Fortescue Improves While BHP Struggles

Fortescue Metals Group stands out as an Australian mining industry success story after having overcome extreme scepticism about its prospects. The PortfolioDirect modelling methodology assesses the Fortescue steady-state bond equivalent return, based on its 2015/16 operating outcome, at 4.7%. This is not especially exciting but significantly better than the negative return displayed by BHP Billiton, based on its recently reported 2015/16 financial results. (VIEW LINK) A 50% iron ore price increase raises the Fortescue bond equivalent yield to slightly over 19%. This also compares favourably with the 6% yield for BHP Billiton on the same assumptions. Fortescue now offers investors a stronger underlying financial performance than available through BHP Billiton. BHP and Fortescue are travelling in opposite directions. BHP is making a lengthy transition from Australia’s largest, most admired and widely held company to be a modestly performing miner still trying to define a sustainable strategy. Fortescue is gaining fresh respect within investment markets and, based on its existing business model, retains latent relative value capable of being re-priced without an improvement in cyclical conditions.