Is the Fortescue dip worth a second look: A solid March quarter vs. deteriorating iron ore prices

Fortescue (ASX: FMG) shares are on a four-day skid, down around 10% and nearing year-to-date lows. During the selloff, the company posted what was a largely in-line March quarter result, where it achieved record FY23-to-date shipments and reaffirmed its FY23 guidance.

At the same time, iron ore prices have fallen sharply, down almost 15% since 19 April to a 5-month low of US$100.55 a tonne.

Singapore iron ore futures (Source: TradingView)

Does the operationally solid March quarter present a buying opportunity for Fortescue? Or does the downside risk for iron ore price outweigh any other fundamental positives? In this piece, we take a look at the key takeaways from UBS, Macquarie and Ord Minnett, and why they remain bearish. 

Third quarter at a glance

• Fortescue shipped 46.3m tonnes of iron ore in the March quarter, down 6% quarter-on-quarter, flat compared to a year ago and in-line with analyst expectations

• FY23-to-date, shipments hit a record 143.1m tonnes

• Average revenue of US$109 a tonne, realising 87% of the average Platts benchmark

• Ore mined of 50.3 wmt vs. analyst estimates of 55 wmt

• C1 cost of $17.73 per wmt vs analyst estimates of $18.4/wmt 

• Cash balance unchanged at $4.0bn with net debt of $2.1bn

Broker views: It’s time to lessen

All three brokers retained Sell or sell-equivalent ratings.

• UBS retained a SELL rating and lowered its target price to $17.40 from $19.80

• Macquarie retained an UNDERPERFORM rating with a $17.00 target price

• Ord Minnett retained a LIGHTEN rating with a $15.00 target price

“Fortescue’s third quarter FY23 result was solid with volumes and realised prices in line with our estimates and cash costs lower than we had forecast,” Macquarie said in a note on Wednesday.

“Movements in iron-ore prices present the most material risk to our earnings forecasts and valuation for FMG.”

One of the key areas of uncertainty was the funding requirements for Fortescue Future Industries, which could disrupt Macquarie’s forecasted long-term dividend payout ratio of 65%. 

“Two 300MW green hydrogen and green ammonia projects are advancing in Norway in Kenya, however details remain elusive,” the analysts warned.

“Fortescue is trading on modest free cash flow yield of 6-8% and with uncertainty over the capital commitment to FFY, we retain our Underperform rating.” 

Fortescue 12-month price chart (Source: Market Index)