Fortescue Metals Group: Flexes big volumes

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
29 July 2022, 11:00 AM
Sectors Covered:
Mining, Energy

  • Strong 4Q22 shipments led to a slight beat on FY22 guidance, while FY23 guidance points to another high-volume year, driving the positive share price reaction today.
  • Another quarter of higher C1 cash costs, with inflationary pressures pushing FY23 C1 cost guidance substantially higher compared to FY22.
  • Price realisation of 78% against the benchmark index edged closer to the ten-year average of ~82%, however lower benchmark prices have offset these gains.
  • Maintain our Hold rating with a revised (login to view).

4Q22 Result

Fortescue Metals Group (ASX:FMG) posted iron ore shipments of 49.5mt (+6% qoq) for 4Q22, beating consensus estimates of 48mt and MorgansF of 47.5mt. As a result, FY22 shipments of 189mt exceeded the top end of 185-188mt guidance.

Increased price realisation vs the benchmark of 78% (62% in 3Q22) led to higher average revenue of US$108/dmt (+8% qoq). The improved revenue realisation was offset by lower benchmark prices, although 4Q22 average price of US$138/dmt was higher than prices observed a year ago of US$120/dmt. 

C1 costs of US$17.19/wmt (+9% qoq) brought the FY22 average to US$15.91/wmt. While FMG has given FY23 guidance for average C1 costs of US$18.00-$18.75/wmt (vs existing consensus of US$16.9/wmt).

FY23 capex guidance of US$2.7-3.1bn (excluding FFI). FFI expenditure is estimated to be in the range of US$600-700m, with only US$100m expected to be capitalised.

Iron Bridge, FMG’s key magnetite project, has advanced after suffering schedule and cost blowouts in the previous quarter, with first production remaining on schedule for 3Q23 and no increases in capital estimates.

Analysis

Coming clean on capex? Consensus still looks far too light on long-term capex, still averaging US$1.5bnpa out to 2030 (roughly equal only to sustaining capex) – despite FMG clearly flagging ongoing hub development, FFI spend, decarbonisation spend, and exploration (resource conversion) which would all sit above iron ore sustaining capex.

While not including this spend, consensus still has FMG producing 200mtpa out to at least 2032. This presents future downgrade potential for long-term FCF forecasts by consensus.

Cost pressures remain. A solid quarter for FMG, however FY23 cost guidance is disappointing.

Cost increases were expected; however, the guided costs are 10% above Visible Alpha consensus with FMG expecting further increases in diesel, labor, and general input costs as inflation is expected to trend higher through the second half of the 2022 calendar year.

Forecast and valuation update

We have made changes to our FY23 assumptions on the back of the new guidance. FY23 shipment expectations have been lifted from 184mt to 189mt, C1 costs have been increased to US$18.4/wmt from $17.2/wmt, and price realisation as a percentage of the benchmark Platts CFR has been lifted from 62% to 75%.

Maintain our Hold rating with a target price of (login to view).

Investment view

Despite recent share price weakness, we believe FMG is still trading around fair value and will look for further volatility before considering our investment view.

We do see potential for the current volatility to push FMG into oversold territory.

Price catalysts

  • FY22 earnings result and dividend expected on the 29th of August.

Risks

  • Inflationary cost pressures.
  • Potential for further COVID-related lockdowns in China affecting steel demand.

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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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