Before Fortescue Metals Group (FMG) reports their latest set of results during Australia’s upcoming earnings season, take a look back at our analysis and summary of the company’s recent operating results.
The piece below was originally published in our ASX 2023 Playbook: What’s your next move – during the start of 2023.
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FMG interim profits, dividend lower as iron ore prices moderate
The pure play iron ore miner saw its top and bottom line growth slow in the half ending 31 December 2022, as macroeconomic headwinds intensified.
Earnings, revenue slump
FMG’s leverage to the price of iron ore was on full display with the release of its fiscal 2023 interim earnings for the half ending 31 December 2022, with the pure play iron ore miner reporting declining operational results across the board. With average iron ore prices in decline, Fortescue saw its total interim revenue dip 4% to US$7.8 billion, down from US$8.1 billion in the first half of fiscal 2022.
Key data point:
FMG made US$87 per tonne of iron ore sold – equal to a 86% realisation of the Platts 62% benchmark, up from a 70% realisation a year prior.
What to watch for:
Realisation is particularly important as it gives investors insights into the current supply-demand dynamics of the iron ore markets – with a higher realisation figure implying greater demand for FMG’s iron ore products. As a result, investors should pay particular attention to how this figure changes over time given its significant impact on the miner’s ability to generate revenue. Despite those realisation increases, weaker revenue flowed onto the miner’s bottom line: EBITDA was down 9% year on year to US$4.35 billion and net profits fell a more pronounced 15% to US$2.37 billion, in the half.
Dividend down 15%
In absolute terms, FMG announced a lower dividend during its interim results report. The interim dividend was A$0.75 per share – down from the A$0.86 per share dividend paid a year ago – representing a decline of 13% year on year. That interim dividend represents a 65% payout of net earnings – in line with the company’s dividend policy of paying out between 50% to 80% of earnings in the form of dividends to investors.
Why it matters:
FMG’s shareholder friendly dividend policy and elevated payouts over the last few years have arguably contributed to demand for the miner’s stock, its valuation, and its recent share price run up.
What to watch for:
Changes in FMG’s dividend policy or a material decline in the company’s revenue and earnings could potentially impact the viability of the miner’s above-market dividend.
Iron Bridge almost complete
Known for producing iron ore below the 62% grade – the miner shipped 96.9 million tonnes of iron ore in the half ending December 31, 2022 – representing a 4% increase year on year. The company has also been making moves to diversify its product mix – with the Iron Bridge Project, which is said to deliver ores up to the grade of 67% – set to start first production in the March 2023 quarter.
Why it matters:
Higher grade ore could help with FMG’s average price realisation and help offset demand shifts away from the lower grade ore that has become increasingly popular in recent years. By diversifying its iron ore product mix across both low and higher grades, FMG would be better placed to deal with changes in demand for different grades of ore, making the miner’s revenue more resilient while potentially increasing the quality of its earnings.
Outlook
Looking towards the remainder of fiscal 2023, FMG reiterated its prior guidance across shipment forecasts and capital expenditure.
Key data point:
FMG’s management team reiterated prior guidance, saying the miner is on track to ship between 187 million and 192 million tonnes of iron ore in fiscal 2023, and total capital expenditure is expected to come in at between US$2.7 to US$3.1 billion.
What to watch for:
Investors should monitor FMG’s upcoming production reports – which are released to cover quarterly operating results not covered in a full year or interim reports. These reports can help investors get a better sense of demand for iron ore prices, up-to-date iron ore price realisation levels for FMG, and to see if any upwards or downwards revisions are made to the miner’s shipment expectations.
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