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Fortescue Metals Group Quarterly Production Report – Flat Result  

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 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$26.8 billion.

fortescue metal grp - Quarter Production report

What are the main points from Fortescue’s quarterly production report?

  • Ore mined for September quarter 2019 is 50.6 mt,down 12% from the previous quarter.
  • Ore processed for September quarter 2019 is 45.1 mt, down 7% from the previous quarter.
  • Shipments for the September quarter 2019 is 42.2 mt, up 5% from the corresponding period.
  • Cash production costs for September quarter 2019 is US$12.95/wmt, down 2% from the corresponding period.
  • Average revenue received for September quarter 2019 is US$85 per dry metric tonne, 89% higher than the corresponding period.

What are the main drivers of this result?

Although shipments were up from the previous quarter, Fortescue’s management notes that overall production was down due to seasonal maintenance activities. Additionally, during the quarter, Fortescue was developing a number of new mine areas, which also had an adverse effect on production levels.

A positive for the quarter is Fortescue reduced net debt from US$2.1 billion to US$0.5 billion or a 76% reduction in net debt. Fortescue management notes, “The combination of operational performance and realised price has generated exceptional operating cash flows and lowered net debt to US$0.5 billion at 30 September 2019. This has provided the capacity to further strengthen the balance sheet through debt reduction and refinancing of the Term Loan on improved terms.”

What is the outlook for Fortescue?

FY20 guidance is unchanged from last quarter, namely:

  • 170 – 175 mt in shipments.
  • Cash production costs of US$13.25 – US$13.75/wmt.
  • Total dividend payout ratio between 50% and 80% of full-year net profit after tax.

An important point to note is that crude steel production in China reached 745 mt, which is 8.4% high than the corresponding period. Iron ore stocks at Chinese ports at the end of the quarter were 120 mt, 4% higher than the previous quarter. Chinese demand for iron ore remains strong, which is a positive for Fortescue’s outlook. Overall, iron ore demand is supported by continuing high levels of steel products used to build infrastructure projects.

Additionally, the Brazilian iron ore miner Vale is still facing production concerns since the tailings dam collapse in 2018. On Monday 21 October 2019, Vale said it had temporarily closed its Itabiruçu tailings dam to assess the structure, lowering its full-year sales guidance between the lower end and midpoint of the previous range of 307 and 332 million tonnes. This is a positive outcome for Fortescue, as this should support the iron ore price in the short term.

What is the market response for Fortescue?

The initial market reaction to Fortescue’s September quarter 2019 report is positive. Today, Fortescue’s share price is up around 2.8% and is currently trading at around A$8.95 (11.00am, 24 October). Fortescue has a P/E ratio around 6 and an annual dividend yield of 5% (fully franked).

 


 

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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