Fortescue Metals Group Ltd

FMG Details

Fortescue Metals Group Ltd (ASX: FMG) deals in the business of exploration,  production, processing, and sale of iron ore. FMG is a global leader in the iron ore industry, and it exports 175 to 180 million tonnes of iron ore annually (mtpa).

H1FY21 Result Performance (For the Period Ended 31 December 2020)

• The company has recorded 44% YoY growth in revenue to US$9.3 billion supported by a 3% increase in ore sold to 90.2 million tonnes (mt) and the benefit of 42% growth in average realised price to US$114 per dry metric tonne (dmt).
• Underlying EBITDA rose 57% YoY to US$6.6 billion supported by the benefits of higher prices and sustained emphasis on cost management through productivity and innovation. Resultantly, the underlying EBITDA margin rose to 71% from 65% in the prior corresponding period.
• Underlying NPAT also increased significantly by 66% YoY to US$4.1 billion and earnings per share rose to US$1.33 (A$1.84).
• The company has declared a fully franked interim dividend of A$1.47 per share that was 93% above the FY20 interim dividend and represents a payout of 80% of H1FY21 NPAT.

Consolidated Income Statement (Source: Company Reports)

Update on Mineral Resources and Ore Reserves

As per an update on mineral resources and ore reserves of dated 27 August 2021, provided by the company,  it has more than 2 billion tonnes of hematite ore reserves and 13.6 billion tonnes of hematite mineral resources as of 30 June 2021.

Development Projects: The company updated that the iron bridge magnetite project is under the development phase and magnetite ore reserves of 716 million tonnes and mineral resources of 5.4 billion tonnes remain unchanged. The Iron Bridge project will provide 22 mtpa of a 67% Fe magnetite concentrate and the production is expected to start by December 2022. Besides, the exploration drilling activities continue across its tenements in the Pilbara.

Delivered Solid Operating Performance in Q4FY21 and FY21

• The company has achieved record quarterly shipments of 49.3 million tonnes in Q4FY21 that led to its highest ever annual shipments of 182.2 million tonnes in FY21.
• The revenue per tonne grew significantly by 72% in FY21 compared to FY20 driven by strong market conditions and continued demand for its products.
• It reported a net cash position of US$2.7 billion on 30 June 2021 from a net debt position of US$1.0 billion on 31 March 2021 owing to the strength of its operating performance coupled with record average revenue has contributed to robust free cash flow generation in Q4FY21.

Key Risks

The company’s business is exposed to  risks of reduced product demand as well as reputational damage. Further, it is susceptible to commodity price risk, as its iron ore sales are mainly subject to prevailing market prices. Fluctuations in interest rates and foreign exchange rates are also some other potential risks.

Outlook

The company is confident of delivering continued strong results owing to its emphasis on investing in growth through the Iron Bridge Magnetite project and Fortescue Future Industries. The company estimates its iron ore shipments to remain between 180 - 185 million tonnes in FY22. This guidance reflects its sustained focus on optimising returns from its integrated operations and marketing strategy. Further, it forecasts C1 cost for FY22 to stay between US$15.00 - US$15.50/wmt and its capital expenditure (excluding FFI) to remain in the range of US$2.8 - US$3.2 billion that includes sustaining and development capital as well as major projects and exploration.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales based relative valuation (on an illustrative basis) and the target price reflecting  a rise of low double-digit (in % terms) has arrived. A slight premium has been applied to EV/Sales Multiple (NTM) (Peer Median) considering its robust performance in FY21 and its investment in growth strategy.

For the purposes of relative valuation, few peers like Alkane Resources Ltd (ALK.AX), Mincor Resources NL (MCR.AX), among others have been considered.

Considering the aforementioned factors, and the current trading levels, we give a “Buy” recommendation on the stock at the current market price of $21.010 per share (Time: 10:46 AM (GMT+10), Sydney, Australia) on 30^th August 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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