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Fortescue Metals (FMG) delivered robust 1H22 results along with Capital Management Initiatives

Investment Thesis 

  • Improving sales mix towards higher grade products should continue to narrow the price discount FMG achieves to the market benchmark Platts 62% CFR Index. 
  • Global stimulus measures – fiscal and monetary policies – are positive for global growth and FMG’s products. 
  • Capital management initiatives – increasing dividends, potential share buybacks given the strength of the balance sheet.
  • Strong cash flow generation.
  • Quality management team.
  • Continues to be on the lower end of the cost curve relative to peers; with ongoing focus on C1 cost reductions should be supportive of earnings.

Key Risks

  • Decline in iron ore prices.
  • Cost blowouts/ production disruptions.
  • Cost out strategy fails to yield results. 
  • Company fails to deliver on adequate capital management initiatives.
  • Potential for regulatory changes.
  • Vale SA supply comes back on market sooner than expected. 
  • Growth projects delayed. 

1H22 Results Highlights   Relative to the pcp: 

  • FMG delivered record half year iron ore shipments of 93.1m tonnes (mt), up +3%. Revenue of US$8.1bn declined -13% per cent on 1H21. Average revenue of US$96/dry metric tonne (dmt) represented a 70% realisation of the average Platts 62% CFR Index (1H22: US$114/dmt, 90% realisation). C1 cost of US$15.28/wet metric tonne (wmt) was up +20% due to price escalation of key input costs, including diesel, other consumables and labour rates, the integration of Eliwana as well as mine plan driven cost escalation. 
  • Underlying EBITDA of US$4.8bn, with an Underlying EBITDA margin of 59% (-28% lower versus 1H21: US$6.6bn, 71% margin). 
  • NPAT of US$2.8bn was -32% lower than pcp. EPS of US$0.90 (A$1.24) was -32% weaker. 
  • Net cashflow from operating activities of US$2.1bn after payment of the FY21 final tax instalment of US$915m. 
  • Capex of US$1.5bn, inclusive of US$589m investment in the Iron Bridge growth project and the Pilbara Energy Connect decarbonisation project. 
  • The Board declared a fully franked interim dividend of A$0.86 per share, down -41% relative to the pcp. It equates to 70% 1H22 NPAT, and is consistent with FMG’s capital allocation framework and stated intent to target the top end of the dividend policy to payout 50 to 80% of full year NPAT. 
  • FMG retained a strong balance sheet with net debt of US$1.7bn at 31 December 2021, inclusive of cash on hand of US$2.9bn. FMG’s credit metrics remain strong with gross debt to last 12 months EBITDA of 0.3x and gross gearing of 23% as at 31 December 2021.

Company Profile

Fortescue Metals Group Ltd (FMG) engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. It owns and operates the Chichester Hub that consists of the Cloudbreak and Christmas Creek mines located in the Chichester Ranges in the Pilbara, Western Australia; and the Solomon Hub comprising the Firetail and Kings Valley mines located in the Hamersley Ranges in the Pilbara, Western Australia. The Company was founded in 2003 and is based in East Perth, Australia.

 (Source: Banyantree)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.