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 features of HY20 results?
- Iron ore shipments for HY20 of 88.6mt, up 7% compared with the corresponding period.
- Revenue for HY20 is US$6.5 billion, up 83% compared with the corresponding period.
- Underlying EBITDA for HY20 is US$4.2billion, up 159%. This represents an EBITDA margin of 65%.
- Net profit after tax for HY20 is US$2.5 billion, up 281% compared with the corresponding period.
- Earnings per share for HY20 of US79.7 cents, up 283% compared with the corresponding period.
- Fully franked interim dividend of A$0.76 per share compared with A$0.30 per share for HY19. This represents an increase of 153% and a payout ratio of 65%.
What are the key drivers of this result?
FMG’s strong revenue and earnings growth reflects the following factors:
- The average realised iron ore price for HY20 of US$80/dmt compared to US$47/dmt in HY19, up 73%. This increase is higher than the average benchmark 62% Platts CFR Index price of 38% over the same period. The improved price outcomes in HY20 reflected market conditions and product mix changes within Fortescue’s portfolio, including the introduction of West Pilbara Fines.
- C1 operating costs averaged US$12.73/wmt during HY20, 3% lower than HY19. Fortescue’s continued focus on productivity and efficiency delivered ongoing cost benefits throughout the half year period.
What is the outlook for FMG?
FMG management provided the following guidance for FY20:
- 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.
- 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 into 2020. 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. 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. Over the medium to long term, 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.
What is the market reaction to FMG’s HY20 results?
The market reaction to FMG’s HY20 report is positive, with FMG’s share price is up 1%. This reflects that the HY20 result is in-line with market expectations. FMG is currently trading at A$11.19 (Wednesday 19 February 2020). FMG trades at a forward P/E ratio 6x and has an annual dividend yield of around 13% based on HY20 earnings.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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