Fortescue Metals Group
Annual Report 2018

Plain-text annual report

F o r t e s c u e M e t a l s G r o u p L t d A n n u a l R e p o r t F Y 1 8 Annual Report FY18 Together we are Fortescue ABN 57 002 594 872 THE DREAM BEGINS 2003 S&P/ASX 200 index 08 FIRST ORE ON SHIP 10 Christmas Creek expanded 57.5mtpa shipped 14 155MTPA SUSTAINABLE PRODUCTION Kings Valley project opened at Solomon • US$2.9 billion debt repaid in FY16 • 169.4mt shipped in FY16 • Fortescue celebrates arrival of first ore carrier, FMG Nicola into Port Hedland • Fortescue recognised as lowest cost iron ore supplier into China 18 FORTESCUE CELEBRATES: • 1 billion tonnes of iron ore • 10 years since first ore shipped to China • 15 years since the Company’s inception 04 Cloudbreak identified 06 Port Hedland groundbreaking 04 05 06 07 08 09 27mtpa shipped 10 11 12 13 14 15 16 17 11 Solomon construction begins 13 Firetail opened at Solomon 80.9mtpa shipped 15 • Anderson Point Berth 5 completion • Fortescue River Gas Pipeline completion • 500 millionth tonne of ore shipped • 165mtpa shipped sustainable production • Achieved lowest ever TRIFR of 2.9 • 170.4mt shipped in FY17 18 Core Leadership team appointed THE JOURNEY CONTINUES Inside 01 Overview 02 Operating and Financial Review 03 Ore Reserves and Mineral Resources 04 Corporate Social Responsibility 05 Corporate Governance 06 Fortescue’s response to climate change 07 Financial Report 08 Remuneration Report 09 Corporate Directory This report is printed on recycled paper. The year at a glance Total Recordable Injury Frequency Rate Production C1 costs 3.7 170 mt Revenue Total taxes paid US$ 12.36/wmt Total number of Fortescue ore carriers delivered to date 6.9US$ bn A$ 1. 2 bn 7 01 About Fortescue Fortescue Metals Group is a global leader in the iron ore industry, recognised for its unique culture, innovation and industry-leading development of world class infrastructure and mining assets in the Pilbara, Western Australia. Since it was founded in 2003, Fortescue has discovered and developed major iron ore deposits and constructed some of the most significant mines in the world. The Company is focussed on its vision of being the safest, lowest cost, most profitable mining company. As the first Company in Western Australia to control a railway from outside the region of operation and the first Company in the world to use CAT autonomous haulage technology on a commercial scale, Fortescue is continuing to introduce cutting edge technology across the business. Now consistently producing 170 million tonnes of iron ore per annum (mtpa), Fortescue has grown to be one of the largest global iron ore producers and has been recognised as the lowest cost provider of seaborne iron ore into China based on Metalytics Resource Sector Economics analysis. Fortescue owns and operates integrated operations spanning three mine sites in the Pilbara, the five berth Herb Elliott Port in Port Hedland and the fastest, heavy haul railway in the world. A natural extension of Fortescue’s supply chain, the fleet of eight Fortescue Ore Carriers were designed to complement the industry best practice efficiency of Fortescue’s port. The world-leading Eliwana mine and rail project will build on Fortescue’s development and construction capability, utilising the latest technology, autonomous trucks and design efficiency. Innovation in exploration, process and design is a key component of Fortescue’s strategy to efficiently and effectively deliver products from mine to market. Fortescue’s longstanding relationships with customers in China have grown from the first commercial shipment of iron ore in 2008, to now being a core supplier of China’s seaborne iron ore and expanding into markets including Japan, South Korea and India. The Company continues to assess exploration and development opportunities throughout South America including Ecuador, Colombia and Argentina. Fortescue is committed to its strategic goals of ensuring balance sheet strength and flexibility, investing in the core long term sustainability of the business while pursuing growth options and delivering returns to shareholders. As a proud West Australian Company, Fortescue values its relationship with key stakeholders by working together to positively manage and create opportunities for Aboriginal people, support communities, protect the environment and strengthen the broader Australian economy. Fortescue Metals Group Ltd Annual Report FY18 01 Overview 03 01 | Overview 01 | Overview Chairman's message Andrew Forrest AO In its short history, Fortescue has achieved what many people thought was impossible: to build a company from a start up to a global leader in the mining industry without losing its heritage, identity and never, ever give up family culture. A decade ago, when we shipped our first 180,000 tonnes of ore to China, I said it was a phenomenal achievement of sheer hard work, of guts and grind over scepticism, of character over doubt. The same can be said today, as we continue to set records, achieve stretch targets and grow as a company. From one of Australia’s most successful explorers we have transitioned through planning, construction and commissioning to build truly global scale operations. We have gone on to demonstrate our excellent operational capability and are now recognised as the world’s lowest cost provider of seaborne iron ore to China based on Metalytics Resource Sector Economic analysis. During the year Lord Sebastian Coe returned to Fortescue’s Board, bringing his unique perspective through his experience in business, marketing and politics across the European Union, India and other markets. We also farewelled Mr Cao Huiquan and welcomed Dr Cao Zhiqiang, who brings extensive experience in technology and steel mill management along with a deep background in international cooperation. Directors. The appointment of two Deputy Chairs further strengthens the overall independence of the Board, supporting the interests of all shareholders. During the year Fortescue moved from its traditional leadership focus with the appointment of our new Core Leadership team, with Chief Executive Officer, Ms Elizabeth Gaines, Chief Financial Officer, Mr Ian Wells, Chief Operating Officer, Mr Greg Lilleyman and Deputy Chief Executive Officer, Ms Julie Shuttleworth. This team brings together a group of incredible individuals who are ingrained with Fortescue’s culture, and who all possess the experience, talent and personal values required to lead our company’s new direction. Collectively, they will champion Fortescue’s unique family values, and have the courage and determination to set immensely challenging stretch targets and to deliver against them. Fortescue is now rapidly evolving and through product diversification and asset development, we are exploring growth opportunities in Australia and internationally. Mr Mark Barnaba AM, Lead Independent Director, joined Ms Sharon Warburton as Joint Deputy Chair of the Board of Our future growth will be built on our reputational capital, underpinned by our people and our relationships. Fortescue’s long-term engagement with our Chinese customers has played a critical role in the company’s growth. We are proud of our contribution to China’s remarkable urban development and our role in supporting trade relations between China and Australia which has been vital to driving economic growth in both nations. It was a pleasure to once again co-host the Australia-China Senior Business Leaders Forum which, since inception, has provided a unique platform to strengthen the comprehensive strategic partnership between our two countries. Nicola and I founded the Minderoo Foundation with the belief in the power of giving a hand up, rather than a hand out. It gives me great pride to see this philosophy lived at Fortescue every day. Perhaps there is no greater demonstration of this innate belief than our Vocational Training and Employment Centre (VTEC). When we started VTEC at Fortescue 12 years ago, I was determined it would end the cycle of jobless training once and for all and break down the social barriers that prohibit so many Aboriginal people from gaining employment. Fortescue Metals Group Ltd Annual Report FY18 I was incredibly proud to join the team in recognising the tenth anniversary of VTEC graduations during FY18 and celebrating the lives and achievements of hundreds of Aboriginal people who have seized the opportunities Fortescue’s VTEC has offered. The outstanding financial performance of Fortescue has benefited all shareholders. As shareholders, Nicola and I choose to use our dividends to fund the important work of the Minderoo Foundation and to support and contribute to programs that strengthen communities and support disadvantaged people in Australia and overseas. Our seven focus areas include driving collaboration and change in global cancer research, ending modern slavery, creating parity for Indigenous Australians, ensuring all children in Australia reach their full potential, nurturing new talents in the arts, generating world changing research and innovation in Western Australia and innovative community development and environmental conservation initiatives. These initiatives are captured in the Eliminate Cancer Initiative, Walk Free Foundation, GenerationOne, Thrive by Five, Forrest Research Foundation and arts, culture, community and environment partnerships. Our recently launched seventh philanthropic pillar, Minderoo Ocean Research, aims to harness the power of science, industry and collaboration to ensure the longevity of our ocean ecology. We have also supported the Western Force which has been rebuilt as a wholly integrated community and high performance rugby club. Fortescue’s ongoing success has been built on 15 years of stable leadership. Under the stewardship of Mr Nev Power, the company earned its reputation as one of the largest and most consistent seaborne iron ore suppliers, taking its place as the lowest cost most efficient producer in the world. Nev, we thank you. I would like to thank and congratulate everyone at Fortescue, led by our Core Leadership team, on a transformative year. When we founded Fortescue our vision was to build a truly Australian entity, committed to becoming the safest, lowest cost, most profitable mining company. I am humbled to see our Fortescue team delivering such outstanding results. An ethical focus on promoting positive change Fortescue and the Minderoo Foundation share a culture and core values of family, integrity, enthusiasm and challenging the status quo. Our organisations are closely aligned through an ethical focus of promoting positive change, as Fortescue looks beyond its Australian borders for growth and development opportunities. Fortescue was established with a clear vision that communities should benefit from the growth of our businesses. The shipment of Fortescue’s first tonne of ore a decade ago wasn’t only a hugely significant milestone for our company, but for the whole Pilbara region. Fortescue is committed to protecting and promoting human rights and shares the goals of the Minderoo Foundation: to eradicate modern slavery, protect the environment and enhance early childhood development. As Fortescue enters more countries and engages with local businesses, we will work with them to also ensure there is no slavery or forced labour in any operations anywhere near ours, and will do our best to defeat it while protecting the environment and spreading the huge nation building benefits of focussing on early childhood development. We begin our exploration activities in South America with the same vision: to ensure that local communities benefit from our success. We are committed to providing training, employment and business development opportunities for local, Indigenous people; just as we have in the Pilbara. Even before our drilling program starts, we have established community offices and have engaged with the community to assist in our exploration activities. As we enter this next exciting phase in Fortescue’s history, our promise to the towns, communities and countries where we seek to work is that we will collaborate to contribute effectively to overall social and economic wellbeing and to the empowerment of communities. 05 01 | Overview Chief Executive Officer’s message Elizabeth Gaines Our team works with a strong sense of culture, values and community. This is our pathway to achieving Fortescue’s vision - to be the safest, lowest cost, most profitable mining company. I am delighted to present my first annual report as Fortescue's Chief Executive Officer. FY18 was a remarkable year for Fortescue. As we celebrated everything we have achieved over the last 15 years, we also looked ahead to position ourselves strongly for the next phase of growth. Commitment to safety and unique culture The safety of our people is our number one priority and our focus remains on ensuring the team go home safely after every single shift. Disappointingly, the Total Recordable Injury Frequency Rate increased during the year to 3.7 as a result of a number of low severity injuries. We have targeted plans in place to improve safety performance. Our Company-wide commitment to improving safety and our unique culture was demonstrated by the record 94 per cent participation rate in our annual Safety Excellence and Culture Survey. During the year, we held a series of Values Forums across the business. Our Values have been such an important part of Fortescue’s culture since we were founded and the Forums confirmed that they are as alive and relevant today as they were 15 years ago. These Values drive our behaviours, our teams and our results, and have enabled us to achieve a cost leadership position and production targets that many thought were unattainable. Delivering on our targets The team worked together to deliver record shipments in the June quarter, ensuring we achieved our target of 170mt for the year. Importantly, this was realised while maintaining our focus on costs, with full year C1 cost reducing to US$12.36/wmt. The sustainable productivity and efficiency initiatives introduced across the business have ensured that we remain highly competitive and continue to generate strong margins on every tonne of ore we produce. With no debt repayments due until 2022, the refinancing strategy that was implemented over the past twelve months leaves our remaining debt structured on investment grade terms and conditions, providing a flexible capital structure supporting our ongoing operations and future growth. World class operations The long-term sustainability of our core iron ore business in the Pilbara remains a key priority for Fortescue. To that end, the largest development since Fortescue’s ambitious T155 project, the Eliwana mine and rail project, was announced during the year. Eliwana will maintain Fortescue’s low cost status, providing us with greater flexibility to capitalise on market dynamics while maintaining production over 20 years. At Fortescue, we have a proud history of embracing technology and innovation, which has become vital in driving sustained productivity, cost savings and improving safety performance across our business and the mining sector more broadly. Building on the pioneering success of autonomous haulage (AHS) at Solomon, this year we commenced the rollout of AHS to our fleet at the Chichester Hub. Once completed, Fortescue will become the first iron ore operation in the world with a fully automated haul fleet. The new relocatable conveyor at Cloudbreak is another example of Fortescue's innovative culture, adapting technology frequently used in underground mining operations to provide greater flexibility and increased accessibility to remote mine pits. Fortescue Metals Group Ltd Annual Report FY18Our customers China remains our core focus, representing 50 per cent of world steel production, and we have strong relationships with a diverse customer base in China. In addition, we have successfully increased the volume of shipments to non-China markets during FY18. Moving forward, the combination of growth in our region combined with China’s Belt and Road initiative represents an unprecedented investment in infrastructure, driving continued investment and demand for steel to the advantage of Fortescue and Australia’s mineral resources sector as a whole. Innovation in process and design is a fundamental part of Fortescue’s strategy to efficiently and effectively deliver products from mine to market. Fortescue has consistently challenged geological thinking to identify valuable deposits and establish a differentiated product offering. Building on this, during the year we announced Fortescue will begin offering a 60 per cent iron content product, West Pilbara Fines, in the second half of FY19. Building a strong business When Fortescue was founded 15 years ago, it was our vision that by first and foremost creating a strong business, we could create economic opportunities and contribute to thriving local communities. This vision continues with the US$1.275bn Eliwana project, which will generate up to 1,900 jobs during construction and 500 full-time site positions once operational. female talent and ensuring that women are encouraged to progress to the C-Suite so that we have equal representation in senior roles across corporate Australia. We are proud of our achievements and our ongoing contribution to Western Australia and the country’s economic strength. Since Fortescue began, we have paid corporate taxes of more than A$3 billion, royalties to the State of more than A$4.5 billion and have invested over US$22 billion in Australia’s economy. We continue to empower generational change through our Vocational Training and Employment Centres. Since the initiative began 12 years ago, 797 Aboriginal people have commenced employment with Fortescue. Our Billion Opportunities program focusses on building capacity and capability in Aboriginal businesses. The program reached a significant milestone during the year, recognising the award of A$2 billion in contracts and subcontracts since its commencement in 2011. At Fortescue, diversity is broader than gender and is embraced in all its forms. 24 per cent of our senior management team is female and we are proudly only one of two listed companies in Australia with greater than 50 per cent female Board members. At a personal level, I am focussed on leadership development, retention of Investing for the future As we look to the future we are driven by four key priorities. We will seek to maintain our balance sheet strength and flexibility and will continue to invest in the long term sustainability of our core iron ore business. We are also prioritising growth primarily through exploration activities and remain focussed on delivering returns to our shareholders. Crucially, our future success will be underpinned by Fortescue’s unique culture. Our culture and Values were created by our Founder and Chairman Andrew Forrest AO, and championed by our former Chief Executive Officer Nev Power, and it is my and the Core Leadership team’s responsibility and privilege to continue that legacy. Together, the Core Leadership team is committed to leading Fortescue through its next phase by empowering and encouraging our people to generate new ideas and have the courage to implement them. I would like to thank and congratulate all of our employees, contractors and suppliers for their great contributions. Their determination, innovation and enthusiasm is driving improvements in safety, productivity and efficiency and delivering these strong results across every aspect of our business. 15 years of milestones 15 years ago, our Chairman Andrew Forrest AO, had the remarkable vision and entrepreneurial spirit to create Fortescue and the determination to build it into a global leader in the mining industry. Fortescue has been on an incredible journey and it is the sheer determination of the Fortescue family that has seen us become the true Australian success story we are today. In April, ten years after Fortescue first exported its ore to Shanghai Baosteel’s Majishan Port, the billionth tonne sailed to China aboard Fortescue’s Ore Carrier ‘FMG Sophia’. This year also marks 15 years since Andrew Forrest AO was elected Chairman of the newly named Fortescue Metals Group, marking the start of his visionary journey to create an Australian-owned iron ore group, comparable in size with the global iron ore majors. We have been proud to recognise these remarkable achievements with customers from around the world, suppliers and key stakeholders, pastoralists, government, Native Title Partners and local communities. In true Fortescue fashion, we have celebrated as a team, with events across the entire business, from the Pilbara to Perth, China to South America. My sincere thanks to the entire Fortescue family; our unique culture and Values have driven us to strive to reach stretch targets, to generate ideas and to never, ever give up. “We achieved these milestones in true Fortescue fashion - taking 10 years to achieve what others took decades to do.” 07 01 | Overview Fortescue's Values Safety Look out for our mates and ourselves Empowerment Take action and encourage your team Family Care for your work mates Frugality Use your brain not your cheque book Stretch targets Deliver against challenging targets Integrity Do what you say you’re going to do Enthusiasm Be positive, energetic Courage and determination Never, ever give up Generating ideas Always be on the lookout for better ways Humility Show vulnerability in leadership Fortescue's unique Values drive the Company's performance in a way that sets Fortescue apart. Fortescue Metals Group Ltd Annual Report FY18 Value Chain INNOVATION IN PROCESS AND DESIGN HAS BEEN A KEY COMPONENT OF FORTESCUE’S STRATEGY IN CHALLENGING INDUSTRY STANDARDS TO MORE EFFICIENTLY AND EFFECTIVELY DELIVER ITS PRODUCT SUITE FROM MINE TO MARKET EXTRACTION AND RECOVERY Innovative use of technology suitable to Fortescue’s deposits MINE TO PORT Heavy haul rail at 42t axle load SHIP LOADING 3 shiploaders and 5 berths maximise outload capacity and utilisation SHIPPING Delivery to Fortescue’s international customers’ specifications and 8 Fortescue Ore Carriers EXPLORATION AND DISCOVERY Challenging geological thinking to identify valuable deposits PROCESSING Ore processing facility design and wet processing optimise output BLENDING AND STOCKPILING Port design facilitates blending and stockpiling of product suite MARKETING Helping customers achieve best value in use 01 02 03 04 05 06 07 08 09 DECOMMISSIONING Mine closure and rehabilitation 09 01 | Overview Fortescue has a talented and diverse Board committed to enhancing and protecting the interests of shareholders and other stakeholders and fulfilling a strong governance role over the Company's affairs. The Board Overview The appointment and reappointment of directors is intended to maintain and enhance the overall quality of the Board through a composition which reflects a diversity of skills, experience, gender and age. The primary driver for the Board in seeking new directors is skills and experience which are relevant to the needs of the Board in discharging its responsibilities to shareholders. All new Board members benefit from a comprehensive induction process that supports their understanding of Fortescue’s business. Fortescue’s policy is to assess all potential Board candidates without regard to race, gender, age, physical ability, sexuality, nationality, religious beliefs, or any other factor not relevant to their competence and performance. There is also a range of support given to Board members which enables them to stay strongly connected to the Company and its culture. These include: • Opportunities for significant contribution to the annual strategy setting process conducted with executive and senior management • Regular briefings from executive and senior management regarding all major business areas, tailored site visits and annual site tours to operations • Visits to meet with key customers that strengthen their understanding of the Company’s key markets • Regular formal and informal opportunities for the directors to meet with management and staff. The Board has established Committees to assist in the execution of its duties and to ensure that important and complex issues are given appropriate consideration. The primary Committees of the Board are the Remuneration and Nomination Committee, the Audit and Risk Management Committee and the Finance Committee. Each Committee has a non-executive Chair and operates under its own Charter which has been approved by the Board. Directors are expected to act independently, ethically and comply with all relevant requirements of the Corporations Act 2001, ASX Listing Rules and the Company’s constitution. The Company actively promotes ethical and responsible decision making through its Values and Code of Conduct and Integrity that embodies these values. There is a formal process and policy to identify, disclose and manage potential conflicts of interest, should they arise. The Board and each of its three primary Committees have established a process to evaluate their performance annually. The process is based on a formal questionnaire and interview conducted every second year by an independent consultant and every other year by the Company Secretary under the direction of the Chair of the Remuneration and Nomination Committee. The most recent review was undertaken in May/June 2018 by the Company Secretary. The results and recommendations are reported to the full Board for further consideration and agreement of improvement actions, where required. At the date of this report, the Board has eight non-executive directors and one executive director, being Chief Executive Officer Elizabeth Gaines. The Board believes that an appropriate mix of non-executive and executive directors is beneficial to its role and provides strong operational and financial insights to support the business. Fortescue Metals Group Ltd Annual Report FY18 Andrew Forrest AO Chairman Mark Barnaba AM Lead Independent Director/Deputy Chair Elizabeth Gaines Chief Executive Officer/Managing Director Appointed Chairman in July 2003; Assumed role of Chief Executive Officer in 2005; Resumed non-executive responsibilities in July 2011. Deputy Chair since November 2017; Lead Independent Director since November 2014; Non-Executive Director since February 2010. Chief Executive Officer since February 2018 and Executive Director since February 2017; Former Non-Executive Director since February 2013. Mr Forrest is Fortescue’s Founder and Chairman and has led the Company to its status as the fourth-largest seaborne iron ore producer. Under Mr Forrest, Fortescue has made significant investments in the Australian resources sector of more than US$22 billion and become the lowest cost and most efficient supplier of iron ore into China. In 2001, Mr Forrest co-founded the Minderoo Foundation with his wife Nicola, which has supported over 250 initiatives across Australia and internationally in pursuit of a range of causes. Mr Forrest was appointed an Officer of the Order of Australia (AO) in 2017 for distinguished service to the mining sector, to the development of employment and business opportunities, as a supporter of sustainable foreign investment, and to philanthropy. He is an Adjunct Professor of the Central South University in China, a longstanding Fellow of the Australian Institute of Mining and Metallurgy, and a leading global representative of the resources sector. He is co-Chairman of the Senior Business Leaders’ Forum, the leading formal dialogue for China and Australia’s most senior business leaders. In 2014, Mr Forrest was named Business Leader of the Year at the Australian Institute of Management Western Australia Pinnacle Awards and was awarded an honorary doctorate by The University of Western Australia for his service to the country. In 2017, he was named West Australian of the Year for his contribution to the community and in 2018, he was honoured with the EY Entrepreneur Of The Year Alumni Social Impact Award for the “lasting and exceptional legacy” of his philanthropic work. Committee memberships: Finance Committee (Chair) A member of the Board of the Reserve Bank of Australia, Mr Barnaba previously worked for McKinsey and Company and also held several senior executive roles at Macquarie Group where he served as Chairman and Global Head of Natural Resources for Macquarie Capital. Mr Barnaba is Chairman of The University of Western Australia’s Business School Board and an Adjunct Professor of Finance and Investment Banking at the University of Western Australia. He is co-founder of Azure Capital and has previously served as the Chairman of Western Power, Edge Employment Solutions, the West Coast Eagles Football Club and Alinta Infrastructure Holdings. After graduating from The University of Western Australia with a Bachelor of Commerce, Mr Barnaba entered Harvard Business School receiving a Master of Business Administration. He received an Honorary Doctor of Commerce from The University of Western Australia in 2012 and was granted the Honorary designation Fellow of CPA from CPA Australia. He is a Fellow of the Australian Institute of Company Directors. In 2015, Mr Barnaba was named a Member in the General Division of the Order of Australia (AM) for significant service to the investment banking and financial sectors, to business education, and to sporting and cultural organisations. Committee memberships: Audit and Risk Management Committee (Chair); Remuneration and Nomination Committee (Member) Elizabeth Gaines commenced as Chief Executive Officer of Fortescue Metals Group in February 2018. A highly experienced business leader with extensive international experience as a Chief Executive Officer and group executive, Ms Gaines has a proven track record in financial and operational leadership across a number of industries, including resources, construction and infrastructure, financial services and travel and hospitality. After joining Fortescue as a Non-Executive Director in February 2013, Ms Gaines was appointed Chief Financial Officer and Executive Director in February 2017. She is a former Chief Executive Officer of Helloworld Limited and Heytesbury Pty Limited and has also held the position of Chief Financial Officer at Stella Group and Entertainment Rights Plc. A member of Chartered Accountants Australia and New Zealand, the Australian Institute of Company Directors and Chief Executive Women, she holds a Bachelor of Commerce degree and Master of Applied Finance degree. Former directorships in the last three years (ASX Listed Entities): NEXTDC Limited (Non-Executive Director); Mantra Group Limited (Non-Executive Director); Nine Entertainment Co. Holdings Limited (Non- Executive Director); lmpediMed Limited (Non-Executive Director); Helloworld Limited (Executive Director). 11 The Board Sharon Warburton Deputy Chair Lord Sebastian Coe CH,KBE Non-Executive Director Jennifer Morris OAM Non-Executive Director Deputy Chair since July 2017; Non-Executive Director since November 2013. Ms Warburton has extensive experience in the mining, infrastructure and construction sectors. She gained substantial operational, commercial and risk management experience in the global resources sector through her time as an executive at Rio Tinto. She has also previously held senior executive positions at Brookfield Multiplex, ALDAR Properties PJSC, Multiplex, and Citigroup. In recognition of her experience, she was awarded Western Australian Telstra Business Woman of the Year in 2014 and was a finalist in The Australian Financial Review’s Westpac 100 Women of Influence (2015). She is on the board of not-for-profit organisation Perth Children’s Hospital Foundation and formerly the Chairman of the Northern Australia Infrastructure Facility and Director of Western Power. Ms Warburton is regarded as a financial, governance and remuneration expert and is a Fellow of the Institute of Chartered Accountants Australia and New Zealand and Australian Institute of Building. She is a Graduate of the Australian Institute of Company Directors, a member of Chief Executive Women and a part-time member of the Australian Takeovers Panel. She holds a Bachelor of Business (Accounting and Business Law) from Curtin University. Other current directorships (ASX listed entities): Gold Road Resources Limited (Non-Executive Director); NEXTDC Limited (Non-Executive Director). Former directorships in the last three years (ASX Listed Entities): Wellard Limited. Committee memberships: Remuneration and Nomination Committee (Chair); Audit and Risk Management Committee (Member); Finance Committee (Member) Non-Executive Director since February 2018. Non-Executive Director since November 2016. Lord Coe is currently a senior advisor with Morgan Stanley & Co International plc and a Non-Executive Director of the Vitality Group of health and life insurance companies. In 2017, he became Chancellor of Loughborough University having previously served as Pro Chancellor of the University. Based in the United Kingdom, Lord Coe is the Executive Chairman of CSM Sport and Entertainment, within the Chime Communications group. He was elected President of the International Association of Athletics Federations (IAAF) in 2015 where he is driving significant governance reforms through the organisation and its 214 Member Federations around the world. Lord Coe previously served as Chairman of the British Olympic Association and was Chairman of the Organising Committee for the London 2012 Olympic Games and Paralympic Games. He was a member of the British athletics team at the 1980 and 1984 Olympic Games where he won two gold and two silver medals, as well as breaking eleven world records. In 1992, Lord Coe became a Member of Parliament and during his political career served as a Government Whip and then Private Secretary to William Hague, Leader of the Opposition and Leader of the Conservative Party. He was appointed to The House of Lords in 2000. Ms Morris is a former Partner in the Consulting Division of Deloitte, where she specialised in complex large-scale business transformation programs and strategy development. She currently holds a senior position at the Minderoo Foundation as Chief Executive Officer of the Walk Free Foundation. She has senior corporate governance experience and is currently a Commissioner of the Board of Australian Sports Commission. A former Director of the Fremantle Football Club and Western Australian Institute of Sport, Ms Morris also served as Chairperson of the Board of Healthway – the WA Government’s peak health promotion body. A former member of the Australian Women’s Hockey Team, Ms Morris won Olympic gold medals at the Atlanta 1996 and Sydney 2000 Olympic Games. In 1997, she was awarded a Medal of the Order of Australia (OAM). Ms Morris is a Member of the Australian Institute of Company Directors, a Fellow of Leadership WA, an affiliate member of Chartered Accountants Australia and New Zealand, and a member of the Vice Chancellor’s List, Curtin University. She holds a Bachelor of Arts (Psychology and Journalism) received with Distinction and has completed Finance for Executives at INSEAD. Committee memberships: Remuneration and Nomination Committee (Member); Audit and Risk Management Committee (Member) Nev Power Former Chief Executive Officer and Managing Director Mr Power was appointed Chief Executive Officer in July 2011 and Managing Director in September 2011 and retired from Fortescue’s Board after resigning from his role as Chief Executive Officer in February 2018. With more than 30 years’ experience in the mining, steel and construction industries, Mr Power led Fortescue’s strong, values based culture and commitment to safety excellence. Prior to joining Fortescue, Mr Power held chief executive positions at Thiess and Smorgon Steel Group. Fortescue Metals Group Ltd Annual Report FY18Dr Jean Baderschneider Non-Executive Director Penny Bingham-Hall Non-Executive Director Dr Cao Zhiqiang Non-Executive Director Non-Executive Director since January 2015. A highly regarded leader in both business and civil society, Dr Baderschneider brings 35 years of extensive international experience in procurement, strategic sourcing and supply chain management along with a deep understanding of high-risk operations and locations and complex partnerships. Dr Baderschneider retired from ExxonMobil in 2013 where she was Vice-President of Global Procurement. During her 30-year career, she was responsible for operations all over the world, including Africa, South America, the Middle East and Asia. A past member of the Board of Directors of the Institute for Supply Management and the Executive Board of the National Minority Supplier Development Council, Dr Baderschneider also served on the boards of The Center of Advanced Purchasing Studies and the Procurement Council of both The Conference Board and the Corporate Executive Board. In February 2011, she was the Presidential appointee to the US Department of Commerce’s National Advisory Council of Minority Business Enterprises. She holds a Master’s Degree from the University of Michigan and a PhD from Cornell University. Non-Executive Director since November 2016. Ms Bingham-Hall brings significant operational skills and experience from executive roles including Head of Strategy at Leighton Holdings (now CIMIC) – Australia’s largest construction, contract mining, infrastructure and property development group – together with 20 years’ experience as a company director. Ms Bingham-Hall is a Fellow of the Australian Institute of Company Directors, a Senior Fellow of the Financial Securities Institute of Australasia and a member of Chief Executive Women and WomenCorporateDirectors Foundation. She holds a Bachelor of Arts (Industrial Design). Other current directorships (ASX listed entities): BlueScope Steel Limited (Non- Executive Director); DEXUS Property Group (Non-Executive Director). Committee memberships: Finance Committee (Member); Audit and Risk Management Committee (Member) Cameron Wilson Company Secretary Mr Wilson was appointed Company Secretary in February 2018, bringing over 20 years mining industry experience across the gold, nickel, coal and mineral sands sectors. He started his career as a lawyer in private practice with a leading Australian law firm and subsequently held a number of senior legal, commercial and governance positions, including most recently as General Counsel and Company Secretary at Iluka Resources Limited. Mr Wilson holds a Bachelor of Laws from the University of Western Australia and is a Graduate of the Australian Institute of Company Directors. Alison Terry Group Manager Corporate Affairs and Joint Company Secretary Ms Terry joined Fortescue in 2014 as Group Manager Corporate Affairs and serves as Joint Company Secretary, having been appointed to the role in February 2017. With significant experience in corporate affairs, legal, company secretarial and general management, Ms Terry has previously held senior executive and Board roles across a number of sectors including automotive, telecommunications and superannuation. Ms Terry holds a Bachelor of Economics and Bachelor of Laws (Honours) and a Graduate Diploma of Business (Accounting). Non-Executive Director since January 2018 (nominated director from Hunan Valin Iron and Steel Group Company Ltd). Dr Cao is currently the Chairman of Hunan Valin Iron and Steel Group Company Ltd and brings extensive experience in technology and steel mill management, along with a deep background in international co- operation. Dr Cao joined Valin Xiangtan Steel in 1997 and has worked in a variety of roles including Director of the Research and Development centre, before being appointed Chief Executive Officer. He holds a PhD in Science and is a senior engineer research fellow. Cao Huiquan Former Non-Executive Director Mr Cao was appointed Chief Executive Officer of Hunan Valin Iron and Steel Group Company Ltd in 2005 and concurrently held the position of General Manger of Lianyuan Iron and Steel Group Co Ltd. Mr Cao resigned from Fortescue’s Board in January 2018. Dr Cao Zhiqiang was appointed to Fortescue’s Board, replacing Mr Cao in January 2018. 13 01 | Overview Core Leadership team The Core Leadership team was announced on 30 November 2017 as part of a move from a traditional leadership focus to a team with active Board support, devolving authority throughout the organisation. Elizabeth Gaines Chief Executive Officer Ms Gaines commenced as Chief Executive Officer in February 2018. A highly experienced business leader with extensive international experience as a Chief Executive Officer and group executive, Ms Gaines has a proven track record in financial and operational leadership across a number of industries, including resources, construction and infrastructure, financial services and travel and hospitality. After joining Fortescue as a Non-Executive Director in February 2013, Ms Gaines was appointed Chief Financial Officer and Executive Director in February 2017. She is a former Chief Executive Officer of Helloworld Limited and Heytesbury Pty Limited and has also held the position of Chief Financial Officer at Stella Group and Entertainment Rights Plc. A member of Chartered Accountants Australia and New Zealand, the Australian Institute of Company Directors and Chief Executive Women, Ms Gaines holds a Bachelor of Commerce degree and Master of Applied Finance degree. Fortescue Metals Group Ltd Annual Report FY18 Left to right: Ian Wells, Elizabeth Gaines, Julie Shuttleworth, Greg Lilleyman Greg Lilleyman Chief Operating Officer Julie Shuttleworth Deputy Chief Executive Officer Ian Wells Chief Financial Officer Mr Lilleyman commenced as Chief Operating Officer in February 2018, after joining Fortescue as Director Operations in January 2017. With nearly three decades of extensive international experience in the mining sector, including over 20 years in the iron ore sector, across multiple commodities in large scope project development and construction, operational and business leadership, JV management and technology deployment, Mr Lilleyman brings significant business credentials and iron ore market knowledge to Fortescue’s Core Leadership team. Mr Lilleyman holds a degree in Construction Engineering from Curtin University and has completed the Vincent Fairfax Fellowship in Ethical Leadership at the University of Melbourne as well as the prestigious Wharton Business School’s Advanced Management Program. He is a member of the Australian Institute of Mining and Metallurgy, the Australian Institute of Company Directors and a Fellow of the Australian Institute of Management. Ms Shuttleworth commenced as Deputy Chief Executive Officer in January 2018, following four years as General Manager Cloudbreak and later General Manager Solomon at Fortescue. She has over 23 years’ experience in the mining industry in Australia, China and Tanzania, including 19 years in gold/copper working for Newcrest Mining, Sino Mining and Barrick Gold. Ms Shuttleworth holds a double major in Extractive Metallurgy and Chemistry from Murdoch University. She is a Fellow and Chartered Professional of the Australian Institute of Mining and Metallurgy, a Graduate Member of the Australian Institute of Company Directors and is on the International Committee of the Society of Mining Metallurgy & Exploration. She has attended INSEAD and Harvard Business School, holds several Diplomas in Financial Markets and Management, and sponsors the Julie Shuttleworth Prize in Mineral Processing at Murdoch University. Ms Shuttleworth has received numerous accolades including 2012 West Australian Business Woman of the Year, she is listed in the 2013 WIM (UK) 100 Global Inspirational Women in Mining, and is one of the 2014 Australian Women of Influence. Mr Wells joined Fortescue in 2010 and has held multiple senior executive roles in the Finance team, including funding, treasury, planning and analysis as well as Company Secretary. He commenced as Chief Financial Officer in February 2018. Prior experience includes financing Fortescue’s US$10 billion major iron ore project development to 155 million tonnes per annum, and successfully undertaking multi-billion dollar capital raising and refinancing transactions in domestic and international capital markets. Most recently, he has held the position of Group Manager Corporate Finance, leading Fortescue's capital management strategy with group responsibility for Treasury and Funding. With more than 20 years’ experience as a senior executive in leading ASX listed and private companies in the mining, energy infrastructure and healthcare industries, Mr Wells’ prior positions include Chief Financial Officer of Singapore Power subsidiary Jemena Limited and Acting CFO of Alinta Limited. Mr Wells holds a Bachelor of Business in Accounting, is a Fellow of CPA Australia, a Certified Finance and Treasury Professional and a Graduate of the Australian Institute of Company Directors. 15 01 | Overview 01 | Overview Executive team Fortescue’s Executive team is accountable for the safety of its people, upholding the Company’s Values, acting with integrity and honesty, and leading the business to achieve its vision of becoming the safest, lowest cost, most profitable mining company. Danny Goeman Peter Huston Tim Langmead David Liu Linda O’Farrell Alison Terry Gerhard Veldsman Rob Watson Fortescue Metals Group Ltd Annual Report FY18 Danny Goeman Director Sales and Marketing David Liu Senior Adviser to the CEO and COO Gerhard Veldsman Executive GM Pilbara Operations Mr Veldsman was appointed Executive General Manager Pilbara Operations in February 2018. He started his career at Fortescue in 2011 and has led the Port and Rail operations and Solomon Hub. Most recently, he was GM Iron Ore Projects, responsible for the Iron Bridge Joint Venture Magnetite Project and feasibility studies into the Western Hub and Nyidinghu. With more than 15 years’ industry experience spanning various commodities and operations in Australia and South Africa, Mr Veldsman’s previous experience includes senior operations management, asset reliability and overseeing mechanical, structural and expansion projects. Mr Veldsman holds a Bachelor of Engineering (Mech), Masters of Engineering (Mech), and is registered as a Professional Engineer in South Africa. Rob Watson Group Manager Health and Safety Mr Watson was appointed Group Manager Health and Safety in 2014 after joining Fortescue in 2011. Prior to this, Mr Watson spent 15 years in a number of senior corporate health and safety roles in large mining companies. Mr Watson’s career in health and safety spans over 25 years in a number of industries and commodities. Mr Watson holds a Masters in Occupational Health and Safety. Mr Liu was appointed Director Sales and Marketing in 2011. He has almost 30 years’ experience in trade and investment projects between Australia and China and a strong understanding of Chinese culture and business practices. Mr Liu moved from Director Sales and Marketing into the role of Senior Adviser to the Chief Executive Officer and Chief Operating Officer in August 2018. Linda O’Farrell Group Manager Fortescue People Ms O’Farrell joined Fortescue in October 2013 as Group Manager Fortescue People, joining the executive team in December 2014. Having held a number of executive human resources roles in major Australian resource companies, Ms O’Farrell brings deep experience in strategic people management, diversity and Aboriginal employment. Ms O’Farrell holds a Bachelor of Economics (Honours in Industrial Relations) from the University of Western Australia. Alison Terry Group Manager Corporate Affairs and Joint Company Secretary Ms Terry joined Fortescue in 2014 as Group Manager Corporate Affairs and serves as Joint Company Secretary, having been appointed to the role in February 2017. With significant experience in corporate affairs, legal, company secretarial and general management, Ms Terry has previously held senior executive and Board roles across a number of sectors including automotive, telecommunications and superannuation. Ms Terry holds a Bachelor of Economics and Bachelor of Laws (Honours) and a Graduate Diploma of Business (Accounting). Mr Goeman was appointed Director Sales and Marketing in August 2018. Mr Goeman has more than 25 years of experience in management, sales and marketing, strategy development and high level commercial negotiations, including more than 20 years with the Rio Tinto group of Companies. Mr Goeman has a wealth of experience in leading commercial transactions in different geographies including Australia, Asia and Europe, and has experience in a range of commodities including diamonds, iron ore, coal and potash. Mr Goeman has a Masters degree in Business Administration. Peter Huston Chief General Counsel and Director Corporate Services Mr Huston joined Fortescue as Chief General Counsel in January 2005 and joined the executive team in January 2009 as Director Corporate Services. Prior to joining Fortescue, Mr Huston spent 12 years as a partner of the law firm now known as Norton Rose and 10 years in private equity, mergers and acquisitions. Mr Huston holds a Bachelor of Laws (Honours), Commerce and Jurisprudence and a Master of Laws. Tim Langmead Director Community, Environment and Government Mr Langmead was appointed Director External Relations in January 2014, after joining Fortescue as Group Manager Corporate Affairs in January 2013 and was subsequently appointed Director Community, Environment and Government. Previously, Mr Langmead held senior corporate affairs roles in the Australian business units of global oil and gas companies. Mr Langmead served in senior staff roles for Ministers in the Howard-Anderson and Howard-Vaile governments and commenced his career as an agribusiness journalist. 17 01 | Overview 01 | Overview Fortescue’s Vision To be the safest, lowest cost, most profitable mining company. Values Fortescue’s unique Values drive the Company’s performance in a way that sets it apart from others. Culture Fortescue is a values-based business with a strong, differentiated culture. The Company believes that by leveraging the unique culture of its greatest asset, its people, it will achieve its stretch targets. Fortescue Metals Group Ltd Annual Report FY18 19 02 Operating and Financial Review Fortescue Metals Group Ltd Annual Report FY18 Operating and financial highlights Production C1 costs Cash on hand 170 mt US$ 12.36/wmt US$ 863 m Revenue Gross debt Net debt US$ 6.9 bn US$ 4.0 bn US$ 3.1 bn 21 02 | Operating and Financial Review Overview of operations Chichester Hub The Chichester Hub in the Chichester Ranges, comprising the Cloudbreak and Christmas Creek mines, has an annual production capacity of 95 million tonnes per annum (mtpa) from three Ore Processing Facilities (OPFs). Consistent and sustained output delivered from the OPFs has allowed Fortescue to continue optimisation of its product strategy through enhanced blending and beneficiation, increasing iron upgrades and reducing impurities. This has resulted in lower mining cut-off grades, further optimising ore bodies and sustainably reducing strip ratios. Building on the success of autonomous haulage technology (AHS) at the Solomon Hub, the first autonomous trucks began operation at Christmas Creek during the year. The conversion of approximately 100 haul trucks at the Chichester Hub will see Fortescue become the first iron ore operation in the world to have a fully autonomous fleet. Cloudbreak’s five kilometre relocatable conveyor and semi-mobile primary crushing station also began operation in FY18. Solomon Hub The Solomon Hub in the Hamersley Ranges is located 60 kilometres (km) north of Tom Price and 120km to the west of Fortescue’s Chichester Hub. It comprises the Firetail and Kings Valley mines which together have production capacity of 75mtpa. Solomon represents a valuable source of production by blending higher iron grade, low cost Firetail ore with low phosphorous Chichester ore to create the high quality Fortescue blend. Fortescue successfully first deployed CAT AHS at the Solomon Hub in 2012. Today, the AHS fleet consists of 70 trucks, delivering a 30 per cent improvement in productivity. Fortescue Metals Group Ltd Annual Report FY18 Christmas Creek Cloudbreak Solomon Hedland Operations Fortescue wholly owns and operates its purpose built and designed rail and port facilities, constructed to deliver iron ore from its mines to Port Hedland and on to its customers. Covering 620km of track, the railway is the fastest, heavy haul line in the world. The efficient design, layout and optimal berthing configuration make Fortescue’s port the most efficient bulk port operation in Australia. The port has five operating berths and is capable of efficiently exporting more than 170mtpa. A natural extension of Fortescue’s supply chain, the Company’s ore carriers were designed to complement the industry leading efficiency of Fortescue’s port. Three Fortescue Ore Carriers made their maiden voyage into Herb Elliot Port in FY18, with the remaining vessel due to be delivered in early FY19. Construction of Fortescue’s tug haven commenced during the year. Due to begin operations in 2019, the tug fleet will provide safe and reliable towage services that will maximise efficiencies at the Company's port operations. Eliwana During the year, Fortescue’s Board of Directors approved the development of the Eliwana mine and rail project. With an estimated capital cost of US$1.275bn, the development consists of 143km of rail and a new 30mtpa dry OPF. The project underpins the introduction of a 60 per cent iron grade product and will maintain Fortescue’s low cost status, providing greater flexibility, while maintaining a minimum 170mtpa production rate over 20 years. The Eliwana project will build on Fortescue’s development and construction capability, utilising the latest technology, autonomous trucks and design efficiency while redeploying existing assets to this world leading development. Iron Bridge Iron Bridge, located 100km south of Port Hedland, is a joint venture between Fortescue, Taiwan’s Formosa Group and China’s Baosteel Resources Ltd, a subsidiary of China’s Baowu Group, incorporating the world class North Star and Glacier Valley Magnetite ore bodies. Feasibility studies for the high grade, magnetite project continue to be assessed with a decision, in conjunction with Fortescue’s joint venture partners, expected during the 2018 calendar year. Exploration Fortescue holds the largest tenement portfolio in the Pilbara. Details of the Company’s reserves and resources are summarised in the Ore Reserves and Minerals Resources Report on pages 35 to 42 of this report. Exploration activity in FY18 included the discovery of several iron ore deposits along the southern and western margins of the Jeerinah Anticline in the western portion of the Hamersley Group. The Western Hub Resources include significant amounts of high iron content bedded iron ore hosted in both the Brockman and Marra Mamba Formations adding high iron content, dry, low cost tonnes to Fortescue’s product suite and providing optionality and flexibility moving forward. During the year, Fortescue continued to undertake early stage, low cost exploration on copper-gold prospective tenements in South Australia and New South Wales. South America Fortescue continued to assess exploration and development opportunities throughout South America including Ecuador, Colombia and Argentina. 32 exploration concessions were awarded in Ecuador and initial evaluation of potential for porphyry copper deposits commenced. A further 64 applications were lodged in Colombia for exploration concessions in areas which are copper and gold prospective. Construction of Fortescue’s tug haven commenced during the year. 23 02 | Operating and Financial Review Fortescue is proud of its longstanding relationships with China. This year marked a number of important milestones in the Company’s relationship with China as Fortescue recognised 10 years since the first shipment of iron ore, celebrated the delivery of the one billionth tonne and marked a decade as Diamond Sponsor of the Boao Forum for Asia. The success and longevity of Fortescue’s association with China is due to the multifaceted nature of the relationship which is built on four pillars of engagement: supply, procurement, investment and community engagement. A decade ago, Fortescue shipped its first 180,000 tonnes of iron ore aboard the Cape size vessel Heng Shan from Herb Elliott Port in Port Hedland. Today, Fortescue is the lowest cost supplier of seaborne iron ore into China. Fortescue has spent over US$1 billion in procurement from China, including the US$600 million the construction of the fleet of Fortescue Ore Carriers. The partnerships with Chinese manufactures has had lasting benefits, enabling the businesses to enter the world market. It has been 30 years since China’s first investment in Australia’s iron ore industry, which includes the highly successful direct investment in Fortescue by Hunan Valin Steel Group who remain a major shareholder. The engagement extends to the community level, with Fortescue sponsoring academic scholarships at Central South University in China and hosting the China-Australia university partnership in the Pilbara. Fortescue is proud of its contribution to China’s remarkable economic development and its role in supporting the important trade relationship between China and Australia, which has been vital to driving economic growth in both nations. Fortescue Metals Group Ltd Annual Report FY18Key Performance Indicators Safety 3.7 Total Recordable Injury Frequency Rate Production 170 mt Meeting annual production target C1 Costs US$ 12.36 /wmt Four per cent reduction from prior year 25 02 | Operating and Financial Review Key performance indicators Safety Fortescue places the utmost importance on safety, as the Company’s number one Value. Every day, Fortescue’s people are encouraged and empowered to look out for their mates and themselves. Fortescue is committed to continuing to improve its safety performance across the following areas: • Strengthening safety leadership through specific action plans to improve the results of the Company-wide Safety Excellence and Culture Survey • Engagement with its contracting partners to ensure compliance with Fortescue’s safety standards and a safe workplace • Enhancement of the critical control monitoring (CCM) program to eliminate fatalities and serious injuries. The CCM program aligns with Fortescue’s risk profile and any significant incident trends • The continued reduction of workplace exposures through safety improvement opportunities. The Company is committed to providing a safe workplace for all of its employees and contractors as it works to become a global leader in safety through reducing its Total Recordable Injury Frequency Rate (TRIFR) and Significant Incident Frequency Rate to the lowest quartile of the resources industry. Fortescue’s rolling twelve-month TRIFR increased by 28 per cent from 2.9 at 30 June 2017 to 3.7 at 30 June 2018, predominantly due to a number of low severity injuries. 12-month rolling TRIFR, per million hours worked 6.0 5.1 4.3 2.9 3.7 FY14 FY15 FY16 FY17 FY18 Production Consistent and predictable production. Production and shipments on a wet metric tonne basis (wmt) for the year are outlined below: 12 months to 30 June Shipments Ore mined Overburden removed Ore processed 2018 million wmt 2017 million wmt Movement % 170 185 267 166 170 198 205 172 - -7 +30 -3 An annual shipment rate of 170mtpa was maintained in FY18 including a record June quarter of 46.5mt. Mining and processing activities continued to support Fortescue’s product strategy and shipping targets. Total processing tonnes included a three per cent increase in the OPF output compared to the prior year. Fortescue’s product strategy continued to focus on delivering value to its customers and maximising the value of its ore bodies and infrastructure assets through beneficiation, as well as operating, asset utilisation and productivity efficiencies. Strip ratio across all mining operations increased to 1.4 with the five year mine strip ratio remaining at 1.5. Mining, million wmt Processing, million wmt Shipments, million wmt 198 181 185 164 140 154 126 172 168 166 165 169 170 170 124 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 Fortescue Metals Group Ltd Annual Report FY18 Key performance indicators Costs C1 costs of US$12.36/wmt, a four per cent reduction from the prior year. During the year, Fortescue has delivered on key strategic initiatives which position the Company for the next phase of growth while improving productivity and remaining the lowest cost producer of seaborne iron ore to China. In FY18, Fortescue delivered a record low C1 cost for the year of US$12.36/wmt, a four per cent improvement over the prior year offsetting a 12 per cent increase in total material moved, a three per cent increase in foreign exchange and a 21 per cent increase in oil price. As a result, the Company has maintained its position as the lowest cost supplier of seaborne iron ore into China based on Metalytics Resource Sector Economic analysis. The strategic initiatives achieved in FY18 include: • The transition to autonomous haul fleet at Christmas Creek with 19 trucks converted and in operation at 30 June 2018. Upon completion of the program, with approximately 100 haul trucks at the Chichester Hub and 70 at the Solomon hub, Fortescue will become the first iron ore operation in the world to have a fully autonomous fleet • Commissioning of the relocatable • Continued improvement focus conveyor at Cloudbreak. The five kilometre conveyor includes a semi-mobile primary crushing station that feeds directly into the ore processing facility. The relocatable conveyor and semi-mobile crushing facilities can be positioned approximate to pits and relocated once mining is complete across all operations including mine planning, design and review of mining methodology, cross-site operational collaboration, efficiency of mining equipment and labour productivity. The chart below illustrates progressive cost reductions over the past five years, representing sustainable, long term improvements in operating costs. C1 cost journey, US$/wmt 33.84 27.15 15.43 12.82 12.36 FY14 FY15 FY16 FY17 FY18 27 02 | Operating and Financial Review Financial performance The Company's focus on safety and the productivity and efficiency of its operations underpins the generation of strong margins and sustainable delivery of shareholder value. Key metrics Revenue, US$ millions Underlying EBITDA1, US$ millions Underlying net profit after tax1, US$ millions Net profit after tax, US$ millions Earnings per share, US cents Realised price, US$/dmt C1 costs, US$/wmt Underlying EBITDA margin, US$/dmt Key ratios Underlying EBITDA margin, % Return on equity, % 2018 6,887 3,182 1,080 878 28.2 44 12 20 46 9 2017 8,447 4,744 2,134 2,093 67.3 53 13 30 56 23 1 Refer to page 29 for the reconciliation of Underlying EBITDA and Underlying net profit after tax to the financial metrics reported in the financial statements under Australian Accounting Standards. Fortescue Metals Group Ltd Annual Report FY18Financial performance In FY18, Fortescue delivered net profit after tax of US$878 million and earnings per share of 28.2 cents (FY17: US$2,093 million and earnings per share of 67.3 cents). Underlying net profit after tax, adjusted for one-off refinancing and early debt repayment costs, was US$1,080 million (FY17: US$2,134 million). Underlying EBITDA Underlying EBITDA, defined as earnings before interest, tax, depreciation and amortisation, exploration, development and other expenses, is used as a key measure of the Company’s financial performance. During the year, Fortescue’s operations generated Underlying EBITDA of US$3,182 million (FY17: US$4,744 million). The reconciliation of Underlying EBITDA and Underlying net profit after tax to the financial metrics reported in the financial statements under Australian Accounting Standards is presented below: 2018 2017 Operating sales revenue Cost of sales excluding depreciation and amortisation Net foreign exchange gain Administration expenses Other income Underlying EBITDA Finance income Finance expenses Depreciation and amortisation Exploration, development and other Net profit before tax Income tax expense Net profit after tax Cost of early debt repayment after tax Underlying net profit after tax 1 Refer to notes to the accompanying financial statements. Note1 3 5 4 6 4 7 7 5, 6 6 14 US$m 6,887 (3,665) 29 (70) 1 3,182 24 (652) (1,277) (32) 1,245 (367) 878 202 1,080 US$m 8,447 (3,661) 13 (56) 1 4,744 19 (502) (1,243) (51) 2,967 (874) 2,093 41 2,134 The Underlying EBITDA of US$3,182 million for FY18 represents a margin of 46 per cent or US$20/dmt. As illustrated in the chart below, Fortescue has been maintaining strong Underlying EBITDA margins through market cycles, demonstrating the commitment to and focus on productivity, efficiency and innovation. US$/dmt 140 120 100 80 60 40 20 51 FY14 17 FY15 21 FY16 30 FY17 20 FY18 Underlying EBITDA, US$/dmt 62 Platts CFR Index, US$/dmt Fortescue realised price, US$/dmt Average Underlying EBITDA, US$/dmt 29 02 | Operating and Financial Review Financial performance Underlying EBITDA (continued) Key factors contributing to the 33 per cent reduction in Underlying EBITDA from the prior year were primarily market driven, with lower prices realised for Fortescue products averaging US$44/dmt in FY18 (FY17: US$53/dmt) and increased shipping rates with the average BCI5 index of US$7/wmt (FY17: US$6/wmt). 4,744 18 1,531 Underlying EBITDA (US$m) 77 222 129 3 3,182 FY17 Volume Price C1 costs Shipping costs Royalty Other FY18 Revenue Sale of iron ore, US$ millions Other revenue, US$ millions Operating sales revenue, US$ millions Shipments, million wmt 62% Fe CFR Platts index, US$/dmt Realised price, US$/dmt 1 Notes to the accompanying financial statements. Note1 3 3 2018 US$m 6,775 112 6,887 170 69 44 2017 US$m 8,335 112 8,447 170 70 53 Demand for Fortescue products remained strong with 170mt of iron ore sold to customers in FY18. The Platts 62 CFR index averaged US$69/dmt in FY18, consistent with the prior year (FY17: US$70/dmt). High profit margins being realised by Chinese steel mills, uncertainty surrounding environmental restrictions and high coal prices supported increased demand for high iron content ores during FY18. As a result, the spread in prices between iron ore products widened during the year and Fortescue realised US$44/dmt compared to US$53/dmt in the prior year. Fortescue’s low cost base and continued focus on productivity and efficiency improvements has partially offset the impact of a reduction in realised iron ore prices to deliver strong cash margins allowing the Company to withstand periods of market volatility. Fortescue continues to explore options for further improvements in margin and has approved the Eliwana project which will support a higher Fe grade, lower alumina product while maintaining flexibility to manage product volumes and commodity cycles. Fortescue Metals Group Ltd Annual Report FY18 Financial performance Production costs The reconciliation of C1 costs and total delivered costs to customers to the financial metrics reported in the financial statements under Australian Accounting Standards is set out below: Mining and processing costs, US$ millions Rail costs, US$ millions Port costs , US$ millions C1 costs, US$ million Shipments, million wmt C1 costs, US$/wmt Shipping costs, US$ millions Government royalty2, US$ millions Administration expenses, US$ millions Shipping, royalty and administration, US$ millions Shipments, million wmt Shipping, royalty and administration, US$/wmt Total delivered cost, US$/wmt Total delivered cost, US$/dmt Note1 5 5 5 5 5 6 2018 1,739 188 172 2,099 170 12.36 1,148 416 70 1,634 170 10 22 24 2017 1,801 200 183 2,184 170 12.82 929 545 56 1,530 170 9 22 24 1 Refer to notes to the accompanying financial statements. 2 Fortescue pays 7.5 per cent state government royalty for the majority of its iron ore products, with a concession rate of five per cent applicable to beneficiated fines. Key factors contributing to FY18 operating cost performance are discussed on page 27. Non-operating events Key non-operating matters forming part of the financial result include: • In the first half of FY18, Fortescue repurchased the Solomon Power Station (FY17: US$326 million). During the second half of the year, Fortescue fully repaid and refinanced the outstanding US$2,160 million of the 9.75% Senior Secured Notes, through a combination of US$1,900 million refinancing and US$260 million cash payment • Finance expenses of US$652 million include one-off costs associated with the above early repayments and refinancing of US$289 million and an interest expense of US$340 million, a 21 per cent reduction from the prior year reflecting lower indebtedness and improved credit terms • Depreciation and amortisation expense of US$1,277 million (FY17: US$1,243 million) • Income tax expense for the year of US$367 million at an effective income tax rate of 29.5 per cent (FY17: US$874 million, at an effective rate of 29.5 per cent). 31 02 | Operating and Financial Review Financial Position Fortescue’s balance sheet has been restructured on low cost, investment grade terms while maintaining flexibility to support ongoing operations and future growth.  Fortescue’s debt decreased to US$3,975 million with a gross gearing of 29 per cent (FY17: US$4,471 million), inclusive of finance leases of US$595 million (FY17: US$818 million). The US$525 million revolving facility remains undrawn at 30 June 2018.  Key metrics Borrowings, US$ millions Finance lease liabilities, US$ millions Total debt Cash and cash equivalents, US$ millions Net debt, US$ millions Equity, US$ millions Cash generated from operations, US$ millions Cash flows from operating activities, US$ millions Capital expenditure, US$ millions Free cash flow, US$ millions Key ratios Gearing, % Net gearing, % 1 Refer to notes to the accompanying financial statements. Note1 9(a) 9(a) 9(b) 2018 3,380 595 3,975 863 3,112 9,732 3,031 1,601 (890) 711 29 24 2017 3,653 818 4,471 1,838 2,633 9,734 5,024 4,256 (716) 3,540 31 21 Fortescue Metals Group Ltd Annual Report FY18 Financial position Debt maturity profile Fortescue successfully refinanced and repaid its high cost senior secured notes in FY18 through the establishment of a US$1.4 billion syndicated term loan, with participation by key Chinese domestic and international relationship banks, a US$500 million senior unsecured notes issue and a US$260 million cash payment. This has lowered the Company’s average cost of capital, improved flexibility, strengthened the balance sheet and further developed Fortescue's strong relationships with China. The Company’s debt maturity profile at 30 June 2018 structured on investment grade terms and conditions is set out below: Debt maturity profile (excluding finance leases), US$m 1,400 750 500 750 CY2018 CY2019 CY2020 CY2021 CY2022 CY2023 CY2024 Syndicated term loan Senior unsecured notes At 30 June 2018, Fortescue had US$1.4 billion of liquidity available including US$863 million of cash on hand and the US$525 million undrawn revolving credit facility. The Company has no financial maintenance covenants across all instruments. The Company has successfully reduced its debt over the past five years to a gross gearing level of 29 per cent at 30 June 2018 (net gearing 24 per cent). Total borrowings and finance lease liabilities of US$3,975 million have returned to below FY11 levels, when Fortescue was producing at an annual rate of 50mtpa. US$m 14,000 12,000 10,000 8,000 6,000 4,000 2,000 mt 175 150 125 100 75 50 25 FY08 FY09 FY0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Debt Tonnes shipped - Fortescue mined ore 33 02 | Operating and Financial Review Financial position Finance leases In FY18, Fortescue repaid the Solomon Power Station finance lease (FY17: $US326 million). During the year, Fortescue continued to draw down on the finance lease facility entered into the previous year with the China Development Bank Funding Leasing Co., Ltd in relation to the financing of eight Fortescue ore carriers. The facility of US$473 million funds 85 per cent of the ore carriers’ costs for a minimum of 12 years on highly flexible terms, including early repayment and extension options, and has been drawn down progressively as the ships have been delivered. At 30 June 2018, US$405 million of the facility has been utilised following delivery of the seven ore carriers, with the remaining funds to be drawn down in FY19 on delivery of the final ore carrier. Cash generated by operations Fortescue continued to generate strong underlying cash flows from operations during the year with cash on hand at 30 June 2018 of US$863 million. Key factors contributing to the 62 per cent decrease in operating cash inflows were as follows: • 18 per cent decrease in revenue as a result of lower realised prices received in FY18 • Increased income tax payments of US$1,062 million (FY17: US$375 million), including US$670 million relating to FY17. This has been partially offset by: • Four per cent reduction in C1 costs to US$12.36/wmt in FY18 • Lower interest payments of US$392 million (FY17: US$412), reflecting US$3.0 billion of debt repayments since July 2016. Capital expenditure Fortescue’s capital expenditure of US$890 million (FY17: US$716 million) included: • Sustaining capital of US$507 million (FY17: US$354 million) • Ore carrier construction of US$149 million (FY17: US$260 million) • Development capital of US$167 million (FY17: US$63 million) • Exploration expenditure of US$67 million (FY17: US$39 million). Dividends and shareholder returns In FY18, Fortescue generated earnings of 28.2 US cents per share (FY17: 67.3 US cents per share), with return on equity of nine per cent (FY17: 23 per cent). 2018 878 28.2 9 11 12 23 62 2017 2,093 67.3 23 20 25 45 52 Net profit after tax, US$ millions Earnings per share, US cents per share Return on equity, % Interim dividend, AUD cents per share Final dividend, AUD cents per share Total dividend, AUD cents per share Dividend payout ratio, % Case Study Strong balance sheet Fortescue’s capital structure underwent significant change over the past ten years, from restrictive project financing which supported the initial Cloudbreak mine development, to its most recent refinancing, delivering flexible, low cost debt reflective of an investment grade company. The Term Loan represented another significant milestone in the commercial relationship between Australia and China, bringing together a world class financial syndicate delivering globally competitive financing terms and aligning funding sources with core business. In February 2018, Fortescue announced the completion of a US$1.4 billion Syndicated term loan co-led by Industrial and Commercial Bank of China and Australia New Zealand Bank. The US$1.4 billion Term Loan, together with the US$0.5 billion Unsecured Note and US$260 million of cash transitioned Fortescue’s balance sheet to an investment grade structure. Fortescue continues to be disciplined in its approach to capital management, delivering returns to its shareholders. This is achieved through sustained productivity improvements which underpin cashflow generation. Capital management remains a key priority for Fortescue as the Company continues to invest in the long-term sustainability of the business, growth options and delivery of returns to shareholders. Fortescue Metals Group Ltd Annual Report FY18 03 Ore Reserves and Mineral Resources 35 03 | Ore Reserves and Mineral Resources Ore Reserves and Mineral Resources Reporting is grouped by operating and development properties and includes both Hematite and Magnetite deposits. Hematite Ore Reserves total 2.25 billion tonnes (bt) at an average iron (Fe) grade of 57.4 per cent. Combined Hematite Mineral Resources total 13bt at an average Fe grade of 56.8 per cent. Magnetite Ore Reserves total 0.7bt at an average mass recovery of 27.2 per cent for a 67 per cent Fe grade product. Magnetite Mineral Resources total 7.9bt at an average mass recovery of 23.3 per cent. Operating property Ore Reserves and Mineral Resources have all been reported to the Joint Ore Reserves Committee (JORC) 2012 standard. Accordingly, the information in these sections should be read in conjunction with the respective explanatory Mineral Resource and Ore Reserve information (Fortescue ASX release dated 17 August 2018). Development property Mineral Resources are a combination of JORC 2012 and JORC 2004 estimates. Those development property Mineral Resources reported to JORC 2012 standard are identified in the Fortescue ASX releases on 17 August 2018, 18 August 2017, 8 January 2015 and 20 May 2014 that includes the supporting technical data. The remaining JORC 2004 Mineral Resource estimates will be progressively updated to the JORC 2012 standard as development priorities dictate. Magnetite Mineral Resources have been updated and reported to the JORC 2012 standards. The Mineral Resources quoted in this report should be read in conjunction with the supporting technical data contained in the corresponding ASX release dated 17 August 2018. The Ore Reserve and Mineral Resource estimation processes followed are well established and are subject to systematic internal peer review, including calibration against operational outcomes. Independent technical reviews and audits are undertaken on an as-required basis as an outcome of risk assessment. In addition to routine internal audit, auditing of the estimation of Mineral Resources and Ore Reserves is addressed as a sub-set of the annual internal audit plan approved by the Board Audit and Risk Management Committee (ARMC). Specific audit of the Ore Reserve process was performed in 2011, 2013, 2015, 2016 and 2017. These audits were managed by Fortescue’s internal audit service provider with external technical subject experts. The 2015, 2016 and 2017 Ore Reserves audits were carried out by independent external technical consultants. The ARMC also monitors the Ore Reserve and Mineral Resource status and approves the final outcome. The annual Ore Reserves and Mineral Resources update is a prescribed activity within the annual Corporate Planning Calendar that includes a schedule of regular executive engagement meetings to approve assumptions and guide the overall process. Tonnage and quality information contained in the following tables have been rounded and as a result the figures may not add up to the totals quoted. Ore Reserves Operating Properties – Hematite The 2018 combined Chichester, Solomon and Eliwana (part of Western Hub) Hematite Ore Reserve is a total of 2,250 million dry tonnes (mt) at an average iron (Fe) grade of 57.4 per cent. Ore Reserves are quoted on a dry product basis while Mineral Resources are quoted on a dry in-situ basis. (Company production and sales reporting is based on wet tonnes. The typical free moisture content of shipped products is nine per cent). The Ore Reserve is quoted as at 30 June 2018 and is inclusive of ore and product stockpiles at mines. Product stockpiles at port have been excluded from contributing to Ore Reserves. The proportion of higher confidence Proved Ore Reserve has remained unchanged (746mt) as a result of ongoing in-fill drilling at both the Solomon and the Chichester deposits, as well as the addition of the Eliwana deposit to Ore Reserves. The Chichester Hub (Cloudbreak and Christmas Creek deposits) contains 1,376mt at an average Fe grade of 57.1 per cent, a decrease of 141mt due primarily to a combination of mining depletion and reconciliation adjustments (-ve). Proved Ore Reserve constitutes 42 per cent of Chichester Ore Reserve. While the Cloudbreak and Christmas Creek deposits are quoted separately for historical reasons, they effectively represent a single deposit with ore generally directed to the most proximal of the three available ore processing facilities (OPFs). The Ore Reserve estimate for the Solomon Hub is 660mt at an average Fe grade of 57.2 per cent, a decrease of 14mt due to production with replacement ore through Grade Control activities and new pit geometries. Solomon Ore Reserve consists of 14 per cent of the tonnage in the Proved Ore Reserve category. The Ore Reserve estimate for the new Eliwana deposit is 213mt at an average Fe grade of 60.1 per cent. The estimate is supported by Detailed Feasibility Study, inclusion in the integrated Life Of Mine plans and Financial Investment Decision announced in May 2018. Eliwana Ore Reserve consists of 37 per cent of the tonnage in the Proved Ore Reserve category. The 2018 Hematite Ore Reserve estimates were subject to comprehensive review and update addressing: • Addition of Eliwana deposit to Ore Reserves (increase) • Revisions to the Cloudbreak pit geometry and cut-off grade (decrease) • Revisions to the Christmas Creek pit geometry cut-off grade (decrease) • Revisions of ore loss and dilution factors based on 12 months of operational history at all mines (tonnage decrease at the Chichesters) • Revisions to the processing response through all OPFs based on updated test work and operational history (minor) • Ore depletion as a result of sales (decrease) • Re-optimisation of mine geometries to maximise the benefit of cost reductions across all Fortescue operations and new additions to the resource base • A revised Life Of Mine (LOM) plan that addresses the listed items and incorporates the latest information on long term product strategy (introduction of 60% Fe product). Fortescue Metals Group Ltd Annual Report FY18 Hematite Ore Reserves – as at 30 June 2018 June 2018 June 2017 Product Tonnes (mt) Iron Fe % Silica SiO2 % Alumina Al2O3 % Phos P % Loss On Ignition LOI % Product Tonnes (mt) Iron Fe % Silica SiO2 % Alumina Al2O3 % Phos P % Loss On Ignition LOI % Cloudbreak Proved Probable Total Christmas Creek Proved Probable Total 270 276 546 302 528 831 Sub-total Chichester Hub Proved Probable Total Firetail Proved Probable Total Kings and Queens Proved Probable Total Sub-total Solomon Hub Proved Probable Total Eliwana Proved Probable Total 572 804 1,376 4 90 94 91 475 566 95 565 660 79 135 213 Total Hematite Ore Reserves Proved Probable Total 746 1,504 2,250 Notes in reference to table 57.3 57.1 57.2 57.0 57.1 57.1 57.1 57.1 57.1 58.7 59.3 59.2 55.9 57.1 56.9 56.0 57.4 57.2 61.1 59.5 60.1 57.4 57.5 57.4 5.45 6.09 5.78 5.96 5.52 5.68 5.72 5.71 5.72 6.24 5.66 5.68 7.23 6.50 6.61 7.18 6.36 6.48 4.22 5.27 4.88 5.75 5.92 5.86 2.86 2.81 2.83 2.77 3.09 2.97 2.81 2.99 2.92 2.71 2.45 2.46 2.57 2.69 2.67 2.57 2.65 2.64 2.51 2.37 2.42 2.75 2.81 2.79 0.053 0.059 0.056 0.040 0.046 0.044 0.046 0.050 0.049 0.113 0.107 0.107 0.074 0.064 0.066 0.076 0.071 0.072 0.144 0.115 0.126 0.060 0.064 0.063 8.38 7.69 8.03 7.72 7.68 7.69 8.03 7.68 7.82 6.60 6.68 6.67 9.96 8.76 8.95 9.82 8.42 8.62 5.21 6.27 5.88 7.96 7.83 7.87 304 289 593 326 597 924 631 886 1,517 13 112 125 103 446 548 116 558 674 - - - 57.5 57.2 57.4 57.1 57.0 57.0 57.3 57.1 57.2 59.0 59.3 59.2 56.3 56.9 56.8 56.6 57.4 57.3 - - - 5.21 5.97 5.58 5.86 5.96 5.93 5.54 5.96 5.79 5.57 5.75 5.73 6.60 6.36 6.40 6.48 6.23 6.28 - - - 2.81 2.75 2.78 2.81 3.03 2.95 2.81 2.94 2.88 2.40 2.53 2.51 2.40 2.61 2.57 2.40 2.59 2.56 - - - 0.052 0.058 0.055 0.043 0.047 0.046 0.047 0.051 0.049 0.114 0.107 0.107 0.073 0.064 0.065 0.078 0.072 0.073 - - - 8.49 8.00 8.25 7.81 7.57 7.66 8.14 7.71 7.89 7.18 6.38 6.46 9.95 9.13 9.29 9.64 8.58 8.76 - - - 746 1,444 2,191 57.2 57.2 57.2 5.69 6.07 5.94 2.75 2.80 2.78 0.052 0.059 0.057 8.37 8.05 8.16 • The diluted mining models used to report the 2018 Ore Reserves are based on Christmas Creek Mineral Resource model reported in 2016, Firetail Mineral Resource model revised in 2014, Cloudbreak Mineral Resource model completed in 2016, Kings Mineral Resource model released in 2017, Kutayi Mineral Resource model released in 2014 and Eliwana Mineral Resource model released in 2018. • Diluted mining models are validated by reconciliation against historical production. • Proved Ore Reserves are inclusive of ore stockpiles at the mines totalling approximately 18mt on dry product basis. • The Chichester Ore Reserve is inclusive of the Cloudbreak, Christmas Creek and Kutayi BID deposits. Selected Christmas Creek Ore Reserves will be directed to the Cloudbreak OPF to optimise upgrade performance and balance Cloudbreak and Christmas Creek OPF lives. • Tonnage information has been rounded and as a result the figures may not add up to the totals quoted. 37 03 | Ore Reserves and Mineral Resources Ore Reserves – Magnetite The 2018 Ore Reserves for Magnetite are from the Iron Bridge project. Ore Reserves for the project total 705mt at an average mass recovery of 27.2 per cent for a 67 per cent Fe grade product. The Magnetite Ore Reserve is quoted as at 30 June 2018. These were compiled in 2015 and have been re-reported as there have been no updates. Ore Reserves are quoted on a dry in-situ tonnes basis prior to processing. No Company sales or production have occurred for Magnetite as at 30 June 2018. Price forecasting has been based on a dry tonnage basis. When shipping occurs production will be quoted in wet tonnes. The typical free moisture content of shipped products is nine per cent. All Magnetite Ore Reserves are classified as Probable Ore Reserves. These have been estimated from Indicated plus Measured Mineral Resources from within the North Star mining study pit. Additional Indicated Mineral Resources from outside the study pit (including the Eastern Limb, Glacier Valley deposits) have not been included in these Ore Reserves. The Magnetite Ore Reserves have been estimated by independent consultants (Golder Associates) using detailed information on mining parameters, geotechnical studies, metallurgical processing, and financial analysis taken from the Iron Bridge feasibility study. Magnetite Ore Reserves – as at 30 June 2018 June 2018 June 2017 DTR mass recovery % In-Situ Tonnes (mt) Product Iron Fe % Product Silica SiO2 % Product Alumina Al2O3 % DTR mass recovery % In-Situ Tonnes (mt) Product iron Fe % Product Silica SiO2 % Product Alumina Al2O3 % North Star (60.72% Fortescue) - Eastern Limb currently not assessed Proved Probable Total Glacier Valley (60.72% Fortescue) Proved Probable Total West Star (60.72% Fortescue) Proved Probable Total Total Magnetite Ore Reserves Proved Probable Total Notes in reference to table - 705 705 - 27.2 27.2 - 67.2 67.2 - 5.52 5.52 - 0.25 0.25 - 705 705 - 27.2 27.2 - 67.2 67.2 - 5.52 5.52 - 0.25 0.25 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 705 705 - 27.2 27.2 - 67.2 67.2 - 5.52 5.52 - 0.25 0.25 - 705 705 - 27.2 27.2 - 67.2 67.2 - 5.52 5.52 - 0.25 0.25 • Magnetite Ore Reserves are a result of a mining study only upon the North Star deposit. Utilising 705mt of Measured plus Indicated Mineral Resources reported within a defined pit design. • All reporting is based on Mass Recovery expressed as a nine per cent Davis Tube Recovery (DTR) cut-off. • All Ore Reserves are reported on a dry-tonnage basis. Mineral Resources Operating Properties – Hematite Mineral Resources for the operating properties including the Chichester and Solomon Hubs and Eliwana are stated on a dry in-situ basis. Mineral Resources from the Eliwana deposit are reported here for the first time, previously they were reported with development properties as part of the Western Hub. The Mineral Resources are inclusive of that portion converted to Ore Reserves, including stockpiles. As at 30 June 2018, the total Mineral Resource for the Chichester and Solomon Hubs and Eliwana was 6,122mt at an average Fe grade of 56.4 per cent, an increase over that stated in the prior year. This was accompanied by a decrease in the proportion of higher confidence Measured and Indicated Mineral Resource mineralisation from 73 per cent to 66 per cent. The Chichester Hub Mineral Resource totalled 3,061mt at an average Fe grade of 56.3 per cent, with 79 per cent of the tonnage in the Measured and Indicated Mineral Resource categories. The Solomon Hub Mineral Resource totalled 2,051mt at an average Fe grade of 55.5 per cent, with 61 per cent of the tonnage in the Measured and Indicated Mineral Resource categories. The Eliwana Mineral Resource totalled 1,010mt at an average Fe grade of 58.8 percent, with 34 percent of the tonnage in the Measured and Indicated Mineral Resource categories. Fortescue Metals Group Ltd Annual Report FY18 Hematite Mineral Resources (Operating Properties) – as at 30 June 2018 June 2018 June 2017 In-Situ Tonnes (mt) Iron Fe % Silica SiO2 % Alumina Al2O3 % Phos P % Loss On Ignition LOI % In-Situ Tonnes (mt) Iron Fe % Silica SiO2 % Alumina Al2O3 % Phos P % Loss On Ignition LOI % 5.55 6.69 6.42 6.13 6.28 6.58 7.05 6.62 5.93 6.61 6.92 6.45 5.91 6.79 7.36 7.01 7.96 7.98 8.00 7.99 7.86 7.79 7.89 3.48 3.43 3.56 0.057 0.059 0.053 3.47 0.058 3.09 3.72 3.75 0.047 0.051 0.054 3.57 0.051 3.28 3.64 3.71 0.052 0.053 0.054 3.53 0.053 3.43 2.81 3.35 0.123 0.113 0.107 3.06 0.111 3.02 3.40 3.47 0.087 0.072 0.082 3.39 0.077 3.04 3.31 3.45 0.088 0.078 0.086 Cloudbreak Measured Indicated Inferred Total Christmas Creek Measured Indicated Inferred Total 479 428 134 56.7 56.1 56.4 1,041 56.4 515 1,004 501 56.9 56.1 55.6 2,020 56.2 Sub-total Chichester Hub 994 1,433 635 56.8 56.1 55.8 3,061 56.3 8 170 133 310 152 919 669 57.5 58.1 57.2 57.7 54.9 55.3 55.0 1,741 55.1 160 1,089 802 55.0 55.7 55.4 Measured Indicated Inferred Total Firetail Measured Indicated Inferred Total Kings and Queens Measured Indicated Inferred Total Sub-total Solomon Hub Measured Indicated Inferred Total Eliwana Measured Indicated Inferred Total 2,051 55.5 7.84 3.34 0.082 229 113 668 60.0 58.5 58.4 1,010 58.8 4.89 5.40 5.70 5.48 2.61 2.81 3.21 0.141 0.098 0.107 3.03 0.114 Total Hematite Operational Mineral Resources Measured Indicated Inferred Total 1,383 2,634 2,105 57.1 56.0 56.5 6,122 56.4 5.98 7.05 6.90 6.76 3.14 3.47 3.45 0.071 0.066 0.083 3.39 0.073 Notes in reference to table 8.7 8.0 7.7 8.3 7.8 7.9 7.8 7.9 8.2 7.9 7.8 8.0 7.8 6.7 7.0 6.8 9.9 8.9 9.2 9.1 9.8 8.6 8.9 8.8 5.8 7.1 6.7 6.6 8.0 8.2 7.9 8.0 478 438 138 56.7 56.1 56.3 1,055 56.4 522 1,088 505 56.9 56.1 55.6 2,115 56.2 1,000 1,526 643 56.8 56.1 55.8 3,170 56.2 21 193 134 348 196 893 671 58.1 58.3 57.2 57.9 55.0 55.2 54.9 1,761 55.1 217 1,087 805 55.3 55.7 55.3 5.60 6.70 6.46 6.17 6.12 6.74 7.09 6.67 5.87 6.73 6.95 6.50 5.43 6.62 7.34 6.83 7.81 8.00 8.22 8.06 7.59 7.75 8.07 3.45 3.46 3.53 3.46 3.12 3.67 3.74 3.55 3.28 3.61 3.69 3.52 2.93 2.78 3.36 3.01 2.92 3.37 3.60 3.41 2.92 3.27 3.56 0.056 0.059 0.052 0.057 0.047 0.050 0.054 0.050 0.051 0.053 0.054 0.052 0.128 0.113 0.107 0.111 0.086 0.073 0.079 0.076 0.090 0.080 0.083 2,109 55.5 7.86 3.34 0.082 - - - - - - - - - - - - - - - - - - - - 1,218 2,613 1,448 56.6 55.9 55.5 5,279 56.0 6.18 7.15 7.58 7.04 3.21 3.47 3.62 0.058 0.064 0.070 3.45 0.064 8.6 8.1 7.8 8.3 8.0 7.8 7.8 7.9 8.3 7.9 7.8 8.0 7.9 6.6 7.0 6.8 9.9 9.1 9.0 9.2 9.7 8.7 8.7 8.8 - - - - 8.6 8.2 8.3 8.3 • Chichester Hub Mineral Resources are quoted at a cut-off of 53.5 per cent Fe, Solomon Hub and Eliwana Mineral Resources are quoted at a cut-off grade of 51.5 per cent Fe. • Fortescue is yet to remodel BCI Mineral Resources. • The Measured Mineral Resource estimate includes mine stockpiles totalling approximately 20mt. 39 03 | Ore Reserves and Mineral Resources Mineral Resources Development Properties – Hematite Fortescue has announced a 393 million tonnes (mt) addition to the Greater Western Hub Mineral Resource as a result of exploration drilling, including increases to the existing Lora and Boolgeeda deposits. This update to the development properties is reported to JORC 2012 standard as identified in the Fortescue ASX release of 17 August 2018 that includes the supporting technical data. The Eliwana deposit previously included in the Greater Western Hub has been transferred to the operating properties. Hematite Mineral Resources (Development Properties) – as at 30 June 2018 June 2018 June 2017 In-Situ Tonnes (mt) Iron Fe % Silica SiO2 % Alumina Al2O3 % Phos P % Loss On Ignition LOI % In-Situ Tonnes (mt) Iron Fe % Silica SiO2 % Alumina Al2O3 % Phos P % Loss On Ignition LOI % Greater Chichester Measured Indicated Inferred Total Greater Solomon Measured Indicated Inferred Total Greater Western Hub Measured Indicated Inferred Total Nyidinghu Measured Indicated Inferred Total - - 433 433 - - - - - - - - 56.4 56.4 7.10 7.10 3.77 0.058 3.77 0.058 - 254 2,404 - 56.6 56.8 - 6.70 6.93 - 3.45 3.71 - 0.083 0.081 2,658 56.8 6.91 3.69 0.082 - - - - - - - - - - 1,642 57.1 1,642 57.1 5.72 5.72 2.85 0.078 2.85 0.078 23 580 1,860 59.6 58.1 57.2 3.56 4.52 5.00 2.21 2.95 3.36 0.139 0.148 0.147 2,463 57.4 4.87 3.25 0.147 Total Development Mineral Resources Measured Indicated Inferred Total 23 834 6,340 59.6 57.6 57.0 3.56 5.18 6.06 2.21 3.11 3.39 0.139 0.128 0.098 7,198 57.1 5.95 3.35 0.102 Notes in reference to table - - 7.0 7.0 - 8.3 7.2 7.3 - - 9.0 9.0 8.0 8.6 8.8 8.8 8.0 8.5 8.1 8.2 - - 433 433 - - - - - - - - 56.4 56.4 7.10 7.10 3.77 0.058 3.77 0.058 - 254 2,404 - 56.6 56.8 - 6.70 6.93 - 3.45 3.71 - 0.083 0.081 2,658 56.8 6.91 3.69 0.082 - - - - - - - - - - 2,125 57.9 2,125 57.9 5.53 5.53 2.93 0.094 2.93 0.094 23 580 1,860 59.6 58.1 57.2 3.56 4.52 5.00 2.21 2.95 3.36 0.139 0.148 0.147 2,463 57.4 4.87 3.25 0.147 23 834 6,823 59.6 57.6 57.2 3.56 5.18 5.98 2.21 3.11 3.38 0.139 0.128 0.102 7,680 57.3 5.89 3.35 0.105 - - 7.0 7.0 - 8.3 7.2 7.3 - - 7.9 7.9 8.0 8.6 8.8 8.8 8.0 8.5 7.9 7.9 • The Greater Chichester Mineral Resource includes the Investigator, White Knight and Mount Lewin deposits. • The Greater Solomon Mineral Resource includes the Serenity, Sheila Valley, Mount MacLeod, Queens Extension, Cerberus, Stingray and Raven deposits. • The Greater Western Hub Mineral Resource includes the Flying Fish, Vivash, Cobra, Lora, Zorb, Farquhar, Elevation, Boolgeeda CID and Wyloo North deposits. • All Mineral Resources are quoted on an in-situ basis after applying an appropriate cut-off for each deposit. Details relating to the cut-offs were provided when each Mineral Resource was first announced. Fortescue Metals Group Ltd Annual Report FY18 Mineral Resources Development Properties – Magnetite Mineral Resource estimates for the North Star, Eastern Limb, West Star and Glacier Valley deposits (60.72 per cent Fortescue) were completed in 2017 and have been re-reported as there have been no updates. Continued internal analysis of the resource models has confirmed the integrity of these resources, with the robust Measured plus Indicated Resources in North Star, Eastern Limb and Glacier Valley the focus of a mining study to evaluate the future development of the project. Magnetite Mineral Resources – as at 30 June 2018 June 2018 June 2017 DTR mass recovery % In-Situ Tonnes (mt) In-Situ Iron Fe % In-Situ Silica SiO2 % In-Situ Alumina Al2O3 % DTR mass recovery % In-Situ Tonnes (mt) In-Situ iron Fe % In-Situ Silica SiO2 % In-Situ Alumina Al2O3 % North Star + Eastern Limb (60.72% Fortescue) Measured Indicated Inferred Total Glacier Valley (60.72% Fortescue) Measured Indicated Inferred Total West Star (60.72% Fortescue) Measured Indicated Inferred Total Total Magnetite Mineral Resources Measured Indicated Inferred Total Notes in reference to table 77 28.6 32.4 39.44 1.91 77 28.6 32.4 39.44 1.91 989 27.8 31.1 40.48 2.28 989 27.8 31.1 40.48 2.28 3,231 24.1 29.6 41.80 2.88 3,231 24.1 29.6 41.80 2.88 4,297 25.1 30.0 41.46 2.73 4,297 25.1 30.0 41.46 2.73 - - - - - - - - - - 477 24.1 32.4 39.33 1.74 477 24.1 32.4 39.33 1.74 2,844 20.5 30.7 40.69 2.19 2,844 20.5 30.7 40.69 2.19 3,321 21.1 30.9 40.50 2.13 3,321 21.1 30.9 40.50 2.13 - - - - - - - - - - - - - - - - - - - - 274 23.5 28.3 43.43 3.43 274 23.5 28.3 43.43 3.43 274 23.5 28.3 43.43 3.43 274 23.5 28.3 43.43 3.43 77 28.6 32.4 39.44 1.91 77 28.6 32.4 39.44 1.91 1,466 26.6 31.5 40.11 2.11 1,466 26.6 31.5 40.11 2.11 6,350 22.5 30.0 41.38 2.60 6,350 22.5 30.0 41.38 2.60 7,892 23.3 30.3 41.12 2.50 7,892 23.3 30.3 41.12 2.50 • Magnetite Mineral Resource estimates, including the North Star, Eastern Limb, Glacier Valley and West Star deposits, are reported according to JORC 2012 standards. • All reporting is based on Mass Recovery expressed as a nine per cent Davis Tube Recovery (DTR) cut-off. • All Mineral Resources are reported on a dry-tonnage basis. 41 03 | Ore Reserves and Mineral Resources Competent Persons Statement The detail in this report that relates to Hematite Mineral Resources is based on information compiled by Mr Stuart Robinson, Mr Nicholas Nitschke, Ms Erin Retz and Mr David Frost-Barnes; full-time employees of Fortescue. Each provided technical input for Mineral Resource estimations. The detail in this report that relates to Magnetite Mineral Resources is based on information complied by Mr Lynn Widenbar, an independent consultant for Widenbar and Associates. Mr Widenbar provided technical input for Mineral Resource estimations. Estimated Ore Reserves for the Chichester and Solomon Hubs and Eliwana deposit for fiscal year 2018 were compiled by Mr Oliver Wang, Mr Martin Slavik and Mr Chris Fowers; full-time employees of Fortescue. Estimated Magnetite Ore Reserves for the Iron Bridge project for fiscal year 2018 were compiled by Mr Glenn Turnbull, an independent consultant for Golder Associates. Mr Robinson is a Fellow of, and Mr Nitschke, Ms Retz, Mr Frost-Barnes, Mr Slavik, Mr Wang, Mr Fowers, Mr Widenbar and Mr Turnbull are Members of the Australasian Institute of Mining and Metallurgy. Mr Robinson, Mr Nitschke, Ms Retz, Mr Frost-Barnes, Mr Slavik, Mr Wang, Mr Fowers, Mr Widenbar and Mr Turnbull have sufficient experience relevant to the style of mineralisation and type of deposit under consideration and to the activity which they are undertaking to qualify as a Competent Person as defined in the 2012 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Robinson, Mr Nitschke, Ms Retz, Mr Frost- Barnes, Mr Slavik, Mr Wang, Mr Fowers, Mr Widenbar and Mr Turnbull consent to the inclusion in this report of the matters based on this information in the form and context in which it appears. Fortescue Metals Group Ltd Annual Report FY1804 Corporate Social Responsibility 43 04 | Corporate Social Responsibility Fortescue is committed to ensuring communities benefit from its growth and development. Fortescue Metals Group Ltd Annual Report FY18 FY18 highlights VTECs anniversary th 10 Billion Opportunities Program milestone achieved A$ 2 bn Total taxes paid in FY18 A$ 1. 2 bn Stays in the Fortescue Family Room Active heritage places managed Recycled waste 971 5,597 88% 45 04 | Corporate Social Responsibility Empowerment is at the heart of Fortescue’s approach to Corporate Social Responsibility Targets Opportunities and Objectives Fortescue’s Policies Voluntary Commitments and Principles Code of Conduct Vision and Values Fortescue Metals Group Ltd Annual Report FY18 Approach to Corporate Social Responsibility Creating shared value Corporate Social Responsibility (CSR) is Fortescue’s commitment to behave ethically, to create value for the Company’s stakeholders, to protect Aboriginal heritage and the environment and to empower and partner with communities to build capability and capacity. Fortescue is committed to ensuring communities benefit from its growth and development and recognises that, in order to achieve its vision of being the safest, lowest cost, most profitable mining company, CSR must be embedded within all aspects of its business. Empowerment is at the heart of Fortescue’s approach to CSR – as is an absolute determination to achieve practical outcomes. It is demonstrated by Fortescue’s ability to empower individuals within the Company and communities to be their best; to find innovative solutions to the most complex business and societal challenges and to find ways to improve the business’ bottom line while delivering positive change. Compliance with all relevant legislation and obligations including those that govern health, safety and environment is the absolute minimum standard to which the Company adheres. Fortescue’s Values form the foundation of the Company’s approach to CSR, setting the ethical and moral compass by which business is undertaken. Fortescue’s Code of Conduct and Integrity establishes the essential standards of personal and corporate conduct and behaviour of employees, suppliers and contractors. This strong base supports the Company’s commitments and principles and leads to the development and implementation of policies, opportunities and objectives, ultimately informing the application of specific business unit targets, processes and plans. A full copy of the CSR report is available on the Company's website at www.fmgl.com.au 47 04 | Corporate Social Responsibility Fortescue's people deliver shared value by maximising their energy and targeting their resources. Fortescue's FY18 CSR Report outlines the performance of Fortescue against key material corporate social responsibility issues and opportunities during FY18. Fortescue is a signatory to the United Nations Global Compact (UNGC) and the FY18 Corporate Social Responsibility report represents the Company’s ongoing commitment to report progress towards the principles of the UNGC. The report has been prepared in accordance with the Global Reporting Initiative (GRI) Standards Core option and a copy of the GRI Content Index is provided within the report, available at www.fmgl.com.au Fortescue Metals Group Ltd Annual Report FY18 The report also takes into account issues identified through Fortescue’s Risk Management Framework and guidance provided by key bodies including the International Council on Mining and Metals (ICMM). Issues are considered material if they reflect the Company’s key environmental, social and economic impacts or if they influence the assessments and decisions of stakeholders. CSR material issues are determined via an annual assessment process that considers associated risks and opportunities and internal and external stakeholder views. The assessment is undertaken through a cycle of identification, prioritisation, validation and review. Based on this assessment the following were determined to be Fortescue’s most material issues: • Employee health and safety • Creating employment and business opportunities for Aboriginal people • Ensuring ethical conduct • Eradicating slavery in the supply chain • Building local communities • Workforce diversity • Protecting biodiversity and water resources • Protecting Aboriginal culture and heritage • Climate change action and disclosure. Fortescue’s performance against each material issue is reported against three core areas: Setting high standards Creating positive social change Safeguarding the environment by championing safety, preserving Aboriginal heritage, embracing diversity and demonstrating integrity by building local communities, empowering Aboriginal people and eradicating modern slavery in Fortescue’s supply chain by protecting biodiversity, managing water resources, reducing greenhouse gas emissions and waste 49 05 Corporate Governance Fortescue Metals Group Ltd Annual Report FY18 Overview of Governance Good corporate governance is critical to the long term, sustainable success of Fortescue. Good governance is embedded throughout Fortescue and is the collective responsibility of the Board of Directors and all levels of management. Fortescue seeks to adopt leading practice, contemporary governance standards and apply these in a manner consistent with its culture and Values. Fortescue supports the intent of the ASX Corporate Governance Council Principles and Recommendations 3rd Edition (Principles and Recommendations) and meets the specific requirements of the Principles and Recommendations, unless otherwise disclosed. Fortescue is also monitoring the development of the 4th Edition of the Principles and Recommendations and welcomes the enhanced focus on corporate culture in driving ethical and socially responsible behaviour, as outlined in the Public Consultation document, issued on 2 May 2018 by the ASX Corporate Governance Council. The cornerstone principles 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 stakeholders and the market generally. Integrity: Developing and maintaining a corporate culture committed to ethical behaviour and compliance with the law. Empowerment: Everyone at Fortescue is empowered to make decisions that support the organisation’s objectives and are in the best interests of stakeholders. Management and staff are encouraged to be innovative and strategic in making decisions that align with Fortescue’s risk appetite and are undertaken in a manner consistent with corporate expectations and standards. Corporate accountability: Ensuring that there is clarity of decision making within the Company, with processes in place to ensure the right people have authorised approval 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 Fortescue is managed for the benefit of its shareholders, taking into account the interests of other stakeholders. A full copy of the Corporate Governance Statement is available on the Company's website at www.fmgl.com.au 51 05 | Corporate Governance Governance framework STAKEHOLDERS GOVERNMENT AND REGULATORS BUSINESS PARTNERS AND INVESTORS SHAREHOLDERS EMPLOYEES COMMUNITY BOARD MANAGEMENT RESPONSIBILITY Audit and Risk Management Committee Remuneration and Nomination Committee Finance Committee S E R U D E C O R P D N A S E I C I L O P BUSINESS PROCESS DELEGATION OF AUTHORITY CHIEF EXECUTIVE OFFICER CORE LEADERSHIP TEAM EXECUTIVE AND LINE MANAGEMENT INTEGRATED RISK MANAGEMENT CORPORATE CULTURE AND VALUES I N D E P E N D E N T A S S U R A N C E A C T I V I T Y Fortescue Metals Group Ltd Annual Report FY18 06 Fortescue’s response to climate change 53 06 | Fortescue’s response to climate change Since FY15, GHG emissions intensity across Fortescue's operations has reduced by 13.5 per cent. Fortescue’s commitment Climate change is one of the most challenging and complex issues facing the planet. Developing solutions to the issues that arise will require a long-term, sustainable, collaborative approach where governments, businesses and communities work together. As a business which strives to create value for its shareholders and communities, Fortescue is committed to playing its part and contributing to global efforts to combat climate change. TCFD recommendations Fortescue accepts the scientific consensus as assessed by the Intergovernmental Panel on Climate Change (IPCC) and supports the Paris Agreement goal of limiting global temperature rise to less than 2oC above pre-industrial levels. The Company’s climate change strategy focusses on mitigating the risks and building the resilience of the business and, where possible, creating and leveraging opportunities. Fortescue will continue to work proactively with its peers and governments to ensure policy frameworks are suitably designed to deliver positive climate change outcomes while also supporting economic growth. Fortescue acknowledges the growing stakeholder interest in business action on climate change and this year has commenced the process to expand disclosure in line with the recent recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) established by the G20 Financial Stability Board. The TCFD recommendations focus on the four key elements depicted below. A copy of Fortescue's approach to climate change is contained within the FY18 Corporate Social Responsibility Report available on the Company’s website at www.fmgl.com.au Governance Strategy Risk management Metrics and targets Disclose the organisation’s governance around climate-related risks and opportunities. Disclose the actual and potential impacts of climate- related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material. Disclose how the organisation identifies, assesses, and manages, climate-related risks. Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. Source: Recommendations of the Task Force on Climate–related Financial Disclosures 2017. Fortescue Metals Group Ltd Annual Report FY18 07 Financial Report 55 07 | Financial Report Directors' Report At 30 June 2018 Directors Your Directors present their report on the Fortescue consolidated group, comprising the Company and its controlled entities, for the year ended 30 June 2018. The Directors of the Company in office during the year and until the date of this report, their qualifications, experience and directorships held in listed companies at any time during the last three years, are set out on pages 11 to 13. The Directors’ meetings, including meetings of the Company’s Board of Directors and of each Board committee held during the year ended 30 June 2018 and the number of meetings attended by each Director are shown in section 2.3 of the FY18 Corporate Governance Statement.1 The relevant interests of each Director in the shares and share rights 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 AO M Barnaba AM S Warburton E Gaines Dr J Baderschneider Dr Z Cao P Bingham-Hall J Morris OAM Lord S Coe CH,KBE Ordinary shares Share rights 1,038,800,000 20,000 50,750 224,823 138,000 - 36,516 5,250 - - - - 525,966 - - - - - 1 Fortescue's FY18 Corporate Governance Statement is available at www.fmgl.com.au Fortescue Metals Group Ltd Annual Report FY18 Directors' Report At 30 June 2018 Operating and financial review Fortescue’s principal activities during the year were exploration, development, production, processing and sale of iron ore. There were no significant changes to the nature of the Group’s principal activities during FY18. The overview of Fortescue’s operations, including a discussion of strategic priorities and outlook, key aspects of operating and financial performance and key business risks are contained in the following sections of the Annual Report: Overview on pages 3 to 19, Operating and Financial Review on pages 20 to 34 and Corporate Governance Statement1 section 4 Risk Management. Dividends Net profit after tax US$m Interim dividend A$ cents per share Final dividend Total dividend A$ cents per share A$ cents per share 2018 878 11 12 23 2017 2,093 20 25 45 The following dividend payments were made during the year: • Final fully franked dividend for the year ended 30 June 2017 of A$0.25 per share, paid in October 2017 • Interim fully franked dividend for the year ended 30 June 2018 of A$0.11 per share, paid in April 2018. Environmental regulation and compliance Fortescue is committed to minimising the environmental impacts of its operations, with an appropriate focus placed on continuous monitoring of environmental matters and compliance with environmental regulations. The details of Fortescue’s environmental performance including compliance with the relevant environmental legislation are presented in Fortescue’s Corporate Social Responsibility Report.2 Greenhouse gas emissions and energy Fortescue complies with the Australian Government’s National Greenhouse and Energy Reporting Act 2007 (Cth) and recognises its responsibility to actively improve energy use and minimise greenhouse gas emissions to reduce its contribution to climate change and impact on the environment. The details of greenhouse gas emissions and energy strategy, compliance and reporting are presented in Fortescue’s Corporate Social Responsibility Report. Unissued shares under share rights Details of the share rights outstanding at 30 June 2018 are as follows: Balance at the end of the year Vested and exercisable at the end of the year Exercise price A$ Number Short term share rights 2016 Short term share rights 2017 Short term share rights 2018 Long term share rights 2016 Long term share rights 2017 Long term share rights 2018 - - - - - - - 616,219 761,507 1,755,884 6,465,830 2,296,040 2,475,313 14,370,793 1,377,726 Remaining contractual life Vesting conditions Years Market Non-market 12.5 13.3 14.3 12.5 13.3 14.3 - - - Yes Yes Yes Yes Yes Yes Yes Yes Yes Number 616,219 761,507 - - - - In FY18, 1,766,692 of the short term share rights and no long term share rights were converted to shares. 1 Fortescue's FY18 Corporate Governance Statement is available at www.fmgl.com.au 2 Fortescue's FY18 Corporate Social Responsibility Report is available at www.fmgl.com.au 57 07 | Financial Report Directors' Report At 30 June 2018 Company Secretary Cameron Wilson and Alison Terry are Company Secretaries of Fortescue. Details of their qualifications and experience are set out on page 13. Directors and Officers indemnities and insurance Since the end of the previous 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 proceedings that may be brought against the Officers in their capacity as Officers of Fortescue, 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 Fortescue. 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 19 to the financial statements. The Board of Directors has considered the position and, in accordance with advice received from the Audit and 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 and 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 and Risk Management Committee to ensure they do not impact the impartiality and objectivity of the auditor • None of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. The auditor’s independence declaration, as required under section 307C of the Corporations Act 2001, is set out on page 59 and forms part of this report. Future developments The Overview section set out on pages 3 to 19 and the Operating and Financial Review section set out on pages 20 to 34 of this Annual report, provide an indication of the Group’s likely developments and expected results. In the opinion of the Directors, disclosure of any further information about these matters and the impact on Fortescue’s operations could result in unreasonable prejudice to the Group and has not been included in this report. Significant changes in state of affairs There have been no significant changes in the state of affairs of Fortescue, other than those disclosed in this report. Proceedings on behalf of the Group No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of Fortescue, or to intervene in any proceedings to which Fortescue is a party, for the purposes of taking responsibility on behalf of Fortescue for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Rounding of amounts The Company is of a kind referred to in ASIC Corporations Instrument 2016/191, 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 instrument to the nearest million dollars, unless otherwise stated. Events occurring after the reporting period On 20 August 2018, the Directors declared a final dividend of 12 Australian cents per ordinary share payable in October 2018. Signed in accordance with a resolution of the Directors. Andrew Forrest AO Chairman Dated in Perth this 20th day of August 2018. Fortescue Metals Group Ltd Annual Report FY18Auditor's independence declaration As lead auditor for the audit of Fortescue Metals Group Ltd for the year ended 30 June 2018, 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 Ltd and the entities it controlled during the period. Justin Carroll Partner PricewaterhouseCoopers Perth 20 August 2018 59 07 | Financial Report Independent auditors' report To the members of Fortescue Metals Group Ltd Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Fortescue Metals Group Ltd (the Company) and its controlled entities (together, the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2018 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: • the consolidated statement of financial position as at 30 June 2018 • the consolidated income statement for the year then ended • the consolidated statement of comprehensive income for the year then ended • the consolidated statement of changes in equity for the year then ended • the consolidated statement of cash flows for the year then ended • the notes to the consolidated financial statements, which include a summary of significant accounting policies • the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Fortescue Metals Group Ltd Annual Report FY18Independent auditors' report Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality Key audit matters Audit scope Materiality For the purpose of our audit we used overall Group materiality of US$92 million, which represents approximately 5% of the three year average profit before tax of the Group for the current and two previous years. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose Group profit before tax because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. We applied a three year average to address potential volatility in the calculation of materiality that arises from iron ore price fluctuations between years. We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Audit Scope Our audit focussed on where the Company has made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. The primary activity of the Group is the operation of integrated iron ore mining operations and infrastructure comprising various iron ore mines in the Chichester and Hamersley ranges, a rail network and port facilities in Port Hedland. Our audit procedures were predominately performed in Perth where many of the Corporate and Group Operations functions are centralised and this was supported by visits to the mining operations at Solomon, Cloudbreak and Christmas Creek, the port and rail facilities at Port Hedland and the Iron Bridge magnetite project. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit and Risk Management Committee. 61 07 | Financial Report Independent auditors' report Key audit matter Revenue from iron ore sales (Refer to note 3) For the year ended 30 June 2018 the Group recognised revenue of US$6,775 million from the sale of iron ore. We focussed on this area as revenue from iron ore sales was the most significant balance in the consolidated income statement. Our audit approach included additional focus on non-cash period end adjustments that relate to the remeasurement of provisional sales. The value of revenue recognised each period is impacted by the Group’s provisional pricing arrangements where the final sales price is determined based on iron ore prices subsequent to the vessel’s arrival at the port of discharge. The Group initially recognises sales at the shipment date price and as applicable re-estimates the consideration to be received using the spot iron ore price at the end of each reporting period, with the impact of the iron ore price movements until final settlement recorded as an adjustment to operating sales revenue. Carrying value of exploration and evaluation assets (Refer to note 12 and 24(b)) At 30 June 2018 the Group recognised exploration and evaluation assets totalling US$857 million. This was a key audit matter as the continued recognition as an asset requires judgement by the Group around the likelihood of recovery through future exploitation or sale of the asset. If a judgement is made by the Group that recovery of the expenditure is unlikely, the relevant capitalised amount will be written off as an impairment expense to the income statement. The majority of the Group’s capitalised exploration and evaluation assets relate to its wholly owned Pilbara regional exploration tenements and its 69% interest in the Iron Bridge Joint Venture (IBJV) which is evaluating the Iron Bridge magnetite project (the IBJV Project). We particularly focussed on the Group’s judgement that the IBJV remains an exploration and evaluation asset which has not progressed sufficiently to be categorised as a development asset. How our audit addressed the key audit matter In addition to the audit procedures we performed over revenue, we addressed the two specific non-cash period end adjustments to revenue as follows: • For a sample of sales contracts open at balance date, we inspected the sales contracts and assessed key terms of the sale including the volume of sales and duration of any provisional sales period • For the sample of sales contracts tested, we recalculated the recorded provisional pricing adjustments to sales revenue and found them to be consistent with relevant external iron ore price indices. To assess the carrying value of the Group’s exploration and evaluation assets, we performed the following audit procedures, amongst others: • We assessed whether the Group had right of tenure to its exploration and evaluation assets on a sample basis and whether ongoing exploration and/or evaluation activities exist to support the continued capitalisation of these assets under the Group’s accounting policies • We held discussions with Group management on the status of the IBJV Project, which indicated that further evaluation and optimisation work was required in advance of a development decision and such work is continuing • We visited the IBJV Project mine and Stage 1 pilot processing plant in June 2018 to observe the current state of this project. We also inspected minutes of the IBJV Committee meetings throughout the year and noted an FY19 budgeted work program was approved for further evaluation testing of the pilot plant. We found that the Group’s continued treatment of the IBJV Project as an exploration and evaluation asset was consistent with the current status of the IBJV Project and the approvals granted by the IBJV Committee. Fortescue Metals Group Ltd Annual Report FY18Independent auditors' report Key audit matter How our audit addressed the key audit matter Restoration and rehabilitation obligations (Refer to note 13 and 24(e)) The Group recognised provisions for restoration and rehabilitation obligations of US$591 million as at 30 June 2018. To assess the Group’s restoration and rehabilitation obligations, we performed the following audit procedures, amongst others: This was a key audit matter as the calculation of these provisions requires judgement by the Group in estimating the magnitude of possible works required for the removal of infrastructure and rehabilitation works, the future cost of performing the work, when rehabilitation activities will take place and the economic assumptions such as inflation and discount rate relevant to such liabilities. The judgement required by the Group to estimate such costs is further compounded by the fact that there has been limited restoration and rehabilitation activity by the Group or historical precedent against which to benchmark estimates of future costs. The Group reviews the restoration and rehabilitation obligations on an annual basis, using experts to provide support in its assessment where appropriate. This review incorporates consideration of the effects of any changes in regulations and the Group’s anticipated approach to restoration and rehabilitation. • We evaluated the Group’s rehabilitation and restoration cost forecasts including the process by which they were developed. We also checked the mathematical accuracy of the underlying calculations • We considered the competence and objectivity of the Group’s experts who reviewed the closure plan and associated cost estimates • We evaluated the expected timing of restoration and rehabilitation activities and found them to be consistent with the life of mine plan for each mining operation • We benchmarked key market related assumptions including inflation rates and discount rates against external market data and found them to be consistent • We assessed provision movements in the year relating to restoration and rehabilitation obligations and found them to be consistent with our understanding of the Group’s operations and associated rehabilitation plans. Other information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2018, including the Overview, Operating and Financial Review, Ore Reserves and Mineral Resources, Corporate Social Responsibility, Corporate Governance, Fortescue's response to climate change, Directors’ Report, Remuneration and Nomination Committee Chair message and Corporate Directory, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors 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 Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. 63 07 | Financial Report Independent auditors' report Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 111 to 138 of the directors’ report for the year ended 30 June 2018. In our opinion, the remuneration report of Fortescue Metals Group Ltd for the year ended 30 June 2018 complies with section 300A of the Corporations Act 2001. Responsibilities 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. PricewaterhouseCoopers Justin Carroll Partner Perth 20 August 2018 Fortescue Metals Group Ltd Annual Report FY18 Directors' declaration In the Directors’ opinion: (a) the financial statements and notes set out on pages 66 to 105 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and giving a true and fair view of the consolidated entity’s financial position at 30 June 2018 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 20 will be able to meet any obligations or liabilities to which they are, or may become, subject to by virtue of the deed of cross guarantee described in note 20. Note 1(a) confirms that the financial statements 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 the Directors. Andrew Forrest AO Chairman Dated in Perth this 20th day of August 2018. 65 07 | Financial Report Consolidated income statement For the year ended 30 June 2018 Operating sales revenue Cost of sales Gross profit Other income Other expenses Net profit before income tax and net finance expenses Finance income Finance expenses Net profit before tax Income tax expense Net profit after tax Net profit after tax is attributable to: Equity holders of the Company Non-controlling interest Net profit after tax Note 3 5 4 6 7 7 14 2018 US$m 6,887 (4,930) 1,957 30 (114) 1,873 24 (652) 1,245 (367) 878 879 (1) 878 Earnings per share for profit attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share Note Cents 8 8 28.2 28.1 Consolidated statement of comprehensive income For the year ended 30 June 2018 Net profit after tax Other comprehensive income: Gain on available for sale financial assets Exchange differences on translation of foreign operations Total comprehensive income, net of tax Total comprehensive income is attributable to: Equity holders of the Company Non-controlling interest Total comprehensive income, net of tax 2018 US$m 878 2 2 882 883 (1) 882 2017 US$m 8,447 (4,888) 3,559 14 (123) 3,450 19 (502) 2,967 (874) 2,093 2,093 - 2,093 Cents 67.3 67.0 2017 US$m 2,093 - - 2,093 2,093 - 2,093 The above consolidated income statement and consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. Fortescue Metals Group Ltd Annual Report FY18 Consolidated statement of financial position At 30 June 2018 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Current tax receivable Total current assets Non-current assets Trade and other receivables Property, plant and equipment Intangible assets Other non-current assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Deferred income Borrowings and finance lease liabilities Provisions Current tax payable Total current liabilities Non-current liabilities Trade and other payables Deferred income Borrowings and finance lease liabilities Provisions Deferred joint venture contributions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Equity attributable to equity holders of the Company Non-controlling interest Total equity Note 9(b) 10(a) 10(c) 14(a) 10(a) 12 10(b) 10(d) 9(a) 13 14(a) 10(b) 10(d) 9(a) 13 17(c) 14(b) 9(d) 2018 US$m 863 120 496 92 79 1,650 3 16,189 4 3 16,199 17,849 678 267 97 197 - 1,239 50 528 3,878 546 270 1,606 6,878 8,117 9,732 1,287 46 8,386 9,719 13 9,732 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 2017 US$m 1,838 141 588 38 - 2,605 3 16,493 7 7 16,510 19,115 708 461 121 227 685 2,202 50 447 4,350 509 266 1,557 7,179 9,381 9,734 1,289 39 8,392 9,720 14 9,734 67 07 | Financial Report Consolidated statement of cash flows For the year ended 30 June 2018 Note Cash flows from operating activities Cash receipts from customers Payments to suppliers and employees Cash generated from operations Interest received Interest paid Income tax paid Net cash inflow from operating activities 9(c)(i) Cash flows from investing activities Payments for property, plant and equipment - Fortescue Payments for property, plant and equipment - joint operations Contributions from joint venture partners Proceeds from disposal of plant and equipment Purchase of financial assets Net cash outflow from investing activities Cash flows from financing activities Proceeds from borrowings and finance leases Repayment of borrowings and finance leases Finance costs paid Dividends paid Purchase of shares by employee share trust Net cash outflow from financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 9(b) 2018 US$m 6,718 (3,687) 3,031 24 (392) (1,062) 1,601 (890) (11) 4 16 (55) (936) 2,071 (2,545) (254) (874) (24) (1,626) (961) 1,838 (14) 863 Non-cash investing and financing activities are disclosed in note 9(c)(ii). The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 2017 US$m 8,768 (3,744) 5,024 19 (412) (375) 4,256 (716) (13) 12 2 - (715) 1,734 (4,187) (47) (755) (27) (3,282) 259 1,583 (4) 1,838 Fortescue Metals Group Ltd Annual Report FY18Consolidated statement of changes in equity For the year ended 30 June 2018 Attributable to equity holders of the Company Contributed Equity US$m Reserves US$m Balance at 1 July 2016 Net profit after tax Total comprehensive income for the year, net of tax Transactions with owners: Purchase of shares under employee share plans Employee share awards vested Equity settled share-based payment transactions Dividends declared Other Balance at 30 June 2017 Net profit after tax Other comprehensive income Total comprehensive income for the year, net of tax Transactions with owners: Purchase of shares under employee share plans Employee share awards vested Equity settled share-based payment transactions Dividends declared Balance at 30 June 2018 1,301 - - (27) 15 - - - 1,289 - - - (24) 22 - - 1,287 33 - - - (7) 16 - (3) 39 - 4 4 - (11) 14 - 46 Retained earnings US$m 7,058 2,093 2,093 - - - Total 8,392 2,093 2,093 (27) 8 16 (762) (762) 3 - 8,392 9,720 879 - 879 - - - 879 4 883 (24) 11 14 (885) 8,386 (885) 9,719 Non- controlling interest US$m 14 - - - - - - - 14 (1) - (1) - - - - Total equity US$m 8,406 2,093 2,093 (27) 8 16 (762) - 9,734 878 4 882 (24) 11 14 (885) 13 9,732 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 69 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Key balance sheet items 12 13 Property, plant and equipment Provisions Taxation 14 Taxation 14(a) Income tax expense 14(b) Deferred tax assets and liabilities 14(c) Unrecognised tax losses Unrecognised items 15 16 Commitments and contingencies Events occurring after the reporting period Related party transactions Share-based payments Remuneration of auditors Other information 17 18 19 20 Deed of cross guarantee 21 22 23 24 Parent entity financial information Interests in other entities Summary of significant accounting policies Critical accounting estimates and judgements 84 85 86 86 87 88 89 89 90 90 92 92 93 94 95 105 Basis of preparation 1 Basis of preparation Financial performance Segment information 2 Operating sales revenue 3 Other income 4 Cost of sales 5 Other expenses 6 Finance income and finance expenses 7 Earnings per share 8 Capital management Capital management 9 9(a) Borrowings and finance lease liabilities 9(b) Cash and cash equivalents 9(c) Cash flow information 9(d) Contributed equity 9(e) Dividends 10 Working capital 10(a) Trade and other receivables 10(b) Trade and other payables 10(c) Inventories 10(d) Deferred income Financial risk management 11 71 72 73 73 73 73 74 74 75 75 77 78 79 79 80 80 80 80 80 81 Fortescue Metals Group Ltd Annual Report FY18 Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2018 Basis of preparation 1 Basis of preparation The financial statements cover the consolidated group comprising of Fortescue Metals Group Ltd (the Company) and its subsidiaries, together referred to as Fortescue or the Group. 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. (a) Compliance with IFRS The financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. (b) Historical cost convention The financial statements have been prepared under the historical cost convention, except for certain financial instruments, which have been measured at fair value. (c) 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 Company and the majority of its subsidiaries. (d) Critical accounting estimates The preparation of financial statements requires management to use estimates, judgements and assumptions. Application of different assumptions and estimates may have a significant impact on Fortescue’s net assets and financial results. Estimates and assumptions are reviewed on an ongoing basis and are based on the latest available information at each reporting date. Actual results may differ from the estimates. The areas involving a higher degree of judgement and complexity, or areas where assumptions are significant to the financial statements are: • Iron ore reserve estimates • Exploration and evaluation expenditure • Development expenditure • Property, plant and equipment - recoverable amount • Rehabilitation estimates. The accounting estimates and judgements applied to these areas are disclosed in note 24. (e) Rounding of amounts All amounts in the financial statements have been rounded to the nearest million dollars, except as indicated, in accordance with the ASIC Corporations Instrument 2016/191. 71 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Financial performance 2 Segment information Fortescue’s chief operating decision maker, identified as the Chief Executive Officer, reviews the Group’s financial performance and makes significant operating decisions having regard to all aspects of the integrated operation, with the key financial information presented internally for management purposes on a consolidated basis. Accordingly, no reportable operating segments have been identified in presenting the Group’s consolidated financial performance. Fortescue uses Underlying EBITDA defined as earnings before interest, tax, depreciation and amortisation, exploration, development and other expenses, as a key measure of its financial performance. The reconciliation of Underlying EBITDA to the net profit after tax is presented below. Underlying EBITDA Finance income Finance expenses Depreciation and amortisation Exploration, development and other Net profit before tax Income tax expense Net profit after tax (a) Geographical information Note 7 7 5, 6 6 14 2018 US$m 3,182 24 (652) (1,277) (32) 1,245 (367) 878 2017 US$m 4,744 19 (502) (1,243) (51) 2,967 (874) 2,093 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 (b) Major customer information 2018 US$m 6,211 676 6,887 2017 US$m 7,995 452 8,447 Revenue from two customers amounted to US$2,753 million and US$988 respectively (2017: US$3,702 million and US$527 million), arising from the sale of iron ore and the related shipment of product. Fortescue Metals Group Ltd Annual Report FY18 Notes to the consolidated financial statements For the year ended 30 June 2018 Financial performance 3 Operating sales revenue Sale of iron ore Other revenue 4 Other income Net foreign exchange gain Other 5 Cost of sales Mining and processing costs Rail costs Port costs Shipping costs Government royalty Depreciation and amortisation Other operating expenses 2018 US$m 6,775 112 6,887 2018 US$m 29 1 30 2018 US$m 1,739 188 172 1,148 416 1,265 2 4,930 2017 US$m 8,335 112 8,447 2017 US$m 13 1 14 2017 US$m 1,801 200 183 929 545 1,227 3 4,888 Total employee benefits expense included in cost of sales and administration expenses is US$601 million (2017: US$579 million). 6 Other expenses Administration expenses Exploration, development and other Depreciation and amortisation 2018 US$m 70 32 12 114 2017 US$m 56 51 16 123 73 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Financial performance 7 Finance income and finance expenses Finance income Interest income Finance expenses Interest expense on borrowings and finance lease liabilities Cost of early debt repayment Other 8 Earnings per share (a) Earnings per share Basic Diluted (b) Reconciliation of earnings used in calculating earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic and diluted earnings per share 2018 US$m 24 24 340 289 23 652 2018 Cents 28.2 28.1 US$m 879 2017 US$m 19 19 430 59 13 502 2017 Cents 67.3 67.0 US$m 2,093 (c) Weighted average number of shares used as denominator Number Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Potential ordinary shares Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share (d) Information on the classification of securities 3,112,150,439 3,111,190,703 10,886,842 11,112,712 3,123,037,281 3,122,303,415 Share rights granted to employees under the Fortescue incentive plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. Details relating to the share rights are set out in note 18. Fortescue Metals Group Ltd Annual Report FY18 Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 9 Capital management Fortescue’s capital management policy supports its strategic objectives and provides a framework to maintain a strong capital structure to deliver consistent returns to its shareholders and sustain future developments and expansion of the business. Fortescue’s capital includes shareholders’ equity, reserves and net debt. Net debt is defined as a combination of cash and cash equivalents, borrowings and finance lease liabilities. Borrowings Finance lease liabilities Cash and cash equivalents Net debt Equity attributable to equity holders of the Company Non-controlling interest Total equity Capital management involves a continuous process of: Note 9(a) 9(a) 9(b) 2018 US$m 3,380 595 (863) 3,112 9,719 13 9,732 2017 US$m 3,653 818 (1,838) 2,633 9,720 14 9,734 • Evaluating capital requirements against the risks arising from Fortescue’s activities and its operating environment • Raising, refinancing and repaying of debt • Development, maintenance and implementation of the dividend policy, including the dividend reinvestment plan. To achieve its primary capital management objective of maintaining a strong capital structure, Fortescue has developed target ranges for a number of financial indicators. These indicators include gearing, net gearing, debt to Underlying EBITDA and interest coverage ratio, and are monitored together with a number of other financial and non-financial indicators. Target ranges for the financial ratios vary upon the investment and commodity cycles. During periods of intensive investment, for example expansion programs, or a commodity downturn, the capital management policy contemplates interim ratio levels returning to a targeted longer term level. Interim levels acknowledge and consider the requirements, in certain circumstances, for remedial actions to be taken. Debt repayments and refinancing completed during the year ended 30 June 2018 resulted in improved credit metrics and lower interest costs. Target gearing ratios and balance sheet flexibility have been achieved with the focus now on re-investing in the business, growth options and shareholder returns. No financial maintenance covenants apply to any of the Company’s debt. (a) Borrowings and finance lease liabilities Senior unsecured notes Syndicated term loan Finance lease liabilities Senior secured notes Total current borrowings and finance lease liabilities Senior unsecured notes Syndicated term loan Finance lease liabilities Senior secured notes Total non-current borrowings and finance lease liabilities Total borrowings and finance lease liabilities 2018 US$m 16 18 63 - 97 1,981 1,365 532 - 3,878 3,975 2017 US$m 9 - 42 70 121 1,481 - 776 2,093 4,350 4,471 75 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 9 Capital management (continued) (a) Borrowings and finance lease liabilities (continued) (i) Refinancing During the year ended 30 June 2018, Fortescue repaid the outstanding US$2,160 million of the 9.75 per cent senior secured notes due to mature in November 2022, through a combination of a US$1,900 million refinancing and a US$260 million cash payment. (ii) Senior unsecured notes Fortescue’s senior unsecured notes comprise a series of the following tranches which have early repayment options: Date of issue Date of maturity March 2018 May 2017 May 2017 April 2023 May 2022 May 2024 Non-call period 5 years 5 years 7 years Face value, US$m Carrying value, US$m 500 750 750 2,000 503 747 747 1,997 Coupon rate Currency 5.125% 4.75% 5.125% USD USD USD (iii) Syndicated term loan The US$1,400 million syndicated term loan established during the financial year is due to mature in February 2022, has a coupon rate linked to LIBOR plus fixed margin and is repayable at Fortescue’s option. The facility has principal repayment of one per cent per annum. (iv) Senior secured notes During the year ended 30 June 2018, the senior secured notes were repaid in full. The notes were due to mature in November 2022 and as at 30 June 2017 had a face value of US$2,160 million and a coupon rate of 9.75 per cent. (v) Finance lease liabilities Finance lease liabilities largely relate to contractual commitments associated with ore carriers, Fortescue River Gas Pipeline and heavy mobile fleet. In the event of default, the assets revert to the lessor. In November 2017, Fortescue repurchased the Solomon Power Station which was previously classified as a finance lease liability. 30 June 2017 Lease expenditure commitments Effect of discounting Finance lease liabilities 30 June 2018 Lease expenditure commitments Effect of discounting Finance lease liabilities Within one year US$m Between one year and five years US$m After five years US$m 120 (79) 41 107 (44) 63 468 (285) 183 310 (149) 161 1,093 (499) 594 583 (212) 371 Total US$m 1,681 (863) 818 1,000 (405) 595 Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 9 Capital management (continued) (a) Borrowings and finance lease liabilities (continued) (vi) Summary of movements in borrowings and finance lease liabilities Senior unsecured notes US$m Syndicated term loan US$m Senior secured notes US$m Senior secured credit facility US$m Finance leases US$m Balance at 1 July 2016 Initial recognition Interest expense Interest and finance lease repayments Transaction costs Foreign exchange loss Repayment Balance at 30 June 2017 Initial recognition Interest expense Interest and finance lease repayments Transaction costs Foreign exchange gain Repayment 483 1,500 41 (40) (16) - (478) 1,490 500 85 (73) (5) - - - - - - - - - - 1,400 20 (14) (23) - - Balance at 30 June 2018 1,997 1,383 2,152 - 221 (210) - - - 2,163 - 180 (241) 58 - (2,160) - 505 344 70 (105) - 4 - 818 171 55 (120) - (5) (324) 595 Information about Fortescue’s exposure to interest rate risk and foreign exchange rate risk is disclosed in note 11. (b) Cash and cash equivalents Cash at bank Short term deposits 2018 US$m 702 161 863 Total US$m 6,771 1,844 430 (448) 24 4 3,631 - 98 (93) 40 - (3,676) (4,154) 4,471 2,071 340 (448) 30 (5) (2,484) 3,975 - - - - - - - - 2017 US$m 923 915 1,838 Cash and cash equivalents do not have any restrictions by contractual or legal arrangements. On 28 July 2017, the Company executed a US$525 million revolving credit facility that remained undrawn at 30 June 2018. 77 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 9 Capital management (continued) (c) Cash flow information (i) Reconciliation of net profit after tax to net cash inflow from operating activities Net profit after tax Depreciation and amortisation Exploration, development and other Share-based payment expense Net unrealised foreign exchange (gain) loss Accrued interest Cost of early debt repayment Rehabilitation expenditure Depreciation in inventory Other non-cash items Working capital adjustments: Decrease in trade and other receivables Decrease (increase) in inventories Decrease in other assets (Decrease) increase in trade and other payables (Decrease) increase in deferred income (Decrease) increase in employee benefit provision (Decrease) increase in current tax payable Increase in deferred tax liabilities Net cash inflow from operating activities (ii) Non-cash financing and investing activities Acquisition of property, plant and equipment by means of finance leases 2018 US$m 878 1,277 32 14 (2) (34) 289 (11) (38) (44) 21 92 9 (30) (113) (24) (764) 49 1,601 2018 US$m - 2017 US$m 2,093 1,243 51 16 2 28 59 - 33 (29) 101 (34) 28 67 115 8 418 57 4,256 2017 US$m (110) Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 9 Capital management (continued) (d) Contributed equity (i) Share capital Issued shares Treasury shares Contributed equity Number Number Number Issued shares US$m At 1 July 2016 3,113,798,151 (362,674) 3,113,435,477 1,296 Purchase of shares under employee share plans Employee share awards vested - - (7,214,860) (7,214,860) 5,118,613 5,118,613 - - At 30 June 2017 3,113,798,151 (2,458,921) 3,111,339,230 1,296 Purchase of shares under employee share plans Employee share awards vested - - (5,115,446) (5,115,446) 6,346,506 6,346,506 - - At 30 June 2018 3,113,798,151 (1,227,861) 3,112,570,290 1,296 Treasury shares Contributed equity US$m 5 (27) 15 (7) (24) 22 (9) US$m 1,301 (27) 15 1,289 (24) 22 1,287 Issued shares (ii) Issued shares are fully paid and entitle the holders to one vote per share and the rights to participate in dividends. Ordinary shares participate in the proceeds on winding up of the Company in proportion to the number of shares held. (iii) Treasury shares Movements in treasury shares represent acquisition of the Company’s shares on market and allocation of shares to the Company’s employees from the vesting of share rights under the employee share-based payment plans. (e) Dividends (i) Dividends paid during the year Final fully franked dividend for the year ended 30 June 2017: A$0.25 per share (30 June 2016: A$0.12 per share) Interim fully franked dividend for the half-year ended 31 December 2017: A$0.11 per share (31 December 2016: A$0.20 per share) Total dividends paid (ii) Dividends declared and not recognised as a liability Final fully franked dividend: A$0.12 per share (2017: A$0.25 per share) 2018 US$m 614 271 885 2018 US$m 271 2017 US$m 285 477 762 2017 US$m 614 (iii) Franking credits At 30 June 2018, franking credits available were A$1,757 million (2017: A$856 million). The payment of the final dividend for the year ended 30 June 2018 will reduce the franking account balance by A$160 million. 79 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 10 Working capital (a) Trade and other receivables Trade debtors - iron ore GST receivables Other receivables Total current receivables Other receivables Total non-current receivables 2018 US$m 89 13 18 120 3 3 2017 US$m 113 9 19 141 3 3 The carrying value of the receivables approximates their fair value. Information about Fortescue's exposure to foreign currency risk, interest rate risk and price risk pertaining to the trade and other receivables balances is disclosed in note 11. Disclosures relating to receivables from related parties are set out in note 17(c). (b) Trade and other payables Trade payables Other payables and accruals Total current payables Customer deposits Total non-current payables (c) Inventories Iron ore stockpiles Warehouse stores and materials Total inventories 2018 US$m 272 406 678 50 50 2018 US$m 215 281 496 2017 US$m 234 474 708 50 50 2017 US$m 277 311 588 Iron ore stockpiles, warehouse stores and materials are stated at cost. Inventories expensed through cost of sales, including depreciation, during the year ended 30 June 2018 amounted to US$3,364 million (2017: US$3,411 million). During the year, inventory write-offs of US$25 million (2017: US$31 million) were recognised in relation to specific items of warehouse stores and materials that were identified as obsolete. (d) Deferred income Iron ore prepayments Port access prepayment Total current deferred income Iron ore prepayments Total non-current deferred income 2018 US$m 267 - 267 528 528 2017 US$m 350 111 461 447 447 Fortescue Metals Group Ltd Annual Report FY18 Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 11 Financial risk management Fortescue is exposed to a range of financial risks, including market risk, credit risk and liquidity risk. Fortescue has established a risk management framework that provides a structured approach to the identification and control of risks across the business, sets the appropriate risk tolerance levels and incorporates active management of financial risks. The risk management framework has been approved by the Board of Directors, through the Audit and Risk Management Committee. The day to day management responsibility for execution of the risk management framework has been delegated to the CEO and the CFO. Periodically the CFO reports to the Audit and Risk Management Committee on risk management performance, including management of financial risks. The key elements of financial risk are further explained below. (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 iron ore price (commodity price risk), interest rates (interest rate risk) and foreign exchange rates (foreign currency exchange risk). (i) Commodity price risk Fortescue is exposed to the commodity price risk, as its iron ore sales are predominantly subject to the prevailing market prices. Fortescue has limited ability to directly influence market prices of iron ore and manages the commodity price risk through focus on improving its cash margins and strengthening the corporate balance sheet through refinancing and early debt repayments. The majority of Fortescue’s iron ore sales contracts are structured on a provisional pricing basis, with the final sales price determined using the iron ore price indices on or after the vessel's arrival to the port of discharge. The estimated consideration in relation to the provisionally priced contracts is marked to market using the spot iron ore price at the end of each reporting period with the impact of the iron ore price movements recorded as an adjustment to operating sales revenue. At 30 June 2018, Fortescue had 31 million tonnes of iron ore sales (2017: 27 million tonnes) that remained subject to provisional pricing, with the final price to be determined in the following year. A 10 per cent movement in the realised iron ore price on these provisionally priced sales would have an impact on the Group's profit of US$101 million (2017: 15 per cent movement would have an impact on the Group's profit of US$161million), before the impact of taxation. This analysis assumes all other factors, including the foreign currency exchange rates, remain constant. Interest rate risk (ii) The Group’s interest rate risk arises from variable rates on the syndicated term loan, finance leases relating to the ore carriers and, to a lesser extent, changes in rates applicable to the short term deposits forming part of cash and cash equivalents. Fortescue’s policy is to reduce interest rate risk over the cash flows on its long term debt funding through the use of fixed rate instruments whenever appropriate. Fortescue’s variable rate financial assets and liabilities at the end of the financial year are summarised below: Cash and cash equivalents Finance leases Syndicated term loan Note 9(b) 9(a) 9(a) 2018 US$m 863 (356) (1,383) (876) 2017 US$m 1,838 (213) - 1,625 81 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 11 Financial risk management (continued) (a) Market risk (continued) 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. A change of 50 basis points in interest rates in variable instruments would have an impact on the Group's profit of US$13 million (2017: a change of five basis points would impact profit by US$1 million), before the impact of taxation. This analysis assumes that all other factors remain constant, including foreign currency rates. (iii) Foreign currency exchange risk Fortescue operates in Australia, and is exposed to the movements in the Australian dollar exchange rate, with a significant portion of its operating costs and capital expenditure incurred and paid in Australian dollars. Fortescue’s risk management policy is to target specific levels at which to convert United States dollars to Australian dollars by entering into either spot or short term forward exchange contracts. The Group does not enter into transactions that qualify as hedging for hedge accounting purposes. The carrying amounts of the financial assets and liabilities denominated in Australian dollars (expressed in US dollars), are set out below: Financial assets Cash and cash equivalents Trade and other receivables Other financial assets Total financial assets Financial liabilities Borrowings and finance lease liabilities Trade and other payables Total financial liabilities 2018 US$m 260 21 62 343 142 518 660 2017 US$m 19 22 - 41 150 351 501 A change of 10 per cent in the Australian dollar exchange rate would have a net impact on the Group's profit of US$36 million (2017: a change of five per cent would have an impact of US$23 million), before the impact of taxation. This analysis assumes that all other variables, including interest rates and iron ore price, remain constant. (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, deposits with banks and financial institutions and receivables from customers. Fortescue is exposed to a concentration of credit risk with the majority of its iron ore customers 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 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 years ended 30 June 2018 and 30 June 2017. 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 CFO. Fortescue minimises the credit risks by holding funds with a range of financial institutions with credit ratings approved by the Board of Directors. At 30 June 2018, Fortescue had US$5 million (2017: US$5 million) of trade receivables which have not been settled within the normal terms and conditions agreed with the customer. These past due receivables relate to a number of customers for whom there is no recent history of default and are not considered impaired. Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Capital management 11 Financial risk management (continued) (c) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. Fortescue manages liquidity risk by maintaining adequate cash reserves and banking facilities, by continuously monitoring actual and forecast cash flows and by matching the maturity profiles of its assets and liabilities. The table below analyses Fortescue’s financial liabilities into relevant maturity groupings based on the period to the contracted maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Less than 6 months US$m Between 6 and 12 months US$m Between 1 and 2 years US$m Between 2 and 5 years US$m Over 5 years US$m Total contractual cash flows US$m Carrying amount US$m 708 190 11 909 678 78 51 807 - 190 11 201 - 90 65 155 - 394 22 416 - 148 115 263 50 4,026 71 4,147 50 1,615 1,602 3,267 - 1,699 193 1,892 - 1,042 335 1,377 758 6,499 308 7,565 728 2,973 2,168 5,869 758 4,258 213 5,229 728 2,236 1,739 4,703 30 June 2017 Non-interest bearing Fixed rate Variable rate 30 June 2018 Non-interest bearing Fixed rate Variable rate Management monitors rolling forecasts of the Group’s cash and overall liquidity position on the basis of expected cash flows. (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. Fortescue's listed debt instruments, including senior secured notes and senior unsecured notes are classified as level 1 financial instruments in the fair value hierarchy, with their fair values based on quoted market prices at the end of the financial year, as outlined below. Senior secured notes Senior unsecured notes 2018 2017 Carrying value Fair value Carrying value Fair value US$m - 1,997 US$m - 1,924 US$m 2,163 1,490 US$m 2,460 1,507 The carrying values of other financial assets and financial liabilities approximate their fair values. 83 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Key balance sheet items 12 Property, plant and equipment Plant and equipment US$m Land and buildings US$m Exploration and evaluation US$m Note Assets under development US$m Development US$m Total US$m Net carrying value At 1 July 2016 Transfers of assets Additions Depreciation Changes in restoration and rehabilitation estimate 13(b) Other At 30 June 2017 Cost Accumulated depreciation Net carrying value At 1 July 2017 Transfers of assets Additions Disposals Depreciation Changes in restoration and rehabilitation estimate 13(b) Other At 30 June 2018 Cost Accumulated depreciation 11,456 573 111 (984) - - 11,156 15,677 (4,521) 11,156 812 3 (5) (969) - (2) 10,995 16,473 (5,478) 849 10 - (62) - (1) 796 1,053 (257) 796 8 - (1) (59) - - 744 1,060 (316) 772 (4) 57 - 1 (13) 813 813 - 813 (17) 70 - - 3 (12) 857 857 - 227 (602) 670 - - (4) 291 291 - 291 (832) 842 - - - - 301 301 - 3,563 16,867 19 - (4) 838 (218) (1,264) 68 5 3,437 4,489 (1,052) 69 (13) 16,493 22,323 (5,830) 3,437 16,493 27 - - (2) 915 (6) (207) (1,235) 35 - 3,292 4,551 (1,259) 38 (14) 16,189 23,242 (7,053) Transfers of assets were made between the categories of property, plant and equipment, intangible assets, exploration and evaluation and development expenditure. Property, plant and equipment includes assets held under finance leases of US$253 million (2017: US$505 million). The details of the finance leases under which these assets are held are disclosed in note 9(a). Fortescue Metals Group Ltd Annual Report FY18 Notes to the consolidated financial statements For the year ended 30 June 2018 Key balance sheet items 13 Provisions Employee benefits Restoration and rehabilitation Total current provisions Employee benefits Restoration and rehabilitation Total non-current provisions (a) Provision for employee benefits Movements in the provision for employee benefits during the year are set out below: At 1 July Changes in employee benefits provision Amounts paid At 30 June 2018 US$m 150 47 197 2 544 546 2018 US$m 177 96 (121) 152 2017 US$m 174 53 227 3 506 509 2017 US$m 169 138 (130) 177 Provision for employee benefits includes the Group's liability for long service leave, annual leave and employee incentives. The current portion includes all of the accrued annual leave and the portion of long service leave where employees have completed their required period of service. The estimated amount of current annual leave and long service leave not expected to be paid in the next 12 months is US$41 million (2017: US$38 million). (b) Provision for restoration and rehabilitation Movements in the provision for restoration and rehabilitation during the year are set out below: At 1 July Changes in restoration and rehabilitation estimate Unwinding of discount Payments for restoration and rehabilitation activities At 30 June 2018 US$m 559 38 5 (11) 591 2017 US$m 487 69 3 - 559 The provision for restoration and rehabilitation has been made in full for all disturbed areas at the reporting date based on current cost estimates for rehabilitation and infrastructure removal, discounted to their present value based on expected timing of future cash flows. Payments for restoration and rehabilitation activities exclude ongoing rehabilitation performed as part of normal operations. 85 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Taxation 14 Taxation For the year ended 30 June 2018, Fortescue continues to be a signatory to the Board of Taxation’s voluntary Tax Transparency Code ("TTC"). The TTC recommends a number of additional tax disclosures to be publicly available, in two separate parts. The Part A disclosure requirements are addressed in this note. (a) Income tax expense Current tax Deferred tax Consolidated group Consolidated group 2018 US$m 320 47 367 2017 US$m 817 57 874 (i) Prima facie income tax expense reconciliation Fortescue operates in a number of jurisdictions and pays income taxes accordingly. The Company’s effective corporate income tax rate is reflective of the statutory corporate income tax rates in each jurisdiction. The majority of the Group’s taxes are paid in Australia consistent with the location of its mining operations. The Australian Group includes Fortescue's wholly-owned Australian entities. For the year ended 30 June 2018, the Group’s global effective tax rate was 29.5 per cent, in line with the Australia corporate tax rate of 30 per cent. Consolidated group 2018 US$m Australian group 2018 US$m Consolidated group 2017 US$m Australian group 2017 US$m Net profit before tax Tax at the Australian tax rate of 30 per cent Research and development Adjustments in respect of income tax expense of prior periods Foreign exchange variations Tax impact of overseas jurisdiction Share-based payments Other Income tax expense Effective tax rate 1,245 374 (3) (1) (4) (1) (1) 3 367 29.5% 1,185 356 (3) (6) (4) 8 (1) 1 351 29.6% 2,967 890 (4) (1) (6) - (5) - 874 29.5% 2,913 874 (4) 3 (6) 7 (5) - 869 29.8% Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Taxation 14 Taxation (continued) (a) Income tax expense (continued) (ii) Reconciliation of income tax expense to current tax (receivable) payable Income tax expense in the consolidated income statement Deferred tax expense Adjustments in respect of income tax expense of prior periods Tax payments made to tax authorities1 Impact of foreign exchange on income tax payable2 Current tax (receivable) payable at 30 June Consolidated group 2018 US$m Consolidated group 2017 US$m 367 (47) (1) 319 (385) (13) (79) 874 (57) 6 823 (115) (23) 685 1 In Australia Fortescue pays pay as you go (PAYG) instalments based on a set rate, as advised by the Australian Taxation Office. 2 Fortescue's income tax payments are made in the local currency of the country where taxes are due, being predominantly Australian Dollars. (b) Deferred tax assets and liabilities Deferred tax assets and liabilities represent the difference between the carrying value of assets and liabilities compared to their income tax base. Deferred tax assets and liabilities are measured at the relevant tax rates enacted for the reporting period. Fortescue's main operations are in Australia and therefore the main taxable income arises in Australia. The Company's major deferred tax assets and liabilities also arise in Australia, predominantly relating to capital investments in the Pilbara region. Deferred tax assets Deferred tax liabilities Consolidated group 2018 US$m Consolidated group 2017 US$m 431 (2,037) (1,606) 470 (2,027) (1,557) 87 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Taxation 14 Taxation (continued) (b) Deferred tax assets and liabilities (continued) Composition of and movements in deferred tax assets and liabilities during the year are set out below: Deferred tax assets Deferred tax liabilities Charged / (credited) to the income statement Consolidated group Consolidated group Consolidated group 2018 US$m 2017 US$m - - - - 223 182 26 431 - - - - 220 225 25 470 2018 US$m (134) (546) (1,244) (105) - - (8) 2017 US$m (123) (540) (1,220) (127) (1) (11) (5) (2,037) (2,027) 2018 US$m 2017 US$m (11) (6) (24) 22 4 (32) - (47) (5) (30) (141) (6) 24 88 13 (57) Temporary differences arising from Exploration expenditure Development Property, plant and equipment Inventories Provisions Other financial liabilities Other items (c) Unrecognised tax losses At 30 June 2018, the Group had income tax losses with a tax benefit of US$28 million (2017: US$23 million) which are not recognised as deferred tax assets. The Group recognises the benefit of tax losses only to the extent of anticipated future taxable income or gains in relevant jurisdictions. These losses do not expire. Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Unrecognised items 15 Commitments and contingencies 30 June 2017 Within one year Between one and five years Total commitments 30 June 2018 Within one year Between one and five years Total commitments Capital US$m Operating leases US$m Total US$m 327 16 343 175 40 215 64 24 88 13 31 44 391 40 431 188 71 259 (i) Capital commitments At 30 June 2018, Fortescue had contractual commitments to capital expenditure not recognised as liabilities, including commitments associated with the construction of iron ore carriers of US$43 million (2017: US$196 million) within 12 months after the end of the year. (ii) Operating lease commitments Fortescue leases various offices and other premises under non-cancellable operating leases expiring within one to three years. The leases have varying terms, escalation clauses and renewal rights. The terms of the leases are renegotiated on renewal. Fortescue also leases mobile equipment, plant and machinery and office equipment under non-cancellable operating leases. The leases have varying terms. Fortescue had no material contingent liabilities or contingent assets at 30 June 2018 or at the date of this report. Fortescue occasionally receives claims arising from its activities in the normal course of business. In the opinion of the Directors, all such matters are covered by insurance or, if not covered, are without merit or are of such a kind or involve such amounts that would not have a material adverse impact on the operating results or financial position if settled unfavourably. 16 Events occurring after the reporting period On 20 August 2018, the Directors declared a final dividend of 12 Australian cents per ordinary share payable in October 2018. 89 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 17 Related party transactions (a) Subsidiaries and joint operations Interests in significant subsidiaries and joint operations are set out in note 22. (b) Key management personnel remuneration Short term employee benefits Share-based payments Post employment benefits 2018 US$'000 6,569 2,469 148 9,186 2017 US$'000 7,469 2,273 141 9,883 Detailed information about the remuneration received by each key management person is provided in the Remuneration Report on pages 111 to 138. (c) Transactions with other related parties The following transactions occurred with joint operations partners Other revenue Balances at 30 June Deferred joint venture contributions Current receivables 2018 US$'000 1,973 269,859 219 2017 US$'000 2,785 265,800 274 The deferred joint venture contributions liability reflects the timing of cash call contributions to the Iron Bridge Joint Venture by Fortescue and other joint operation partners. 18 Share-based payments (a) Employee share rights plans During the year ended 30 June 2018, Fortescue issued 1,845,707 (2017: 1,874,545) short term share rights and 3,045,753 (2017: 3,666,789) long term share rights to employees and senior executives, convertible to one ordinary share per right. The short term rights vest over one year, and the long term rights vest over three years. Outstanding at 1 July Share rights granted Share rights forfeited or lapsed Share rights converted or exercised Outstanding at 30 June 2018 Number 15,795,024 4,891,460 (4,548,999) (1,766,692) 14,370,793 2017 Number 18,355,858 5,541,334 (5,122,418) (2,979,750) 15,795,024 Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 18 Share-based payments (continued) (a) Employee share rights plans (continued) The weighted average fair value of share rights granted during the year ended 30 June 2018 was A$5.34 per right (2017: A$4.85) for the short term share rights and A$5.04 per right (2017: A$4.61) for the long term share rights. The estimated fair value of the short term share rights was determined using a trinomial option pricing model and the estimated fair value of the long term share rights was determined using a combination of analytical approaches, binomial tree and Monte Carlo simulation. The fair value estimation takes into account the exercise price, the effective life of the right, 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 right. The weighted average inputs used to determine the fair value of share rights granted during the year ended 30 June 2018 were: • Share price: A$4.90 (2017: A$4.99) • Exercise price: nil (2017: nil) • Volatility: 49 per cent (2017: 68 per cent) • Effective life: 2.1 years (2017: 2.2 years) • Dividend yield: 7.1 per cent (2017: 3.5 per cent) • Risk free interest rate: 1.9 per cent (2017: 2.0 per cent). Details of share rights outstanding at 30 June 2018 are presented in the following table: Balance at the end of the year Vested and exercisable at the end of the year Exercise price Short term share rights 2016 Short term share rights 2017 Short term share rights 2018 Long term share rights 2016 Long term share rights 2017 Long term share rights 2018 (b) Employee expenses - - - - - - - A$ Number 616,219 761,507 1,755,884 6,465,830 2,296,040 2,475,313 14,370,793 1,377,726 Remaining contractual life Vesting conditions Years Market Non-market 12.5 13.3 14.3 12.5 13.3 14.3 - - - Yes Yes Yes Yes Yes Yes Yes Yes Yes Number 616,219 761,507 - - - - 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 2018 US$m 14 2017 US$m 16 91 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 19 Remuneration of auditors PricewaterhouseCoopers Australia Audit and other assurance services Audit and review of financial statements Other assurance services Total audit and assurance services Other services Consulting services Total remuneration of PricewaterhouseCoopers Australia Network firms of PricewaterhouseCoopers Australia Audit and other assurances Audit and review of financial statements Total remuneration of auditors 20 Deed of cross guarantee 2018 US$'000 2017 US$'000 753 398 1,151 225 1,376 130 130 1,506 791 338 1,129 122 1,251 63 63 1,314 Fortescue Metals Group Ltd 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 Corporation Instrument 2016/785 issued by the Australian Securities and Investments Commission. Holding entity • Fortescue Metals Group Ltd Group entities • FMG Pilbara Pty Limited • Pilbara Power Pty Limited • Chichester Metals Pty Limited • FMG JV Company Pty Limited • FMG Resources (August 2006) Pty Limited • FMG Ashburton Pty Limited • International Bulk Ports Pty Limited • Pilbara Mining Alliance Pty Limited • The Pilbara Infrastructure Pty Limited • Fortescue Services Pty Limited • FMG Solomon Pty Limited • FMG Personnel Pty Limited • FMG Nyidinghu Pty Limited • FMG Personnel Services Pty Limited • FMG Procurement Services Pty Limited • CSRP Pty Limited • Pilbara Gas Pipeline Pty Limited • FMG Training Pty Limited • Pilbara Marine Pty Limited Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 20 Deed of cross guarantee (continued) (a) Consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position and consolidated statement of changes in equity The consolidated income statement, consolidated statement of comprehensive income and consolidated statement of changes in equity for the year ended 30 June 2018 along with the consolidated statement of financial position at 30 June 2018 for the closed group and the extended closed group represented by the above companies are materially the same as that of the Group. 21 Parent entity financial information (a) Summary financial information Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Contributed equity Reserves Retained earnings Total equity Net profit after tax Total comprehensive income for the year 2018 US$m 247 10,035 10,282 86 91 177 10,105 1,287 29 8,789 10,105 1,468 1,468 2017 US$m 158 10,161 10,319 759 43 802 9,517 1,289 22 8,206 9,517 319 319 The parent entity’s financial information has been prepared using the same basis, including the accounting policies, as the consolidated financial information, except as outlined below: • • Investments in subsidiaries, associates and joint operations have been accounted for at cost; and Profit for the year includes dividends received from subsidiaries of US$1,411 million (2017: US$410 million). (b) Guarantees entered into by the parent entity The parent entity is a party to the following guarantees: • Deed of cross guarantee, as described in note 20; and • Guarantees forming part of Fortescue's senior debt arrangements associated with the senior secured notes at 30 June 2017 included providing security to the secured debt holders with respect to the assets of the Company and certain of its subsidiaries. No liability was recognised by the parent entity or the Group in relation to these guarantees. (c) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities at 30 June 2018 or 30 June 2017. 93 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 22 Interests in other entities (a) Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following significant subsidiaries, in accordance with the accounting policy described in note 23(a)(i): Country of incorporation Class of shares Equity holding 2018 % 2017 % Investment 2018 US$ 2017 US$ Australia Singapore Singapore Hong Kong Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Hong Kong Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 88 88 88 100 100 100 100 100 100 100 100 100 100 100 100 100 88 88 88 100 100 100 100 100 100 100 100 100 100 1 1 209,053 209,053 1 1 43,557,023 43,557,023 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 97,610,244 64,837,148 1 1 Controlled entities Chichester Metals Pty Limited FMG International Pte Limited FMG International Shipping Pte Ltd FMG Iron Bridge Limited FMG Magnetite Pty Limited FMG North Pilbara Pty Limited FMG Pilbara Pty Limited FMG Procurement Services FMG Resources (August 2006) Pty Limited FMG Solomon Pty Limited Karribi Developments Pty Limited Pilbara Housing Services Pty Limited Pilbara Power Pty Limited The Pilbara Infrastructure Pty Limited FMG Hong Kong Shipping Ltd FMG Personnel Services Pty Ltd (b) Joint operations The consolidated financial statements incorporate Fortescue's share in the assets, liabilities and results of the following principal joint operations, in accordance with the accounting policy described in note 23(a)(ii). Country of incorporation Holding entity Principal activities Australia FMG Magnetite Pty Ltd Development of magnetite assets and production of magnetite concentrate Participating interest 2018 69% 2017 69% Australia FMG North Pilbara Pty Ltd Iron ore exploration 69% 69% Joint operations Iron Bridge Joint Venture Glacier Valley Joint Venture Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. (a) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries, being the entities controlled by the Company. Control exists when the Group is exposed to, or has right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. 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. Subsidiaries are consolidated from the effective date of acquisition to the effective date of disposal. 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, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position respectively. (ii) Joint arrangements A joint arrangement is an arrangement when two or more parties have joint control. Joint control exists when the parties agree contractually to share control over the activities that significantly affect the entity's returns (relevant activities), and the decisions about relevant activities require the unanimous consent of the parties sharing joint control. Joint arrangements are classified as either joint operations or joint ventures, based on the contractual rights and obligations between the parties to the arrangement. Joint operations If the contractual arrangement specifies a right to the assets and the obligations for the liabilities for the parties, the arrangement is classified as joint operation. The Group recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial statements under the appropriate headings. Details of the joint operations are set out in note 22. To support operations and construction projects of some of the joint operations, Fortescue and other parties to the joint arrangements are required, from time to time, to contribute funds in the form of cash calls, in proportion to their respective interests in the joint arrangements. These funds, if contributed by the parties to the joint arrangements in different financial years, may give rise to deferred joint venture contribution assets or liabilities. Joint ventures If the contractual arrangement grants the parties the right to the arrangement's net assets, it is classified as a joint venture. Interests in joint ventures are accounted for using the equity method, after initially being recognised at cost in the consolidated balance sheet. (b) 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. (c) Foreign currency translation Transactions in foreign currencies have been converted at rates of exchange at the date of those transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange at the reporting date, with the resulting gains and losses recognised in the income statement, except as set out below: • For qualifying cash flow hedges, the gains and losses arising on foreign currency translations are deferred in other comprehensive income • Translation differences on site rehabilitation provisions are capitalised as part of the development assets. Gains and losses on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. 95 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (d) Revenue recognition Revenue is measured at the fair value of the 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 significant risks and rewards of ownership have passed 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. The above conditions are generally satisfied when title passes to the customer, typically on the bill of lading date when iron ore is delivered to the vessel. Revenue is recorded at the invoiced amounts. Fortescue’s sale contracts may provide for provisional pricing of sales with final pricing determined using the iron ore price indices on or after the vessel’s arrival to the port of discharge. A provisionally priced sale contains an embedded derivative which is required to be separated from the host contract. At each reporting date, in the absence of an iron ore futures market, the provisionally priced sales are marked-to-market at period end prices, with adjustments (both gains and losses) recorded in operating sales revenue in the consolidated income statement and in trade debtors or trade payables in the balance sheet. (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. (e) 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. (f) Income tax 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. Income tax on the profit or loss for the period comprises current and deferred tax. Current income tax charge is calculated on the basis of the taxation laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Current income tax represents the expected tax payable on the taxable income for the year and any adjustments to tax payable in respect to previous years. Where the amount of tax payable or recoverable is uncertain, a provision is established based on the Group’s understanding of applicable tax law at the time. Settlement of these matters may result in changes to current and deferred income tax if the settlement differs from the provision. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. However, the deferred income tax is not accounted for if it arises from the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit or loss. 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 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. Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (f) Income tax (continued) Fortescue and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation at 1 July 2002, namely the FMG tax consolidated group, and are therefore taxed as a single entity from that date. FMG Iron Bridge (Aust) Pty Ltd and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as at 28 September 2011, namely the FMG Iron Bridge tax consolidated group, and are therefore taxed as a single entity from that date. The head entity and the controlled entities in both tax consolidated groups continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in each tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, the head entity of each group 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 each corresponding tax consolidated group. (g) Cash and cash equivalents Cash and cash equivalents include cash on hand, short term deposits 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. (h) 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. 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 of the receivables, 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 the income statement within 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. (i) Inventories Warehouse stores and materials, 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: • materials and production costs, directly attributable to the extraction, processing and transportation of iron ore to the existing location • production and transportation overheads • depreciation of property, plant and equipment used in the extraction, processing and transportation of iron ore. 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. (j) Financial assets Fortescue classifies its financial assets into loans and receivables, financial assets at fair value through profit or loss and available for sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. 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. 97 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (j) Financial assets (continued) Loans and receivables are initially measured at fair value and subsequently carried at amortised cost. At the end of each reporting period loans and receivables are reviewed for impairment, with the difference between the carrying amount and the present value of estimated future cash flows recognised in the income statement. (ii) Financial assets through profit or loss This category comprises only derivative financial instruments. They are carried on the balance sheet at fair value with changes in fair value recognised in profit or loss. (iii) Available for sale financial assets Available for sale financial assets, comprising principally marketable equity securities, are non derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the reporting date. Investments are designated as available for sale if they do not have fixed maturities and fixed or determinable payments and management intends to hold them for the medium to long term. These instruments are recognised at fair value, with changes in fair value being recognised directly in other comprehensive income, unless the change is considered to be a significant or prolonged decrease below original cost, in which case the decrease is recognised in profit or loss as an impairment loss. (k) Financial liabilities (i) Trade payables Trade and other payables are initially recognised at fair value and subsequently carried at amortised cost and represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid. (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. Borrowings are derecognised when the contractual obligations are discharged, cancelled or expire, or when the terms of an existing borrowing are substantially modified. Any difference between the carrying amount of a derecognised liability and the carrying amount of the new liability is recognised in the income statement. (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 the income statement over the lease period to reflect a constant periodic rate of interest on the remaining balance of the liability for each period. (l) Property, plant and equipment 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 as assets under development. 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. Gains and losses arising on disposal of property, plant and equipment are recognised in the income statement and determined by comparing proceeds from the sale of the assets to their carrying amount. (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 the income statement during the financial period in which they are incurred. Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (l) Property, plant and equipment (continued) (iii) Depreciation Depreciation of 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. 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. The estimated useful lives for the principal categories of property, plant and equipment depreciated on a straight-line basis are as follows: • buildings • rolling stock • plant and equipment • rail and port infrastructure assets 20 to 40 years 25 to 30 years 2 to 20 years 40 to 50 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 mines. (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 and capitalised in respect of each identifiable area of interest, 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, 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 within exploration, development and other expenses in the income statement. 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. 99 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (l) Property, plant and equipment (continued) Development costs are accumulated in respect of each separate area of interest. Costs associated with commissioning of 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 the decision is made. Each area of interest is reviewed at the end of each accounting period and the accumulated costs written off to the income statement 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 mines. (m) Stripping costs (i) 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. (ii) Production stripping costs Overburden and other mine waste materials continue to be removed throughout the production phase of the mine. This activity is referred to as production stripping, with the associated costs charged to the income statement, as operating cost, except when all three criteria below are met: • Production stripping activity provides improved access to the specific component of the ore body, and it is probable that economic benefit arising from the improved access will be realised in future periods • The Group can identify the component of the ore body for which access has been improved • The costs relating to the production stripping activity associated with that component can be measured reliably. If all of the above criteria are met, production stripping costs resulting in improved access to the identified component of the ore body are capitalised as part of development asset and are amortised over the life of the component of the ore body. The determination of components of the ore body is individual for each mine. The allocation of costs between production stripping activity and the costs of ore produced is performed using relevant production measures, typically strip ratios. Changes to the mine design, technical and economic parameters affecting life of the components and strip ratios, are accounted for prospectively. (n) 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 income statement 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 the income statement on a straight-line basis over the lease term. Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (o) 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 include decommissioning of facilities, 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 using Australian Government bond market yields that match, as closely as possible, the timing of the estimated future cash outflows. The judgements and estimates applied for the estimation of the rehabilitation provisions are discussed in note 24. When provisions for closure and rehabilitation are initially recognised, the corresponding cost is capitalised into the cost of mine development assets, representing part of the cost of acquiring the future economic benefits of the operation. The capitalised cost of closure and rehabilitation activities is recognised within development assets and is amortised based on the units of production method over the life of the mine. 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. (p) Impairment of non-financial assets 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. 101 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (q) Finance costs Finance costs principally represent interest expense and are recognised as incurred except when associated with major projects involving substantial development and construction periods. In addition, finance costs include losses arising on derecognition of finance liabilities at above their carrying value, unwinding of the discount on provisions and bank charges. Interest expense and other borrowing costs directly attributable to major projects are added to the cost of the project 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 construction 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. (r) 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 provisions 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. Consideration is given to expected future wage and salary levels, probability 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. 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. (s) Share-based payments Share-based remuneration benefits are provided to employees under the Fortescue’s share rights plan, as set out in note 18. The fair value of rights is measured at grant date and is recognised as an employee benefits expense over the period during which the employees become unconditionally entitled to the rights, with a corresponding increase in equity. The fair value of the rights granted is measured to reflect expected market vesting conditions, but excludes the impact of any non-market vesting conditions (for example, profitability). Non-market vesting conditions are included in assumptions about the number of rights that are expected to become exercisable. At each reporting date, the entity revises its estimate of the number of rights 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 the income statement with a corresponding adjustment to equity. (t) 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. Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (u) 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. (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. (v) Goods and Services Tax (GST) Revenues, 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. (w) Comparatives Where applicable, certain comparatives have been adjusted to conform with current year presentation. (x) New accounting standards and interpretations (i) New and amended standards adopted by the Group The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 July 2017: • AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses • AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 • AASB 2017-2 Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016 Cycle. The adoption of these amendments did not have any impact on the current period or any prior period and is not likely to affect future periods. (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 2018 reporting periods. These standards and interpretations have not been early adopted. AASB 15 Revenue from Contracts with Customers (effective from 1 July 2018) The core principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduces a five-step process for applying this principle, which includes guidance in respect of identifying the performance obligations under the contract with the customer, allocating the transaction price between the performance obligations, and recognising revenue as the entity satisfies the performance obligations. The Group has concluded its evaluation of the impact of AASB 15 and determined that the only relevant impact for the Group relates to the shipping of iron ore sold to customers. The Group sells a significant proportion of its products on Cost and Freight (CFR) terms, which means that the Group is responsible for shipping the product to a destination port specified by the customer. 103 07 | Financial Report Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 23 Summary of significant accounting policies (continued) (x) New accounting standards and interpretations (continued) (ii) New accounting standards and interpretations not yet adopted (continued) Under AASB 118 Revenue the Group recognised the total contract revenue when title to iron ore passed to the customer, typically on the bill of lading date when ore is delivered to the ship, the related shipping costs in full at that point. Under AASB 15 the shipping service will represent a separate performance obligation, and will be recognised separately from the sale of the ore when the shipping service has been provided, along with the associated costs. Fortescue’s sale contracts may provide for provisional pricing of sales at the time the product is delivered to the vessel with final pricing determined using the iron ore price indicies on or after the vessel’s arrival to the port of discharge. As explained in more detail below provisional pricing adjustments to revenue will be dealt with under AASB 9 rather than AASB 15, and therefore the AASB 15 rules on variable consideration do not apply to the provisional pricing mechanism of the Group’s sales contracts. Commencing in the year ending 30 June 2019, provisional pricing adjustments will continue to be included in operating sales revenue on the face of the income statement with the amount of such adjustments disclosed by way of note to the financial statements. The Group will adopt the modified transitional approach to implementation where any transitional adjustment is recognised in retained earnings at 1 July 2018 without adjustment of comparatives and the new standard will only be applied to contracts that remain in force at that date. The impact of this change to retained earnings at 1 July 2018 is estimated at US$2 million. AASB 9 Financial Instruments (effective from 1 July 2018) The Group has concluded its evaluation of the impact of AASB 9 and determined that there is no significant impact on the Group’s results from application of the standard. As explained above, Fortescue’s sale contracts may provide for provisional pricing of sales at the time the product is delivered to the vessel with final pricing determined using the iron ore price indicies on or after the vessel’s arrival to the port of discharge. Under AASB 139 Financial Instruments: Recognition and Measurement the final pricing adjustment mechanism represents an embedded derivative which is separated from the host contract and recognised at fair value through profit or loss. Under AASB 9 the receivable asset is measured at fair value through profit or loss which will result in a similar overall impact on the income statement and balance sheet. AASB 9 introduces an expected credit loss model for impairment of financial assets which replaces the incurred loss model used in AASB 139. This is not expected to have a significant impact on the Group given our credit risk management processes, and the resulting insignificant level of credit losses. AASB 16 Leases (effective from 1 July 2019) AASB 16 introduces new framework for accounting for leases and will replace AASB 117 Leases. The new standard will primarily affect the accounting by lessees and will result in the recognition of almost all leases on the balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for almost all lease contracts. Depreciation would be recognised on the assets and interest on the financial liabilities over the lease term. Management is continuing to determine the extent that these operating leases will be recognised as assets and liabilities on the Company’s statement of financial position, the impact on profit and classification of the related cash flows, commencing with a detailed contract review process. Some of the operating leases in existence at the reporting date will be exempt on the basis of being short-term or low value, some relate to arrangements that will not qualify as leases under the new standard and some will be subject to renewal prior to the implementation. There are two transition provisions available for the adoption of AASB 16, being retrospective application to each prior reporting period presented by applying AASB 108, or retrospective application with the cumulative effect of initially applying the standard recognised at the date of initial application. Fortescue is continuing to evaluate the transition approach. Fortescue Metals Group Ltd Annual Report FY18Notes to the consolidated financial statements For the year ended 30 June 2018 Other information 24 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. (a) Iron ore reserve estimates 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. 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 the income statement may change where such charges are determined by the units of production method, or where the useful economic lives of assets change • The carrying value of deferred tax assets may change due to changes in estimates of the likely recovery of tax benefits. (b) 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 the income statement. (c) 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. (d) 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 the income statement. 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. (e) Rehabilitation estimates 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. 105 08 Remuneration report Fortescue Metals Group Ltd Annual Report FY18 Remuneration and Nomination Committee Chair On behalf of the Directors of Fortescue Metals Group Ltd, I am pleased to present the Remuneration Report for the year ended 30 June 2018. Our Report aims to provide you with clear information on our remuneration strategy for Executives and Directors, aligned to deliver the best outcomes to you, our shareholder. A governing principle of Fortescue’s remuneration strategy is to ensure management are held accountable for achieving stretch targets on the critical deliverables of safety, production and cost. For FY18, the Board determined aggressive targets for each and designed incentives specifically to drive business transformation, financial performance and to protect shareholders. As reported in the Operating and Financial Review, FY18 has once again delivered strong, consistent results against the majority of our key targets for the year, reflecting our strong values-based culture and the commitment of the whole Fortescue team. Performance culture driving remuneration strategy Fortescue’s remuneration strategy is underpinned by its core Values and performance culture which includes setting challenging stretch targets, striving to achieve them and rewarding success. Key focus areas are innovation, value creation, long-term sustainability and growth with the Board exercising discretion to recognise outstanding levels of achievement where outcomes may not accurately reflect performance. Once again, Fortescue’s unique culture continues to deliver outstanding levels of engagement as demonstrated by the annual Safety Excellence and Culture Survey with an exceptional 94 per cent participation rate as well as substantial improvement across all survey metrics. A commitment to diversity and ensuring an encouraging and inclusive workplace through practical measures, including fair and equitable pay, flexible work practices and support for parents returning to work are fundamental drivers of our success. Safety performance for the year was disappointing with TRIFR increasing over the period from 2.9 to 3.7, primarily driven by an increase in low severity injuries. Safety is the team’s highest priority and targeted plans are in place to improve this performance going forward. Culture 94% Participation in Safety Excellence and Culture Survey Reduced costs 4% US$ 12.36/wmt Consistent production 170 mt Safety performance 28% 3.7 Total Recordable Injury Frequency Rate 107 08 | Remuneration Report Long term sustainable value The delivery of long term, sustainable value is our goal. Focussed cost reduction, debt repayment and balance sheet management has been very successful and remain key objectives of our long term strategy. C1 cost reductions have been significant and sustainable, generating shareholder value. Despite challenging market conditions, the team have achieved our balance sheet goals, providing a strong platform for growth. The re-rating of Fortescue shares was achieved through the execution of the disciplined Capital Management Strategy. As at 30 June: • Gross debt reduced to US$4.0bn • Net debt reduced to US$3.1bn • Gross gearing was 29 per cent • Debt to EBITDA of 1.2 times. C1 US$/wmt 48 44 34 27 15 13 12 FY12 FY13 FY14 FY15 FY16 FY17 FY18 12,691 10,553 9,557 9,569 7,159 7,188 6,771 5,188 4,471 2,633 3,975 3,112 FY13 FY14 FY15 FY16 FY17 FY18 Debt Net Debt Gross gearing (RHS) Net gearing (RHS) Leadership 2018 was a year of transition with a change in leadership and the appointment of Fortescue’s Core Leadership team (CLT), comprising our Chief Executive Officer Elizabeth Gaines, Deputy Chief Executive Officer Julie Shuttleworth, Chief Operating Officer Greg Lilleyman and Chief Financial Officer Ian Wells. The CLT bring considerable experience, talent and the commitment to Fortescue’s culture and Values required to lead the Company through its next phase of growth and development. The collaborative working style is core to their success. FY18 performance During FY18, a challenging year from a market perspective, significant progress on the delivery of Fortescue’s business strategy was achieved, specifically: • Consistent production from the Company’s world class assets, with 170mt of iron ore shipped and achievement of a record 46.5mt for the June 2018 quarter • Continued cost reduction including a four per cent year on year or eight per cent reduction in C1 costs when normalised for exchange rate and fuel costs, reflecting the sustained improvement in productivity and efficiency together with higher production volumes • Substantial increase (approximately 101 per cent) in non-China Sales • Significant progress toward Fortescue’s growth strategy including the identification and assessment of opportunities locally and abroad • Employee engagement levels maintained at high levels, measured by an outstanding 94 per cent response rate to the annual Safety Excellence and Culture Survey • Mine life maintained at target production rate and quality • Completed the capital management strategy reducing gross debt, the cost of capital and increasing flexibility. Fortescue's share price decreased by 16 per cent over the year impacted predominantly by iron ore price movements. The correlation between Fortescue’s share price and the movement of the iron ore price 62 Platts index is shown in the graph below. 1 year e r a h s / $ U A 7 6 5 4 3 2 1 0 FMG share price Platts 62% index 90 80 70 60 50 40 30 20 10 0 t m d / $ S U 3/07/2017 3/10/2017 3/01/2017 3/04/2017 During FY18, the Fortescue team successfully focussed on measures within their control. The Board has rewarded this 3 focus. year Platts 62% index FMG share price 7 160 e r a h s / $ U A 6 5 4 3 2 1 0 t m d / $ S U 140 120 100 80 60 40 20 0 6 1 0 2 / 7 0 / 1 6 1 0 2 / 0 1 / 1 6 1 0 2 / 1 0 / 1 6 1 0 2 / 4 0 / 1 7 1 0 2 / 7 0 / 1 7 1 0 2 / 0 1 / 1 7 1 0 2 / 1 0 / 1 7 1 0 2 / 4 0 / 1 8 1 0 2 / 7 0 / 1 8 1 0 2 / 0 1 / 1 8 1 0 2 / 1 0 / 1 8 1 0 2 / 4 0 / 1 Fortescue Metals Group Ltd Annual Report FY181 year 7 6 5 4 3 2 e r a h s / $ U A FMG share price Platts 62% index 90 80 70 60 50 40 30 20 t m d / $ S U 1 0 Over the performance period of the FY16 LTIP, Fortescue’s share price has materially 3/07/2017 outperformed the iron ore indices as shown in the graph below. 3/10/2017 3/01/2017 3/04/2017 0 10 3 year e r a h s / $ U A 7 6 5 4 3 2 1 0 FMG share price Platts 62% index t m d / $ S U 160 140 120 100 80 60 40 20 0 6 1 0 2 / 7 0 / 1 6 1 0 2 / 0 1 / 1 6 1 0 2 / 1 0 / 1 6 1 0 2 / 4 0 / 1 7 1 0 2 / 7 0 / 1 7 1 0 2 / 0 1 / 1 7 1 0 2 / 1 0 / 1 7 1 0 2 / 4 0 / 1 8 1 0 2 / 7 0 / 1 8 1 0 2 / 0 1 / 1 8 1 0 2 / 1 0 / 1 8 1 0 2 / 4 0 / 1 The outcomes of the FY16 LTIP recognises and rewards the outstanding performance achieved by long term employees in a challenging iron ore market. Treatment of incentives and discretionary ex-gratia payment for Mr Power Mr Power’s ESSIP and LTIP grants were approved by shareholders at the 2015 AGM. Other than Mr Power’s FY18 ESSIP and FY16 LTIP entitlements, all of Mr Power’s ESSIP and LTIP entitlements have lapsed. At the time of Mr Power’s resignation, the Board considered the potential risk of an unintended windfall gain in respect to the FY16 LTIP value that may have occurred as a result of an increasing share price. In order to ensure a responsible remuneration outcome in the interests of shareholders, the Board has exercised its discretion to limit Mr Power’s potential FY18 total remuneration through the ‘at risk’ component as follows: • An FY18 ESSIP entitlement awarded on a pro-rata basis up to cessation of employment and subject to Company performance against the abovementioned FY18 stretch targets • An FY16 LTIP entitlement awarded on a pro-rata basis up to cessation of employment, subject to Company performance against targets and the FY16 LTIP rights being capped by reference to an amount equal to the aggregate value of the FY16 LTIP award using a notional share price of $1.80 (being the share price at the date of grant) • An ex-gratia payment of A$1,006,850. FY18 remuneration outcomes Fixed remuneration for the CLT was established at the time of each of their appointments during the year, having regard to comparable roles within the ASX 100, ASX 50 and ASX 30 indices as well as other global resource companies. Remuneration for each of the CLT members has been positioned lower than the remuneration for prior incumbents in these roles, noting that Fortescue has not previously had a Deputy CEO. FY18 Short Term Incentive stretch targets for production, sustaining capital expenditure and culture have been met, with the growth target partially achieved. The Board has exercised its discretion for a partial award related to C1 cost and underlying EBITDA margin, reflecting continued cost reductions against an aggressive target on a normalised basis. As noted above, the safety target has not been achieved and is a core area of focus for improvement. Awards for the FY18 short term incentive averaged 69 per cent of maximum opportunity. FY16 Long Term Incentive Plan (LTIP) is the first of the newly designed LTIPs to complete its performance period. Stretch targets for this plan have been achieved at varying levels, resulting in an overall payout ratio of 86 per cent. • The Total Shareholder Return (TSR) target has been exceeded, reflecting the outstanding share price growth over the three year performance period • Growth in share price reflects the investment grade debt profile and the outstanding operating cost reduction which was achieved through execution of strategy over the last three years • The three year average Average Return on Equity (AROE), based on underlying NPAT (which excludes exceptional items relating to the Company's one-off costs of refinancing activities) has been achieved at threshold • Strategic measures have been achieved at target. Strategic measures are closely aligned with short term incentive measures to ensure long term value is retained and not impacted by a purely short term focus (eg long term mine life is preserved notwithstanding ongoing reductions in annual operating costs). This application of board discretion resulted in Mr Power’s total at risk remuneration accounting for 51 per cent of his total remuneration, a 59 per cent reduction in 'at risk' remuneration in total from FY17. Conclusion Fortescue’s remuneration strategy is designed to motivate, attract and retain employees to deliver on the Company’s strategic objectives. For executives and senior staff this includes a high proportion of ‘at risk’ remuneration which is fundamentally aligned to shareholder returns. At its core, the strategy drives management accountability for the achievement of stretch targets for the business, through a balance of financial and non-financial measures. We have seen a reduction in the ‘at risk’ award for the FY18 short term incentive (compared to FY17) and an award for the FY16 LTIP (for the period from 1 July 2016 to 30 June 2018), which aligns with shareholder returns over these periods. Through its ongoing focus on a targeted short and long term remuneration framework, Fortescue continues to work towards its vision to be the world’s safest, low cost, most profitable mining company while also positioning the Company for its future growth and development. Sharon Warburton Remuneration & Nomination Committee Chair 109 08 | Remuneration Report Contents Remuneration Report 1. FY18 overview and year ahead 2. Remuneration governance 3. Executive remuneration strategy 4. Executive remuneration structure 5. Incentive plan operation and performance 6. How executive remuneration is reported 7. Executive contract terms 8. Non-executive director remuneration 9. Equity Instrument disclosures relating to key management personnel Fortescue Metals Group Ltd Annual Report FY18 Remuneration Report 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’. Within this Remuneration Report reference to 'Executive(s)' includes Executive Directors and Other Key Management Personnel. There have been no changes to Key Management Personnel after the reporting date. The information provided in this Remuneration Report has been prepared in accordance with requirements under the Corporations Act 2001 and Accounting Standards. Further details in regard to Company Directors can be found in the Corporate Governance Section of the Annual Report. Whilst the functional and reporting currency of Fortescue is 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 and Executives are remunerated in Australian dollars. This report forms part of the Directors’ Report and unless otherwise indicated the following sections have been audited in accordance with section 308 (3c) of the Corporations Act 2001. The KMP of the Group for FY18 were: Non-executive Directors Current A Forrest AO Chairman M Barnaba AM Deputy Chair and Lead Independent Director S Warburton Deputy Chair J Baderschneider Non-Executive Director J Morris OAM Non-Executive Director P Bingham-Hall Non-Executive Director Z Cao S Coe CH, KBE Former H Cao Executive Directors Current E Gaines Former N Power Non-Executive Director (Appointed 18 January 2018) Non-Executive Director (Appointed 21 February 2018) Non-Executive Director (Retired 18 January 2018) Chief Executive Officer (Commenced as CEO on 19 February 2018) Chief Executive Officer (Ceased employment 19 February 2018) Other key management personnel (Executives) Current J Shuttleworth Deputy Chief Executive Officer (Commenced as Deputy CEO on 8 January 2018) I Wells G Lilleyman Chief Financial Officer (Commenced as CFO on 19 February 2018) Chief Operating Officer (Commenced as COO on 19 February 2018) 111 08 | Remuneration Report 1. FY18 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 (RNC) are committed to the continued review and refinement of the remuneration strategy to ensure it meets the changing needs of the organisation, maintains market competitiveness, and aligns with shareholder interests. 1.1 FY18 Remuneration outcomes - linking performance and pay The Board takes into consideration both quantitative and qualitative assessments when deliberating on Executive remuneration to ensure that reward outcomes reflect both Company and individual performance. The following explains how fixed and variable remuneration outcomes were driven by performance in FY18. Total Fixed Remuneration (TFR) Further details are provided on page 135 Delivery Performance measures Outcomes Cash, superannuation and optional salary sacrifice benefits An individual’s TFR is a fixed / guaranteed element of remuneration. TFR for the CEO and KMP is benchmarked at least annually against companies in the ASX 100, ASX 50 and ASX 30 indices as well as global resources companies. CEO and KMP TFR was benchmarked against the above indices at the time of appointment. Current CEO TFR is 25% lower than the previous CEO reflecting market trends and benchmarks. Short Term Incentive Plan Executive and Senior Staff Incentive Plan (ESSIP) Further details are provided on page 118 Delivery Performance measures Outcomes Generally, a minimum of 50% of the incentive value (up to 100% on election) is granted in share rights with the balance in cash Share rights are granted based on the share price at the beginning of the performance period with value realised at the time of award at the end of the performance period Movement in share price over the performance period directly affects the value received ensuring full alignment with returns to shareholders over the performance period A balanced scorecard of performance measures including financial and non-financial measures. Financial measures represent the key controllable drivers of financial performance being underlying EBITDA and NPAT Targets set are stretch levels of performance with each target either met (resulting in 100% of maximum opportunity) or not met (resulting in no payment) The Board may exercise its discretion to vary the level of award (positive or negative) when considering overall shareholder value generated over the performance period. The Board will consider overall Company performance including the degree of stretch in the measures, operating environment and level of improvement on the prior year Company Financial Targets • Production • Operating Cost • Sustaining Capital • EBITDA margin • Price realisation • Business diversification and growth targets Company Sustainability Targets • Safety • Culture and engagement KMP Performance: • Measured on Company targets plus an additional 4-5 Personal KPIs aligned to business plan and set at stretch levels of performance During FY18, the Company continued to deliver strong performance against many but not all of its stretch targets Awards made in relation to the FY18 ESSIP reflect achievement of: • On target tonnes shipped • On target sustaining capital expenditure • Significant measurable improvement in employee culture and engagement Partial award for: • Substantial diversification and growth strategy progress • Strong EBITDA margin • 8% reduction in C1 costs when normalised for exchange rate and fuel costs No award was made for safety. Safety performance this year was disappointing and whilst there has been a significant reduction in significant incidents, the specific TRIFR target has not been met Price realisation was also below target and no award was made The outcome of the FY18 ESSIP represents an average payment of 69% of maximum opportunity compared with an average payment of 96% of maximum opportunity in FY17 Refer to section 5 for further detail Fortescue Metals Group Ltd Annual Report FY18Long Term Incentive Plan (LTIP) Further details are provided on page 123 Performance Measures Measured against: • Relative TSR (33%) • AROE (33%) • Strategic Measures (34%) Delivery Share rights are granted based on the share price at the beginning of the performance period with value realised at time of award at the end of the performance period Movement in share price over the performance period directly affects the value received ensuring strong correlation with returns to shareholders over the course of the same period Outcomes FY16 LTIP FY16 LTIP share rights were granted at a share price of $1.80 and the share price has increased over the performance period to $4.35. This increase in share price is reflected in the nominal value of FY16 LTIP vested rights awarded which are valued at the end of the performance period The FY16 LTIP has achieved all three of its performance measures resulting in 86% of share rights vesting under this plan • A TSR outcome of 139% (93rd percentile) has been achieved • An AROE outcome of 15.2% has been achieved and therefore, the 15% threshold has been met • Strategic measures are set and assessed annually. The strategic measures for each of the performance years of the FY16 LTIP have been achieved at target 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. 113 08 | Remuneration Report 2. REMUNERATION GOVERNANCE Fortescue believes that robust governance is critical to underpinning the effectiveness of the remuneration strategy. 2.1 The Remuneration and Nomination Committee The RNC operates under a Board- approved Charter. The purpose of the RNC is to provide assistance and recommendations to the Board to ensure that it is able to fulfil its responsibilities relating to the following: • Remuneration strategy • Non-Executive Director remuneration • CEO and Executive Director remuneration • Other Core Leadership team and senior executive remuneration • Short term and long term incentive plans • Core Leadership team recruitment • Annual Performance Review of the CEO and other Core Leadership team members • Succession planning and talent management • Diversity strategy • Gender pay equity • Matters relating to the Company’s recruitment, retention and termination policies • Nomination and review of applicants for the Board Director position • Committee Member appointments. A copy of the Charter is available under the Corporate Governance section of the Company's website available at www.fmgl.com.au The RNC in FY18 consisted solely of Non- Executive Directors. The CEO and others may be invited to attend all or part of meetings by the Committee Chair as required, but have no vote on matters before the Committee. 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 REMUNERATION CONSULTANTS Will be engaged directly by management other than in respect of KMP to provide advice and market data to ensure Fortescue’s remuneration position remains competitive BOARD OF DIRECTORS • Approving the remuneration of Non-Executive Directors and CEO • Ensuring remuneration practices are competitive and strategic and align with the attraction and retention policies of the Company BOARD REMUNERATION AND NOMINATION COMMITTEE Advise the Board on: • Remuneration strategy, policies and practices • Non-Executive Director remuneration • Executive remuneration • Diversity strategy • Gender pay equity HUMAN RESOURCES MANAGEMENT • Implementation of remuneration policies and practices • Advising the Remuneration and Nomination Committee of changing statutory and market conditions • Provides relevant information to the Remuneration and Nomination Committee to assist with decisions Fortescue Metals Group Ltd Annual Report FY18 2.2 Use of remuneration consultants The Committee has the resources and authority appropriate to perform its duties and responsibilities, including the authority to engage external professionals on terms it deems appropriate. During the year ended 30 June 2018, the Committee retained PwC in relation to the review of policies and practices, the provision of general information and market trends. This did not incorporate providing the Committee with any remuneration recommendations as defined by the Corporations Act 2001. 2.3 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) The fraud, dishonesty or breach of obligations (including, without limitation, a material misstatement of financial information) of any person; or b) 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. 2.4. 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. Fortescue’s Securities 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 Securities Trading Policy can be accessed from the Corporate Governance section of the Company's website available at www.fmgl.com.au 2.5 Minimum shareholding and holding conditions All Directors and employees are encouraged to own Fortescue shares and the Company enables employee participation as a shareholder through short and long term incentives, salary sacrifice and dividend reinvestment programs. In 2018, the Board introduced a minimum shareholding policy for Directors and Executives as detailed below: NEDs: CEO: 100% of base annual fees 100% of TFR Other KMP: 75% of TFR Other Executives: 50% of TFR (as determined by the Board). Participants are encouraged to meet their respective minimum shareholding within a reasonable timeframe, generally within five years from date of appointment by holding shares that vest under the long term incentive plan. The Directors’ and Executives’ Minimum Shareholding Policy can be accessed from the Corporate Governance section of the Company's website available at www.fmgl.com.au In addition to the minimum shareholding requirement, a minimum of 79 per cent of the ‘at risk’ component of executive remuneration is granted in share rights. The number of share rights granted is based on the face value share price at the commencement of the performance period. The value of any shares that may vest (subject to performance) is also subject to the same share price fluctuations experienced by shareholders over the performance period. The minimum shareholding requirement combined with the structure of Fortescue’s incentive plans ensures that executive remuneration is directly aligned with shareholder returns. 3. EXECUTIVE REMUNERATION STRATEGY Fortescue’s reward strategy seeks to build a performance oriented culture that supports the achievement of the Company’s strategic vision and to attract, retain and motivate employees by providing market competitive fixed remuneration and incentives. The reward strategy also supports Fortescue’s 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 performance based culture and acknowledging global industry outperformance • Alignment to the long term goals of the Company. 3.1 Remuneration Policy Fortescue is committed to providing competitive remuneration packages to its executives and senior employees. Fortescue benchmarks remuneration components against major indices such as the ASX 30, ASX 50 and ASX 100 Resources Indices. Fortescue seeks to attract and retain the best global mining industry talent so also benchmarks against comparable roles in global peer group companies. The Board acknowledges that market conditions (including material conditions outside the control of the Company), share price and market capitalisation may change the Company’s relative comparator group from time to time. The Board, however, has a long term strategy to ensure that executive remuneration is appropriately positioned to motivate, attract and retain key executives and senior employees through the commodity cycles to deliver on the current and long term strategic activities of the Company. Rewarding executives throughout the commodity cycle is critical to long term shareholder value. Information may also be sought from independent remuneration consultants regarding executive remuneration as and when required as detailed in section 2.2. 115 08 | Remuneration Report 3.2 How remuneration practices align with our reward strategy Remuneration strategy principle Policy Practice High levels of share ownership Drive alignment of employee and shareholder interests A minimum 50% of the ESSIP paid in shares with executives able to elect up to 100% in shares. LTIP awarded as shares Market competitive remuneration Attract and retain key talent and be competitive against relevant companies Remuneration is benchmarked against the ASX 100 Resources, ASX 30, ASX 50 as well as relevant global 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 64% 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 Growth is key measure. There is a strong link between long term strategic initiatives and short term at risk measures to ensure alignment A significant portion of executive remuneration granted as performance rights vesting subject to short and long term performance hurdles Shareholder and executive alignment LTIP rewarding sustained performance over a three year period 4. 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 comprise: • Total Fixed Remuneration (TFR) • Executive & Senior Staff Incentive Plan (ESSIP) • Long Term Incentive Plan (LTIP). 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 its ranking on the Australian Securities Exchange. Fixed Remuneration is benchmarked against the market median (50th percentile) with the ability to earn third quartile (75th percentile) or above total remuneration for outstanding performance against stretch targets. Remuneration is benchmarked against companies in the ASX 100 Resources Index, ASX 30 and ASX 50 as well as relevant global indices as required but at least annually. The number of share rights granted under both ESSIP (which generally account for a minimum of half the incentive) and LTIP (which is granted solely in share rights) are determined based on the face value share price at the start of the relevant performance period. This means that the movement in share price over the performance period directly affects the value received by executives and ensures full alignment with returns to shareholders over the course of the same period. The remuneration mix (shown in the section below) clearly illustrates the significant proportion of ‘at risk’ components of executive remuneration and reinforces the pay for performance policy alignment adopted by the Board. Further, a minimum 79 per cent (up to a maximum of 100 per cent) of the total ‘at risk’ component is offered in the form of share rights and, subject to share price movement, is fully aligned with shareholders calculated based on the face value share price at the commencement of the performance year. This means that over three quarters of the value to the individual of the combined ESSIP and LTIP is tied directly to the share price at the time of award, ensuring that executive reward is aligned to shareholder value. Fortescue Metals Group Ltd Annual Report FY18 4.1 FY18 Remuneration mix The table below shows the remuneration mix for superior performance when stretch hurdles have been met for both the CEO and executives. The remuneration mix for the current CEO and other CLT reflects the pro-rata ESSIP and LTIP values associated with their change in role during FY18. Former CEO 28% 31% Current CEO 32% 29% 41% 39% Total at risk 72% 68% Other CLT 36% to 40% 26% to 27% 34% to 36% 60% to 63% 0% 20% 40% 60% 80% 100% TFR ESSIP (at risk) LTIP (at risk) The chart to the right represents the actual remuneration mix for KMP in 2018: • The nominal value of the LTI, for all KMP except Mr Power, reflects the share price growth from $1.80 to $4.35 over the performance period • Ms Gaines and Mr Lilleyman did not participate in the FY16 long term incentive due to the timing of their commencement of employment • Mr Wells’ Other payment is for a retention plan related to his prior role, the retention period for which concluded on 30 June 2018 • Mr Power’s remuneration mix is comprised of the following: o An ESSIP entitlement reflecting the pro-rata accrued benefit (based on achieving 56 per cent of maximum opportunity) up to the date he ceased employment o An LTIP entitlement reflecting the pro-rata accrued benefit and capped value of Mr Power’s LTI at the grant price of $1.80 per share o Mr Power’s Other payment relates to an ex-gratia payment of A$1,006,850 plus accrued leave entitlements of A$634,776 paid out on cessation of employment. 28% 37% 31% 48% 39% 12% 21% 63% 69% 15% 37% 21% 34% 14% 31% N Power E Gaines G Lilleyman J Shuttleworth I Wells TFR STI (at risk) LTIP (at risk) Other 4.2 FY19 Remuneration mix The table below shows the remuneration mix for superior performance when stretch hurdles have been met for both the CEO and CLT in FY19. 28% Total at risk Current CEO 28% 31% Other CLT 36% 28% 41% 36% 72% 64% 0% 20% 40% 60% 80% 100% TFR ESSIP (at risk) LTIP (at risk) 117 08 | Remuneration Report 5. INCENTIVE PLAN OPERATION AND PERFORMANCE 5.1 Executive and Senior Staff Incentive Plan (ESSIP) The purpose of the ESSIP is to incentivise and reward key Fortescue Executives (including KMP) for achieving annual Company and individual performance objectives that drive shareholder value. Historically the CEO’s ESSIP potential award is linked solely to Company objectives with other executives ESSIP potential award generally linked 60 per cent to Company objectives, and 40 per cent to individual performance. This creates alignment of CEO and executive remuneration with Company performance during the Plan Year. 2018 was a year of transition with the formation of the four-member CLT and changes to each of their roles part way through the year. In this transition year, their ESSIP potential award was linked to a combination of Company and individual based performance objectives. Mr Power’s pro rata award was linked solely to Company objectives. The maximum ESSIP opportunity is established at the beginning of the financial year for each executive. Generally, the ESSIP 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 ESSIP in shares. Share rights are granted based on the election made by the participant and represent the maximum number of shares that may be awarded subject to performance. The number of ESSIP share rights are calculated based on the Volume Weighted Average Price (VWAP) of Fortescue shares traded over the first five trading days of the performance period (eg. 1 July 2017 to 7 July 2017). In addition to those awards that are generally granted under the ESSIP, the Board has the ability to introduce additional awards that are aligned with and support the Company’s business strategy. Additional awards may be comprised of cash, shares or a combination of both and are granted at the discretion of the Board. No additional awards were made in 2018. Maximum General ESSIP opportunity Role Former Chief Executive Officer Current Chief Executive Officer Other CLT Prior % of TFR 112.5 75 56.25 or 75 New % of TFR 112.5 112.5 75 No. of Participants 1 1 3 The maximum incentive opportunity for KMP in FY18 is shown below: Note that the actual award outcomes under the ESSIP will be determined by the number of objectives achieved and the value of the Fortescue shares at time of vesting. As shown in the table above, the Maximum General ESSIP opportunity was increased for the current CEO and other CLT upon commencement of their current roles. The maximum award for 2018 year has been prorated (ie the higher maximum only applies from commencement of their new role). Individuals who commence during the year similarly will have awards under the ESSIP pro-rated based on service during the performance period. 5.2 How ESSIP objectives and weightings are determined Generally, ESSIP targets and measures are set on an annual basis and are linked to the annual stretch budget and Fortescue’s strategic plan focussing on core drivers of shareholder value resulting in well balanced financial and non-financial targets. There is a strong link between the ESSIP measures and the strategic measures within the LTIP to ensure alignment of short and long term value. Personal objectives are set at stretch levels of performance with measures and weightings aligned to the individual’s ability to influence outcomes and ensure focus on critical deliverables. The charts on the following page show the relationship between the primary ESSIP performance measures for the CEO and other KMP in FY18: • The former CEO had 40 per cent financial, 40 per cent growth and 20 per cent non- financial targets • The current CEO had 60 per cent financial, 20 per cent growth and 20 per cent non-financial • Financial and non-financial targets are aligned specifically to the executive’s respective roles and responsibilities and financial targets range from 40 per cent to 60 per cent • Financial includes cost, production and profitability measures • Non-Financial includes safety, culture and engagement measures. Fortescue Metals Group Ltd Annual Report FY18 08 | Remuneration Report 5.3 How the ESSIP works: ESSIP participant rewards are designed to reflect Company performance and provide alignment with shareholder outcomes by generally linking a minimum of half the ESSIP to share price movement over the financial year. The number of share rights granted in respect to the FY18 ESSIP is determined based on the VWAP at the start of the performance period which was A$5.26. • • If the share price at the time of award is higher, executives will receive higher value per share right If the share price at the time of award is lower, the value to executives is decreased. The value of share rights is therefore aligned with shareholder interests as executives receive value consistent with share price movements. Value is not realised until the vested rights are exercised into shares and then sold. 5.4 How Fortescue performed over the past five years Fortescue continues to build on its performance over the past five years, showing strong performance in safety, production and cost to deliver shareholder value. The chart to the right shows Fortescue's cost reductions, a world class improvement over the past five years. In considering Fortescue’s performance and benefits for shareholder value, the Board have regard to the ASX 100 resources index in respect of the current financial year and the previous four financial years. In FY18, Fortescue’s share price decreased from the FY17 closing price of A$5.22 to A$4.39 at the end of FY18. This represents a 16 per cent decrease compared with the ASX 100 Resources index which increased 34 per cent over the corresponding period. The Fortescue share price movement throughout FY18 was strongly correlated to movement in iron ore price. See graph on page 108. Example: The example below assumes that Executive A has an incentive opportunity of $100,000 and has elected to take 70 per cent of the incentive in shares. $100,000 $5.26 70% $30,000 $70,000 13,310 80% $24,000 10,648 Details of offer Nominal Value of full award VWAP at start of FY18 (1 to 7 July 2017) Participant Share Weighting Potential award Cash (30 per cent of opportunity) Nominal value of share rights (70 per cent) Share Rights (70 per cent of opportunity) (ie $70,000 ÷ $5.26) Example outcome Percentage of incentive opportunity achieved (company and personal performance) Cash paid (80% of cash component) No. Share Rights Vested (80% of share rights convert to vested rights) C1 US$/wmt 48 44 34 27 15 13 12 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Total million tonnes shipped (wmt) Revenue from iron ore operations - US$million 2018 2017 2016 2015 2014 170 170 169 165 124 6,775 8,335 6,947 8,390 11,611 EBITDA – US$million Net profit/(loss) - US$million 3,182 878 4,744 2,093 3,195 2,506 985 316 5,636 2,740 Return on Equity % Gearing (Book value of Debt/ Debt + Equity) Dividends paid A$ per share Share Price A$ Change in share price A$ Change in share price % 9 29 0.36 4.39 (0.83) (16) 23 31 0.32 5.22 1.72 49 12 45 0.05 3.50 1.59 83 4 56 0.13 1.91 (2.44) (56) 43 56 0.20 4.35 1.31 43 The non-IFRS information included in the table above has not been subject to audit. Fortescue Metals Group Ltd Annual Report FY18 5.5 FY18 ESSIP performance outcomes ESSIP awards are based on an assessment of Company and individual performance. Company performance comprises company financial and non-financial based measures designed to drive both a short and long term perspective on performance and protect the long term interests of shareholders by seeking to ensure efficient processing of reserves mined and financial objectives are met. Performance objectives are set by the Fortescue Board in line with the annual business planning and budgeting process and are established in line with a culture of stretch targets. The weighting for each target is reviewed annually and may vary from year to year to reflect its criticality, effort to achieve and impact on the business. In FY18, financial targets account for 80 per cent of the former and 70 per cent for the current CEO performance objectives with non-financial targets accounting for the remaining 20 to 30 per cent. The mix of financial and non- financial objectives for other executives varies and are specific to their roles and responsibilities. The financial performance measures were chosen as they represent the key drivers of financial performance (underlying EBITDA, NPAT) of the Company and provide a framework for delivering long term shareholder value, irrespective of the iron ore price. Objective and measurement Company financial performance Cost • C1 cost < US$11.50/wmt • Global competitiveness and level of improvement compared to global peers during the period • The level of improvement across key business drivers on the prior year • Any other relevant under or over performance or other criteria not stated above. In circumstances where performance against stretch targets is not accurately reflected in the level of achievement against stretch targets (whether under or over), the Board may exercise its discretion to increase or decrease the vesting level of the incentive and therefore the value awarded. In FY18, the Board set a number of key targets in respect of cost reduction across all operating and support functions and challenging production and growth targets. The Board determined the relative weighting and mix of performance objectives for the CEO and executives in order to deliver long term sustainable shareholder value. The ESSIP performance objectives in 2018 are shown below: The non-financial component of the ESSIP is measured with reference to an assessment against a range of measures. A majority of the non-financial measures are quantitative-based. Fortescue’s Board recognises the importance of supporting the Company’s strong, differentiated culture underpinned by its core Values, which is fundamental to corporate success. Fortescue has measured and rewarded high levels of employee engagement, demonstrated by the results of the Company’s annual Safety Excellence and Culture Survey, through both the ESSIP and more recently within the strategic measures of the LTIP. The strength of Fortescue’s values-based culture continues to be a core contributor to its success and accordingly to remuneration outcomes. A key element of Fortescue’s culture is to set challenging stretch targets and strive to outperform those targets. When deliberating on performance outcomes, the Board follows a rigorous assessment process including: • The degree of stretch in the measures and targets and the context in which the targets were set • The level of achievement against the stretch targets • The operating environment over the performance period and management’s ability to respond to unforeseen events • Financial performance and shareholder value generated FY18 Short Term Incentive Outcomes Weighting (% of STI) Former CEO Current CEO Executives Result Achievement 5 5 5 to 10 US$11.83 • Sustaining Capex < $3.07/wmt 5 5 5 to 10 US$3.05 Partially achieved. The C1 cost of $US11.83 has been normalised for budgeted fuel and exchange rate to ensure a like-for- like comparison to the target. The result remains short of the target but is a 8% reduction to a normalised C1 cost of US$12.82/wmt for FY17 In light of the continued year on year cost reduction and Fortescue maintaining its position as the lowest cost provider of seaborne iron ore to China, the Board has exercised its discretion to award 71.3% for this measure based on achieving 97% of the target Achieved. The Capex target has been met 121 08 | Remuneration Report Objective and measurement Company financial performance Profitability • EBITDA/Revenue Margin >50% FY18 Short Term Incentive Outcomes Weighting (% of STI) Former CEO Current CEO Executives Result Achievement 10 5 55.8% 0 to 10 Partially achieved. The underlying EBITDA margin adjusted for a C1 cost of US$11.83/ wmt based on the budgeted fuel and exchange rate has exceeded the target at 55.8% In recognition of the sensitivity of this measure to external factors, the Board has exercised its discretion to award 71.3% for this measure based on exceeding the target on a normalised basis • Contractual price realisation Production • Tonnes Shipped > 170.0 million wmt Growth • Specific Growth Objectives designed to increase Fortescue’s market value assessed at the absolute discretion of the Board 10 10 40 5 10 20 65% Not achieved. The contractual price realisation target has not been met 10 to 20 170 Achieved 0 to 20 Partially met Partially achieved. Significant progress has been made toward Fortescue’s growth strategy including the identification and assessment of opportunities locally and abroad and establishing a presence in Ecuador and Argentina The Board has determined that this measure will be awarded at 50% based on partial achievement Not achieved. Keeping people safe remains Fortescue’s highest priority. However, in FY18 TRIFR increased to 3.7 and this target has not been met Achieved. The Safety Excellence and Culture Survey participation rate and net promoter score exceeded the Company's target and overall this is an exceptional result This measure has been met Partially achieved. CEO personal objectives are assessed by the Board and CLT personal objectives are assessed by the CEO and recommended outcomes approved by the Board Company Non-Financial Performance Safety1 • TRIFR < 2.6 10 10 10 to15 3.7 Culture • Participation rate ≥85% • Positive Net Promotor Score 10 Included in personal KPIs Included in personal KPIs 94 +10 Personal Objectives Personal Objectives • 4 to 5 Personal Objectives set at Stretch Levels of performance against the FY18 Business Plan n/a 40 40 to 45 Partially Met 1 In the event of a fatality no award is made for the Safety KPI. The non-IFRS information included in the table above has not been subject to audit. In FY18, Mr Power was measured solely against Company performance outcomes thereby ensuring the alignment between Company performance, shareholder value and CEO reward for the performance year. Due to Ms Gaines’ appointment as CEO during the FY18 performance period, Ms Gaines has been measured on both Company performance and personal objectives related to her tenure as CFO. Payment of ESSIP awards are made in September 2018 after the release of the Company’s audited full year results and with final approval from the Board. Further details in regard to the Company’s full year results are set out in the Finance Report on page 55 to 105. Fortescue Metals Group Ltd Annual Report FY18 5.6 FY18 ESSIP awards Share rights granted under the ESSIP at the beginning of FY18 are shown below. All share rights vest if all ESSIP objectives are met. ESSIP share rights reflect the face value share price at the commencement of the performance year when share rights are granted. The ultimate value of these share rights to the executives will reflect either an improvement or decline in the Company’s share price over the performance period. The adoption of this approach is specifically to ensure that awards made to executives have a value which reflects sustainable value of shareholders investment in the Company. The ESSIP has awarded on average 69.2 per cent of maximum opportunity. The last column in the table below details the actual number of share rights that vested based on actual performance: Executive E Gaines N Power1 J Shuttleworth I Wells G Lilleyman ESSIP Share Rights granted ESSIP Share Rights lapsed ESSIP Share Rights forfeited ESSIP Share Rights vested 225,414 427,830 61,537 42,246 154,495 60,862 268,106 17,230 11,406 43,259 - - - - - 164,552 159,724 44,307 30,840 111,236 Unvested share rights lapse once the total at risk outcome of the ESSIP is determined. 1 Mr Power’s ESSIP participation is on a pro-rata basis and represents his accrued entitlement up to cessation of employment. 2018 A$ TFR Executive directors Maximum ESSIP opportunity (per cent of TFR) Weighting in shares (per cent) Maximum ESSIP cash opportunity Maximum ESSIP Shares opportunity - value at grant1 Nominal Value of ESSIP Vested Rights Total ESSIP cash awarded Share Price at grant $5.2591 Share Price at Vesting $4.3480 ESSIP outcome E Gaines2,3 1,268,125 93.5 N Power4 2,000,000 112.5 Other executives J Shuttleworth2,3 602,500 I Wells2,3 675,349 G Lilleyman2,3 1,083,333 67 66 75 100 100 80 50 100 - - 1,185,469 2,250,000 80,906 323,625 222,169 222,169 - 812,500 73 56 72 73 72 - - 865,397 715,473 840,0045 694,4805 58,253 233,013 192,645 162,183 162,188 134,090 - 585,003 483,656 1 Participant’s elected weighting in shares (minimum 50 per cent of the total award) divided by the strike price used to determine the number of share rights granted being the VWAP of Fortescue shares traded over the first five days of the Plan year ($5.26). 2 TFR reflects the pro-rata TFR of the FY18 year. 3 Maximum ESSIP opportunity reflects the pro-rata incentive arrangements associated with the prior position calculated from the commencement of the performance year up to the date of promotion plus pro-rata incentive arrangements associated with the new role calculated from the date of promotion to the end of the performance year. 4 Mr Power ceased employment on 19 February 2018. 5 Represents Mr Power’s accrued entitlement under the ESSIP awarded on a pro-rata basis. 5.7 Long Term Incentive Plan (LTIP) The LTIP is granted in the form of share rights at the commencement of the three year performance period with awards vesting subject to the achievement of the specified performance conditions. The three year performance period, performance measures and date of assessment and award for each of the LTIPs are as follows: Plan FY16 LTIP FY17 LTIP FY18 LTIP Performance Period Performance Measure Assessment and Award 1 July 2015 to 30 June 2018 1 July 2016 to 30 June 2019 1 July 2017 to 30 June 2020 Relative TSR AROE Strategic Measures September 2018 September 2019 September 2020 123 08 | Remuneration Report 5.7.1 LTIP operation The LTIP plans operate under the performance rights plan rules as approved by shareholders at the Company’s Annual General Meeting on 11 November 2015 and are granted in the form of share rights. Each share right entitles the holder (subject to achievement of the specified performance conditions) to one fully paid ordinary share in the Company for nil consideration. The LTIP is assessed against multiple performance measures weighted as follows: • Total Shareholder Return relative to the ASX 100 Resources comparator group (33 per cent) • Absolute Return on Equity (33 per cent) • A basket of strategic measures (34 per cent). The relative weighting between financial and strategic measures provides the ability to assess performance across a cyclical market. The inclusion of strategic measures also ensures alignment between short and long term value creation by ensuring long term value is not compromised. The combination of AROE and relative TSR ensure continued alignment with delivering shareholder value. Each of the performance measures provide for a determination by the Board that the Company has performed at a Threshold, Target or Stretch level. The TSR vesting schedule is as follows: These graduated levels of performance have been included in order to align and reward executives through market cycles. In the event that performance is at the target level in respect of the relevant performance measure, executives will be entitled to 100 per cent of the tranche of LTIP share rights to which the performance measure relates. Where performance is at the stretch level, executives will be entitled to 150 per cent of the tranche of LTIP share rights to which the performance measure relates. Nevertheless, if the target for any individual performance measure is exceeded, so that up to 150 per cent of the relevant number of LTIP share rights may vest, the maximum number of LTIP share rights that may vest across the three performance measures is capped in aggregate at 100 per cent of share rights granted under the plan. The Board believes that by incorporating the stretch level of performance into the vesting schedule, the Company will be better able to effectively reward and recognise executives in years where outstanding performance is achieved. This will serve as further motivation and assist in retention through more challenging periods. Total Shareholder Return (TSR) TSR is a measure of the performance of the Company’s shares over a three year period against the ASX 100 Resources Index (noted below). It combines share price appreciation and dividends paid to show the total return to the shareholder expressed as a percentage. Relative TSR hurdles are valuable because the Company needs to outperform a peer group of participants to receive any reward and therefore, is aligned to relative market performance. The ASX 100 Resources Index has been chosen as the comparator group because this is a transparent market indicator, includes Fortescue’s ASX Listed commodity market peers and represents the peer group that Fortescue competes with for investment. When formulating the vesting schedule for the TSR performance measure, the Board considered both local and international market practice. In line with the Company’s approach to setting stretch targets, the Board determined that a vesting schedule more aggressive than standard market practice was required in order to align executive reward for this performance measure with superior shareholder returns. The vesting criteria for both threshold and target have been set at the 60th percentile and 80th percentile (respectively) higher than standard market practice. The plan also provides for a premium grant of awards where Fortescue delivers the market leading total shareholder return over the performance period. Performance Below Threshold Threshold Target Stretch LTIP TSR target and vesting schedule Average TSR Portion of tranche that vests Below the 60th percentile Nil At the 60th percentile 25% of share rights vest At the 80th percentile 100% of share rights vest At the 100th percentile 150% of share rights vest Vesting between performance levels is calculated on a linear basis with the stretch element considered together with the achievement of all performance measures and subject to the aggregate performance cap Fortescue Metals Group Ltd Annual Report FY18 The Board acknowledge that a relative TSR hurdle can result in unintended outcomes. The intent is to ensure no windfall gains or undue penalty. In the event that TSR is negative but the relative TSR hurdle is achieved, the Board will consider overall performance and circumstances and may, at its absolute discretion, reduce the level of vesting or determine that no award will be made in respect to the TSR measure. Absolute Return on Equity (AROE) AROE performance is measured over the relevant three year performance period. As part of the Board’s consideration when determining FY16 LTIP AROE targets, consideration was given to the minimum AROE threshold. This consideration included the current market cycle at the time and most recent historical performance of the ASX 100 Resources comparator group. Historical Performance of the ASX 100 Resources: • Average AROE for FY11 to FY15 was 7 per cent. • Average AROE for FY15 was 2.6 per cent, down from 7 per cent in FY14. In light of this assessment, the Board determined a threshold AROE of 15 per cent for the FY16 LTIP based on the following: • 15 per cent is an aggressive target which exceeds the Company’s cost of equity • An annual 15 per cent AROE would be at least the 70th quartile of performance of the ASX 100 Resources index in any of the past five years • The stretch target of >30 per cent would be at least the 80th percentile of the ASX 100 Resources index in any of the past five years. The AROE vesting schedule is as follows: Performance Below Threshold Threshold Target Stretch LTIP AROE Target and Vesting Schedule Average ROE Portion of tranche that vests <15% 15% 30% >30% Nil 25% of share rights vest 100% of share rights vest 150% of share rights vest Vesting between Threshold and Target performance levels is calculated on a linear basis with the stretch element considered together with the achievement of all performance measures and subject to the aggregate performance cap. Strategic Measures Strategic Measures and associated key performance indicators are aimed at directing performance toward the achievement of the Company’s long term objectives (strategic objectives). The strong link between these strategic measures and the ESSIP measures ensure that long term value is not compromised by focussing on annual short term goals alone. The strategic objectives devised by the Board specifically relate to key milestones and objectives that are fundamental to the Company’s sustainability, continuing development and growth and delivery of shareholder value. The balanced scorecard approach ensures that executives continue to focus on the delivery of key milestones that drive long term value and that the Board has the ability to reward these achievements even in times when external factors outside the control of executives may impact shareholder returns. 125 08 | Remuneration Report Annual Strategic measures and objectives are as follows: Performance Measure Objective (KPI) Link to strategy Safety • Improve Fortescue’s relative position against the global Safety leadership and culture LTIP strategic measures and objectives Performance Resource management Growth Balance sheet management safety culture benchmark • Improve Fortescue’s relative position on the global cost curve with a future target to have a C1 cost which is the lowest in the world • Reduce all-in cash cost • Maximise production capacity without increasing capital expenditure budget • Increase long term resources quantity and value • No net decrease in mine life • Quantity, quality and diversity of tenements • Diversify customer base • Strategic options for growth in iron ore and other commodities • Reduce gearing (Debt/Debt + Equity) to target levels • Overall cost of financing • Maintain cash on hand at Board approved levels • Balance sheet flexibility Competitive position, cash flow and efficient use of capital Long term sustainability Growth and diversity of income Capital efficiency, cash flow and long term sustainability Performance targets for each strategic objective are set and assessed annually for each financial year of the relevant three year performance period. This approach provides the Company with the flexibility to respond to economic and industry challenges as they occur to ensure that performance targets are always relevant and drive long term shareholder value. Whether a strategic objective has been achieved is measured at the end of the relevant financial year on an outcome basis as follows: Outcome Did not meet Threshold Target Exceeded Score 0 1 2 3 Annual performance outcomes are assessed and approved by the Board at the end of each financial year with approved outcomes banked each year for inclusion in the overall LTIP assessment at the end of the three year performance period. The strategic measure vesting schedule is as follows: Performance Below Threshold Threshold Target Stretch LTIP strategic measure target and vesting schedule Score Portion of tranche that vests <5 5 10 15 Nil 25% of share rights vest 100% of share rights vest 150% of share rights vest Vesting between performance levels is calculated on a linear basis with the stretch element considered together with the achievement of all performance measures and subject to the aggregate performance cap Share rights vest at the end of the three year performance period subject to performance against the three measures. 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. Fortescue Metals Group Ltd Annual Report FY185.7.2 FY16 LTIP performance outcomes The FY16 LTIP has achieved all three performance measures as shown in the table below resulting in 86.2 per cent of share rights vesting under this plan. Measure Weighting Threshold Result Achieved FY16 LTIP performance outcomes TSR AROE Strategic Measures FY16 LTIP vesting outcome 33% 33% 34% 100% 5.7.3 FY16 LTIP TSR Performance 60th percentile 92.8 percentile 15% 5 out of 15 15.2% 10 out of 15 132% 26% 100% Weighted Average 43.6% 8.6% 34.0% 86.2% In the period from 1 January 2015 to 30 June 2018, Fortescue achieved a TSR of 139 per cent and a percentile ranking of 92.8 per cent. Based on the percentile ranking, 132 per cent of share rights granted in respect to the TSR measure will vest. TSR Performance FY16 LTIP 139% 92.8 132% TSR Percentile Ranking Vesting Outcome Details of the FY16 comparator group and TSR Ranking is shown in the table below. Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 BlueScope Steel Limited Fortescue Metals Group Ltd South 32 Limited Alumina Limited Sims Metal Management Limited Rio Tinto Limited WorleyParsons Limited Newcrest Mining Limited Iluka Resources Limited BHP Billiton Limited Oil Search Limited Caltex Australia Limited Woodside Petroleum Limited Origin Energy Limited Santos Limited TSR 493% 139% 97% 95% 65% 65% 63% 61% 47% 29% 18% 7% 6% -20% -25% Percentile rank 100% 92.8% 85.7% 78.5% 71.4% 64.2% 57.1% 50.0% 42.8% 35.7% 28.5% 21.4% 14.2% 7.1% 0.0% Note: TSR is calculated over the defined performance period, being the three years up to and including 30 June 2018. 127 08 | Remuneration Report 5.7.4 FY16 LTIP AROE performance The Board has taken the approach (which is consistent with the approach taken on TSR) to ensure that AROE performance does not result in unintended windfall gains or undue penalty. At the time of making the decision to refinance and repay debt, as part of the Capital Management Strategy, the Board acknowledged the costs of redemption. The costs, which have the benefit of lowering borrowing costs and provide significant future benefit to earnings, have been excluded from the statutory NPAT for the purposes of calculating AROE. Fortescue’s AROE performance over the three years ending 30 June 2018 based on the underlying NPAT (which excludes one-off items relating to the cost of company refinancing activities) over the three year performance period is 15.2 per cent. The AROE performance threshold of 15 per cent has been met and accordingly, 26 per cent of share rights have vested in respect to this measure. Year ending 30 June 2016 30 June 2017 30 June 2018 Average ROE Vesting Outcome AROE 12.4 23.1 11.1 15.2 26% 5.7.5 FY16 LTIP Strategic Measures Performance Performance Measure Objective (KPI) Outcome LTIP strategic measures and objectives Safety • Improve Fortescue’s relative position against the global safety culture benchmark Performance • Improve Fortescue’s relative position on the global cost curve with a future target to have a C1 cost which is the lowest in the world • Reduce all-in cash cost • Maximise production capacity without increasing capital expenditure budget Achieved target. Improved from 69th percentile to 77th percentile over the three years The combination of long term safety culture as well as improvements to both the Safety Excellence and Culture Survey results and injury frequency rate is our strategic goal Achieved target C1 costs have reduced from US$27.15/wmt in FY15 to US$12.36/wmt for FY18, representing a 54.5% reduction During this period, Fortescue was officially recognised as the lowest cost supplier of seaborne iron ore into China, based on Metalytics Resource Sector Economic Analysis, a position which has been maintained Despite market volatility in the sales price of iron ore, the reduction in total delivered costs resulted in an average EBITDA margin of US$24/dmt over the three year period Target sustaining capital expenditure budgets were also achieved whilst achieving production targets over the three years Fortescue Metals Group Ltd Annual Report FY18Resource management • Increase long term resources quantity and value • No net decrease in mine life • Quantity, quality and diversity of tenements Growth • Diversify customer base • Strategic options for growth in iron ore and other commodities Achieved target FY18 reserves and resources statement indicates maintenance of 20 years mine life, based on Life of Mine plans. Year on year cost savings have been achieved without reducing long term mine life ensuring shareholder value. The addition of 540m wmt from the Eliwana project facilitates the sustainable production of a 60 per cent Fe product which will be introduced to the market from existing operations in the second half of FY19. The US$1.275bn Eliwana mine and rail project significantly increases mining inventory into Fortescue’s integrated mine, rail and port operation Achieved target Fortescue’s non-China sales have increased significantly by 357% between FY15 and FY18. Importantly, these sales were into Japan and Korea together with India. India has recently become the third largest steel producing country and represents a significant growth market Considerable progress has been made in assessing growth opportunities in other commodities including in South America as well as expanding iron ore operations through the development of the Eliwana mine Balance sheet management • Reduce gearing (Debt/Debt + Equity) to target Achieved target levels • Overall cost of financing • Maintain cash on hand at Board approved levels • Balance sheet flexibility The successful execution of Fortescue’s Capital Management Strategy over this three year period has reduced gross debt and lowered the Company’s average cost of capital. The restructured debt facilities have investment grade terms and conditions, providing additional flexibility and the strengthened balance sheet supports future growth. The team have outperformed over the three year period in relation to balance sheet management 129 08 | Remuneration Report 5.7.6 FY16 LTIP awards Share Rights granted under the LTIP at the beginning of FY16 are shown below. The last column details the actual number of share rights that vested based on actual performance. • Unvested share rights lapse once the outcome of the LTIP is determined • Ms Gaines and Mr Lilleyman commenced after the performance period had commenced and accordingly, did not participate in the FY16 LTIP • Mr Power’s LTIP participation is on a pro-rata basis and represents his accrued entitlement up to cessation of employment on 19 February 2018 • Mr Power’s LTIP award has been capped at the share price at grant (being $1.80) thereby reducing the number of share rights that vested. FY16 LTIP Executive E Gaines N Power J Shuttleworth I Wells G Lilleyman LTIP Share Rights Granted LTIP Share Rights Lapsed LTIP Share Rights Forfeited LTIP Share Rights Vested - 1,666,482 210,394 189,465 - - 1,137,809 29,034 26,146 - - - - - - - 528,673 181,360 163,319 - 5.8 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 Salary Sacrifice Share Plan (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 because they are issued in lieu of salary which would otherwise be payable and are subject to a monetary limit of A$5,000 per annum. 6. HOW EXECUTIVE REMUNERATION IS REPORTED Executive remuneration is reported in a number of ways throughout this report, differences of which are driven by the following: • Total remuneration package – represents the current remuneration package at stretch target comprising fixed remuneration plus the nominal value of the ESSIP and LTIP at the applicable participating percentage • Actual remuneration paid – represents the nominal value to the individual and includes fixed remuneration, any cash incentives paid and the nominal value of equity at the time share rights vest - Value received by executives is subject to performance and share price movement aligned with shareholder value. Refer to the table on the following page for further information • Statutory remuneration – represents remuneration including share based payments calculated in accordance with Australian Accounting Standards, including the fair value attributed to the FY18 ESSIP share component plus one year each of the FY16, FY17 and FY18 LTIP. 6.1 Actual remuneration paid in FY18 The Board follows a structured process for ensuring that executive remuneration is aligned to shareholder value and stretch targets are set for the incentive plans which are reflective of market conditions and other challenges facing the industry. The nominal value of actual pay realised by executives is reflective of the following: • FY18 ESSIP is generally awarded partly as vested rights (minimum 50 up to 100 per cent determined on election) with the balance (0-50 per cent) awarded in cash; FY18 ESSIP share rights granted at the beginning of the performance period at a face value share price of A$5.26 • FY18 ESSIP vested rights awarded have a nominal value based on A$4.35 being the five day VWAP at the beginning of FY18. The decrease in share price over the respective performance periods has resulted in an decrease in equity value to executives in respect to this plan • FY16 LTIP is awarded solely in vested rights • FY16 LTIP share rights granted at the beginning of the performance period at a face value share price of A$1.80 • The pro-rata number of share rights that would have vested to Mr Power has been reduced to reflect the FY16 award value capped at $1.80 per share • FY16 LTIP vested rights awarded have a nominal value based on A$4.35 being the five day VWAP at the beginning of FY18. Other than for Mr Power the increase in share price over the respective performance periods has resulted in an increase in equity value to executives in respect to these plans. Fortescue Metals Group Ltd Annual Report FY18 The following table shows the nominal remuneration value realised by the individual and includes fixed remuneration, any cash incentives paid and the nominal value of equity at the time the share rights vest or shares are awarded. The following key points should be read in conjunction with the table below: • Ms Gaines and Mr Lilleyman were not eligible to participate in the FY16 LTIP • Mr Power’s FY18 ESSIP and FY16 LTIP represents his pro-rata accrued entitlements with his FY16 LTIP capped at grant price • Mr Power’s other payment relates to an ex-gratia cash payment of $1,006,850 plus annual and long service leave paid out on cessation of employment • Mr Wells participated in a retention plan (relating to a prior role), the retention period for which was from 1 January 2017 to 30 June 2018. Other payment relates to the retention payment made upon the conclusion of the retention period. Fixed1 remuneration $ 1,239,830 1,266,328 Name E Gaines N Power2 - - FY 18 ESSIP cash paid $ Nominal Value of FY18 ESSIP vested rights $ Nominal Value of FY16 LTIP Vested Rights $ Other payment $ 715,473 - - 694,4803 2,298,6703 1,006,850 634,776 5,901,104 Leave entitlement on cessation of employment $ Nominal total remuneration earned in FY18 $ 1,955,303 J Shuttleworth 598,831 58,253 192,645 788,553 - I Wells 654,606 162,183 134,090 710,711 426,342 G Lilleyman 1,072,619 - 483,656 - - 1,638,282 2,087,932 1,556,275 1 Fixed remuneration includes cash salary, paid leave and superannuation. 2 Mr Power ceased employment on 19 February 2018. 3 Pro- rata ESSIP and LTIP entitlement. The LTIP value has been capped at $1.80 per share. The non IFRS information included in the table above has not been subject to audit. 6.2 Statutory remuneration disclosures for executives Statutory remuneration disclosures are prepared in accordance with Australian Accounting Standards and include share based payments expensed during the financial year, calculated in accordance with AASB 2 Share based payments. The estimated fair value of the short term share rights was determined using a trinomial option pricing model and the estimated fair value of the long term share rights was determined using a combination of analytical approaches, binomial tree and Monte Carlo simulation. The fair value estimation takes into account the exercise price, the effective life of the right, 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 right. Statutory remuneration differs significantly from actual remuneration paid to executives due to the accounting treatment of share based payments. For details of remuneration actually paid to the Chief Executive Officer and executives in FY18 refer to section 6.1. 6.21 Statutory Remuneration Disclosures for year ending 30 June 2018 • Mr Power’s FY17 and FY18 LTIP share rights were forfeited on cessation of employment • Mr Power’s other payment relates to an ex-gratia payment of A$1,006,850 and accrued leave entitlements paid out on resignation • Mr Wells other payment is in respect to a retention plan which concluded on 30 June 2018. 131 08 | Remuneration Report FY18 Short-term employee benefits Post employment benefits End of service Share-based payments Total Statutory Remuneration ESSIP cash value for 2018 Plan Year Non- monetary benefits Cash salary and fees Superann- uation Other Payment ESSIP Share value $A $A $A $A $A $A LTIP Share value $A Total $A Executive Directors E Gaines N Power1 Executives 1,214,830 1,248,816 - - 4,223 28,582 J Shuttleworth 578,782 58,253 - I Wells 634,557 162,183 4,223 G Lilleyman 1,047,619 - - 1 Mr Power ceased employment on 19 February 2018. 25,000 17,512 20,049 20,049 25,000 - 860,316 416,370 2,520,739 1,641,626 886,468 (1,087,517) 2,735,487 - 234,554 334,372 1,226,010 426,342 163,723 362,743 1,773,820 - 610,003 337,670 2,020,292 6.22 Statutory Remuneration Disclosures for year ending 30 June 2017 • Mr Pearce’s ESSIP and LTIP share rights were forfeited on resignation • Mr Pearce’s other payment relates to accrued annual leave and long service leave entitlements paid out on resignation • Mr Cernotta’s ESSIP and LTIP share rights were forfeited on resignation • Mr Cernotta’s FY17 ESSIP award represents pro-rata accrued entitlements paid as a cash payment • Mr Cernotta’s other payment relates to an ex-gratia payment of A$947,596 (inclusive of notice) and accrued annual leave and long service leave entitlements paid out on resignation. FY17 Short-term employee benefits Post employment benefits End of service Share-based payments Total Statutory Remuneration ESSIP cash value for 2017 Plan Year (incl. the FY17 ESSIP additional Stretch Objective) Cash salary and fees Non- monetary benefits Superann- uation Other payment ESSIP Share value LTIP Share value $A $A $A $A $A $A $A Executive Directors N Power E Gaines1 S Pearce2 Executives G Lilleyman3 N Cernotta4 1,963,000 2,125,000 403,514 551,250 422,973 - 481,269 500,000 483,590 448,702 8,528 631 9,883 - - 1 Ms Gaines commenced as CFO and Executive Director on 6 February 2017. 2 Mr Pearce ceased employment on 31 December 2016. 3 Mr Lilleyman commenced employment on 1 January 2017. 4 Mr Cernotta ceased employment on 31 January 2017. 5 Ms Gaines ESSIP share value is the cash value of share rights. 30,000 12,304 - - 1,424,582 1,918,947 337,6445 - 13,900 283,813 - (447,741) 15,000 - 559,838 - 19,904 972,123 - (385,809) Total $A 7,470,057 1,305,343 282,828 1,556,107 1,538,510 Fortescue Metals Group Ltd Annual Report FY186.3 Details of share right grants to executive directors At the 2015 AGM, shareholders approved the maximum number of share rights to be granted to Mr Power without further shareholder approval as shown in the table below. Actual performance rights are granted annually by the Board in accordance with the Performance Rights Plan. Mr Power Maximum Share right grant ESSIP Share Rights LTIP Share Rights Total FY16 to FY18 3,671,425 4,895,232 8,566,657 Share rights granted in FY16, FY17 and FY18 1,352,043 3,035,007 4,387,050 At the 2017 AGM, shareholders approved the maximum number of share rights to be granted to Ms Gaines without further shareholder approval as shown in the table below. Actual performance rights are granted annually by the Board in accordance with the Performance Rights Plan. Ms Gaines ESSIP Share Rights LTIP Share Rights Total Maximum Share right grant FY16 to FY18 Share rights granted in FY16, FY17 and FY18 247,051 209,637 456,688 247,051 209,637 456,688 Ms Gaines was granted an additional 68,186 share rights in respect to the FY18 ESSIP and 90,915 additional share rights in respect to the FY18 LTIP as a result of her appointment to the role of CEO on 19 February 2018. Any shares awarded in respect to the additional share rights will be purchased on market. The issue of share rights to participants will not have a diluting effect on the percentage interest of shareholders holdings if the share rights vest into shares acquired on market. 6.4 Details of share based payments relating to LTIP The following table provides details of the number of share rights granted under the LTIP during the financial years ended 30 June 2016 to 30 June 2018. The value of the rights has been determined using the grant date fair value. • The estimated fair value of the long term share rights was determined using a combination of analytical approaches, binomial tree and Monte Carlo simulation. The fair value estimation takes into account the exercise price, the effective life of the right, 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 right • Mr Power’s share rights for the FY17 and FY18 LTIP were forfeited upon cessation of employment on 19 February 2018 • Mr Power’s LTIP participation is on a pro-rata basis and represents his accrued entitlement up to cessation of employment on 19 February 2018 • Mr Power’s LTIP award has been capped at the share price at grant (being $1.80) thereby reducing the number of share rights that vested • Ms Gaines and Mr Lilleyman commenced during the LTIP performance period and were not granted share rights under the FY16 or FY17 LTIP. 133 08 | Remuneration Report Name LTIP plan Grant date* Performance period No. Share rights granted Value per share right granted Value of rights granted at grant date % Performance achieved Vested Forfeited / lapsed E Gaines FY16 14/12/2015 FY17 20/09/2016 FY18 08/11/2017 FY18 27/12/2017 N Power FY16 14/12/2015 FY17 20/09/2016 FY18 06/09/2017 J Shuttleworth FY16 14/12/2015 FY17 20/09/2016 FY18 06/09/2017 FY18 27/12/2017 I Wells FY16 14/12/2015 FY17 20/09/2016 FY18 06/09/2017 FY18 27/12/2017 G Lilleyman FY16 14/12/2015 FY17 20/09/2016 FY18 06/09/2017 FY18 27/12/2017 1/7/15 to 30/6/18 1/7/16 to 30/6/19 1/7/17 to 30/6/20 1/7/17 to 30/6/20 1/7/15 to 30/6/18 1/7/16 to 30/6/19 1/7/17 to 30/6/20 1/7/15 to 30/6/18 1/7/16 to 30/6/19 1/7/17 to 30/6/20 1/7/17 to 30/6/20 1/7/15 to 30/6/18 1/7/16 to 30/6/19 1/7/17 to 30/6/20 1/7/17 to 30/6/20 1/7/15 to 30/6/18 1/7/16 to 30/6/19 1/7/17 to 30/6/20 1/7/17 to 30/6/20 - - - - - - - - - - - - 209,637 $4.15 $869,994 Determined in 2020 90,915 $4.17 $379,116 Determined in 2020 1,666,482 $1.72 $2,866,349 86.2 528,673 1,137,809 798,085 $4.61 $3,679,172 570,440 $4.98 $2,840,791 - - - - 798,085 570,440 210,394 $1.72 $361,878 86.2 181,360 29,034 100,759 $4.61 $464,499 Determined in 2019 72,019 $4.98 $358,655 Determined in 2020 30,543 $4.17 $127,364 Determined in 2020 189,465 $1.72 $325,880 86.2 163,319 26,146 109,639 $4.61 $505,436 Determined in 2019 81,068 $4.98 $403,719 Determined in 2020 31,585 $4.17 $131,709 Determined in 2020 - - - - - - - - - - - - 190,147 $4.98 $946,932 Determined in 2020 15,846 $4.17 $66,078 Determined in 2020 * Grant date is determined in accordance with AASB 2 share based payments. Fortescue Metals Group Ltd Annual Report FY187. EXECUTIVE CONTRACT TERMS Total Remuneration Package and other terms of employment for executives are formalised in a service agreement. The CEO and executives are employed on a rolling basis with no specified fixed term. The CEO and executives are remunerated on a total fixed remuneration (TFR) basis inclusive of superannuation and allowances. The major terms of the agreements relating to remuneration are set out in the table below: Position Executive TFR (A$) Maximum ESSIP opportunity Maximum LTIP opportunity % of TFR A$ % of TFR A$ Nominal Value of Total Remuneration Package at Maximum Opportunity Chief Executive Officer Deputy Chief Executive Officer Chief Financial Officer Chief Operating Officer E Gaines 1,500,000 112.5 1,687,500 150 2,250,000 5,437,500 J Shuttleworth 700,000 I Wells 825,000 G Lilleyman 1,200,000 75 75 75 525,000 618,750 100 100 700,000 1,925,000 825,000 2,268,750 900,000 100 1,200,000 3,300,000 Executives are required to provide written notice of three or six months (as specified in their individual service agreement) to terminate their employment. Should executives not provide sufficient notice they will forfeit the monetary equivalent (calculated based on TFR) of any shortfall in the notice period. Termination benefits for KMP comply with the limits set by the Corporations Act 2001 that do not require shareholder approval. 8. NON-EXECUTIVE DIRECTOR (NED) REMUNERATION 8.1 NED Remuneration Policy Fortescue’s policy on NED remuneration requires that NED fees are: • Not ‘at risk’ to reflect the nature of their responsibilities and safeguard their independence • Market competitive with fees set at levels comparable with NED remuneration of comparable companies. 8.2 NED fee pool NEDs receive fees for both Board and Committee membership. The payment of additional fees for serving on a Committee recognises the additional time commitment required by NEDs who serve on a Committee. The maximum aggregate remuneration payable to NEDs is $2.5 million, which was approved by shareholders at the Annual General Meeting on 8 November 2017. There have been no further changes to the aggregate fee pool since November 2017. The Board will not seek any increase to this fee pool at the 2018 AGM. The Board reviewed and increased the fees payable to both the Deputy Chair and Lead Independent Director and the Deputy Chair. The increases reflect the additional workload undertaken by each of these Directors. NED fees (inclusive of superannuation) effective from 1 July 2018 are outlined in the table below: Position Board Chairman* Deputy Chair and Lead Independent Director Deputy Chair Non-Executive Director Audit & Risk Management Committee Chair Audit & Risk Management Committee Member Remuneration & Nomination Committee Chair Remuneration & Nomination Committee Member China Advisory Group Board of Representatives Finance Sub-Committee Member *The Chairman of the Board has elected to forego Directors' fees and receives no form of remuneration. Non-Executive directors do not receive retirement benefits, nor do they participate in any incentive programs of the Company. Fee (A$) 0 529,500 262,900 154,000 44,000 16,500 44,000 16,500 66,000 6,600 135 08 | Remuneration Report The remuneration of non-Executive directors for the year ended 30 June 2018 and 30 June 2017 is detailed below. 2018 $A A Forrest AO M Barnaba AM S Warburton J Baderschneider J Morris OAM P Bingham-Hall C Zhiqiang1 C Huiquan2 S Coe3 CH, KBE 1 C Zhiqiang appointed 18 January 2018 2 C Huiquan retired 18 January 2018 3 S Coe appointed 21 February 2018. 2017 $A A Forrest AO O Hegarty1 M Barnaba AM E Gaines2 C Huiquan G Raby3 S Warburton J Baderschneider J Morris OAM4 P Bingham-Hall5 Base fees Committee fees Other benefits - 394,410 217,816 154,000 139,367 139,367 69,962 84,037 54,709 - 56,917 60,001 - 29,864 20,904 - - - - - - - - - - - - Superann- uation - 24,506 24,487 - 17,769 16,828 - - - Total - 475,833 302,304 154,000 187,000 177,099 69,962 84,037 54,709 Base fees Committee fees Other benefits Superann- Total - 72,831 169,231 83,371 154,000 81,596 139,367 154,000 87,025 87,025 - 6,426 58,591 12,505 - 28,404 51,551 - 10,666 7,466 - - - - - - - - - - uation - 22,493 23,921 9,817 - - 20,046 - 10,257 9,921 - 101,750 251,743 105,693 154,000 110,000 210,964 154,000 107,948 104,412 1 O Hegarty retired 5 December 2016 2 E Gaines commenced as CFO and Executive Director on 6 February 2017 3 G Raby retired 5 December 2016 4 J Morris OAM appointed 9 November 2016 5 P Bingham-Hall appointed 9 November 2016. Fortescue Metals Group Ltd Annual Report FY189. EQUITY INSTRUMENT DISCLOSURES RELATING TO KEY MANAGEMENT PERSONNEL 9.1 Unvested Share Rights The movement during the reporting period in the number of unvested share 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: 2018 Name Balance at the start of the year Granted1 Exercised / converted Forfeited / lapsed Balance at the end of the year Vested Unvested Not exercisable Non-Executive Directors of Fortescue A Forrest AO M Barnaba AM S Warburton J Baderschneider J Morris OAM P Bingham-Hall C Huiquan2 C Zhiqiang3 S Coe4 CH,KBE Executive Directors of Fortescue E Gaines N Power5 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 615,789 (89,823) - - - - - - - - - - - - - - - - - - - 525,966 3,424,686 998,270 (299,282) (2,029,362) 2,094,312 Other key management personnel of Fortescue J Shuttleworth I Wells G Lilleyman 467,526 412,285 99,761 164,099 154,899 360,488 (71,942) (38,283) (91,780) (84,431) (74,898) (7,981) 475,252 454,003 360,488 1 Share rights were granted in accordance with the short term and long term share rights plans, as disclosed in note 18 of the Financial Report. 2 H Cao retired on 18 January 2018. 3 Z Cao appointed on 18 January 2018. 4 S Coe appointed 21 February 2018. 5 Mr Power ceased employment on 19 February 2018. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 525,966 525,966 2,094,312 2,094,312 475,252 454,003 360,488 475,252 454,003 360,488 2017 Name Balance at the start of the year Granted1 Exercised / converted Forfeited / lapsed Balance at the end of the year Vested Unvested Not exercisable Non-Executive Directors of Fortescue A Forrest AO O Hegarty2 C Huiquan G Raby4 M Barnaba AM S Warburton J Baderschneider J Morris OAM5 P Bingham-Hall6 Executive Directors of Fortescue E Gaines3 N Power - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3,805,250 1,097,367 (838,181) (639,750) 3,424,686 Other key management personnel of Fortescue S Pearce7 G Lilleyman8 N Cernotta9 1,416,675 - (312,593) (1,104,082) - - 99,761 - - 99,761 934,880 347,500 (195,250) (1,087,130) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3,424,686 3,424,686 - - 99,761 99,761 - - 1 Share rights were granted in accordance with the short term and long term share rights plans, as disclosed in note 18 of the Financial Report. 2 O Hegarty retired 5 December 2016. 3 E Gaines commenced as CFO and Executive Director on 6 February 2017. 4 G Raby retired 5 December 2016. 5 J Morris OAM appointed 9 November 2016. 6 P Bingham-Hall appointed 9 November 2016. 7 S Pearce ceased employment 31 December 2016. 8 G Lilleyman commenced employment on 1 January 2017. 9 N Cernotta ceased employment 31 January 2017. 137 08 | Remuneration Report 9.2 Share holdings (Ordinary Shares) The numbers of shares and vested share rights 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: 2018 Name Received on conversion of rights Held at 1 July 2017 Non-Executive Directors of Fortescue A Forrest AO M Barnaba AM S Warburton J Baderschneider J Morris OAM P Bingham-Hall C Huiquan2 C Zhiqiang3 S Coe CH,KBE 1,038,800,000 20,000 50,750 138,000 - 35,000 - - - - - - - - - - - - Executive Directors of Fortescue E Gaines N Power4 50,000 2,951,238 89,293 299,282 Other key management personnel of Fortescue J Shuttleworth I Wells G Lilleyman 100,258 71,050 - 71,942 38,283 91,780 1 Negative amounts reflect the result of leaving the Company during the year. 2 C Huiquan retired on 18 January 2018. 3 C Zhiqiang appointed on 18 January 2018. 4 Mr Power ceased employment on 19 February 2018. 2017 Issued Purchases Sales Transfers Other1 - - - - - - - - - - - - - - - - - - 5,250 1,516 - - - 85,000 - - - - - - - - - - - - - - (299,282) - - - - - - - - - - - - - - - - - Held at 30 June 2018 - 1,038,800,000 - - - - - - - - - (2,951,238) - - - 20,000 50,750 138,000 5,250 36,516 - - - 224,823 - 172,200 109,333 91,780 Name Directors of Fortescue A Forrest AO O Hegarty2 C Huiquan G Raby4 M Barnaba AM S Warburton J Baderschneider J Morris OAM5 Held at 1 July 2016 Received on conversion of rights Issued Purchases Sales Transfers Other1 1,037,479,247 40,000 - 8,000 20,000 50,750 138,000 - - 50,000 - - - - - - - - - - - - - - 1,320,753 - - - - - - - - - SINCE FIRST ORE 35,000 - - PRODUCED - - - - - - - - - - - - - - - - - - - - (40,000) - (8,000) - - - - - TONNES IRON - ORE SHIPPED - - - P Bingham-Hall6 ANNIVERSARY Executive directors of Fortescue E Gaines3 N Power 2,526,307 838,181 Other key management personnel of Fortescue G Lilleyman8 S Pearce7 N Cernotta9 - 227,305 50,000 - 312,593 195,250 - - - - - (413,250) - 104 - - - - - - - - - - (540,002) (245,250) Held at 30 June 2017 - 1,038,800,000 - - - 20,000 50,750 138,000 - 35,000 50,000 2,951,238 - - - 1 Negative amounts reflect the result of leaving the Company during the year. 2 O Hegarty retired 5 December 2016. 3 E Gaines commenced as CFO and Executive Director on 6 February 2017. 4 G Raby retired 5 December 2016. 5 J Morris OAM appointed 9 November 2016. 6 P Bingham-Hall appointed 9 November 2016. 7 S Pearce ceased employment 31 December 2016. 8 G Lilleyman commenced employment on 1 January 2017. 9 N Cernotta ceased employment 31 January 2017. Fortescue Metals Group Ltd Annual Report FY1809 Corporate Directory 139 09 | Corporate Directory Shareholder information at 20 August 2018 Top 20 holders of ordinary shares Rank Name Shares number % of issued capital 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Minderoo Group Pty Ltd HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Valin Investments (Singapore) Pte Ltd Citicorp Nominees Pty Limited Valin Resources Investments (Singapore) Pte Ltd Emichrome Pty Ltd AMNL Financing Pty Ltd The Trust Company Limited Bnp Paribas Noms Pty Ltd National Nominees Limited BNP Paribas Nominees Pty Ltd AMNL Financing Pty Ltd Valin Mining Investments (Singapore) Pte Ltd Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Mr William Graeme Rowley HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited-Gsco Eca Pacific Custodians Pty Limited Substantial holders Name 1 2 Minderoo Group Pty Ltd and John Andrew Forrest Hunan Valin Iron and Steel Group Company 918,806,548 506,202,206 270,902,886 228,007,497 163,318,041 130,776,216 93,045,000 71,365,581 64,968,641 50,559,189 34,826,304 33,596,599 30,365,261 11,161,764 9,285,673 8,613,891 8,244,951 7,812,276 7,116,225 6,437,999 29.51 16.26 8.70 7.32 5.24 4.20 2.99 2.29 2.09 1.62 1.12 1.08 0.98 0.36 0.30 0.28 0.26 0.25 0.23 0.21 2,655,412,748 85.28 Shares number % of issued capital 1,038,800,000 434, 914,118 33.36 13.97 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 Shareholders number Shares number % of issued capital 26,217 27,798 8,305 6,240 377 68,937 12,747,570 73,482,822 63,997,575 152,731,076 2,810,839,108 3,113,798,151 0.41 2.36 2.06 4.90 90.27 100.00 Unmarketable parcels There were 3,568 members holding less than a marketable parcel of shares in the Company. Fortescue Metals Group Ltd Annual Report FY18 Glossary Australian Accounting Standards Australian Accounting Standards are developed, issued and maintained by the Australian Accounting Standards Board, an Australian Government agency under the Australian Securities and Investments Commission Act 2001. AMMA Australian Mines and Metals Association. ASX Australian Securities Exchange. ASX 100 Resource Index A capitalisation-weighted index which measures the performance of the resources sector of the ASX 100. The index is calculated on an end of day basis. ASX Corporate Governance Principles and Recommendations (Third Edition) Principles and recommendations developed and released by the ASX Corporate Governance Council on the corporate governance practices to be adopted by ASX listed entities and which are designed to promote investor confidence and to assist listed entities to meet shareholder expectations. Beneficiation Beneficiation is a process whereby ore is pulverised into fine particles and the higher grade material is separated, often magnetically, from the gangue (waste). BID Bedded Iron Deposit. bt Billion tonnes. C1 Cost Operating costs of mining, processing, rail and port on a per tonne basis, including allocation of direct administration charges and production overheads. CFR A delivery term that indicates that the shipment price includes the cost of goods, freight costs and marine costs associated with a particular delivery. Chichester Hub Fortescue’s mining hub with two operating iron ore mines, Cloudbreak and Christmas Creek, located in the Pilbara, approximately 250 kilometres south east of Fortescue’s Herb Elliott Port in Port Hedland. CID Channel Iron Deposit. CO2e Carbon dioxide equivalent which is the internationally recognised measure of greenhouse gas emissions. Contractors Non-Fortescue employees, working with the Company to support specific business activities. Corporations Act Corporations Act 2001 of the Commonwealth of Australia. HSES Health, safety, environment and security. ICMM The International Council on Mining and Metals, established in 2001 to act as a catalyst for performance improvement in the mining and metals industry. DID Detrital Iron Deposit. Direct employees Total number of employees including permanent, fixed term and part-time. Does not include contractors. dmt Dry metric tonne. dmtu Dry metric tonne unit. EPA Environmental Protection Authority. Fe The chemical symbol for iron. FIFO Fly-in Fly-out is defined as circumstances of work where the place of work is sufficiently isolated from the worker’s place of residence to make daily commute impractical. Fortescue Fortescue Metals Group Ltd (ACN 002 594 872) and its subsidiaries. Fortescue blend A blend of ore from Christmas Creek and Firetail mines, with an iron grade of 58.2pct fe Fortescue River Gas Pipeline A 270 kilometre gas pipeline which delivers natural gas from the Dampier to Bunbury Pipeline to the main power station in the Solomon Hub. FY Refers to a Financial Year. Gearing Debt / (debt + equity). GJ Gigajoules. GRI The Global Reporting Initiative (GRI) is an international independent organisation which has developed a standard for sustainability reporting and disclosure. Ha Hectares. Hematite An iron ore compound with an average iron ore content of between 57 per cent and 63 per cent Fe. Hematite deposits are typically large, close to the surface and mined via open pits. Indigenous Land Use Agreements (ILUA) Statutory agreement between a native title group and others about the use of land and waters. Indicated Resource As defined in the JORC Code, that part of a mineral resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence. It is based on exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. The locations are too widely or inappropriately spaced to confirm geological and/or grade continuity but are spaced closely enough for continuity to be assumed. Inferred Resource As defined in the JORC Code, that part of a mineral resource for which tonnage, grade and mineral content can be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological and/or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which may be limited or of uncertain quality and reliability. International Financial Reporting Standards International Financial Reporting Standards (IFRS) is a single set of accounting standards, developed and maintained by the IASB with the intention of those standards being capable of being applied on a globally consistent basis. IUCN International Union for Conservation of Nature. JORC Code The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves 2004 or 2012 Edition, as the case may be, each prepared by the Joint Ore Reserves Committee of the Australian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Mineral Council of Australia, as amended or supplemented from time to time. 141 09 | Corporate Directory Key Management Personnel Key Management Personnel (KMP) are 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. Kings CID Fines Fortescue’s stand-alone product produced from Channel Iron Deposit Ore from its Kings mine in the Solomon Hub, with an iron grade of 57.3 per cent Fe. kL Kilolitre. Local supplier Suppliers based in the Pilbara region. LOM Life of Mine, being the number of years over which available reserves will be extracted. m3 Cubic metres. Magnetite An iron ore compound that is typically a lower grade ore than Hematite iron ore because of a lower iron content. Magnetite ore requires significant beneficiation to form a saleable concentrate. After beneficiation, Magnetite ore can be palletised for direct use as a high-grade raw material for steel production. Measured Resource As defined in the JORC Code, that part of a mineral resource for which tonnage densities, shape, physical characteristics, grade and mineral content can be estimated with a high level of confidence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. The locations are spaced closely enough to confirm geological and grade continuity. mt Million tonnes. mtpa Million tonnes per annum. Net gearing (Debt - cash) / (debt - cash + equity). NGER The National Greenhouse and Energy Reporting (NGER) Scheme was introduced in 2007 to provide data and accounting in relation to Greenhouse Gas emissions and energy consumption and production. The NGER Scheme operates under the National Greenhouse and Energy Reporting Act 2007 (NGER Act). NPAT Net profit after tax. OPF Ore Processing Facility. Pilbara The Pilbara region in the north west of Western Australia. Probable Ore Reserve As defined in the JORC Code, the economically mineable part of an indicated mineral resource, and in some circumstances, a measured mineral resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. Proved Ore Reserve As defined in the JORC Code, the economically mineable part of a measured mineral resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. Reserves or Ore Reserves As defined in the JORC Code, the economically mineable part of a measured mineral resource and/or an indicated mineral resource. It includes diluting materials and allowances for losses, which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. Ore reserves are sub-divided in order of increasing confidence into Probable Ore Reserves and Proved Ore Reserves. Where capitalised, this term refers to Fortescue’s estimated reserves. Resources or Mineral Resources As defined in the JORC Code, a concentration or occurrence of material of intrinsic economic interest in or on the Earth’s crust in such form, quantity and quality that there are reasonable prospects for eventual economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral resources are sub-divided, in order of increasing geological confidence, into inferred, indicated and measured categories. Where capitalised, this term refers to Fortescue’s estimated Mineral Resources. Senior Executive Leadership position title of Director or Group Manager. Solomon Hub A mining hub with two operating iron ore mines, Firetail and Kings. The Hub is located approximately 60 kilometres north of the township of Tom Price and 120 kilometres west of the railway that links the Chichester Hub to Port Hedland. Super Special Fines Fortescue’s flagship iron ore product from the Chichester Hub, with an iron grade of 56.4 per cent Fe. TRIFR Total Recordable Injury Frequently Rate per million man hours worked, comprising lost time injuries, restricted work and medical treatments. Underlying EBITDA Underlying EBITDA is defined as earnings before interest, tax, depreciation and amortisation, exploration, development and other expenses. Underlying EBITDA margin Underlying EBITDA / Operating sales revenue. Underlying Net Profit After Tax Net profit after tax adjusted for the after tax impact of one-off refinancing and early debt repayment costs. UNGC United Nations Global Compact provides a leadership platform for business that are committed to aligning their strategies and operations with ten universally accepted principles in human rights, labour, environment and anti-corruption. Voluntary employee turnover Permanent and fixed term employees who left Fortescue voluntarily for reasons not initiated by the Company. VTEC Vocational Training and Employment Centre. wmt Wet metric tonne. WMYAC Wirlu-murra Yindjibarndi Aboriginal Corporation. WTI West Texas Intermediate. Fortescue Metals Group Ltd Annual Report FY18 FY18 Awards FY18 Awards June 2018 - Ernst Young Entrepreneur of the Year Alumni Special award for Societal Impact Chairman and Founder Andrew Forrest AO May 2018 - Supply Nation Corporate Member of the Year award May 2018 - Australia China Business Award Cross Border Investment May 2018 - Forbes Asia’s inaugural Emergent 25 List CEO Elizabeth Gaines November 2017 - TR Foundation Stop Slavery award - One of 15 leading companies November 2017 - International Mining and Resources Conference Legend in Mining award, Former CEO Nev Power October 2017 - Department Mines, Industry Regulation and Safety Resources Sector awards for excellence Safety Representatives category FY18 Finalist September 2017 - CMEWA Women in Resources awards Drill and Blast Operator Megan Lockyer 143 09 | Corporate Directory Corporate information Contact Information Fortescue registered office Australia Level 2, 87 Adelaide Terrace East Perth, WA 6004 T: +61 8 6218 8888 F: +61 8 6218 8880 E: fmgl@fmgl.com.au www.fmgl.com.au Fortescue Shipping office Shanghai, China 33/F East Building, Eton International Business Plaza 555 Pudong Ave, Pudong, PC200120 Shanghai, P.R China Singapore FMG International, The Central 8 Eu Tong Sen St, 24-91 Singapore 059818 Fortescue VTEC and Community office 1B/2 Byass St South Hedland, WA 6722 T: +61 8 9158 5800 F: +61 8 6218 8880 E: hedlandcommunity@fmgl.com.au E: vtec@fmgl.com.au Orange, NSW 5 Corporation Place Orange, NSW 2800 Stock Exchange listings Australian Business Number ABN 57 002 594 872 Auditor PwC Level 15, 125 St Georges Terrace Perth, WA 6000 www.pwc.com.au Securities Exchange listings Fortescue Metals Group Ltd shares are listed on the Australian Securities Exchange (ASX) ASX Code: FMG Stay in touch Latest news, reports and presentations via email If you would prefer to receive information such as Annual Reports, notices of meetings and announcements via email, you can change your communication preferences on the Registry website: www.linkmarketservices.com.au Twitter @FortescueNews au.linkedin.com/company/fortescue- metals-group Fortescue Share Registry Link Market Services Limited Level 12, QV1 Building 250 St Georges Terrace Perth, WA 6000 Locked Bag A14 Sydney South, NSW 1235 T: 1300 733 136 (within Australia) T: +61 2 8280 7603 (International) F: +61 2 9287 0309 www.linkmarketservices.com.au www.youtube.com/user/ FortescueMetalsGroup Event calendar 2018 Key dates for Fortescue shareholders in 2018. Please note dates are subject to review. Full year results announcement 20 August 2018 September Quarterly Production Report 25 October 2018 Annual General Meeting 15 November 2018 Fortescue Metals Group Ltd Annual Report FY18 THE DREAM BEGINS 2003 S&P/ASX 200 index 08 FIRST ORE ON SHIP 10 Christmas Creek expanded 57.5mtpa shipped 14 155MTPA SUSTAINABLE PRODUCTION Kings Valley project opened at Solomon • US$2.9 billion debt repaid in FY16 • 169.4mt shipped in FY16 • Fortescue celebrates arrival of first ore carrier, FMG Nicola into Port Hedland • Fortescue recognised as lowest cost iron ore supplier into China 18 FORTESCUE CELEBRATES: • 1 billion tonnes of iron ore • 10 years since first ore shipped to China • 15 years since the Company’s inception 04 Cloudbreak identified 06 Port Hedland groundbreaking 04 05 06 07 08 09 27mtpa shipped 10 11 12 13 14 15 16 17 11 Solomon construction begins 13 Firetail opened at Solomon 80.9mtpa shipped 15 • Anderson Point Berth 5 completion • Fortescue River Gas Pipeline completion • 500 millionth tonne of ore shipped • 165mtpa shipped sustainable production • Achieved lowest ever TRIFR of 2.9 • 170.4mt shipped in FY17 18 Core Leadership team appointed THE JOURNEY CONTINUES Inside 01 Overview 02 Operating and Financial Review 03 Ore Reserves and Mineral Resources 04 Corporate Social Responsibility 05 Corporate Governance 06 Fortescue’s response to climate change 07 Financial Report 08 Remuneration Report 09 Corporate Directory This report is printed on recycled paper. F o r t e s c u e M e t a l s G r o u p L t d A n n u a l R e p o r t F Y 1 8 Annual Report FY18 Together we are Fortescue ABN 57 002 594 872 

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