Australia’s third largest iron ore miner, Fortescue Metals (FMG) has posted a better than expected set of half year profit results, helped mostly by a surge in iron ore prices, a reduction in costs and a small lift in shipments. For the six months ended Dec 2016, net profit after tax almost quadrupled to US$1.2bn.
Iron ore prices have recently hit their best levels in 2.5 year highs thanks partly to Chinese stimulus (the biggest consumer of ore), which has been the big driver of the pure ore play’s results. FMG received a realised price of US$56/dry metric tonne for ore sold; a 30% lift on 1H16.
While iron ore price fluctuations are out of the group’s control, FMG has been successful in bringing down costs by 20% over the half. Its C1 costs – which measures operating costs of mining, processing, rail and port – improved to US$13.06/wmt for HY17. FMG shipped 86.1 million tonnes (mt) of iron ore over the half, a 3% lift on last year’s result.
As was already disclosed in their latest quarterly report, FMG cut its debt to US$4bn, taking advantage of the surge in iron ore prices and subsequent cash generation to improve its balance sheet. Over the half, FMG made US$1.7bn in voluntary debt repayments, generating interest savings of US$64m per year and takes its net gearing to 30%.
FMG has increased its dividend from A$0.03 a year earlier to a fully franked A$0.20, which is payable to investors on 6 April. It will trade ex-dividend on 2 March. This represents a payout ratio of 38% from its net profit.
Looking ahead, FMG has maintained its guidance for the year. It expects to ship between 165-170mt of iron ore over FY17. This compares to the 169.4mt the miner shipped in FY16. It expects C1 costs to remain between US$12-13/wmt based on an exchange rate of US$0.75 and oil price of US$50/barrel. It plans on spending US$360m on its on ore carriers and tugs and US$80m on exploration and development.
FMG shares are trading near six-year highs and have more than tripled in value on the ASX in just 12 months thanks to stronger iron ore prices and a concerted effort to cut its debt. Its shares are coming under some pressure today. For more Reporting Season coverage, please visit https://www.commsec.com.au/reportingseason