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Fortescue Metals Group FY19 Results – Sound Result But The Iron Ore Market Is Weakening

Jordan Baird

Jordan Baird is the head ASR Wealth Advisers client services desk and has been with the organisation since 2017. He first started investing in his early years. While he believes that investors should leave no stone unturned he has a particular interest in trading based on broad macroeconomic trends along with specific analysis of innovative up-and-coming companies.

Fortescue Metals Group (ASX: FMG) is an iron ore miner. Fortescue Metals consistently 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$23.3 billion.

Fortescue Metals Group - FY19 Results

What are the results from Fortescue Metals FY19?

Today (Monday 26 August 2019) Fortescue Metals released its FY19 annual results. The main points are as follows:

  • Revenue from ordinary activities for FY19 is US$9,965 million, up 45 per cent from FY18.
  • Underlying NPAT for FY19 is US$3.2 billion, up 195 per cent from FY18.
  • Earnings per share for FY19 is US$1.03.
  • The final dividend of A$0.24per share (fully franking) bringing total FY19 dividends to A$1.14, a 78 per cent pay-out of full year NPAT and 396 per cent higher than FY18 dividends of A$0.23 per share

Specific results on company operations are as follows:

  • Overburden removed for FY19 is 303.7 million (wmt), up 14 per cent from FY18.
  • Ore mined for FY19 is 206.7 million (wmt), up 12 per cent from FY18.
  • Ore processed for Fy19 is 176.9 million (wmt), up 7 per cent from FY18.
  • Shipments for FY19 is 167.7 (wmt), down 1 per cent from FY18.


What were the drivers of this result?

The main driver of this result was a higher average iron ore price. The iron ore price increased significantly as the Brazilian iron ore mine Vale halted production due to the tailing dam collapse in 2018. As the supply of iron ore in the international market was reduced, the price of iron ore significantly increased. This allowed Fortescue Metals to have higher than average cash flow and profitability.

Fortescue Metals management also notes:

Continued strength in Chinese steel production, growing by 9.9 per cent in the first half of calendar 2019 compared to the prior comparable period.


What is the outlook for Fortescue Metals? 

Fortescue Metals management notes that FY20 Guidance includes:

  • 170-175mt in shipments, inclusive of 17-20mt of West Pilbara Fines product, this is slightly up from FY19.
  • Total capital expenditure of US$2.4 billion.
  • A total dividend pay-out ratio between 50 and 80 per cent of full year NPAT

The Brazilian iron ore miner Vale has recommenced partial production of its iron ore mine in July. Over time, it can be expected that the iron ore price will fall back to its long-term trend (possibly around the US$50 to US$80 range). The iron ore price has weakened significantly in the last two months, with the price around US$88 per tonne (62 per cent fines) compared with US$120 per tonne in early July 2019. This situation is unfavourable Fortescue Metals, as a falling iron ore price will have a negative impact on profitability and cash flow.


What is the market reaction?

The initial market reaction to Fortescue Metals FY19 is slightly negative. Fortescue Metals share price is down around 4 per cent and is currently trading at around A$7.24 (11.45am, 26 August). However, this result may not be fully due to Fortescue Metals FY19 results, as the ASX200 is down today. Fortescue Metals has a P/E ratio in the high-teens and an annual dividend yield of 4.0 per cent (fully franked).




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).

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ASR has no position in any of the stocks mentioned.

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