* Fortescue to make early $500 million repayment on Friday
* CEO sees long term market for exports to China
* September quarter shipments rise 60 percent (Recasts, adds CEO quotes)
By James Regan
SYDNEY, Oct 16 (Reuters) - Iron ore producer Fortescue Metals Group said it will make a $500 million bond repayment on Friday, more than three years before it is due, underscoring its confidence of turning a profit despite a slump in iron prices.
Fortescue chief executive Nev Power said on Thursday the company would continue to pay down debt early, even as a 40 percent drop in iron ore prices this year squeezed operating margins.
"I sleep very peacefully, we are generating strong cash flows and continuing to repay our debt," Power said as the company released its quarterly report.
Fortescue has expanded rapidly to become Australia's third-largest iron ore miner behind global giants Rio Tinto and BHP Billiton , and is currently producing at a rate of 156 million tonnes a year.
Iron ore prices, however, have tumbled from a peak of around $190 a tonne in early 2011 to current levels around $82.20 .IO62-CNI=SI as big miners continue to flood the market with cheap ore in a battle for market share.
Rio Tinto's output is set to rise by 24 million tonnes this year to 290 million tonnes a year, while BHP is adding a further 65 million tonnes to take its output to the same level by mid-2017.
Fortescue said its September quarter shipments rose 60 percent from a year ago to 41.5 million tonnes.
Its average selling price fell to $71 per tonne over the quarter, from $121 per tonne a year earlier. This was only partly offset by a 12 percent fall in overall costs of landing ore in China to $45 a tonne.
However, Power said modernisation of China's steel sector - Fortescue's main customer - provided confidence there will long be a market for the company's ore.
"Increasingly, large modern steel plants are being built on the seaboard to take advantage of lower-cost seaborne iron ore," he said.
Unlike its bigger rivals, Fortescue has called a temporary halt to growth while it pays off a hefty portion of the $11.3 billion it borrowed to fund massive development costs at its mines. Friday's payment of an unsecured note will bring total repayments to $3.6 billion.
While its costs remain above BHP and Rio Tinto, which are pegged between $30 and $35 a tonne all in, they are still well below those of smaller Australian rivals.
Fortescue's shares have still fallen 41 percent so far this year, compared with a 68 percent fall by Atlas Iron, it's nearest rival.
Editing by Richard Pullin