Fortescue Metals Group: Q2 beats estimates

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
30 January 2023, 8:00 AM
Sectors Covered:
Mining, Energy

  • A strong quarter for Fortescue Metals Group (ASX:FMG), coming in ahead of market estimates on shipments, pricing, and cost performance.
  • Price realisations impressed at 88%, well ahead of market expectations.
  • FY23 shipments guidance left unchanged at 187-192mt.
  • Iron Bridge is on track for first production by the end of the March 2023 quarter, with only a minor slip in schedule.
  • Exploration drilling set to get underway in Gabon.
  • We maintain our Reduce rating with a (login to view).

2Q23 result

FMG recorded iron ore shipments of 49.4mt (+4% qoq) in 2Q23, slightly beating consensus expectations of 47.3mt and MorgE of 48.0mt.

Price realisations in 2Q23 of 88% led to an average achieved price of US$87/dmt, comfortably beating Visible Alpha consensus of US$74.94/dmt.

The higher volumes helped C1 cash costs, which came in below expectations at US$17.17/wmt (vs consensus/MorgE of US$17.60/US$17.40 per wmt). FMG outlined lower FX rates and fuel costs as also helping, but maintained FY23 cost guidance (in case of further inflationary pressures during 2H23). 

Capex of US$728m in 2Q23 brought 1H23 total capex spend to US$1.4bn and trending to the lower end of FY23 capex guidance of US$2.7-3.1bn (excluding FFI).

Iron Bridge is tracking for first production at the end of March 2023, with the facility targeting 22Mtpa of magnetite concentrate at full capacity. FMG previously guided for 1mt of shipments out of Iron Bridge for FY23 but adjusted it to <1mt on the back of short-term challenges such as tight labour markets. 

FMG expects to start initial drilling at the Belinga Iron Ore Project in Gabon in March 2023.

Analysis

FMG is tracking in the higher range of their guidance for FY23 iron ore shipments with 96.9mt shipped in 1H23 and FY23 guidance of 187-192mt. Allowing for some impact from wet season in 3Q’FY23.

Significant capex is still to come from FMG’s decarbonisation spend and various projects targeting FID in CY23.

FMG expects to fund this spending through its iron ore cash flow, which sees its FCF yield reducing significantly over the next few years, and increasing its sensitivity to any unexpected market volatility.

Forecast and valuation update

We have updated our estimates for the result and rolled forward our model. We have increased our price realisation estimates for the next quarter to 84% (from 82%) and applied our increased long-term iron ore price assumptions to our valuation (now US$72/t real, was US$65/t).

Post changes our Target Price has increased marginally to (login to view).

Investment view

FMG’s share price has outpaced gains from the increases in our assumptions.

A solid floor in iron ore prices has understandably increased confidence in FMG, but with Chinese steel market conditions still subdued we fear the China re-opening thematic is already being priced in.

We maintain our REDUCE rating with a (login to view) target price.

Price catalysts

  • 1H23 earnings and dividend result on 15th February.

Risks

  • Volatility in steel demand and iron ore pricing from any changes in China’s re-opening strategy.
  • Execution on growth projects in iron ore and renewables.

Find out more

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