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Fortescue Metals Y21 Result – Strong Profits And Dividend Driven By High Iron Ore Prices

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Fortescue Metals Group Ltd (ASX: FMGis 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 capitalization of A$65 billion.

 

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What are the key features of Fortescue Metal’s FY21 profit result?

Fortescue Metal’s reported annual shipments for FY21 of 181.2 million tonnes. Net profit after tax (NPAT) for FY21 of US$10.3 billion, increasing 117% from FY20. Net cash flow from operating activities for FY21 of US$12.6 billion. Management also announced a final dividend of A$2.11 per share, bringing the total dividend in FY21 to A$3.58 per share, representing around an 80% payout of NPAT.

The main driver of Fortescue Metal’s strong profit result is due to the strong iron ore price over the year. The iron ore price was able to maintain its high levels due to supply issues from Brazil and strong demand from China.

Fortescue Metal’s has a strong balance sheet with a cash balance of US$6.9 billion on 30 June 2021. Gross debt was US$4.3 billion, resulting in a net cash position of US$2.7 billion. This compares to Fortescue Metal’s net debt position of US$258 million on 30 June 2020, showing a strong increase in Fortescue Metal’s balance sheet.

 

What is the outlook of Fortescue Metal’s?

Management did provide guidance for FY22, iron ore shipments are expected between the range of 180 – 185mt, C1 cost expected between the range of US$15 and US$15.50/wmt, capital expenditure between the range of US$2.8 – US$3.2 billion.

The key driver of FY22 earnings will be movements in iron ore price. In recent weeks, the iron ore price has weakened to around $US160 per tonne compared to a peak of around $US220 per tonne. While the price of iron ore has weakened, in the short term, iron ore prices are expected to remain strong reflecting flat production profiles of the major producers. In the long term, it can be expected that the iron ore price will weaken towards a long-term average of say US$60 per tonne because at some point there will be a supply response.

 

What is the market reaction to Fortescue Metal’s profit result?

The market reaction to Fortescue Metal’s profit result is positive with the share price up around 6% to A$21.22 while the market is up slightly by 0.11% (30 August 2021). This suggests that Fortescue Metal’s FY21 result is better than market expectations (particularly the size of the dividend). Fortescue Metal’s trades on a forward P/E ratio of around 5x and has a dividend yield of around 14% (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 purposes 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 proceedings. 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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