Cost cuts keep Fortescue in black despite iron ore plunge

* Fortescue aims to cut iron ore costs down to $39/t

* Says mounting industry supply glut "a disaster"

* Shares (Berlin: DI6.BE - news) jump as much as 9 percent

* To hold at least $1.5 billion in cash this quarter (Recasts, adds CEO, analyst quotes)

By James Regan

SYDNEY, April 16 (Reuters) - Australia's Fortescue Metals Group Ltd slashed costs more than expected to stay in the black last quarter, as it scrambles to avoid the fate of smaller rivals in the beaten down iron ore market.

The attack on costs sent the miner's stock up as much as 9 percent on Thursday, although the shares have still halved in value over the past seven months in line with plummeting prices for the steelmaking raw material.

Two small iron ore companies have shut mines in the past week, while Goldman Sachs (NYSE: GS-PB - news) says half the world's so-called "tier two" miners - which includes Fortescue - are at risk of closure as mega miners boost supply.

"The current state of the industry has been a disaster for everyone. It's ripped the heart out of the industry," Fortescue chief executive Nev Power said, adding that the miner aimed to cement its place in the business, irrespective of any further price falls.

"Absolutely there's a Plan B, C, and D, and whatever the market price is, we'll respond to that and make sure that we can maintain a positive cash margin," he told reporters on a conference call.

Fortescue, the world's fourth-largest iron ore producer but saddled with $9 billion in debt, has been under scrutiny since it pulled a $2.5 billion refinancing last month due to the high yield being sought.

In its third-quarter production report, the miner said it had improved its total delivered cost by 17 percent on the prior quarter, and was now targetting a breakeven price of $39 a tonne.

This compares with a current price for delivery to China - Fortescue's main market - of $49.70 a tonne, down about 60 percent from a year ago .

Fortescue also said its lower operating costs should allow it to keep its cash at or above $1.5 billion this quarter, reassuring investors who had feared the company was burning through its cash pile at current ore prices.

PRICE THE WILD CARD

Analysts said the strong result eased pressure on Fortescue to raise capital in the short-term, but said the outlook for iron ore remained challenging.

"I think it would be prudent of them to be continuing to assess all the options," said Chris Drew, a Sydney-based analyst at RBC Capital. "If the iron ore price goes to the low 40s, the cost performance will be very helpful, but it won't solve everything for them."

Citi this week forecast iron ore will average just $37 a tonne over the second half of calendar 2015 and will only rise to about $40 by 2019.

It blamed a rising supply glut in the sea-traded market for ore, due to over-production in Australia as well as over-estimates of steel production growth in China.

Power said Fortescue had no plans to increase production further and was assessing options to raise extra capital. The company has previously canvassed selling a stake in its infrastructure, but he said it was not considering an equity raising.

The better-than-expected cost cuts would likely force out short-sellers who have been targeting the stock as iron prices have slumped, two fund managers told Reuters.

But with Fortescue cutting costs as fast as bigger rivals Rio Tinto (Xetra: 855018 - news) and BHP Billiton (NYSE: BBL - news) , the industry cost curve was being driven lower and flatter, which did not bode well for producers in an oversupplied market.

"This probably generates a short-covering rally in Fortescue, but it tells you where the industry's headed," said Paul Phillips, a partner at Perennial Investment Partners. (Additional reporting by Sonali Paul and Swati Pandey; Editing by Richard Pullin)