While many shifts in the iron ore market have been on and some experts believe that Fortescue Metals Group Ltd (ASX: FMG) will be putting itself into the shoes of a junior player, Atlas Iron, in terms of financial scenario casting doubts on the earnings projections made by many others. On one side, many believe that the group has the potential to witness an earnings’ result that can be over $US1 billion in upcoming years, 2019 and 2020; and on the other side, we have many believing that the widened scenario for lower grade iron ore related discounts in prices can nudge the whole framework with some financial holes digging a bit deeper. The past 2 years have led ASX:FMG work on more discounts with Chinese steel mills preferring better iron content ores.
It is worth noting that FMG’s products having content of iron ore below 59-60% have received large discounts against the ones with 62%. The group now aspires to have developing >60% iron content product with Eliwana cited to be having 60% Fe product. Production at the Eliwana project has been slated for December 2020.
Then there has been a big reduction in its net debt in last five years, and the debt now sits around $US3 billion as at FY17 against over $US10 billion as at FY13. The aim is to be in a state of no debt repayments until 2022 with more work on balance sheet. At the same time, if one looks at the stock price movement over the last five years, the ASX: FMG stock has risen about 21.5% but with iron ore shortcomings and other performance related issues, the stock price plunged about 14% in last one year.
As at Q3 of 2018, FMG’s net debt has been reported around US$3.1bn while shipped C1 costs have been US$12.43/wmt and interest savings of US$130mpa were reported. The focus over the recent periods has been to portray long term low cost outcomes backed by structural improvements and better productivity.
For half year 2018, the group’s NPAT was US$681m with cash on hand of about US$892m. The interim dividend was a payout of 40% with US$0.22 as earnings per share. The group is trying to pull strings towards managing operations to have better margins, and its free cash flows have been lowered. Hence, less borrowing costs with improved capital management have been taken to the next level with low cost growth options being explored for the iron business. At Pilbara, the group is trying for having low cost growth options that can unveil position in Iron Ore, Lithium, Copper and Gold.
For FY18, the group has slated to have a dividend policy of 50-80% pay-out of NPAT. While the general iron ore price forecasts have been taking a mixed view, it will be a key to watch out the iron ore miners in the given set-up and how ASX:FMG would place itself given the other giants like ASX BHP Billiton in place. FMG is about to reveal more on product pricing in the coming period.
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