Time to take profits on this Iron Ore Producer - Fortescue Metals Group Limited

FMG Details
Lowest cost seaborne supplier of iron ore for China against its peers: Fortescue Metals Group Limited (ASX: FMG) continues to focus on controlling debt given the ongoing strong cash flows generation driven by the rise in iron ore prices. As per November 2016 review by Metalytics Resource Sector Economics, FMG’s productivity and efficiency efforts positioned them to be the lowest cost seaborne supplier of iron ore into China, as compared to peers.
 

China’s 2016 Iron Ore Supply CFR Costs (Source: Company Reports)
 
Completed financing agreement for major ore carriers: The grouphas completed the agreement with the China Development Bank to finance eight of their Very Large Ore Carriers (VLOCs) which are under construction. China Development Bank is financing 85% of the VLOC cost for at least 12 years. With this Chinese financing deal, the group enhanced their debt maturity flexibility and boosted their capital structure. FMG has otherwise also reported about strengthening the balance sheet, and the group repaid US$700 million of debt and controlled their net debt to US$4.2 billion inclusive of US$1.8 billion cash and finance leases of US$0.5 billion as per their September quarter update. Net gearing fell to 33% while gross gearing is forecasted to fall below 40% during fiscal year of 2017. The group’s capital expenditure reached US$1.28 per wet metric tonne (wmt) during the September quarter while the group is targeting a full year sustaining capital to average US$2.00/wmt.
 
Delivered outstanding bottom line performance: FMG generated a strong fiscal year of 2016 NPAT performance, which rose over 212% year on year (yoy) to US$985 million. Underlying EBITDA enhanced 27% yoy to US$ 3,195 million for the year against the prior corresponding period. But, the group revenues fell over 17% to US$7,083 million for the year. However, FMG shipped 169.4mt during the year at C1 Cost $15.13/wmt, which is a decline of 43%. Moreover, FMG continues to maintain its competitiveness by further declining its C1 Cost to $13.55/wmt based on its recent quarter performance. The group is on track to reach its target of US$12-13/wmt C1 Cost. The group is currently taking up early stage, low cost exploration on copper-gold prospective tenements in New South Wales and assessing high potential, early stage exploration tenements in highly prospective areas of Ecuador.
 

Ongoing cost improvements (Source: Company Reports)
 
Higher levels: FMG stock generated an outstanding performance this year to date and rallied over 238.5% (as at 14 December 2016). But, this heavy spurt in the stock price placed them at high levels seen in last five years or so and this came at the back of iron ore price rebound. With some volatility now being seen in iron ore prices, we believe investors can leverage the heavy rise in the stock as a profit booking opportunity. We give a “Sell” recommendation on the stock at the current price of – $ 6.29

 
FMG Daily Chart (Source: Thomson Reuters)

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