Fortescue Metals Group Ltd (ASX: FMG) 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 are the key points of Fortescue Metals quarterly report?
Fortescue Metals iron ore shipments of the June quarter is 47.3 mt. Fortescue Metals FY20 iron ore shipments totalled 178.2 mt, up 6% compared with FY19. This exceeds the top end of guidance of 177 mt. C1 costs for the June quarter is US$13.02/wmt. C1 costs for FY20 is US$12.94/wmt. This includes COVID-19 related costs of approximately US$0.22/wmt. Total capital expenditure in FY20 is US$2.0 billion. Average revenue for the June quarter is US$81/dmt, which represents a 14% discount the spot price. The average revenue for FY20 is US$79/dmt.
Importantly, Chinese crude steel production remained strong in the June quarter. Market conditions for the iron ore market continue to show strong demand and weakening supply, which is putting upwards pressure on the spot price. Weakening supply stems from continued COVID-19 issues in Brazil that is affecting Vale’s production capacity. The spot price of iron ore today is US$107, well above the long-term average.
Fortescue Metal’s revenue per tonne increased by 21% compared to FY19. This is mainly attributed to stronger demand for iron ore, and a sustained high spot price for iron ore.
Fortescue Metal’s maintains a strong balance sheet with cash on hand totalling US$4.9 billion at the end of 30 June 2020 (US$4.2 billion at 31 March 2020). Gross debt increased to US$5.1 billion at 30 June 2020 following the drawdown of the US$1.0 billion revolving credit facility in April 2020. Fortescue’s net debt at 30 June 2020 was US$0.3 billion, compared with net cash of US$0.1 billion at 31 March 2020.
What is the outlook for Fortescue Metal’s?
Fortescue Metal’s provided FY21 guidance in this report, with iron ore shipments for FY21 expected to be in the range of 175 – 180 mt and C1 costs for FY21 expected to be in the range of US$13 – US$13.50/wmt (based on an assumed $US/$A exchange rate of $0.70). Total capital expenditure for FY21 is expected to be in the range of US$3.0 – US$3.4 billion. This is comprised of approximately US$1.0 billion of sustaining, operational and hub development capital, US$140 million on exploration expenditure and studies and US$1.9 - US$2.3 billion on major projects (Eliwana, Iron Bridge and Energy).
The main factor that is going to determine Fortescue Metal’s success is the iron ore price. If the iron ore price continues to remain strong due to strong demand and weakening supply, Fortescue Metal’s should continue to performance well. At some point, the iron ore price should weaken towards the long-term trend (perhaps around US$50 per tonne).
What is the market reaction to Fortescue Metals report?
The market reaction to Fortescue Metals report is positive. Fortescue Metals share price is up around 3% and is currently trading at A$17.39. Fortescue Metals is trading at a forward P/E ratio of around 7x and has an annual dividend yield of around 6.2%.
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