Company Overview - Fortescue Metals Group Limited (Fortescue) is an iron ore producer and explorer operating in the Pilbara region of Western Australia. Fortescue is engaged in mining of iron ore from its Cloudbreak and Christmas Creek mine sites, the operation of an integrated mine, rail and port supply chain and the expansion of iron ore operations. Its Cloudbreak mine site is located in the Chichester Ranges in the Pilbara region of Western Australia, 263 kilometers (km) south of Port Hedland and 150km north of Newman. Its Christmas Creek is second mining operation, 50 km to the east of Cloudbreak. The Company has also designed and constructed rail and port facilities to support the development and sale of the Pilbara's stranded iron ore bodies. Its subsidiaries include The Pilbara Infrastructure Pty Limited, FMG Pilbara Pty Limited, Chichester Metals Pty Limited, Pilbara Mining Alliance Pty Limited, and Karribi Developments Pty Limited.

Analysis - Fortescue Metals (FMG) provided record operational performance for FY14 that yielded NPAT of US$2.7bn and EBITDA of US$5.6bn. Final FY14 dividend was reported to be of A$0.10 per share resulting in the full year dividend to be A$0.20 per share.


Performance Highlights (Source – Company Reports)

The quarterly updates for the period ending 30 September 2014 indicated FMG’s eighth consecutive shipping record delivering 41.5 million tonnes (mt) for the September quarter leading to an annualized rate of 166mt. September proved to be a second consecutive quarter with operations exceeding the targeted 155mt per annum run rate with a reduction in C1 cost to US$32 per wet metric tonne (wmt). FMG’s operational results enable it to stay focused on capital management and repayment of debt while enduring market volatility.


Operation Highlights for September Quarter ’14 (Source – Company Reports)

The Company reported that C1 costs continued to decrease to US$32.08/wmt in the September 2014 quarter, which reflects a 6% improvement from the previous quarter. Further, cost to customers was US$45/wmt for the September 2014 quarter and this included C1, shipping, royalties and administration.

The Company also reported that CFR prices realized in the September 2014 quarter were US$71/dry metric tonne (dmt) based on an average 62% Platts CFR index of US$90/dmt. In fact, cash on hand increased to US$2.6 billion at 30 September 2014. This indicated FMG’s continued strength of operational cashflows, reduced capital expenditure and lower finance costs. The Company also reported that net debt was US$6.9 billion with an additional voluntary repayment of US$0.5 billion scheduled for payment on 17^th October 2014.


Based on FMG’s Aboriginal engagement, it is noted that the vocational training and employment centres in Port Hedland and Roebourne are training and facilitating employment for Aboriginal people. Aboriginal-owned businesses and joint ventures were awarded contracts of about A$115 million in the September quarter. This also entailed the award of a management contract at Solomon’s Dally camp to a joint venture between Native Title group Martu Idja Banjima and Action Industrial Catering and a rail corridor maintenance contract to Guma ICRG JV Pty Ltd.


Costs Reduction Journey (Source – Company Reports)

With regards to updates on mining, processing and shipping, the shipping record with 41.5mt of ore shipped led to a 60% increase over the prior comparable period. Further, shipments included 40.9 million FMG’s equity tonnes and 0.6 million third party tonnes. However, FMG mined 42.9mt of ore which was 2% below from previous quarter. The mining rate reduction was owing to the Company’s decision to reduce working capital, lowering iron ore stocks by a further 5%. The Company stated that working capital reductions are expected to continue throughout FY15. On the other hand, ore mined in the quarter increased by 23% than the prior comparable period. There was a little dip in strip ratios at the Chichester Hub which averaged 3.0. These were below the five year mine plan of 3.5 owing to the nature of the mining areas. The strip ratio at the Solomon Hub was 1.2 during said quarter as mining at the Kings Valley project was on full progression. FMG’s mines are now reported to operate at a steady state.

Remarkable performance of the Christmas Creek and Cloudbreak wet plants through the September 2014 quarter maintained production capacity beyond 155mtpa. In fact, FMG’s total output from all processing facilities yielded 38.9mt which was though 5% below the prior quarter owing to product quality improvement after the ending of additional crushing feed.

Record outload performance was witnessed for Port with an annualized run rate of 166mtpa. On the other hand, Rail operated at an annualized run rate of 164mtpa during the September 2014 quarter. FMG’s efforts in optimizing the work enabled it to yield increased productivity and efficiency for both Port and Rail assets.
FMG also maintains its FY15 production and shipping guidance of between 155mt to 160mt at a C1 operating cost of US$31-32/wmt based on a US to Australian dollar exchange rate.


Price Realization (Source – Company Reports)

A sneak-peek at the market reveals that increase in new seaborne iron ore supply, credit conditions in China and high Chinese port stocks have led to spreads ranging between the 58% and 62% indices in the June 2014 quarter. These spreads narrowed during the September 2014 quarter in effect from market absorbing additional seaborne supply. The Company expects to witness an increasing price environment which may result in higher realization rates during the next quarter. It is also noted that strong Chinese steel production with the low construction activity in China is being equipoised by an increase in steel exports, which are on target to reach 75-80mt in 2014. The Company expects to witness strong demand for its ores underscoring the value for its high quality and low impurity products. The Company added to its low phosphorous, high value-in-use ores with the successful launch of its new product, Kings Fines.


Debt Maturity Profile (Source – Company Reports)

The Company’s net debt position as at 30 September 2014 was  US$6.9 billion, including finance leases of US$0.3 billion and cash on hand of US$2.6 billion. The Company’s flexible debt profile allows it to achieve the initial targeted gearing level of 40%. The earliest debt maturity is in 2017.

The Company retained the capital expenditure guidance of US$1.3 billion for FY15, excluding any project spend associated with the Iron Bridge Joint Venture that has been fully funded by the Formosa Group.


Capital Profile (Source – Company Reports)

With regards to development efforts for Fortescue River Gas Pipeline, the Company intends to execute a plan to lower energy costs and reduce carbon footprint by transitioning its Pilbara operations from diesel to natural gas. The Fortescue River Gas Pipeline will deliver gas from the Dampier to Perth Pipeline to the Solomon Power Station, with completion scheduled in the March 2015 quarter.

Building of the fifth berth at Anderson Point, AP5, is on schedule and on budget for completion in the March 2015 quarter. Major deck modules are expected for arrival during the December 2014 quarter for installation. The Company also reported that major contracts have been awarded to aforesaid effect.


Port Fifth Berth under Construction (Source – Company Reports)

The Company has also secured the contract for the 5mtpa detrital iron deposit core processing facility for the Solomon Detrital Processing Plant, and engineering is 40% complete and on track.

Iron Bridge Project JV construction activities continue to be progressing well with completion of concrete works at the North Star OPF; well-advanced structural, mechanical and piping works; commencement of electrical and instrumentation works; and planning and documentation of the start-up of the plant. First production from the 1.5mtpa OPF is expected in the March 2015 quarter.


In 2014, the Company entered into an agreement for the construction of four highly efficient very large ore carriers (VLOCs) for a total investment value of US$280 million. A total of eight VLOCs have now been committed to, at a total cost of US$555 million. The VLOCs are scheduled for delivery from August 2016 through to April 2018.

With respect to full automation of trucks at Solomon, FMG reported Q1 CY15 Firetail to move to full truck automation, and then in CY16, Kings to move to autonomous trucks. 


Exploration Drilling Program (Source – Company Reports)

The 2014 exploration drilling program continued throughout the September 2014 quarter. The Chichester up-dip (Cloudbreak and Christmas Creek) brownfield drilling programs were completed with a resource estimation planned for release in the December 2014 quarter. The Company continues work with regards to identifying and defining new targets for bedded mineralization for the Solomon Hub with a drill program completed at Frederick. Exploration drilling is continuing through the Western Hub.

Given the entire play, we put a BUY recommendation for this stock at the current price of $2.79.

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