Fortescue Metals Group Limited

FMG Details

Key Business Update: Fortescue Metals Group Limited (ASX: FMG) operates as an iron ore mining company that owns Chichester Hub and Solomon Hub, both located in Pilbara Western Australia. On 15 December 2021, FMG entered into an agreement with the Government of the Republic of Gabon for development study of Belinga Iron Ore Project.

Q1FY22 Operational and Financial Update

• Operational Update: Iron ore shipments clocked 45.6 million tonnes (mt), up 3% PcP. Average revenue stood at US$118/dmt, a realized gain of 73% of the average Platts 62% CFR Index coupled with contractual realization of 77%. C1 cost stood at US$15.25/wmt, in line with previous quarter.
• Financial Position: Net debt stood at US$175 million as on 30 September 2021 post payment of final dividends (FY21) amounting to US$4.7 billion and capex of US$744 million in the quarter. Cash balance clocked US$4.1 billion, down from US$6.9 billion in prior period.
• Marketing Updates: Chinese crude steel production stood at 806mt for the 30 September 2021 year-to-date, up by 2% relative to prior corresponding period. Global steel production (excluding China) surged by 15.8% and Ex-China crude steel production resurged to pre-COVID levels. China portside sales via FMG Trading Shanghai Co. Ltd edged up to 3.7mt in Q1FY22, relative to 2.8mt in Q1FY21.

FY21 Operational Overview, Analysis by Kalkine Group

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

The iron ore bridge Magnetite project is expected to deliver 22mt/annum of high grade 67% iron magnetite concentrate. FMG is expecting iron ore shipments to stand in range of 180-185 mt for FY22. It is anticipated that C1 costs are to wander in range of US$15.00 to US$15.50/wmt considered prolonged impact of pandemic on labor market.

Valuation Methodology: EV/Sales 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 ~16.567% 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 EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low single-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 Newcrest Mining Ltd (ASX: NCM), BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), and others are considered. Considering current trading levels, projected increase in C1 cost, impact from labor shortage, high iron ore price volatility, and downside indicated by valuation, we suggest investors to book profits and give a “Sell” recommendation on the stock at the current market price of $20.080, as of 22 December 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

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.

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