Materials

Fortescue iron ore shipments exceed guidance; cost issues escalate

Thu 28 Jul 22, 10:39am (AEST)
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Key Points

  • Output expectations for the current financial year have been lifted to between 187m and 192m tonnes of iron ore
  • The company reported average revenue of US$108 per dry metric tonne for the quarter and US$100 per dry metric tonne for the 2022 financial year
  • The miner now expects the average cash costs of US$18 to US$18.75 a tonne for its direct shipping ore in the current financial year, up from an average $US15.19 a tonne last financial year

While falling iron ore prices and speculation that the dividend is on a downward trajectory saw Fortescue Metals (ASX: FMG) trade sideways in July, the Pilbara iron ore major’s fortunes were raised somewhat this morning following a robust June quarter update.

Revelation that the company beat its iron ore export guidance to ship 189m tonnes to the end of June 30 – after a record 49.5m tonne June quarter – saw the share price up 2.20% at the open.

Iron Bridge magnetite project

After factoring in a million tonnes from its delayed Iron Bridge magnetite project, output expectations for the current financial year have been lifted to between 187m and 192m tonnes of ore.

The company reported average revenue of US$108 per dry metric tonne for the quarter and US$100 per dry metric tonne for the 2022 financial year.

Overall, Fortescue ended June with net debt of US$900m, down from US$2.4bn at the end of March, and with US$5.2bn in cash at bank.

Higher costs

However, on a less positive note, the miner nudged cost expectations higher courtesy of continued cost inflation currently being experienced within the Australian mining industry.

As a result, the miner now expects the average cash costs of US$18 to US$18.75 a tonne for its direct shipping ore in the current financial year, up from an average $US15.19 a tonne last financial year, and above the $US17.19 a tonne cost of the June quarter.

Inflationary pressures

Fortescue attributes revised guidance to the lag effect of ongoing inflationary pressures, and cited diesel, labour rates, ammonium nitrate and other consumables together with mine plan driven cost escalation.

The company expects costs for its green energy focused unit Fortescue Future Industries to come in at between US$600m and US$700m in the 2023 financial year.

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Fortescue Metals Group share price over three months.

What brokers think

As a reflection of underlying uncertainty surrounding the iron ore price, rising costs and labour issues, Fortescue’s share price is down around -30% over one year.

Consensus on Fortescue is Moderate Sell.

Based on Morningstar’s fair value of $17.50 the stock appears to be overvalued.

Based on the seven brokers that cover Fortescue (as reported on by FN Arena) the stock is currently trading with -8% downside to the target price of $16.72.

In light of rising cost pressures and lower expectations for base metals, Goldman Sachs has a Sell rating and price target of $13.20.

Based on the tight WA labour market and inflationary environment, UBS sees risks to both timeline and capex for Fortescue’s Iron Bridge magnetite project and maintains a Neutral rating and $16.00 target price.

While Credit Suisse remains positive on iron ore, coal and aluminium, the broker is concerned about rising costs and retains a Neutral rating, while the target price drops to $17 from $20.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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