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It is expected to come into production in December 2020, funded from Fortescue’s cash flows, and enable the group to maintain its current production of 170 million tonnes a year for the next two decades. The project, which will necessitate the construction of a new 120 kilometre rail line linking the mine to Fortescue’s Solomon Hub, will have a capital intensity of $US42 a tonne.

Funding of the project will be spread over three years - $US165 million next financial year, $US760 million in 2019-20 and $US350 million in 202-21 – but the group’s relatively strong operating cash flows and the intense focus in recent years on reducing its debt levels and pushing out the maturity of its remaining borrowings should allow the capital cost to be comfortably digested.

Eliwana is seen, not simply as a necessary replacement for Firetail, but a key to upgrading the quality of Fortescue’s blended ores. That has become an imperative as the price it is receiving for its existing production has headed south as the prices received by its rivals, Rio Tinto and BHP, have headed north.

Traditionally, Fortescue’s product, with a 58 per cent ferrous content, was priced at a 10 per cent to 15 per cent discount to the benchmark 62 per cent product.

From the start of last year, however, that discount has steepened. In the first half of this year it had blown out to 32 per cent and in March Fortescue amended its full-year guidance to say it expected to realise only 65 per cent of the Platts 62 per cent index.

Fortescue has steadfastly held the view that the divergence between the prices it receives and those of the higher-quality producers is a passing phenomenon that would end as China’s steel mills started to look for lower-cost product.

Rio and BHP have a different view. They believe the trends in prices are largely structural and driven by the industry reforms being pursued by China’s authorities.

China has been trying to improve the efficiency of its industrial output while lowering its emissions intensity, which has seen steel production migrating to the coastal regions and towards the larger and more efficient – and less polluting - mills.

If Rio and BHP are right, the relatively recent blow-out in the spreads between lower-quality and higher-quality ores would become a permanent feature of the industry landscape.

Fortescue has said Eliwana will enable it to introduce a 60 per cent iron grade product, branded Fortescue Premium, in the second half of next financial year, with volumes of the product increasing as Eliwana ramps up.
That would enable it to blunt the impact of the discount its ore currently receives, which has cost it nearly $US10 a tonne of margin (earnings before interest, tax, depreciation and amortisation) in the past 12 months.

A narrowing of the discount if the price penalty for its ore were reduced would be a bonus.

Fortescue hasn’t indicated how the new mine will impact its overall costs which, at $US12.43 a tonne year-to-date, sit at the low end of the industry cost curve, a phenomenal achievement by past and present Fortescue management.

Elizabeth Gaines, who replaced Nev Power as chief executive earlier this year, was previously its chief financial officer. Her deputy, Julie Shuttleworth, was previously general manager of the Solomon Hub.

They were part of the team that had a relentless focus on costs and execution and therefore there is an expectation they will continue to produce good cost outcomes and that Eliwana will be brought in on time and within budget, enabling not just a maintenance of Fortescue production levels as Firetail tails away but higher values realised for that production.