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$35 billion.

What are the key features of Fortescue Metals quarterly activities report?

  • Total ore mined for the December quarter is 54.6 million tonnes, up 8% from the previous period.
  • Total ore shipped for the December quarter is 46.4 million tonnes, up 10% from the previous period.
  • C1 costs for the December quarter is US$12.54/wmt, down 3% from the previous period.
  • Net cash at 31 December 2019 is US$3.3 billion, down 3% from the previous period. Gross debt at 31 December 2019 was US$4.0 billion with net debt of US$0.7 billion.
  • Total capital expenditure for the December quarter is US$431 million.

Fortescue Chief Executive Officer, Elizabeth Gaines, said:

Once again, the Fortescue team has achieved outstanding results demonstrated by multiple records across the operations, including record shipments of 88.6mt during the first half of FY20, while maintaining our industry leading cost position below US$13/wmt. The key highlight for the quarter was our improved safety performance resulting in a TRIFR of 2.5 on a rolling 12-month basis.

 

What are the drivers of this result?

A key driver of Fortescue Metals increases in total ore shipped is due to continued strong demand from Chinese steel production. Chinese steel production in 2019 reached 996 million tonnes, 8.3% higher than 2018. In the December quarter, iron ore demand was supported by low steel inventories, high levels of steel production and mill restocking.

 

What is the outlook for Fortescue Metals?

Fortescue Metals updated their FY20 guidance based on the strong performance in the first half year. FY20 updated guidance is as follows:

  • Shipments at the upper end of the range of 170 –175mt.
  • C1 costs in the range of US$12.75 –US$13.25/wmt (previously US$13.25 –US$13.75/wmt).

Fortescue Metals has benefited from the strong iron ore price throughout 2019 calendar 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 Australian iron ore producers are unable to increase supply in the short term without significant capital investment.

The question now for investors is will the iron ore price remain strong moving into 2020. The Brazilian iron ore producer Vale is expecting iron ore production in 2020 to reach pre tailing dam collapse levels. This could increase total supply of iron ore in the global market reducing the price. Another point of concern for Australian iron ore producers is the coronavirus outbreak in China. The outbreak could weaken Chinese economic growth and demand for iron ore to produce steel. Investors could closely monitor these supply and demand issues for iron ore moving into 2020, and the effect they may cause on Australian iron ore producers such as Fortescue Metals.

 

What is the market reaction?

The market reaction to Fortescue Metals December quarterly activities report is slightly negative. Fortescue Metals is down around 2% and is currently trading at A$11.31. Fortescue Metals has a forward P/E ratio around 7x and an annual dividend yield of 7%.

 


 

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January 30, 2020