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$55 billion.

What are the key features of Fortescue Metal’s FY20 result?

Fortescue Metal’s FY20 underlying net profit after tax is US$4.746 million, up 49% from FY19. Revenue for FY20 is US$12,820 million, up 29% from FY19. Basic earnings per share for FY20 is US154 cents. Ore shipped for FY20 is 178.2 m wmt, up 6% from FY19. Fortescue Metal’s will pay a final dividend of A$1.00 per share (fully franked).

The main driver of Fortescue Metal’s strong profit result is due to the strong iron ore price over the year. The average iron ore price for FY20 is US$79/dmt, up 21%. The iron ore price was able to maintain its high levels due to supply issues from Brazil. This originally began due to the tailing dam collapse in 2019. Supply issues continue to occur in the second half of this year due to COVID-19 issues at Vale’s operational sites. In addition to higher prices, Fortescue Metal’s iron ore shipments increased by 6% on the year, which capitalised on the strong iron ore price.

Fortescue Metal’s has a strong balance sheet with cash on hand of US$4.9 billion at 30 June 2020. Gross debt is US$5.1 billion following the drawdown of the US$1.0 billion Revolving Credit Facility in April 2020. Total capital expenditure in FY20 is US$2.0 billion comprising US$690 million in sustaining capital, US$389 million in development capital, US$116 million in exploration and studies and US$771 million in major projects (Eliwana, Iron Bridge and Energy).

What is the outlook for Fortescue Metal’s?

The outlook for Fortescue Metal’s is positive. This is based on the continued strong performance of the iron ore price.

Fortescue Metal’s did provide guidance for FY21. Iron ore shipments for FY21 are expected to be in the range of 175 – 180mt and C1 costs are expected to be in the range of US$13.00 – US$13.50/wmt. These parameters for FY21 are around the same levels as in FY20. Capital expenditure of US$3.0 – US$3.4 billion, which is comprised of US$1.0 billion of sustaining, operational and hub development capital, US$140 million of exploration expenditure and studies and US$1.9 – US$2.3 billion for major projects (Eliwana, Iron Bridge and Energy).

The main factor that is going to determine Fortescue Metal’s success is the iron ore price. If the iron ore price continues to remain strong due to strong demand and weakening supply, Fortescue Metal’s should continue to perform well. At some point, the iron ore price should weaken towards the long-term trend (perhaps around US$50 per tonne).

What is the market’s reaction?

The market reaction to Fortescue Metal’s FY20 is positive. Fortescue Metal’s share price is up 2.3% and is currently trading at A$18.40. Fortescue Metal’s is trading at a forward P/E ratio of around 8x and has an annual dividend yield of around 6.3%.

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August 25, 2020