Fortescue Metals Group: Iron Bridge blowout flagged

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
01 February 2021, 5:00 PM
Sectors Covered:
Mining, Energy

  • Fortescue Metal Group (ASX:FMG) posted a strong 2Q21 result, although it came with the warning that FMG was conducting a detailed review of the budget and schedule for its Iron Bridge magnetite project, with headwinds putting pressure on FMG’s plans.
  • As expected FMG flexed volumes given the strong price environment, with 2Q21 shipments of 46.4mt (vs MorgE 46.8mt), +5% QoQ.
  • Iron ore price strength was again the highlight, with the highest realisation (91%) since 2017, and FMG’s highest realised price since 2014 (US$122/t).
  • Guided 1H21 NPAT of US$4-$4.1bn sets up a strong interim dividend.
  • We maintain our Hold rating and increase our target price from A$17.60 (login to view revised target price).

Strong 2Q21 result

Ongoing iron ore price strength remained the key highlight in 2Q21, with price realisation (actual 91% vs MorgE 86%) the highest since 2017, and FMG’s achieved price the highest since 2014.

As expected FMG flexed its shipped volumes into the strong price environment, with sales of 46.4mt (vs MorgE 46.8mt). C1 costs were flat on the previous quarter at US$12.81/wmt (vs MorgE US$12.54/wmt), with strong volumes combatting the rising Australian dollar.

FY21 guidance maintained

FMG maintained its FY21 guidance of shipments of 175-180mt (vs MorgE 178mt), C1 cash costs of US$13-$13.5/wmt (vs MorgE US$13/wmt) and capex of US$3.0-$3.4bn (vs MorgE US$3.1bn).

There is pressure on FMG’s opex and capex guidance however, which are based on an AUD of $0.70, from ongoing Australian dollar strength. Along with the 2Q21 result, FMG flagged that it was conducting a detailed review of its budget and schedule for its developing Iron Bridge magnetite project.

In addition to the FX pressure, COVID-19 restrictions are restricting FMG’s access to skilled workers and inputs.

Short-term fortunes dominated by iron ore

FMG has made the best of a good situation, clamping down on C1 costs and making smart decisions with its capital (outside of a possible future move into renewable energy).

Combined with robust iron ore prices this has seen FMG’s profitability transform. We continue to watch steel markets closely, with recovering met coal prices adding to pressure on steelmaker margins (possible risk to iron ore), but demand conditions still appear strong.

Until we see market fundamentals turn we expect FMG to continue generating substantial FCF, and paying out a meaningful portion as dividends.

Stretching our view on fair value

On a TSR basis FMG’s share price is sitting at the upper limit of what we consider fair value, with the company producing large high quality earnings and currently paying out 80% of underlying earnings as dividends.

We maintain our Hold rating on FMG post the 2Q21 result, having updated our estimates for the quarter and increasing our EBITDA multiple to 4x. Our blended target price (NPV:EBITDA) has increased (login to view revised target price). The key risk to our call remains the iron ore price and FX.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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