Fortescue Metals Group Ltd (ASX: FMG)
Fortescue Metals Group Ltd (Fortescue Metals) is an iron ore miner. Fortescue Metals produces 170 million tonnes of iron ore per annum, making it one of the largest global iron ore producers. Fortescue Metals has a market capitalisation of A$34 billion.
What has happened to Fortescue Metals share price recently?
Fortescue Metals was trading at a February 2020 high at around A$12.00. Since then, Fortescue Metals share price has increased by around 11% and is currently trading at A$13.62.
What are the key recent developments in Fortescue Metals operations?
During the March 2020 quarter, Fortescue Metals performed very well. Fortescue Metals reported iron ore shipments of 42.3 million tonnes, up 10% compared with March quarter 2019 and C1 costs of US$13.27/wet metric tonne (wmt), down 2% compared with March quarter 2019 costs of US$13.51/wmt. Continued strong demand for iron ore allowed a delivered average revenue of US$73/dry metric tonne (dmt).
Regarding Fortescue Metals response to COVID-19, the company has implemented a range of strategies. Firstly, the company has expanded a range of measures to protect the health and safety of the employees. This includes site operational roster being temporarily extended from a two week on/one week off roster to a four week on/two week off roster which has reduced people movement by approximately 40 per cent.
What is the outlook for Fortescue Metals?
The outlook for Fortescue Metals is positive. Fortescue Metals announced (30 April 2020) in the company’s report their FY20 guidance has been upgraded to iron ore shipments of 175 – 177 million tonnes (originally 170 – 175 million tonnes). C1 cost guidance for FY20 is US$12.75 – US$13.25/wmt. Total capital expenditure revised to US$2.0 - US$2.2 billion (previously US$2.4 billion), reflecting the timing of expected payments on growth projects
In addition to Fortescue Metals strong operational performance, Fortescue Metals has a strong balance sheet with US$4.2 billion cash on hand at 31 March 2020 (US$3.3 billion at 31 December 2019). This includes US$1.6 billion reserved for the FY20 interim dividend, which was paid on 6 April 2020. Gross debt remained at US$4.0 billion at 31 March 2020, resulting in a net cash position of US$0.1 billion, compared with net debt of US$2.9 billion at 31 March 2019. Total capital expenditure year-to-date is US$1.3 billion.
Rio Tinto Ltd (ASX: RIO)
Rio Tinto Ltd (Rio Tinto) is one of the world’s largest metals and mining company. Rio Tinto produces iron ore, aluminum, copper, diamonds, titanium and borates. Rio Tinto has 60 operations and projects around the world and around 37,000 suppliers. Rio Tinto has a market capitalisation of A$33 billion.
What has happened to Rio Tinto share price recently?
Rio Tinto was trading at a February 2020 high at around A$99. Since then, Rio Tinto share price has fallen around 7% and is currently trading at A$92.16.
What are the key recent developments in Rio Tinto operations?
During the March 2020 quarter, Rio Tinto performed soundly. Rio Tinto’s production levels are as follows: Pilbara iron ore production for Q1 2020 is 77.8 Mt (up 2% from Q1 2019); bauxite production for Q1 2020 is 13.8 Mt (up 9% from Q1 2019); aluminum production for Q1 2020 is 783 kt (down 2% from Q1 2019); copper production for Q1 2020 is 133.0 kt (down 8% from Q1 2019); titanium dioxide slag production for Q1 2020 is 293 kt (down 1% from Q1 2019); and IOC iron ore pellets and concentrate production for Q1 2020 is 2.6 Mt (up 3% from Q1 2019).
Regarding COVID-19 effects on Rio Tinto’s operations, the company has reduced mining operations at Richards Bay Minerals in South Africa in compliance with a government directive to lockdown on 26 March for 21 days. Rio Tinto has shut down the fourth pot-line at the Tiwai Point smelter in New Zealand with production continuing the other three lines to comply with government lockdown requirements for containing the spread of Covid-19. However, issues relating to COVID-19 has not materially impacted on Rio Tinto’s iron ore operations.
What is the outlook for Rio Tinto?
Rio Tinto management broadly maintained production guidance for FY20. In general, it is expected that production in the iron ore and aluminum businesses will be broadly flat, while production in the copper and diamond business is expected to fall. The flat outlook for iron ore production is a little below market expectation. For the minerals and energy business, production of titanium dioxide and borates is expected to be flat. This means that changes in commodity prices will drive Rio Tinto’s FY20 earnings rather than changes in production.
In terms of commodity prices, the key question now for investors is will the iron ore price remain strong over the remainder of 2020. In Brazil, COVID-19 is continuing to have devastating impact on the country. This has put into question Vale’s (a large Brazilian iron ore producer) ability to maintain production levels over the short-term. In Vale’s Q1 report, it is noted that considering the uncertainties and potential impact of COVID-19 on Vale’s operations, the company revised its production guidance for its businesses. The new forecasts for 2020 production are iron ore fines 310-330 Mt (from 340-355Mt) and pellets 35-40Mt (from 44Mt).
COVID-19 is also halting repair work Vale would like to make on several their iron ore projects in the region.
This has put upwards pressure on the iron ore price, which is a positive for Australian iron ore producers. However, it is important to note that over the medium to long term, when COVID-19 is dealt with and Vale production normalises to pre-tailing dam levels, it can be expected that the iron ore price will fall from current levels of around US$90 per tonne to around US$50 per tonne.
A worrying factor that could impact Australian iron ore miners are new trade tensions between Australia and China. Australia and China began a political dispute after the Australian Government called for an international inquiry into the global response to COVID-19. This was strongly supported by the broader intentional community, especially by the European Union. Over 110 countries voted in favour of this resolution at the World Health Assembly. Interestingly, China supported the inquiry, mainly due to the pressure put on China by the international community to vote in favour of the inquiry.
It appears as a result of Australia’s actions, China retaliated against Australia by imposing several trade related disruptions. Firstly, China imposed an 80% import tariff on Australia barley exports. Secondly, China targeted Australian beef by suspending imports from four large processing plants. Thirdly, China announced that Australian iron ore exports will have to go through inspections.
These trade actions by China seems to be in retaliation against Australia for calling an international inquiry into the COVID-19 response. The worry is that China could expand this trade dispute to possibly include tariffs on Australian iron ore. However, this is considered unlikely since China relies so heavily on Australian iron ore to build infrastructure projects to boost its economic growth.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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