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$32 billion.
What has happened to Fortescue metals share price this year?
Fortescue Metals hit a new 52-week high of A$10.37 a share. This represents a 177% increase of the share price in the year.
Why has Fortescue Metals performed well?
Fortescue Metals has benefited from the strong iron ore price throughout the year. The spot price of iron ore peaked in July at around US$125.00.
The higher than average iron ore price (particularly in 2019) reflects continued strength of Chinese demand and problems with tailing dams in Brazil causing Brazilian production of iron ore to fall significantly in late 2018 and early 2019. The current iron ore price also reflects that the Australian producers are unable to increase supply in the short term without significant capital investment. Further, the timing of a full recovery of Brazilian iron ore production remains highly uncertain. Today (11 December 2019) the iron ore spot price is around US$91.00, this still higher than the long average of around US$70.
Another important point is in 2011, the price of iron ore peaked at around $US185 per tonne. This was at a time where the $US/$A exchange rate was around parity. Currently, the $US/$A exchange rate is 0.68. Consequently, in Australian dollar terms, the iron ore price when it peaked in July was close to the peak in 2011. A continuing weak A$ allows for Australian iron ore to become cheaper on the international market, which should continue to boost exports of iron ore.
How has the strong iron ore price effected other Australian iron ore producers?
In recent years, BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) have conducted capital management activities recently in light of the strong commodity prices, sale of underperforming assets and a preference to hand back surplus capital and franking credits to shareholders.
- In December 2018, BHP undertook an off-market buy back of BHP shares ($US5.2 billion). This was followed by a special dividend to BHP shareholders in January 2019 ($US5.2 billion).
- In February 2019, Rio Tinto commenced an on-market buy back of $US1.1 billion, to be completed no later than February 2020. Rio Tinto also conducted buy backs in 2018 and 2017. Further, Rio Tinto paid a special dividend of $US2.43 per share in April 2019. Rio Tinto also paid a special dividend of 61 UC cents per share on 19 September 2019.
- Fortescue Metals has paid two special dividends in FY19. The first was $A0.11 per share in April 2019 and second was A$0.60 per share in June 2019. This is the first time Fortescue Metals has undertaken capital management activities (other than buying back debt).
Final thoughts on Fortescue Metals
Fortescue Metals has had an incredible year backed on the high spot price of iron ore. However, it is important to note that if the iron ore producer Vale recommences a full production recovery the iron ore price could come back down to the long-term average of around US$70. Fortescue Metals is cheap for investors to buy with a forward P/E ratio of around 6x and an annual dividend yield of around 7.5%.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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