Fortescue Metals Group (FMG) is an iron ore miner, with operations located in the lucrative Pilbara iron ore province in Western Australia.

The company is the third biggest iron ore miner in Australia behind BHP Billiton (ASX:BHP) and Rio Tinto (ASX:RIO) – two of the market’s leading blue chip stocks.

On 1 June, FMG CEO Andrew Forrest announced plans to step down from his role on July 18.

Forrest, who founded FMG in 2003, will assume the new role of company chairman at the board’s next meeting on August 18.

Chief Operating Officer Nev Power will become the new FMG CEO upon Forrest’s exit.

Separately FMG said it is targeting an annual iron-ore production rate of 155 million tonnes by mid-2013.  FMG was previously aiming to achieve the milestone by 2014.

The group said key contracts are in place and the strong price of iron-ore has provided it with the means to grow capital spending.

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Fortescue Metals (FMG) is an iron ore miner, with operations located in the lucrative Pilbara iron ore province in Western Australia.

FMG was one of the market’s hot shares last year when it doubled its share price after bottoming out near $3.50 in May.

On 25 March, FMG downgraded its 1Q11 production guidance due to the wet weather events at the beginning of the year.

FMG now expects quarterly production to be at the lower end of its previous guidance of 8.5 – 9.0 million tonnes of iron ore.

However, Fortescue Metals said that operations are now back to normal and that its Christmas Creek ore processing, stockpile and train loading facility has now commenced.

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Bradken (BKN) is a leading supplier of consumable parts, capital equipment and associated maintenance and refurbishment services to the resources and freight rail industries.

The company’s five divisions are mining products, rail, power and cement, engineered products and industrial.

The company suffered from a volatile environment over 2008, as the commodities bubble burst and the stock market worried over demand for BKN’s services.

BKN has seen signs of improvement in 2010 on a turnaround for miners and iron ore prices, improved order intake levels and strength in its rail division.

The company is also excited over its acquisition of Almac, which will offer BKN access to new wear products in the growing Western Canadian oil sands, coal and hard rock mining market.

BKN recently impressed the market when it upgraded its FY10 underlying earnings guidance (EBITDA) to be in line with, instead of below, FY09 EBITDA.

Iron ore awe

A turnaround for miners and commodities has seen BKN showing signs of decided strength over 2009 and into 2010.

The spot price of iron ore has traded significantly above the benchmark for a while now. A shift away from the traditional benchmark pricing of ore has transpired, resulting in an indexed system that more closely reflects market movements during the year.

Demand from China and restocking in the developed world has driven the recovery seen in commodity prices.

Last week, iron ore major BHP Billiton (BHP) delivered another record in West Australian iron ore production, with the miner’s iron ore and metallurgical coal production up 16% in the June quarter from the same period a year ago.

Iron ore sector peer Fortescue Metals Group (FMG) confirmed mid-month that it ran its West Australian mines, railways and ports harder than expected last quarter to benefit from the most of near-record iron ore prices.

Boom times for iron ore and increased sector activity is beneficial for BKN, which is sure to pick up more work owing to sector strength.

BKN also stands to benefit from increased activity in the coal sector, with major miners BHP and Rio Tinto (RIO) in late May bidding on Queensland’s coal rail track network.

BHP views coal as a lucrative place to be at the moment. The miner is reportedly seeking a 10% increase in the price of coking coal for the July-September quarter, to roughly $225 per tonne.

Almac on board

A couple of months ago, BKN agreed to acquire the business assets of Canadian-based Almac Machine Works for $51 million. BKN confirmed the acquisition went through on 12 July.

Almac manufactures and supplies a range of products and services primarily to the Canadian oil sands, mining and conventional oil and gas markets. Canada has the world’s second largest proven oil reserves at 175 billion barrels, trailing only Saudi Arabia, with 96% of that being Alberta oil sands.

The new business will be managed from within the Resources division of the US based Engineered Products division and is expected to drive synergies amounting to $0.5 million per annum.

The acquisition price of $51 million represents 5.0x normalised CY09 EBITDA of $10.3 million. The acquisition is funded by a $50 million capital raising, and is expected to be approximately 3% EPS accretive in the first full year after the acquisition.

Almac is expected to report normalised revenue of $55 million and normalised EBITDA of $13.3 million for the year ending 31 December, 2010.

Recent financials

On 9 February, BKN reported its 1H10 results, impressing the market.

BKN clocked a net profit after tax for its December half of $25.7 million, a 26% decrease on the same half in the prior year.

Operating earnings were up on guidance but down 22% on last year to $70.7 million whilst EPS decreased 30% to 19.8 cents per share.

BKN declared a half dividend of 13 cents per share, up 30% on the prior year.

BKN’s Rail division delivered sales growth of 21% in 1H10 compared to 1H09 as the group saw continued strong market demand for freight wagons.

BKN worked hard over 1H10 to reduce its costs and raise its cash flow. Operating cash flow for the half of $81.8 million was 54% higher on year due to reduced working capital and lower capital expenditure.

The strong cash performance enabled a reduction in net debt of $72 million from June 2009 to $326.3 million at December 2009.

BKN’s gearing is sound, with net debt at 2.19 times EBITDA.

Improving outlook

Along with news of the Almac acquisition, BKN upgraded guidance provided at its 1H10 results in February, with FY10 EBITDA now expected to be in line with, instead of slightly below, FY09 EBITDA.

BKN’s Rail division is expected to deliver a strong performance through continued productivity improvements at the Xuzhou operations as well as ongoing purchasing gains.

All other divisions continue to improve, in line with expectations.

BKN remains comfortable with the outlook for the core business, with signs of recovery in the US-based Engineered Products Division.

Outlook

Even back when BKN forecast FY10 to be down slightly on FY09, the market was still expecting a decent full year result owing to improved market conditions.

This was confirmed by the company itself when it recently upgraded its FY10 underlying earnings guidance to be in line with, instead of below, FY09 EBITDA.

BKN stands to benefit significantly from forecast skyrocketing iron ore prices, as it is closely tied to miners and the iron ore sector.

A big boon going forward will be BKN’s acquisition of Almac, which will provide the company with access to new wear products in the growing Western Canadian oil sands, coal and hard rock mining market.

BKN has also seen order intake levels rise and expects particular strength from its rail division, which performed strongly over 1H10.

BKN may even beat its FY10 guidance, as it recently beat underlying earnings guidance for 1H10.

Therefore it will be one of the stocks to watch in coming months.

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Fortescue Metals Group (FMG) is an iron-ore miner with operations in WA’s Pilbara region, and is Australia’s third largest miner in the stock market, behind RIO and BHP

According to FMG’s CEO, Andrew Forrest, a tentative deal with Kevin Rudd was reached over the resources super profits tax just days before he was ousted as PM.

The agreement proposed lifting the rate at which the profit tax would kick in from 6%, to 15%.

In addition, the agreement would have placated part of the bigger miners’ concerns over the tax being applied retrospectively across existing projects.

Interestingly, mining shares would have likely have been the shares to buy had the agreement been finalised.

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