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Fortescue Metals Video

Stock of the Day - Fortescue Metals (HOLD)

Fortescue Metals Group Limited (FMG) quite recently reported for strong results with regards to its December 2014 quarter. The result in a way illustrates FMG’s strategy to equipoise the havoc caused by the lower iron ore prices while the production is stable with full-year shipment guidance remaining the same at 155-160 mm tons. Cost reduction stands out in FMG’s efforts with a reported 11% q/q reduction with a further aim of pulling down the delivered costs to US$41/t in FY15 (US$52/t in FY14) while the year-end exit rates will indicate a delivered cost of US$35/t. FMG hopes to be on the cost-cutting stride for another six months or so in view of the fact that it has lowered its C1 cash cost guidance for full year FY15 to US$28-29/t from earlier guidance of US$31-32/t. Cost reductions are more or less driven by the weakening fuel and energy costs, lowering waste movements, and the drop in currency. In fact, the delivered costs of US$35/t targeted by the end of FY15 may reduce the break-even iron ore price for the Company.



Quarterly Updates for the Period ending 31 December 2014 (Source – Company Reports)

From operational standpoint, a very strong F2Q15 update has been provided. Iron ore shipments at 41.1mt in the quarter were higher than an estimate of 38-40mt in 2QFY15. There was 11% dip in the strip ratio in the December quarter. Iron ore ASP at US$63/t was in line with expectations and inferred a lowering of quality discount from above US$20/t in September quarter to US$12/t in the December quarter. Between 2008 and 2014, FMG volumes increased from zero to 155 million tonnes per annum of iron ore despite some unfavorable economic conditions. The Company reported that a total of 43.6Mt of ore was mined and 36.7Mt of product produced during the December Quarter. Unit costs fell to US$28.5/wmt but FMG expects costs to average around US$25-26/wmt in 2H.


Capital Expenditure (Source – Company Reports)

Net debt increased from US$6.9bn in the September quarter to US$7.5bn by end-December. This increase may have been attributed to adjustment of pre-payments and higher rate of sustaining capex. At the same time, it is prudent to note that FMG is free of maturities until CY2017 and the cut in capex guidance from US$1.3bn to US$0.65bn in FY15 should help save cash in the next six months.


Fortescue Chichester Hub Mineral Resources (Source – Company Reports)

The announcement with regards to an increase in Mineral Resource base along the Chichester Range of more than 300mt has been another highlight. The increase includes additional tonnages lying immediately north of the known Mineral Resources at both Cloudbreak and Christmas Creek. At Cloudbreak, there have been 70 Mt added and at Christmas Creek 46 Mt have been added. About 35 kilometres southeast of Christmas Creek OPF, a new Mineral Resource of 106 Mt has been defined at Kutayi and a re-estimate of the Mineral Resource at Mt Lewin in view of new drilling has increased this Mineral Resource by 82 Mt to 280 Mt.

The Fortescue River Gas Pipeline connecting the Solomon Power Station to the Dampier to Bunbury Pipeline remains on schedule for completion in the March 2015 quarter. This will improve operational efficiencies. Construction of the AP5 berth at Port Hedland remains on schedule and budget for completion in the March 2015 quarter. AP5 will extend total port capacity by around 15-20mtpa. Construction of the Iron Bridge JV project continues on schedule and on budget with 1.5mtpa Stage 1 OPF scheduled for completion in the March 2015 quarter.


FY15: MBIO 58% [P] Spot Price Realisation to 62% Platts on $/DMT basis (Source – Company Reports)

December quarter drilling included testing of extensions to known mineralisation at operating hubs and at more than 30 targets within other FMG’s tenure.


Fortescue’s Chinese Iron Ore Import Market Share is Reaching 16% (Source – Company Reports)

The fall in the AUD, oil price and reduction in strip ratios should enable FMG to have positive cash margins down to a 62% index price of around US$60/dmt. We think that the earnings profile is subject to iron ore prices to some extent and the outlook remains little restrained. Nonetheless, the cost reduction efforts would help manage the sway and endure cash flows. The game-changers entail capital management, expansion beyond 155mn tpa, higher long-term prices for iron ore, changes in strip ratios and product quality.


FMG Daily Chart (Source - Thomson Reuters)

Based on the foregoing, we put a HOLD recommendation for this stock at the current price of $2.31.