Objective:

This assignment will involve the use of corporate annual reports, analysis of the relevant information provided within the reports, compare and contrast the information with the requirement of relevant accounting standards and finally reporting your observations and conclusion.

Note:It is important to refer to relevant accounting standards in your report to score high marks in this group assignment.

Note: The word limit of 1000 words shall not include cited references, table of contents and the executive summary

Your task shall be allocated latest annual report (2016) of Fortescue Metals Group Limited and draft a report incorporating the following points in relation to your company.

Company: Fortescue Metals Group Limited

Questions:

Leases and Voluntary Disclosures

What are the values of the leased assets and liabilities? What information is disclosed in the notes to the accounts in relation to leased assets and liabilities?

Identify any two voluntary disclosures made by the company in its annual report. Explain their relevance to company's business (if any).

Who is the auditor of your company?Explain whether the Audit Report of your company is a qualified report or unqualified.

Annual Report 2016 ABN 57 002 594 872 People. Innovation. Performance. THE YEAR AT A GLANCE SAFETY 4.3 Total Recordable Injury Frequency Rate Operating cost 43% 169.4 million tonnes shipped 8 Revenue 7.1 US$ TH billion $2.9 anniversary of first ore on ship US billion debt retired \"Fortescue's Trade Up\" Reduction of a pathway to an apprenticeship in greenhouse gas emissions launched Second towage licence 8% 1.8 billion A$ Contracts to Aboriginal companies and Joint Ventures 2.17 Ore Reserves 11.6 billion tonnes Mineral Resources Contents Overview 3 Operating and Financial Review 13 Reserves and Resources 25 Corporate Social Responsibility 39 Governance 65 Financial Report 67 Remuneration Report 115 Corporate Information 147 FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 1 About Fortescue About this report Fortescue Metals Group is a global leader in the iron ore industry, recognised for its culture, innovation and industry-leading development of world class infrastructure and mining assets in the Pilbara, Western Australia. This report has been prepared for Fortescue's stakeholders in line with Fortescue's statutory and regulatory obligations. The Company is committed to becoming the safest, lowest cost, most profitable iron ore producer and the information within this report outlines Fortescue's performance and the journey to realising this vision in a manner that reflects the Company's core values. 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. Now producing 165 - 170 million tonnes of iron ore per annum, the Company has grown to be one of the largest global iron ore producers and is focussed on its vision of being the safest, lowest cost, most profitable iron ore producer. The Company's operations span four mine sites in the Pilbara. The Chichester Hub, which includes the Cloudbreak and Christmas Creek mines, is located in the Chichester Ranges and the Solomon Hub, in the Hamersley Ranges, includes the Firetail and Kings Valley mines. This report provides a summary of Fortescue's operations and financial position for the financial year ended 30 June 2016. All references to Fortescue, the Group, the Company, we, us and our refer to Fortescue Metals Group Limited (ABN 57 002 594 872) and its subsidiaries. All references to a year are the financial year ended 30 June 2016 unless otherwise stated. All dollar figures are in US currency unless otherwise stated. Fortescue owns and operates an integrated supply chain including its five berth Herb Elliott Port in Port Hedland and the fastest, heavy haul railway in the world with up to 42 tonne axle load capacity over 620km of track. With only a ten-day seaborne journey from Port Hedland to China, Fortescue has longstanding relationships with customers and stakeholders in China and has contributed to China's remarkable economic development and ongoing urban growth. Embracing innovation is deeply engrained in Fortescue's approach to business, as the first company in Western Australia to control a railway from outside a region of operation and the first company in the world to use CAT autonomous haulage technology on a commercial scale. 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, build up communities, protect the environment and strengthen the broader Australian economy. The world's best address for iron ore Fortescue holds the largest tenement position in the Pilbara. 2 I FORTESCUE METALS GROUP LIMITED OVERVIEW OPERATING AND FINANCIAL REVIEW Overview Operating and Financial Review Reserves and Resources Overview Corporate Social Responsibility Governance Financial Report Remuneration Report Corporate Information FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 3 OVERVIEW Chairman's Message Andrew Forrest I am delighted to describe Fortescue's outstanding results for 2016. From one of Australia's most successful, largest and most vociferous explorers we have transitioned through planning, construction, commissioning, and back into planning and construction, to truly build global scale operations. We have gone on to finally prove our mettle as an operations company with very few peers worldwide, as we take our place as one of the world's most efficient iron ore producers. At Fortescue, the Board's attitude is that it is there to lead and guide; we never pretend to be a managing board. In this way, the responsibility for our performance is entirely mutual, with management fully empowered to achieve its goals. We hold Board meetings every quarter and not monthly, yet we are flexible and agile, meeting several times a day electronically if that is what the situation requires. Australia's mining industry is very well positioned to fuel the great arc of the developing world, from China through the sub-continent, the Middle East and into Africa. China's visionary \"One Belt, One Road\" infrastructure strategy has continued to develop, and the opportunities for northern Australia are now also emerging. Fortescue's engagement with senior Government and business leaders throughout the region, through strong relationships and our ongoing sponsorship of the Boao Forum, continues to drive our business. During the year, very successful meetings of the Australia-China Senior Business Leaders' Forum (SBLF) were held in Sydney as well as on Hainan Island in conjunction with the Boao Forum. China's and Asia's strength, combined with Fortescue's outstanding performance, have allowed shareholders a rewarding dividend policy which directly funds the philanthropic work of Fortescue's founding shareholder, Minderoo. While maintaining strict financial and operational controls, we encourage a corporation that feels non-bureaucratic and friendly, and in which we all treat each other with the preciousness we would our family. This doesn't mean we don't hold each other to account; we certainly do. However, it is done with encouragement and where a problem can't be beaten by a known path, together management and the Board - in fact, all of us - take responsibility for finding another solution. The Minderoo Foundation and Fortescue continue to support large numbers of diverse philanthropic pursuits in Australia and throughout the world, and I hope that you are as heartened as I am by our involvement. Together we drive a number of initiatives including supporting the vulnerable and disadvantaged, encouraging community vibrancy and highlighting the critical importance of early years wellbeing as well as whole-of-life education. Our Board sets targets that require all of our teams to lift our business performance to the next level. Most importantly, safety continues to steadily improve, and at the same time the team's achievement on cost reduction has been truly excellent. The result, positioning us at the very lowest end of the global cost curve, is highly commendable and will ensure our business is strong and well placed to withstand the inevitable challenges that the market will continue to send our way. Management has well and truly met our targets and we have been in lock step with them for the journey. Walk Free Foundation Global Freedom Network. Following on from the historic signing by global faith leaders of the Joint Declaration of Religious Leaders Against Modern Slavery in December 2014, further Declaration signings occurred in Canberra and New Delhi, in December 2015. 39 leaders representing 19 faiths have now signed the Declaration. The December 2015 events were the catalyst for the introduction of the Australian Freedom Network and the Indian Freedom Network, as other nations and leaders joined us in working to end modern slavery. Global Slavery Index (GSI). The third GSI was launched in May to worldwide fanfare and critical acclaim. In the biggest and most comprehensive report yet, the GSI found that an estimated 45.8 million people around the world are in slavery, with 58 per cent of those people living in India, China, Pakistan, Bangladesh and Uzbekistan. We can't act if we don't know the size and scale of this abhorrent practice, and the GSI is an important piece of global research that continues to provide us with impetus to encourage governments, business and civil society to act with speed and commitment. Other Walk Free Foundation initiatives and affiliated organisations, such as the Bali Process in conjunction with the Australian Government, Global Fund to End Slavery, the Freedom Fund and Walk Free Movement, are ensuring a coordinated effort to eradicate modern slavery. 4 I FORTESCUE METALS GROUP LIMITED OVERVIEW Overview OVERVIEW GenerationOne Our A$65 million partnership across the five Western Australian universities has now seen eight scholarships awarded to outstanding students who are conducting ground breaking research in various areas. Plans for Forrest Hall at The University of Western Australia were completed and construction will begin this year. To date, the Minderoo Foundation, with Fortescue's unwavering support, has supported more than 250 initiatives and committed over A$245 million across Australia and abroad including projects in education, Corporate Information Building cultural capital through an effective talent pipeline is an important pursuit, and the focus has been on a collaboration with the Western Australian Academy of Performing Arts (WAAPA), where we have supported the visiting artists program. Among many community support projects, the Foundation responded with great energy to the bush fire disaster in Yarloop, provided scholarships for primary and secondary students and supported organisations ranging from Channel 7 Telethon and St Vincent de Paul through to a men's shed in Fitzroy Crossing. It is the results that we achieve in these challenges that build the platforms to ensure the next generation inherits, as much as is in our own control, a better world. Remuneration Report Arts, Culture and the Community In building communities carefully through generosity and ensuring the environment is preserved, the future of Australian mining is one that is more relevant than ever to this nation and the world it supplies. More importantly, my personal goal for Fortescue and Minderoo is that together we recognise our role in addressing the challenges that go beyond mere business outcomes. Financial Report Forrest Research Foundation Our CEO, Nev Power, has led the excellent results achieved by the Fortescue team during the year. His leadership and unwavering focus on delivering against each and every one of our critical goals represents an extraordinary achievement, resulting in longterm sustainable growth for shareholders. Governance Key achievements include a partnership with the Telethon Kids Institute to increase the translation of evidence to practice and policy and the commencement of the Australian Government's A$20 million Connected Beginnings initiative based on our recommendations. Locally, we are working with Challis Primary School in Armadale, Western Australia, where children have enjoyed massive improvements in developmental outcomes following our four year investment in the Challis Parenting and Early Learning Centre. Our Board has continued to provide its expertise and experience to our great company as we make great strides towards realising our vision - to be the safest, lowest cost, most profitable iron ore producer. During the year we announced that Peter Meurs, an early pioneer and believer in Fortescue, would step down from the Board and we gratefully acknowledge his outstanding contribution to Fortescue's infrastructure and mine development capability. The very successful T155 US$9 billion expansion project stands among Peter's many achievements at Fortescue and we wish him all the very best with his future endeavors. Stephen Pearce, our high performing CFO has now been appointed as an Executive Director in addition to his ongoing role as an integral member of the executive management team. Corporate Social Responsibility We believe every child in Australia should be given the best chance to reach their potential. Thrive by Five, an initiative that has attracted substantial Australian Government support, encompasses this belief, and puts effort into contributing to a national shift in attitudes, policy and practice so that children's critical first few years of life are prioritised. Conclusion Reserves and Resources Thrive by Five research, Indigenous affairs, disaster response and the arts. The act of giving expands our horizons, stimulates our intellect and nurtures us. We are proud that through our success, as fellow Fortescue shareholders, you are able to contribute and be part of programs that are making a difference all over the world. Operating and Financial Review Fortescue's commitment to Indigenous employment is complementary to the programs operated by GenerationOne, which has secured a commitment for over 62,000 jobs across corporate Australia. Through the Vocational Training and Employment Centres (VTEC) initiative, pioneered by Fortescue and now funded by the Federal Government, GenerationOne achieved one of its key goals - facilitating long-term sustainable employment for a further 5,000 First Australians. This brings the total number of jobs filled through GenerationOne to over 28,000. More broadly, the Creating Parity Review, produced at the request of the Prime Minister and Cabinet, gained much traction during the financial year. Trials of the Healthy Welfare Card are under way in Ceduna, SA, and Kununurra, WA, and there are strong early indicators of success. Other Creating Parity recommendations are in progress. FORTESCUE METALS GROUP LIMITED 2015 2016 ANNUAL REPORT I 5 OVERVIEW Chief Executive Officer's Report Nev Power Our strategic focus is on achieving our vision to be the safest, lowest cost, most profitable iron ore producer and the operating results achieved by the whole team during FY16 on safety, production and costs have brought that vision closer to reality. During 2016, our entire Fortescue team has performed extremely well to deliver against all key elements of our safety and business strategy, resulting in a substantially improved competitive position, global cost leadership, a strong balance sheet and a resilient platform for future growth. Safety performance continues to deliver steady improvement with a further 15 per cent reduction achieved in Total Recordable Injury Frequency Rate (TRIFR) during the year, meeting our FY16 target. The safety of all of our people is our highest priority and we will strive for further improvement through safety leadership, shared best practices, engagement and empowerment of our teams as we continue to build our strong workplace culture. During FY16, our company wide Safety Excellence and Culture Survey provided clear direction on our focus and priorities for the year ahead. At Fortescue, our safety value means that we look after our mates, and ourselves - we are our brother's and sister's keeper. We aspire to safety leadership across all of our operations and will work to continually improve our safety performance in FY17 and beyond. Maximising value from our world-class assets, while being highly responsive to the market and our customers' needs drives our leadership and all key decisions. Our differentiating culture of stretch performance, shaped by our strong values is a key factor in Fortescue's consistent delivery against each of our challenging targets. Consistent production and operating excellence has underpinned our performance in FY16. With completion of our second full year of operation following the Company's development and construction phase, our business is strategically positioned to maximise returns from consistent production, optimising our ore bodies and Ore Processing Facility (OPF) upgrade performance. Production in FY16 of 169.4mt maintained our consistent production rate, including a slight uplift due to favourable weather conditions, and will continue through FY17 at 165-170mt. Our unwavering drive for cost reductions continues to deliver outstanding results. We exited FY16 with our C1 cost at US$14.31/wmt for the fourth quarter, and our guidance for FY17 of US$12-13/wmt includes sustained continuous improvements. Our highly successful approach to productivity and efficiency gains is embedded in all of our operating processes and will deliver further gains through operational excellence, innovation, and our values-driven approach to embrace and deliver against stretch targets. Cost savings of US$1.9 billion were achieved during FY16, bringing cumulative cost savings since we reached full operating capacity to US$3.5 billion. Fortescue is now firmly positioned at the very lowest end of the global cost curve and we are well placed to achieve further improvements in FY17 through innovation and our ongoing productivity and efficiency focus. This result clearly demonstrates successful delivery of a critical strategic target resulting in a significant improvement in our business resilience as well as our competitive position. Market outlook for FY17 is positive as urbanisation and industrialisation in China underpins ongoing domestic steel demand and regional growth through the massive One Belt, One Road infrastructure plan. Fortescue's exports represent 18 per cent of China's iron ore imports with over 700 million tonnes shipped to our Chinese customers to date, while we also continue to grow our presence in markets including Japan, South Korea and the emerging economies. Excellent financial performance has been delivered for FY16, as cost reductions have contributed to strong cash flows from operations which in turn have been applied to further reduce our debt. Sustaining capital expenditure for FY16 was US$1.33/wmt, well below our guidance estimate and reflecting the young age of our high quality assets. 6 I FORTESCUE METALS GROUP LIMITED OVERVIEW Overview OVERVIEW Building stronger communities, ensuring that the benefits from our operations are shared is a core commitment for Fortescue and we are proud of the contributions we have made to employment, education and business development in the communities supporting our business. Our direct Aboriginal employment has risen to 14 per cent, with Fortescue and its contractors now employing more than 1,100 Aboriginal people across all sites. Our Fortescue team provided the skills, hard work, passion and commitment required to deliver these outstanding results for our organisation in FY16. Every single group across the business has excelled and can all feel very proud of what has been achieved together. I take this opportunity to thank each and every one of our great Fortescue family for their innovative ideas, tireless work and contributions on our journey to be the world's safest, lowest cost, most profitable iron ore producer. As we embark on this next phase, our focus must be on building our towns in the Pilbara into vibrant and sustainable communities that will attract and retain the workforce and families for those key industry sectors and companies to thrive. Governance We can also look to our neighbours on the east coast, with towns such as Mackay and Townsville providing great examples of vibrant, sustainable communities that have grown with the workforces for their key industry sectors. Corporate Social Responsibility Development and investments by mining, resource and energy companies across northern Australia have provided the catalyst for major regional development to date and will be one of the key sectors that will contribute to the next phase. Reserves and Resources Debt repayment during the year totalled US$2.9 billion reducing net debt to US$5.2 billion. We are fast approaching our initial balance sheet targets with our net gearing ratio now below 40 per cent and set to improve further with ongoing strong cash flows from operations. The value of contracts awarded under the Billion Opportunities program stands at A$1.8 billion, building capability and skills in businesses owned wholly or partially by Aboriginal people. Operating and Financial Review Net profit after tax for FY16 was US$985 million with the positive contribution from cost reductions more than offsetting the impact of the lower iron ore price compared to FY15. This outcome, crucial to delivery of our strategic cost reduction target, has been achieved through the efforts of all of our teams and ensures that the cost savings provide a sustainable platform for further improvement. Business, governments and communities working together will give us the best opportunity to achieve this goal. Nev Power, CEO: Look north and create a vision for the future Without dwelling on what might have been, the fact is that northern Australia now provides a wealth of untapped potential. In order for northern Australia's enormous potential to be fully realised, a clear focus will be required by governments at all levels, business and the community. Creating a future vision for our own Pilbara region in WA will be a vital first step on this path. Companies such as Fortescue Metals Group will also contribute through their community engagement and continued efforts to end Aboriginal disparity through training, employment and business opportunities. Commitment to a shared vision for the Pilbara and for northern Australia will position us strongly to attract and retain a diverse workforce, build our industries and grow sustainable communities for the future. Abridged version - full article published in The West Australian on 20 November 2015. Corporate Information WA is in the same time zone as much of Asia and all of China, facilitating business relationships and regional travel, and all of northern Australia has the geographic proximity to those markets that ensures we also have a significant shipping advantage, another key factor in our favour. Finally, community organisations will play an important role in building the social fabric through arts, culture, sporting and recreational activities, which must all be at a level that will make the regional lifestyle at least comparable, if not more attractive, to the bigger cities. Remuneration Report We can all reflect on how different the Australia of today might be if the first European settlements had been established in the tropics rather than on the shores of Botany Bay, the south-west of WA or Tasmania. At the same time, business will provide the jobs, training and primary income while continuing to build the capability in infrastructure, energy and transportation that all contribute to our region's competitive advantage. Financial Report Governments must not only provide the core health and education services but must also ensure that these are targeted to the needs of the workforce we want to attract. FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 7 OVERVIEW Fortescue's 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 our product suite from mine to market 1 Exploration and discovery Challenging geological thinking to identify valuable deposits 2 Extraction and Recovery Innovative use of technology suitable to our deposits 3 4 PROCESSSING Ore processing facility design and wet processing optimise output MINE TO PORT Heaviest haul rail at 42t axle load 5 Blending and Stockpiling Port design facilitates blending and stockpiling of product suite 6 Ship Loading 3 shiploaders 5 berths maximise outload capacity and utilisation 7 MARKETING Helping customers achieve best value in use 8 shipping Delivery to our international customers' specifications VLOCs 8 I FORTESCUE METALS GROUP LIMITED OVERVIEW Overview OVERVIEW Fortescue's Board Operating and Financial Review Reserves and Resources Regular formal and informal opportunities for the directors to meet with management and staff. The directors also undertake an annual competency selfassessment to evaluate whether the Board, as a whole, maintains an appropriate mix of skills and experience to effectively fulfil its role. Opportunities for improvement are incorporated into director training and consideration for new director appointments. Corporate Information Biannual visits to China to meet with key customers and strengthen their understanding of the Company's key markets At the date of this report, the Board has eight non-executive directors and two executive directors being Chief Executive Officer, Mr Nev Power, and Chief Financial Officer, Mr Stephen Pearce. Mr Pearce was appointed as a director on 21 June 2016. Previously, Mr Peter Meurs acted as an Executive Director prior to his resignation on 18 April 2016. 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 into the business. The Board has maintained a consistent compliment of two executive directors in recent years and has consistently maintained a majority of independent directors. Remuneration Report Regular briefings from executive and senior management regarding all major business areas, tailored site visits and annual site tours to operational locations The Board and each of its three primary Committees have established a formal process to evaluate their performance annually. The process is undertaken by an independent consultant and supported by the Company Secretary. The most recent review was undertaken in February 2016. The results and recommendations are reported to the full Board for further consideration and agreement of improvement actions, where required. Financial Report Significant contribution to the annual strategy setting process conducted with executive and senior management 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 that embodies these values. There is a formal process to identify, disclose and manage potential conflicts of interest, should they arise. In this regard, the roles of Vice Chairman and the Lead Independent Director are a cornerstone that ensures the interests of all shareholders are protected equally. Governance All new Board members benefit from a comprehensive induction process that supports their understanding of Fortescue's business. 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: 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 Nominations Committee, the Audit and Risk Management Committee and the Finance Committee. Each Committee has an independent, non-executive Chair and operates under its own Charter which has been approved by the Board. Corporate Social Responsibility 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 has an appropriate mix of executive and non-executive directors to support its role. The primary driver for the Board in seeking new directors has been, and continues to be, the skills, experience, knowledge and other important attributes which are relevant to the needs of the Board in discharging its responsibilities to shareholders. As with all roles in the Company, Fortescue's policy is to recruit the best person for each role regardless of race, gender, age, physical ability, sexuality, nationality, religious beliefs, or any other factor not relevant to their competence and performance. The 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. FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 9 The Board Andrew Forrest Chairman Owen Hegarty Vice Chairman Mr Forrest was appointed Chairman in July 2003 and Chief Executive Officer in 2005. In July 2011 Mr Forrest resumed responsibilities as Chairman (elect). Mr Forrest is the Founder of the Company and is also the Founder and Chairman of Minderoo Foundation, Australia's largest philanthropic organisation which operates GenerationOne, The Australian Employment Covenant and Walk Free. He was appointed by the Prime Minister as Chair of the Indigenous Jobs and Training Review in 2013 (the Forrest Review). Mr Forrest holds other positions including Chairman Global Freedom Network, Councillor Global Citizen Commission, Commonwealth Ambassador for Employment and Engagement with disadvantaged communities, Vice Patron of the SAS Resources Fund, Chair of the Foundation of the Art Gallery of Western Australia, Adjunct Professor of the China Southern University, Fellow of the Australian Institute of Mining and Metallurgy, Co-Chairman of the China Australia Senior Business Leaders' Forum. Current directorships (ASX listed entities): None Committee membership: Member: Remuneration and Nomination Committee and Finance Committee Mr Hegarty was appointed Vice Chairman in November 2014 having served as a Non-Executive Director since October 2008. Mr Hegarty has 40 years' experience in the global mining industry, 25 years' with the Rio Tinto group including Managing Director of Rio Tinto Asia and Managing Director of the Group's Australian copper and gold business. Mr Hegarty was Founder and CEO of the Oxiana Ltd Group (now OZ Minerals Ltd). the mining industry. Mr Hegarty is also a member of a number of government and industry advisory groups and Chairman of EMR Capital. Mr Hegarty is a former Director of the AusIMM and was awarded the AusIMM Institute Medal in 2006 and the G.J. Stokes Memorial Award in 2008 for achievements in Mr Barnaba was appointed Lead Independent Director in November 2014, having served as a Non-Executive Director since February 2010. Mr Barnaba serves as both Chairman of Macquarie Group, Western Australia and as Chairman and Global Head, Resources Group, Macquarie Capital, co-founder (and previously Co-Executive Chairman) of Azure Capital, previously the Chairman of Western Power, Edge Employment Solutions, the West Coast Eagles Football Club and Alinta Infrastructure Holdings. He was appointed by the Premier to Chair the Mark Barnaba WA Steering Committee of the Commonwealth Business Lead Independent Director Forum in CHOGM in 2011. Nev Power Chief Executive Officer, Executive Director Current directorships (ASX listed entities): Chairman: Tigers Realm Minerals Pty Ltd, Non-Executive Director: Tigers Realm Coal Limited and Highfield Resources Limited Committee membership: Member: Remuneration and Nomination Committee Mr Barnaba holds a Bachelor of Commerce with first class honours from the University of Western Australia and an MBA from Harvard Business School, graduating with a high distinction as a Baker Scholar. Mr Barnaba is a Fellow of the Australian Institute of Company Directors. Current directorships: (ASX listed entities): None Committee membership: Chair: Audit and Risk Management Committee and Finance Committee, Member: Remuneration and Nomination Committee Mr Power was appointed Chief Executive Officer in July 2011, and Executive Director in September 2011. Mr Power has extensive experience with more than 30 years' exposure to the mining, steel and construction industries. Prior to joining Fortescue, Mr Power held Chief Executive positions at Thiess and the Smorgon Steel Group. Mr Power has led Fortescue's commitment to safety excellence, and to the Billion Opportunities program which has awarded over A$1.8 billion in contracts to Aboriginal businesses. He is also a passionate advocate for the development of northern Australia and for its communities to reach their full potential. He is a Fellow of both Engineers Australia and the AusIMM and a member of the Australian Institute of Company Directors. He holds a Bachelor of Engineering and a Master of Business Administration. Mr Power has a long history in agribusiness and aviation, holding both fixed wing and helicopter commercial pilot licenses. Current directorships: (ASX listed entities): None Mr Pearce was appointed as an Executive Director in June 2016, after joining Fortescue in March 2010. Mr Pearce has more than 20 years' experience in senior management roles in the mining, oil and gas and utilities industries. He previously held the position of Managing Director and Chief Executive Officer of Southern Cross Electrical Engineering Limited and prior to that Chief Financial Officer of Alinta Limited. He has a Bachelor of Business from RMIT, a Graduate Diploma in Company Secretarial Practice and is a fellow of the Institute of Chartered Accountants Australia and New Zealand, a member of the Governance Institute of Australia and Australian Institute of Company Directors. Mr Pearce is currently Chairman of the Lions Eye Institute. Current directorships (ASX listed entities): Non-Executive Director: Cedar Woods Limited Mr Meurs was appointed as an Executive Director of the Company in February 2013 after joining Fortescue as Director Development in 2010. Mr Meurs resigned from the Board on 18 April 2016. Mr Meurs is a Fellow of Engineers Australia and a member of the Australia Institute of Company Directors. Stephen Pearce Chief Financial Officer, Executive Director Peter Meurs Executive Director 10 I FORTESCUE METALS GROUP LIMITED OVERVIEW Mr Meurs was previously the Managing Director at WorleyParsons with project management and company development experience in hydrocarbons, minerals and metals. Current directorships (ASX listed entities): None Non-Executive Director Committee and an ex officio member of the Boards of Austrade and Export Finance and Insurance Corporation. Current directorships (ASX listed entities): NonExecutive Director: Oceana Gold Corporation, Yancoal Australia Limited and iSentia Group Limited Former directorships in the last 3 years (ASX Listed Entities): Non-Executive Director: SmartTrans Holdings Limited, Sm@rtTrans Limited and YPB Group Ltd Ms Warburton was appointed as a Non-Executive Director in November 2013. She has previously held positions as Executive Director of Strategy and Finance with Brookfield Multiplex, Chief Planning and Strategy Officer of UAE based ALDAR Properties PJSC, and senior executive roles with Multiplex, Citigroup and Rio Tinto. Ms Warburton is a Fellow of the Chartered Accountants Australia New Zealand. She is a Graduate of the Australian Institute of Company Directors and a member of Chief Executive Women. She is Chairman of the northern Australia Infrastructure Facility, Director of Western Power and member of the Takeovers Panel. Current directorships (ASX listed entities): NonExecutive Director: Wellard Limited and Gold Road Resources Limited Committee membership: Chair: Remuneration and Nomination Committee, Member: Audit and Risk Management Committee Mr Wells was appointed as Company Secretary in February 2015, after joining Fortescue in 2010 as Group Manager, Treasury and Business Planning. Mr Wells holds a Bachelor of Business in Accounting, is a Fellow of CPA Australia, a Certified Finance and Treasury Professional, and a member of the Australian Institute of Company Directors. He is also a Director of not-for-profit Alzheimer's Australia WA and a member of the Salvation Army business advisory committee. Non-Executive Director Geoff Raby Non-Executive Director Sharon Warburton Non-Executive Director Ian Wells Company Secretary With more than 20 years' experience in senior finance and management roles in the mining, energy infrastructure and healthcare industries, Mr Wells was previously Chief Financial Officer at Singapore Power subsidiary Jemena Limited, and also held senior executive roles at Alinta Limited. Mr Thomas has a Bachelor of Commerce, Graduate Diploma in Applied Corporate Governance and an Master of Business Administration. He is a Certified Practising Accountant and a Fellow of Governance Institute of Australia Chartered Secretaries Australia. Corporate Information Mr Thomas was appointed as Company Secretary in June 2010, joining Fortescue in April 2004 as Group Financial Controller. Mr Thomas is the Group Manager of Infrastructure Services and acts as joint Company Secretary. He has extensive experience in accounting and finance, IT and business administration in the mining and professional service industries. Remuneration Report Mr Raby was appointed as a Non-Executive Director in August 2011. He formerly served as Australia's Ambassador to the People's Republic of China between 2007 and 2011. Mr Raby has also held positions including Deputy Secretary in the Department of Foreign Affairs and Trade (DFAT), Australia's Ambassador to the World Trade Organisation (1998-2001), Australia's APEC Ambassador (2003-2005), and Head of DFAT's Office of Trade Negotiations and Head of the Trade Policy Issues Division at the OECD, Paris. He has been the Chair of DFAT's Audit Cao Huiquan Financial Report Chairman of Hunan Valin Iron & Steel Group Co. Ltd, Chairman and CEO of Hunan Valin Steel Co Ltd in 2011. He currently serves as Chairman of Hunan Valin Iron and Steel Group Co., Ltd and Chairman of Hunan Valin Steel Co., Ltd Current directorships (ASX listed entities): None Governance Mr Cao was nominated by Hunan Valin Iron & Steel Group Company Ltd to join Fortescue's Board as a Non-Executive Director in February 2012. Mr Cao joined Hunan Xiangtan Iron & Steel Co. Ltd in 1991, was appointed General Manager in 2003 and in 2005 was appointed General Manager of Hunan Valin Iron & Steel Co Ltd. Mr Cao was appointed Corporate Social Responsibility Current directorships (ASX listed entities): NonExecutive Director: NEXTDC Limited, Nine Entertainment Co. Holdings Limited and ImpediMed Limited Former directorships in the last 3 years (ASX Listed Entities): Executive Director Helloworld Limited, NonExecutive Director of Mantra Group Limited Committee membership: Member: Audit and Risk Management Committee and Finance Committee Reserves and Resources Elizabeth Gaines Ms Gaines was appointed as a Non-Executive Director in February 2013. She has extensive operational experience as a group executive running large businesses and a proven track record in internal business and financial leadership. Ms Gaines is the former Chief Executive Officer of Helloworld Limited. Prior to this, Ms Gaines was Chief Financial Officer of the Stella Group, Chief Finance and Operations Director of UK-based Entertainment Rights Plc and Chief Executive Officer of Heytesbury Pty Limited. Ms Gaines is a member of the Chartered Accountants Australia and New Zealand, the Australian Institute of Company Directors and Chief Executive Women. She is a Commissioner of Tourism WA and in August 2016 was appointed to the Board of 7-Eleven Stores Pty Ltd. Operating and Financial Review Non-Executive Director Ms Baderschneider is a past Board member of The Center of Advanced Purchasing Studies (CAPS) and Procurement Councils of The Conference Board and the Corporate Executive Board. Ms Baderschneider is a member of Advisory Councils of President Lincoln's Cottage (Executive Committee), the Ford's Theatre, and the ILR School at Cornell University. She is also a member of Cornell's President's Council of Cornell Women and the Board of Trustees of the Maret School in Washington, D.C. Current directorships (ASX listed entities): None Overview Jean Baderschneider Ms Baderschneider was appointed as a Non-Executive Director in January 2015. She brings 30 years' experience with ExxonMobil in global operations, strategic sourcing and supply chain management roles including as VicePresident, Global Procurement. Previously a member of the Board of Directors of the Institute for Supply Management, the Executive Board of the National Minority Supplier Development Council (NMSDC) and Presidential appointee to the US Department of Commerce's National Advisory Council of Minority Business Enterprises in February 2011. Mark Thomas Group Manager Infrastructure Services, Company Secretary FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 11 Executive team Nev Power Mr Power was appointed as Chief Executive Officer in July 2011 and has over 30 years' experience in the mining, steel and construction industries. Mr Pearce joined Fortescue in March 2010 with more than 20 years' experience in senior management roles in the mining, oil and gas and utilities industries. Please refer to the Board of Directors section for more details on Mr Power's experience. Please refer to the Board of Directors section for more details on Mr Pearce's experience. Chief Executive Officer Executive Director Nick Cernotta Director Operations Tim Langmead Director External Relations Simon Carter Group Manager Development Rob Watson Group Manager Health and Safety 12 I FORTESCUE METALS GROUP LIMITED OVERVIEW Stephen Pearce Chief Financial Officer, Executive Director Mr Cernotta was appointed as Director, Operations in March 2014 with more than 30 years' experience in the mining industry, spanning various commodities and operations in Australia, Africa, South East and Central Asia, Saudi Arabia and Papua New Guinea. Prior to joining Fortescue Mr Cernotta held the position of Chief Operating Officer, Macmahon Contracting and prior to that Director of Operations for the Barrick Gold Australia Pacific Regional Business Unit. Mr Langmead was appointed Director External Relations in January 2014 after joining Fortescue in January 2013 as Group Manager Corporate Affairs. Previously Mr Langmead held senior corporate affairs roles in the Australian business units of global oil and gas companies. He served in senior staff roles for Ministers in the Howard-Anderson and Howard-Vaile governments and commenced his career as an agribusiness journalist. Mr Carter joined Fortescue in 2011 from WorleyParsons in the USA. He was appointed Group Manager, Development in November 2014 following the delivery of the Solomon Project, for which he was the Project Director. Mr Carter holds Bachelor degrees with honours in Electrical Engineering and Law, and has over 25 years of engineering, construction and project experience in Africa, South America, Europe, New Zealand and Australia. Mr Watson joined Fortescue in 2011 and was appointed Group Manager Health and Safety in 2014. Mr Watson has held a number of senior corporate health and safety roles in large mining companies over the last 15 years. His total 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. David Liu Director of Sales and Marketing Linda O'Farrell Group Manager Fortescue People Mr Liu joined Fortescue in 2003 and was appointed as Director of Sales and Marketing in 2011 after completing his post-graduate studies at the University of Western Australia. Having spent nearly 30 years in Perth, Mr Liu has strong experience in trade and investment projects between Australia and China. He brings a deep understanding of Asian, particularly Chinese, culture and business practices to Fortescue's strategy of securing long term partnerships with the major steel mills in Asia. Ms O'Farrell joined Fortescue in October 2013 as Group Manager Fortescue People, joining the Executive team in December 2014. Ms O'Farrell previously held executive human resources roles in major Australian resources companies. Ms O'Farrell brings deep experience in strategic people management, diversity and Aboriginal employment and holds a Bachelor of Economics degree (Honours in Industrial Relations) from the University of Western Australia. Mr Huston joined Fortescue in January 2005 with over 20 years' experience in legal and corporate advisory roles. 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. Peter Huston Director Corporate Services, Chief General Counsel Peter Lynch Director Business Development Mr Lynch joined Fortescue in June 2016 and has over 28 years' of experience in the Australian and global mining sector including coal, copper, gold, lead, and zinc. He has held a number of senior roles, including directorships of several publicly listed junior mining companies including Managing Director of ASX listed Cokal Ltd (ASX:CKA) and prior to that as President and CEO of Waratah Coal Inc (TSX:WCI). Operating and financial review 169.4 15.43 $ million tonnes Consistent operating performance /wmt C1 costs Production Highlights 7.1 billion Focus on productivity and efficiency lowers costs 985 $ Debt repayments 3.2 Cash billion A key global supplier of iron ore $ 1.6 $ 212 per cent increase from prior year 2.9 $ at 30 June 2016 billion debt retired in FY16 Debt repayments above six billion since November 2013 5.2 million billion Positive cash margins from cost reductions $ Net debt Net profit after tax Underlying EBITDA Revenue $ 43 per cent decrease from prior year billion at 30 June 2016 Net gearing lowered to 38% FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 13 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 in excess of 90 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. This innovative approach has enabled Fortescue to increase iron upgrades and reduce impurities, which has resulted in lower mining cut-off grades, further optimising ore bodies and sustainably reducing strip ratios, while improving final product specifications. During the year, Fortescue began transitioning to a full owner operator model at Christmas Creek. This will further reduce Fortescue's costs through ongoing improvement of the efficiency and productivity of the site. Solomon Hub The Solomon Hub in the Hamersley Ranges is located 60km north of Tom Price and 120km to the west of the Chichester Hub. It comprises the Firetail and Kings Valley mines which together have production capacity in excess of 70mtpa. Solomon represents a valuable source of production by blending higher grade, low cost Firetail ore with low phosphorous Chichester ore to create the high quality Fortescue blend. 14 I FORTESCUE METALS GROUP LIMITED OPERATING AND FINANCIAL REVIEW During the year, Fortescue continued to expand the use of autonomous haulage at both the Kings Valley and Firetail mines. Since the autonomous haulage system (AHS) was deployed at Solomon in 2012, over 200mt of material has been safely moved. The integration of AHS into Solomon has seen a 20 per cent productivity improvement compared to the regular fleet. Overview OPERATING AND FINANCIAL REVIEW Overview of operations Rail and Port Corporate Social Responsibility Fortescue wholly owns and operates its purpose designed rail and port facilities, constructed to deliver iron ore from its mines to Port Hedland and onto its customers. The Company's railway covers 620km and is the fastest, heavy haul line in the world. The Company's world class rail operations run a cycle of 13 trains a day with each train carrying up to 35,000 tonnes of iron ore directly to Herb Elliott Port. Reserves and Resources Iron Bridge, located 100km south of Port Hedland, is a joint venture between Fortescue, Taiwan's Formosa Group and China's Baosteel Group, incorporating the world class North Star and Glacier Valley Magnetite ore bodies. The development of a large scale pilot plant and successful testing of an innovative, low cost production process was completed during Stage One of the project. Subject to market conditions and approval by joint venture partners, Stage Two will deliver product via a pipeline to storage and handling facilities in Port Hedland. Operating and Financial Review Iron Bridge Governance The efficient design and layout, optimal berthing configuration and ongoing innovation to increase productivity makes Fortescue's Port the most efficient bulk port operation in Australia. The site sits on two hundred hectares of land and comprises three inload and outload circuits with three train unloaders, 54km of conveyor systems, three stackers, three reclaimers, transfer stations, drive stations, sample stations, and power and control systems. The Port has five operating berths and is capable of efficiently exporting more than 165mtpa. Financial Report In May 2016, Fortescue was awarded a second towage licence for the Port at Port Hedland. This will ensure Fortescue can provide long term, sustainable towage services crucial to meeting customer needs. Fortescue has the largest tenement portfolio in the Pilbara. Details of the Ore Reserves and Mineral Resources are summarised in the Reserves and Resources Report on pages 25 to 37. Corporate Information While exploration activity in FY16 was primarily focussed on Fortescue's iron ore tenements, the Company continues to undertake early stage, low cost exploration on coppergold prospective tenements in South Australia and New South Wales. Fortescue is also assessing high potential, early stage exploration tenements in highly prospective areas of Ecuador. This exploration is in line with Fortescue's strategy of focussing on its core iron ore business while creating low cost future optionality. Remuneration Report Exploration FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 15 OPERATING AND FINANCIAL REVIEW Key performance indicators C1 costs Safety Production TRIFR 4.3 169.4mt 15 $15.43 2 /wmt 43 Fortescue's FY16 results demonstrate the focus on business fundamentals and the consistent delivery of steady, sustainable cost reductions supported by outstanding performance across all aspects of operations. Fortescue's team continued to innovate and deliver excellent progress on key areas within the Company's control that support its vision to become the safest, lowest cost, most profitable iron ore producer, including: Continuous steady improvements in safety performance Sustainable production delivering maximum value from the Company's assets Productivity, efficiency and innovation further reducing costs. In FY16, Fortescue delivered strong results on each of the above key strategic targets and continued to apply cash generated by operations to debt repayments, significantly strengthening the Company's balance sheet. Safety The health and safety of our people is core to Fortescue's values and the Company's commitment to becoming a global leader in safety. Fortescue's Total Recordable Injury Frequency Rate (TRIFR), used as a measure of its safety performance, has been progressively reducing year on year, with a 15 per cent reduction in FY16 to 4.3. The Company remains focussed on delivering progressive improvement in its safety performance to achieve its vision of zero injury and harm across the entire business. TRIFR, per million hours worked 10 9.2 8 7.6 6.0 6 5.1 4.3 4 2 FY12 FY13 FY14 FY15 FY16 Further information on the Company's safety performance in FY16 and on Fortescue's approach to safety is set out on pages 44 to 45. 16 I FORTESCUE METALS GROUP LIMITED OPERATING AND FINANCIAL REVIEW Overview OPERATING AND FINANCIAL REVIEW Key performance indicators In FY16, Fortescue continued to operate at a consistent production rate, delivering total shipments of 169.4mt. Production and shipments for the year on a wet metric tonnes (wmt) basis are outlined below. 2016 2015 Ore mined 181.1 164.1 +10 Overburden removed 195.9 300.0 -35 Ore processed 167.6 153.6 +9 Shipments - Fortescue mined ore 166.8 160.2 +4 Shipments - Fortescue equity ore 167.4 161.4 +4 Total ore shipped including third party product 169.4 165.4 +2 Mining, million tonnes (wmt) 181.1 153.6 140.4 94.6 124.2 80.9 76.1 57.5 53.9 FY13 FY14 165.4 169.4 167.6 126.0 64.6 FY12 Shipments, million tonnes (wmt) FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 Corporate Social Responsibility 164.1 Processing, million tonnes (wmt) Movement, % Reserves and Resources 12 months to 30 June (million tonnes) Operating and Financial Review Production FY16 The Company's rail and port infrastructure has continued to support its mining and processing operations throughout the year. Fortescue's Port capacity exceeds current operating targets and the Company's focus remains on maximising the value of its ore bodies and infrastructure assets through beneficiation, operating efficiencies and productivity improvements. Financial Report OPF performance continued to improve following the successful implementation of a number of projects during the year enhancing iron ore recovery and plant reliability. A key focus at the OPFs is on increase of iron upgrades and reduction of impurities, allowing product cut-off grades to be lowered and reducing strip ratios while maintaining the overall product grade. Through these initiatives, the strip ratio has continued to decrease averaging 1.1 for the year, including 1.2 at the Chichester Hub and 0.8 at the Solomon Hub. These improvements to strip ratio reflect the strategic investment made by Fortescue in processing capacity, supported by a sustained focus on mining efficiencies and improved ore body modelling. Governance Mining volumes and processing throughput support shipments of 165mt to 170mt per year. Iron ore stockpiles at the mines and product stocks at the OPFs and at Port are maintained at optimum levels to support these production targets and continue to be managed closely to ensure product quality and specifications. Remuneration Report Corporate Information FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 17 OPERATING AND FINANCIAL REVIEW Key performance indicators Costs Steady, consistent cost reductions delivered through FY16 demonstrate operational excellence across the mines, OPFs and infrastructure, together with ongoing delivery of productivity and efficiency improvement programs. C1 costs averaged US$15.43/wmt in FY16, a 43 per cent reduction from the prior year. This result includes an average C1 cost of US$14.31/wmt for the June 2016 quarter. Fortescue's C1 cost reduction journey, with ten consecutive quarters of progressive cost improvements, is illustrated at the bottom of this page. Progressive cost reductions delivered by Fortescue in recent years represent sustainable, long term improvements in operating costs, supporting mine lives in excess of 20 years. Key focus areas which have contributed to the 43 per cent reduction in C1 costs during the year include: OPF performance, with improved upgrades and yields, enhanced plant reliability and shutdown optimisations Mine planning, design and mining methodology Cross-site operational synergies Contractor insourcing programs Mining equipment and labour productivity Autonomous haulage system Procurement initiatives to maximise the value of products and services procured into the business Benefits of the lower Australian dollar and declining oil prices. As focus continues on innovation, productivity and efficiencies, the full year FY17 C1 cost is estimated at US$12-13/wmt, based on an Australian dollar exchange rate of 0.75 and an oil price of US$50 per barrel (WTI). C1 costs journey, US$/wmt 34.88 34.03 32.08 28.48 25.90 22.16 16.90 Q3FY14 Q4FY14 Q1FY15 18 I FORTESCUE METALS GROUP LIMITED OPERATING AND FINANCIAL REVIEW Q2FY15 Q3FY15 Q4FY15 Q1FY16 15.80 Q2FY16 14.79 14.31 Q3FY16 Q4FY16 Overview OPERATING AND FINANCIAL REVIEW Financial results and position Operating and Financial Review Fortescue's FY16 financial results are underpinned by strong operational performance and the continued success of the productivity and efficiency drive. Improved profitability with strong cash flow generation through the year enabled significant debt reductions, which reshaped the Company's balance sheet, improving credit metrics. 7,083 8,574 Underlying EBITDA 3,195 2,506 Net profit after tax 985 316 31.6 10.2 3,023 2,037 Revenue 1 Earnings per share US cents Cash from operating activities Capital expenditure - Fortescue 304 626 Free cash flows 2,719 1,411 Cash and cash equivalents 1,583 2,381 6,771 9,569 Net debt 5,188 7,188 15.43 27.15 Key ratios % % Gearing 45 56 Net gearing 38 49 Underlying EBITDA margin 45 29 Return on equity 12 4 C1 costs 1 US$/wmt Financial Report \u0007 efer to page 20 for the reconciliation of Underlying EBITDA to the financial metrics reported in the financial statements under Australian R Accounting Standards. Governance Debt Corporate Social Responsibility 2015 US$m Reserves and Resources 2016 US$m Key metrics Remuneration Report Corporate Information FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 19 OPERATING AND FINANCIAL REVIEW Financial results and position Financial performance In FY16, Fortescue delivered net profit after tax of US$985 million and earnings per share of 31.6 cents (FY15: US$316 million and 10.2 cents). This result has been achieved despite a 29 per cent reduction in the iron ore price and demonstrates strong operational performance and significant improvement in operating margins. Underlying EBITDA 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. In FY16, Fortescue's operations generated Underlying EBITDA of US$3,195 million (FY15: US$2,506 million). The reconciliation of Underlying EBITDA to the financial metrics reported in the financial statements under Australian Accounting Standards is presented below. Note1 2016 US$m 2015 US$m Operating sales revenue 3 7,083 8,574 Cost of sales excluding depreciation and amortisation 5 (3,841) (6,051) Gain on disposal of assets 4 Net foreign exchange (loss) gain 4, 6 1 3 (2) 68 Administration expenses 6 (52) (94) Other income 4 6 6 3,195 2,506 Underlying EBITDA Finance income 7 214 15 Finance expenses 7 (675) (644) Depreciation and amortisation 5, 6 (1,244) (1,405) Exploration, development and other 6 Net profit before tax Income tax expense 8 Net profit after tax 1 (136) (52) 1,354 420 (369) (104) 985 316 Notes to the accompanying financial statements. The 27 per cent improvement in Underlying EBITDA has been delivered through reductions in C1 operating costs, contributing US$1,956 million to the result and fully offsetting the impact of lower iron ore prices as illustrated below. Underlying EBITDA, US$ million 377 1,743 1,956 70 2,506 FY15 70 18 3,195 117 Volume C1 costs 20 I FORTESCUE METALS GROUP LIMITED OPERATING AND FINANCIAL REVIEW Shipping costs Price Royalty Fx Other FY16 Overview OPERATING AND FINANCIAL REVIEW Financial results and position Revenue Note1 2016 US$m 2015 US$m 6,923 8,323 3 Sale of joint venture ore 3 24 67 Other revenue 3 136 184 7,083 8,574 Operating sales revenue Shipments - Fortescue mined ore mt 166.8 160.2 Shipments - Fortescue's share of joint venture ore mt 0.6 1.2 62% Fe CFR Platts index US$/dmt 51 72 Realised price US$/dmt 45 57 1 (i) Key movements in operating sales revenue Revenue, US$ million 8,574 1,743 343 43 48 7,083 Other FY16 Governance Revenue decreased by 17 per cent or US$1,491 million as a result of a 29 per cent reduction in the iron ore price, offset by the impact of improved price realisations. Corporate Social Responsibility Notes to the accompanying financial statements. FY15 Price Volume Sale of joint venture ore Financial Report Other key factors impacting Fortescue's revenue in FY16 were the increase in Fortescue's iron ore shipments and lower sale of joint venture iron ore following temporary suspension of the Nullagine Iron Ore Joint Venture operations in December 2015. Revenue and iron ore price (ii) Price realisations US$/dmt 11,753 9,000 160 8,574 8,120 120 7,083 6,716 80 3,000 40 In FY16, Fortescue realised US$45/dmt (FY15: US$57/dmt). FY12 FY13 FY14 Revenue FY15 FY16 CFR 62% Fe Platts index 0 Corporate Information 6,000 Remuneration Report US$m 12,000 Fortescue products are priced relative to the 62% Fe CFR Platts index, which averaged US$51/dmt for the year (FY15: US$72/dmt). Realised prices average in the range of 85 to 90 per cent of this index. Reserves and Resources Sale of iron ore Operating and Financial Review Financial performance (continued) FORTESCUE METALS GROUP LIMITED 2016 ANNUAL REPORT I 21 OPERATING AND FINANCIAL REVIEW Financial results and position Financial performance (continued) Production costs The reconciliation of C1 costs and total delivered costs to customers to the financial metrics reported in the financial statements under Australian Accounting Standards is set out below. Note1 2016 US$m 2015 US$m Mining and processing costs 5 2,092 3,765 Rail costs 5 201 230 Port costs 5 204 274 Operating leases 5 76 80 C1 costs, US$ million 2,573 4,349 Shipments - Fortescue mined ore, mt 166.8 160.2 15 27 C1, US$/wmt Shipping costs 5 781 1,112 Government royalty2 5 446 516 Administration expenses 6 52 94 8 11 23 38 Shipping, royalty and administration, US$/wmt Total delivered cost, US$/wmt 1 Notes to the accompanying financial statements. 2 F\u0007 ortescue pays 7.5 per cent State Government royalty for the majority of its iron ore products, with a concession rate of five per cent applicable to beneficiated fines. Key factors contributing to the FY16 operating costs performance are discussed on page 18. Total delivered cost, US$/wmt 69 21 62 18 52 18 38 11 Total delivered cost to customers, inclusive of C1 costs, shipping, state government royalties and administration charges, were US$23/wmt (FY15: US$38/wmt). 23 8 48 44 34 27 15 FY12 FY13 FY14 FY15 FY16 C1 Shipping, royalty and administration Total delivered cost Non-operating events Key non-operating matters forming part of the financial result include: Net gain on debt redemption of US$150 million (FY15: net loss of US$45 million) Depreciation and amortisation expenses of US$1,244 million (FY15: US$1,405 million) Exploration, \u0007 development and other expenses of US$136 million, following the temporary suspension of the Nullagine Iron Ore Joint Venture operations and review of capital projects (FY15: US$52 million) Income \u0007 tax expense for the year of US$369 million at an effective income tax rate of 27 per cent (FY15: US$104 million at a rate of 25 per cent). Shares on issue The number of shares on issue at 30 June 2016 was 3,113,798,151 and remained unchanged since last year. 22 I FORTESCUE METALS GROUP LIMITED OPERATING AND FINANCIAL REVIEW Overview OPERATING AND FINANCIAL REVIEW Financial results and position Strong cash generation underpinned by consistent operating performance and sustainable cost reductions delivered across the supply chain enabled Fortescue to accelerate debt repayments. In FY16, Fortescue successfully retired US$2.9 billion of debt, generating a net gain on redemption of US$150 million and delivering annual interest savings of US$186 million. As a result of these debt repayments, the net gearing ratio dropped to 38 per cent with gross gearing expected to fall below 40 per cent during FY17. Operating and Financial Review Balance sheet strength Key metrics 2016 US$m Note1 2015 US$m 10(a) 6,771 9,569 Cash and cash equivalents 10(b) (1,583) (