47/1606-I P 47/1623-I P 47/1645-I P 47/1673-I E 69/2724-I E 69/3038-I P 08/619-I P 08/618-I P 45/2863-I P 45/2864-I P 45/2865-I P 47/1283-I P 47/1284-I P 47/1285-I P 47/1316-I P 47/1317 P 47/1399-I P 47/1400-I P 47/1401-I P 47/1411-I P 47/1412-I P 47/1423-I P 47/1552-I P 47/1553-I P 47/1554-I P 47/1609-I P 47/1610-I P 47/1612-I P 47/1634-I P 47/1636-I P 47/1638-I P 47/1648-I P 47/1649-I P 47/1650-I P 47/1692-I P 47/1693-I P 47/1694-I P 52/1422-I WA/14EOS P 47/1318 E 69/3039-I P 08/620-I P 47/1211-I P 47/1286-I P 47/1390-I P 47/1402-I P 47/1427-I P 47/1555-I P 47/1613-I P 47/1639-I P 47/1667-I P 47/1695-I Holder: FMG Pilbara Pty Ltd E 08/1432-I E 08/1439-I E 08/1550-I E 08/1626-I E 08/1814-I E 08/2175-I E 08/2200-I E 08/2284-I E 08/2298-I P 08/624 Status: Granted E 08/1816-I E 08/1933 FMG Mineral rights status: 100% iron ore rights (NB. 1) E 08/1962-I E 08/2004-I E 08/2072-I E 08/2137-I E 08/2157-I Holder: FMG Pilbara Pty Ltd E 08/1628-I E 08/1629-I E 08/1630-I E 08/1631-I E 08/1632-I E 08/2000-I E 08/1961-I E 08/1985-I E 08/1986-I E 08/1992 E 08/2250-I E 08/2258-I E 08/2293-I E 08/2294-I E 08/2295-I E 47/1549-I E 47/1677-I E 47/1735-I E 47/1773-I E 47/1833-I P 47/1237-I E 52/2484-I E 52/2730-I E 52/2786-I P 08/647-I Status: Granted E 08/1633-I E 08/2003-I E 08/2296-I E 47/1879-I E 08/1741-I E 08/1878-I E 08/2034-I E 08/2038-I E 08/2353-I E 08/2354-I E 47/2035-I E 47/2171-I FMG Mineral rights status: 100% iron ore rights, 75% non-iron (NB.2) E 08/1950-I E 08/1915-I E 08/1916-I E 08/1949-I E 08/2114-I E 08/2039-I E 08/2065-I E 08/2067-I E 47/1535-I E 08/2364-I E 47/1395-I E 47/1396-I E 47/2636-I E 47/2236-I E 47/2292-I E 47/2587-I Holder: FMG Pilbara Pty Ltd E 47/1333 E 47/1334 M 47/1411 M47/1417 E 47/1352 E 47/1372 Status: Granted E 47/1398 E 47/1399 E 47/1436 FMG Mineral rights status: 100% mineral rights except diamonds E 47/1523 E 47/1524 M 47/1408 M 47/1409 M 47/1410 Holder: FMG Pilbara Pty Ltd G 45/275 L 47/361 G 45/285 L 47/362 L 45/158 L 47/363 L 45/191 L 47/367 Status: Granted L 45/240 L 47/381 L 47/232 L 47/382 L 47/293 L 47/391 FMG Mineral rights status: n/a L 47/294 L 47/392 L 47/296 L 47/397 L 47/301 L 47/471 L 47/351 M 45/1177 M 47/1413-I L 47/360 E 08/1894 E 08/2398 E 08/2522 E 45/3705 E 45/4166 E 45/4227 E 46/994 E 47/1660 E 47/2197 E 47/2666 E 47/2879 E 47/2940 E 52/2892 E 52/2986 Holder: FMG Pilbara Pty Ltd E 08/2367 E 08/1893 E 08/2516 E 08/2391 E 45/3489 E 08/2521 E 45/4161 E 45/3605 E 45/4221 E 45/4162 E 46/990 E 45/4222 E 47/1435 E 46/991 E 47/1999 E 47/1578 E 47/2578 E 47/2061 E 47/2831 E 47/2618 E 47/2922 E 47/2832 E 52/2745 E 47/2939 E 52/2919 E 52/2890 E 52/2933 M 47/1404 M 47/1456 M 47/1457 M 47/1458 M 47/1459 M 47/1473 M 47/1475 M 47/1476 M 47/1477 M 47/1478 M 47/1481 M 47/1488 M 47/1489 P 08/531 P 47/1706 P 52/1421 FMG mineral rights status: 100% all mineral rights E 08/1908 E 08/2497 E 45/3306 E 45/4107 E 45/4203 E 45/4265 E 47/1384 E 47/1990 E 47/2573 E 47/2759 E 47/2918 E 47/2964 E 52/2913 E 69/2727 Status: Application E 08/1905 E 08/2459 E 45/2920 E 45/4056 E 45/4191 E 45/4250 E 46/1002 E 47/1669 E 47/2559 E 47/2689 E 47/2882 E 47/2958 E 52/2904 E 59/1934 E 08/1907 E 08/2491 E 45/3305 E 45/4103 E 45/4202 E 45/4254 E 47/1383 E 47/1818 E 47/2572 E 47/2739 E 47/2914 E 47/2962 E 52/2912 E 69/2726 E 08/2088 E 08/2513 E 45/3423 E 45/4157 E 45/4220 E 46/989 E 47/1433 E 47/1998 E 47/2577 E 47/2830 E 47/2921 E 52/2737 E 52/2918 E 69/3189 E 08/1903 E 08/2402 E 45/2859 E 45/3762 E 45/4170 E 45/4248 E 46/997 E 47/1666 E 47/2198 E 47/2675 E 47/2880 E 47/2941 E 52/2893 E 52/2988 E 08/1906 E 08/2490 E 45/2970 E 45/4093 E45/4192 E 45/4253 E 47/1342 E 47/1670 E 47/2560 E 47/2729 E 47/2883 E 47/2960 E 52/2910 E 69/2722 E 08/1904 E 08/2443 E 45/2919 E 45/3817 E 45/4171 E 45/4249 E 46/1000 E 47/1667 E 47/2223 E 47/2678 E 47/2881 E 47/2957 E 52/2903 E52/2989 E 08/2059 E 08/2512 E 45/3400 E 45/4126 E 45/4217 E 46/986 E 47/1404 E 47/1997 E 47/2576 E 47/2829 E 47/2920 E 52/2732 E 52/2917 E 69/2729 E 08/1982 E 08/2498 E 45/3307 E 45/4119 E 45/4204 E 46/977 E 47/1397 E 47/1992 E 47/2574 E 47/2828 E 47/2919 E 52/1984 E 52/2915 E 69/2728 P 45/2890 P 46/1812 P 46/1813 P 46/1815 P 47/1697 P 47/1705 P 45/2889 P 46/1814 P 08/621 P 08/532 Holder: FMG Pilbara Pty Ltd E 08/1627 E 08/2398 Status: Application FMG Mineral rights status: 100% iron ore rights (NB. 1) Holder: FMG Pilbara Pty Ltd L 47/368 L 47/472 L 47/693 Status: Application FMG Mineral rights status: n/a L 47/700 Holder: FMG Magnetite Pty Ltd E 09/1871-I E 45/2510-I E 45/2535-I M 45/1226-I Status: Granted FMG mineral rights status: 100% all mineral rights (NB.3) Fortescue Metals Group Limited I Annual Report 2013 I 145 Fortescue Metals Group Limited I Annual Report 2013 I 145 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 TENEMENT REPORT As at 23 September 2013 Western Australia Tenure (continued) Holder: FMG Magnetite Pty Ltd L 45/257 L 45/272 L 45/289 Holder: FMG Magnetite Pty Ltd L 45/293 L 45/294 L 45/317 L 45/291 Status: Granted L 45/292-I L 45/325-I FMG Mineral rights status: n/a L 45/318 Status: Application L 45/319 L 45/320 L 45/331 FMG Mineral rights status: n/a Holder: FMG North Pilbara Pty Ltd E 45/3084-I M 45/1184-I M 45/1211-I M 45/1212-I M 45/1213-I Status: Granted FMG mineral rights status: 100% all mineral rights (NB.3) Holder: FMG Resources Pty Ltd E 04/1534-I E 08/2259-I E 09/1872-I E 09/1873-I E 16/420-I E 51/1166-I E 52/1945-I E 52/1946-I E 52/1947-I E 52/2423-I E 63/1500-I E 63/1501-I E 63/1502-I E 63/1503-I E 69/2929 E 69/2954-I E 69/2955-I E 69/2956 E 69/2969-I E 69/2963 Status: Granted E 30/432-I E 52/2621-I E 69/2930 E 69/2970-I FMG mineral rights status: 100% all mineral rights E 45/3224 E 45/3225 E 52/2854-I E 57/738-I E 69/2945-I E 69/2946-I E 69/2971-I E 69/2993-I E 51/1158-I E 51/1159-I E 45/3226 E 57/756-I E 59/1267-I E 59/1275-I E 69/2947-I E 69/2948-I E 69/2950-I E 77/1932-I E 74/504-I E 74/500-I E 51/1165-I E 59/1360-I E 69/2953-I Holder: FMG Resources Pty Ltd E 08/2280-I E 08/2281-I E 08/2282-I Status: Granted FMG Mineral rights status: 100% iron ore rights, 75% non-iron (NB.2) Holder: FMG Resources Pty Ltd E 04/1536 E 52/2949 E 52/2967 E 69/3176 P 77/4058 E 04/1537 E 52/2950 E 52/2968 E 69/3177 P 77/4059 E 04/2129 E 52/2957 E 52/2979 E 69/3198 P 77/4060 E 04/2322 E 52/2958 E 52/2980 E 69/3199 Status: Application E 04/2323 E 52/2959 E 52/2981 E 69/3200 E 45/3221 E 52/2960 E 52/2990 E 69/3201 E 45/4150 E 52/2961 E 59/1279 E 69/3214 FMG mineral rights status: 100% all mineral rights E 51/1574 E 52/2962 E 59/1956 E 69/3229 E 52/2946 E 52/2964 E 69/2951 E 69/3178 E 51/1575 E 52/2963 E 69/2949 E 69/3231 E 52/2947 E 52/2965 E 69/3118 P 77/4056 E 52/2948 E 52/2966 E 69/3125 P 77/4057 Holder: Fortescue Metals Group Ltd P 47/1663-I P 47/1664-I P 47/1665-I P 47/1666-I Status: Granted FMG mineral rights status: 100% all mineral rights Holder: The Pilbara Infrastructure Pty Ltd AL 70/1 G 45/286 L 45/222 L 45/223 Holder: The Pilbara Infrastructure Pty Ltd L 47/661 Holder: Global Advanced Metals Pty Ltd E 45/4024 E 45/4025 Holder: Maincoast Pty Ltd E 47/1461 E 70/2596 Status: Granted L 45/224 L 46/86 L 46/87 FMG mineral rights status: n/a L 46/96 L 47/375 Status: Application FMG mineral rights status: n/a Status: Application FMG mineral rights status: Earning 60% iron ore rights Status: Application FMG mineral rights status: 100% all mineral rights Holder: Pilbara Iron Ore Pty Ltd E 47/1191 E 47/1192 E 47/1224-I E 47/1225-I E 47/1235 E 47/1380-I M 47/580 Status: Granted FMG mineral rights status: 50% all mineral rights P 47/1414 Holder: Pilbara Iron Ore Pty Ltd L 47/205 Holder: Contract Power Australia Pty Ltd L 46/63 Holder: Derek Ammon E 47/1140 Holder: Derek Ammon M 47/583 Status: Application FMG mineral rights status: n/a Status: Application FMG mineral rights status: n/a Status: Granted FMG mineral rights status: 40% all mineral rights (NB.4) Status: Application FMG mineral rights status: 40% all mineral rights (NB.4) Holder: Cullen Exploration Pty Ltd E 08/1393-I E 47/1154-I E 47/1649-I E 47/1650-I P 08/556-I Status: Granted FMG mineral rights status: 51% iron ore rights Holder: Cullen Exploration Pty Ltd E 52/1667-I Status: Granted FMG mineral rights status: Earning 51% iron ore rights 146 I Fortescue Metals Group Limited I Annual Report 2013 146 I Fortescue Metals Group Limited I Annual Report 2013 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 TENEMENT REPORT As at 23 September 2013 TENEMENT REPORT As at 23 September 2013 Western Australia Tenure (continued) Holder: Cullen Exploration Pty Ltd M 08/502 M 47/1490 Holder: David Ryan P 47/1275 Holder: Blue Mist Enterprises Pty Ltd E 47/1863 E 47/1861 Status: Application FMG mineral rights status: 51% iron ore rights Status: Granted FMG mineral rights status: Option for 100% all mineral rights Status: Granted FMG mineral rights status: 100% all mineral rights Holder: Flinders Mines Ltd E 47/1011-I E 47/1016-I E 47/1306-I M 47/1407-I Status: Granted FMG mineral rights status: 100% iron ore rights Holder: Flinders Mines Ltd M 47/663 M 47/664 M 47/665 M 47/666 Status: Application M 47/667 M 47/668 M 47/669 FMG mineral rights status: 100% iron ore rights M 47/670 M 47/671 M 47/672 Holder: BC Iron Ltd E 45/2552-I E 45/2717-I E 46/522 E 45/3790 M 46/515 E 46/663 E 46/523 E 46/928 Status: Granted E 46/651 E 46/929 E 46/652 E 46/930 L 46/68 L 46/93 L 46/73 L 46/94 Status: Granted L 46/74 L 46/95 L 46/75 Holder: BC Iron Ltd G 46/9 G 46/8 L 46/85 L 46/84 Holder: BC Iron Ltd M 46/522 M 46/523 E 46/653 E46/931 L 46/76 FMG mineral rights status: 50% iron ore rights E 46/654 E46/969 E 46/655 E 46/970 E 46/656 E 46/657 E 46/658 FMG mineral rights status: n/a L 46/79 L 46/80 L 46/81 L 46/82 L 46/83 Status: Application FMG mineral rights status: 50% iron ore rights Holder: Aldershot Resources Ltd E 52/1763-I Holder: Livno Consolidated Pty Ltd E45/4021 Status: Granted FMG mineral rights status: Exclusive licence to explore for all minerals (NB.5) Status: Application FMG mineral rights status: Beneficial right to earn 100% mineral rights Holder: Pilbara Gas Pipeline Pty Ltd L 45/334 L 45/333 L 45/332 L 45/346 L 45/345 L 45/344 L 45/335 L 45/347 Status: Application L 45/336 L 45/348 L 45/337 L 45/349 L 45/338 L 45/352 Queensland Tenure FMG mineral rights status: n/a L 45/339 L 45/353 L 45/340 L 47/695 L 45/341 L 47/696 L 45/342 L 47/697 L 45/343 Holder: FMG Resources Pty Ltd EPC 1972 EPC 1975 EPC 2013 South Australia Tenure Holder: FMG Resources Pty Ltd EL 5023 EL 5063 EL 5024 EL 5197 EL 5025 EL 5237 Status: Application EPC 2090 EL 5026 Status: Granted EL 5027 EL 5028 EL 5029 EL 5030 EL 5031 EL 5032 EL 5061 EL 5062 Holder: FMG Resources Pty Ltd EL 2013/00086 New Zealand Tenure Status: Application Holder: FMG Pacific Limited EP 50994 EP 51212 EP 51258 EP 52147 Status: Granted EP 52604 EP 52887 EP 54658 PP 50960 PP 50961 Holder: FMG Pacific Limited CSL 52727 CSL 52728 Status: Application NB 1 - Kalamazoo Resources Ltd has 12 month exclusive option to assess and then option to farm-in to earn 50% interest in non-iron mineral rights. NB.2 - Joint Venture with Northern Star Resources Ltd. Northern Star Resources hold 25% beneficial interest in non-iron mineral rights and are farming-in to earn an additional 35%. NB.3 - FMG North Pilbara Pty Ltd/FMG Magnetite Pty Ltd are subsidiaries of FMG Iron Bridge Limited which is owned 88% by Fortescue Metals Group Ltd and 12% by Baosteel Resources International Co. Ltd. NB.4 - This has been contested and is currently being litigated. NB.5 - In addition; option to purchase outright. Fortescue Metals Group Limited I Annual Report 2013 I 147 Fortescue Metals Group Limited I Annual Report 2013 I 147 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013 CORPORATE DIRECTORY Australian Business Number ABN 57 002 594 872 Directors Andrew Forrest – Non-Executive Chairman Herb Elliott – Non-Executive Deputy Chairman Nev Power – Executive Director Graeme Rowley – Non-Executive Director Geoff Brayshaw – Non-Executive Director Owen Hegarty – Non-Executive Director Cao Huiquan – Non-Executive Director Mark Barnaba – Non-Executive Director Geoff Raby – Non-Executive Director Herbert Scruggs – Non-Executive Director Elizabeth Gaines – Non-Executive Director Peter Meurs – Executive Director Company Secretary Mark Thomas Principal Registered Office in Australia Level 2, 87 Adelaide Terrace East Perth WESTERN AUSTRALIA 6004 Tel: +61 8 6218 8888 Fax: +61 8 6218 8880 Website: www.fmgl.com.au Email: fmgl@fmgl.com.au Auditor PricewaterhouseCoopers Level 15, 125 St Georges Terrace Perth WESTERN AUSTRALIA 6000 Internal Auditor KPMG 235 St Georges Terrace Perth WESTERN AUSTRALIA 6000 148 I Fortescue Metals Group Limited I Annual Report 2013 148 I Fortescue Metals Group Limited I Annual Report 2013 Stock Exchange Listings Fortescue Metals Group Limited shares are listed on the Australian Securities Exchange (ASX) ASX Code: FMG Fortescue Share Registry C/ – Link Market Services Limited 1A Homebush Bay Drive Rhodes NEW SOUTH WALES, 2138 Locked Bag A14 Sydney South NEW SOUTH WALES, 1235 Tel: 1300 554 474 or + 61 2 8280 7111 Fax: +61 2 9287 0303 For any change in personal details, please contact Link Market Services. Annual General Meeting 13th November 2013 Prefer email? There is a better way to access your information and help the environment Every year we are required to communicate information to securityholders, including annual reports, notices of meetings and other advices. We believe everyone benefits from electronic securityholder communication – securityholders receive prompt information and have the convenience and security of electronic delivery, there are significant cost savings, and our communications are environmentally friendly. Please alter your communication preferences by logging in via the Registry website: www.linkmarketservices.com.au. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 30 June 2013CONTENTS • Chairman’s Statement • Chief Executive Officer’s Statement • Operations Report • Reserves and Resources Report • Corporate Social Responsibility • Corporate Governance • Financial Report • Directors’ Report • Remuneration Report • Auditor’s Independence Declaration • Financial Statements • Directors’ Declaration • • Independent Auditor’s Report to the Members Shareholder Information • Tenement Report • Corporate Directory 2 6 8 10 15 38 50 51 67 85 86 139 140 143 144 148 ‘‘ Fortescue has continually faced challenges and embraced opportunities and it is this ability, to respond quickly to a changing landscape, which has been key to its success. ‘‘ Andrew Forrest, Chairman 2013 ANNUAL REPORT ABN: 57 002 594 872 A DECADE OF GROWTH 2003 The dream begins 2005 ASX 200 listing 2007 Construction at 70% 2009 27mt shipped 2011 Solomon Hub developed 2013 Firetail opened 2004 Cloudbreak identified 2006 Port Hedland ground-breaking 2008 First ore on ship 2010 Christmas Creek expanded 2012 57.5mt shipped www.fmgl.com.au 

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