Iron Ore

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

Wed 26 Apr 23, 1:10pm (AEST)
Copper 16 Mining Truck
Source: iStock

Key Points

  • Both Fortescue and iron ore prices are down around 10% in the past week
  • Fortescue posted a solid March quarter result including record year-to-date shipments
  • UBS, Macquarie and Ord Minnett all reiterated bearish ratings on Wednesday

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.

Iron ore futures
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.” 

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


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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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