Fortescue Metals Group Ltd

Continued Focus on Optimising Product Mix:Fortescue Metals Group Ltd (ASX: FMG) is primarily engaged in exploration, development, production, processing, and sale of iron ore. On 30 May 2019, the company made an announcement for distribution of a special dividend of A$ 0.60 per security, which is to be paid on 14 June 2019. The company made another announcement on its Dividend Reinvestment Plan allocation price. The allocation price for the shares to be issued in the plan is $8.3798.

Recently, the company also approved the development of Queens Valley mining area at the Solomon Hub in Western Australia for maintaining production of the low-alumina Kings Fines product and enhancing its product mix. Total capital expenditure of the development is estimated to be US$ 287 million with US$ 10 million to be incurred in FY19.

Insights into quarterly production report:In April 2019, the company released its quarterly production report for the period ended 31 March 2019. During the period, total shipments of 38.3 million tonnes were reported that included 3.8 mt of shipments of West Pilbara Fines. Cash production costs amounted to US$ 13.51 per wet metric tonne. Average price received per dry metric tonne was increased to US$ 71 from US$ 40 during the December quarter. The period also saw approval for the development of Stage 2 of the Iron Bridge Magnetite Project that is expected to increase Fortescue’s average grade and will help to deliver the majority of its products at more than 60% iron grade.


Production Summary for FY19 (Source: Company Reports)
 
Extracts from Balance Sheet:Cash in hand as at 31 March 2019 amounted to US$ 1.1 billion and Gross Debt amounted to US$ 4.0 billion. Total Capital expenditure during the quarter including sustaining capital, exploration and development expenditure amounted to US$196 million.
 
FY19 Guidance: The company expects FY19 shipments to be around 165-170mt, C1 costs (cash production costs) are expected to be between US$ 13 – 13.50 per wmt. Total capital expenditure, including Fortescue’s share of Iron Bridge Magnetite Project, is estimated at US$ 1.2 billion for FY 19. Depreciation & amortisation is expected to be at US$ 7.10 per wmt.
 
Stock Performance: The stock is currently trading at a price of $8.610, up 6.296% as on 12 June 2019. The stock is currently priced close to a 52-week high of $8.720. The company’s shares yielded positive returns of 41.49% over a period of 3 months and 126.18% on YTD basis. The current market capitalisation stands at $24.94 billion and stock is available at Price-to-Earnings multiple of 21.780x. Hence, considering the above-mentioned factors along with the returns generated in the recent past, we give a “Hold” recommendation to the stock at a current market price of $8.350 (down 3.02% on 13 June 2019).

Mineral Resources Limited

 
Well-positioned to deliver shareholder value:Mineral Resources Limited (ASX: MIN) is engaged in the supply of goods and services to the resource sector. In an announcement made to the exchange on 05 June 2019, the company released the final Director’s Interest Notice for Timothy Roberts notifying that he is a registered holder of 11,264 securities.
 
YTD March 2019 Operational Performance:Mining Services performance was characterised by a number of factors including commencement and signing of new crushing contracts, commencement of productions at crushing plants and progress in exploration and approvals for drilling targets in Perth Basin, etc. The company expects further growth of >20% in external crushing business under the mining services in the next 12 months. Under Commodities, the company talked about the Joint Venture agreement with Albemarle to sell 50% interest in Wodgina Lithium Project and reported that the transaction is most likely to be completed in CY19. Upon completion of the transaction, the company is also aiming to commence construction of two lithium hydroxide modules, each of which is estimated at circa A$400 million. The completion of Albemarle transaction during CY19 is expected to leave the company with a significant cash balance.
 
The company recently completed an offering of US$700 million in Senior Unsecured Notes for a term of 8 years. The proceeds will be utilised to refinance existing credit facilities and for general corporate purposes.
 
FY19 Guidance:The company reported the FY19 EBITDA Guidance between an expected range of $360 million to $390 million predicted on assumptions including the pricing for lithium and iron ore.
 

Returns to Shareholders since IPO (Source: Company Reports)
 
Stock Performance and Recommendation: The company’s stock yielded returns of -0.93% and -5.59% over a period of 1 month and 3 months, respectively. The PE Ratio of the shares stands at 21.930x. Apart from the above discussed factors, the company has a track record of delivering shareholder value with remarkable growth in EPS of ~20%, total shareholder returns of ~$19.07, and cumulative dividends paid at $3.97 per share since its IPO. Hence, we give a “Buy” recommendation to the stock at a current market price of $14.660 (down 1.346% on 13 June 2019). 
 

BHP Group Limited

 
Weather Conditions Impact Production: BHP Group Limited (ASX: BHP) is amongst the world’s top producers of commodities including iron ore, metallurgical coal, and copper. On 07 June 2019, the company released a presentation on the management of tailings storage facilities. Among its portfolio, the company has 67 operated tailing facilities and 9 non-operated tailing facilities. The company is in the process of establishing a dedicated task force to have an enhanced focus on internal dam management and is progressing towards new technologies to mitigate risks.
 
FY19 Guidance: In the operational update for nine months ended 31 March 2019, the company stated that the production guidance for FY19 remains unchanged for energy coal, metallurgical coal, petroleum and copper. The guidance for iron ore is decreased to between 265 and 270 mt due to the impact of Tropical Cyclone Veronica. Unit costs for New South Wales Energy Coal are expected to be approx. US$ 51 per tonne and that for Western Australia Iron Ore are expected to be less than US$15 per tonne. The guidance for unit costs in case of Petroleum, Escondida and Queensland Coal remained the same.
 
Production update: March YTD-19 production of petroleum was 92 mt reporting no change on the pcp owing to lower seasonal gas sales. Production of Copper totalled to 1,245 mt, reporting 3% decrease on pcp impacted by expected lower copper grades at Escondida. Production of iron ore, Metallurgical coal and Energy coal also remained unchanged at 175 mt, 31 mt and 20 mt, respectively. Iron Ore production did not witness any growth due to Tropical Cyclone Veronica. Growth in Metallurgical Coal and Energy Coal production was offset by adverse weather.
 

Snapshot of Operational Performance (Source: Company Reports)
 
Key Developments: The March 2019 quarter was characterised by major developments including approval of US$696 million in capital expenditure for Atlantis Phase 3 project in the US Gulf of Mexico. Other than the above, five projects in petroleum, copper, iron ore, and potash with a total budget of US$11.1 billion were under development by the end of March 2019.
 
Stock Performance: The company’ stock yielded positive returns of 7.64% and 7.69% over a period of 1 month and 3 months, respectively. It has a market capitalisation of ~$117.1 billion and Price Earnings Ratio of 27.20. The company did not witness much growth during the nine months ended March 2019 due to unfavourable factors including weather conditions and lower sales. Hence, considering aforesaid parameters and current trading level, we give a “Hold” recommendation on the stock at a current market price of $39.560, (down 0.478% on 13 June 2019).

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