How Should Investors Perceive this Iron Ore Stock Unfolding Potential - FMG?

Fortescue Metals Group Limited

¹Ratios such as P/E, EPS, ADY are on Trailing Twelve-Month basis, which are subject to change based on certain factors such as company performance, and stock price changes.

²ROE has been taken for the Half-Year Ending December 2021.

FMG Details

Company Overview: Fortescue Metals Group Limited (ASX: FMG) operates as an iron ore mining company that is developing Eliwana Mine and Rail Project and the Iron Bridge Magnetite Project.

New Partnership on Cards: Below highlighted the summary of new partnership announced.

Partnership Crux, Analysis by Kalkine Group

Q3FY22 Operational and Financial Update:

• Operational Update: Iron ore shipments clocked 46.5 million tonnes (mt) for the quarter which was 10% higher on PcP basis, recording a total of 139.5mt shipments for the nine months to 31^st March 2022.
• Financial Position: Net debt stood at US$2.4 billion and cash balance clocked in as US$2.2 billion as of 31^st March 2022.

Key Risks and Challenges

FMG is exposed to iron ore prices and realization impacted by global steel demand and crude price movements. An increase in cost overruns in exploration activities may affect profitability and drain cash balance. Fluctuations in foreign currency may erode earnings.

Outlook: Recently, after witnessing its nine months performance the company updated with the upgradation of the guidance of FY22 shipments to be ~185 - 188mt (earlier 180 - 185mt). FY22 C1 cost is revised to ~US$15.75 - US$16.00/wmt (earlier US$15.00 - US$15.50/wmt) and capital expenditure (excluding FFI) is amended to be ~US$3.0 - US$3.2 billion (earlier US$3.0 - US$3.4 billion). Moreover, the Iron Bridge Magnetite project capital estimate has been changed to be in the ambit of ~US$3.6 - US$3.8 billion (earlier US$3.3 billion – US$3.5 billion).

Valuation Methodology: Price/Earnings Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation

The stock of FMG gave a negative return of ~24.17% in the past one year. The stock is currently trading lower than the 52-weeks’ average price level band of $13.900 - $26.580. The stock has been valued using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price low double-digit downside (in percentage terms). The company might trade at a slight discount to its peers, considering high volatility in iron ore prices and expected increase In C1 costs. For valuation, few peers like Deterra Royalties Ltd (ASX: DRR), BlueScope Steel Ltd (ASX: BSL), and Sims Ltd (ASX: SGM). Considering current lower trading levels, new partnerships contract, impact from labor shortage, probable increase in C1 cost, high iron ore price volatility, and downside indicated by valuation, we give a ‘Buy’ rating on the stock at the closing market price of $17.000, down by ~8.602% as of 20^th June 2022.

FMG Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

 Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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