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FMG

FMG Metals Ltd COVID-19 Response

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

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.

 

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Update on COVID-19

The coronavirus (COVID-19) was first reported from the Wuhan province in China on 31 December 2019. The World Health Organisation data shows a total of confirmed cases of 634,835 and 29,957 deaths globally. As of today (30 March 2020), there have been over 4,093 confirmed cases and 8 have died of COVID-19 in Australia.

 

What is an update on Fortescue Metals share price?

Over the last month, Fortescue Metals share price has fallen around 10% and is currently trading at A$9.50.

 

What is Fortescue Metals response to COVID-19?

Fortescue Metals announced today (30 March 2020) the company’s response to the COVID-19 outbreak. Fortescue Metals announced that the company’s mining, processing and shopping activities remains in line with FY20 shipping guidance and is currently towards the upper end of guidance range of 170 – 175 mt. Fortescue Metals has a strong balance sheet with US$4.3 billion of liquidity including US$3.3 billion of cash on hand and US$1 billion available from the revolving credit facility. This should allow Fortescue Metals to financially deal with any unforeseen concerns in the short-term.

 

What is the outlook for Fortescue Metals?

Fortescue Metals reported strong HY20 earnings of net profit after tax of US$2.5 billion, up 281% compared with the corresponding period. In addition, as per the announcement today, Fortescue Metals FY20 guidance remains as follows: shipments at the upper end of the range of 170 –175mt; C1 costs in the range of US$12.75 –US$13.25/wmt; total capital expenditure of US$2.4billion incorporating the Pilbara Energy Connect program; and a dividend pay-out policy is a ratio of 50 to 80% of full year net profit after tax.

That said, the key question now for investors is will the iron ore price remain strong moving forward. The Brazilian iron ore producer Vale is expecting iron ore production in 2020 to reach pre tailing dam collapse levels. This could increase total supply of iron ore in the global market reducing the price. Another point of concern for Australian iron ore producers is the coronavirus outbreak in China. The outbreak could weaken Chinese economic growth and demand for iron ore to produce steel. These factors put downward pressure on the iron ore price. Investors could closely monitor these supply and demand issues for iron ore moving into 2020, and the effect they may cause on Australian iron ore producers such as FMG.

Investors that want exposure to the iron ore industry could consider following Fortescue Metals. Fortescue Metals is trading at a forward P/E ratio of 5x earnings and a dividend yield of over 10% (fully franked). These indicators reflect the market’s expectation that the iron ore price will fall over the medium to long term to around US$50 per tonne. However, notwithstanding the above points, the iron ore price remains surprisingly resilient, currently trading at around the US$85-90 per tonne.


 

Disclaimer:


This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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