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.
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).
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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