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Fortescue's $1.2bn net profit for 1H17 almost triple prior period

Glenn Freeman  |  22 Feb 2017Text size  Decrease  Increase  |  

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Fortescue Metals Group has reported $1.2 billion in net profit after tax and a 20-cent dividend for the first half of fiscal 2017.

 

The iron ore exporter Fortescue Metals Group (ASX: FMG) recorded an almost three-fold (286 per cent) increase on its $319-million net profit recorded in the first half of fiscal 2016.

Its shareholders will receive an interim dividend of 20 cents a share, fully franked, representing a 38 per cent net profit payout ratio, and more than five-times the 3-cent dividend paid a year earlier.

Fortescue CEO Nev Power called out the iron ore exporter's improvement in C1 costs, down 20 per cent, and shipments of 86.1 million tonnes, "slightly ahead of our targets". The C1 cost represents the direct production costs of iron ore.

"Our successful operational performance combined with positive market conditions produced strong cash flows, facilitating further debt repayments of US $1.7 billion," he said.

Revenue of US$4.4 million for the half was up 34 per cent from US$3.3 million in the first half of fiscal 2016. According to Power, "this reflects the 27 per cent increase in ... iron ore price to US$65 per dry metric tonne (dmt) for the first half of fiscal 2017".

Fortescue's average realised price was US$56 per dmt--87 per cent of the average 62 Platts CFR iron ore price.

The realised iron ore price during the half was higher than that expected by Morningstar senior equities analyst Mat Hodge, who sees Fortescue as very highly leveraged against this.

"Forecast flat steel demand from China is the key driver of our view that the iron ore price will fall considerably longer term," Hodge said.

"Fiscal stimulus in China has tightened the iron ore market for the last year and helped to absorb additional supply, but we think it will be difficult for supplier restraint to persist when stimulus abates and demand falters."

He also pointed to substantial increases in the iron ore stocks held at major Chinese ports, which could in turn lead to a change in sentiment and destocking "that would weigh on prices".

In response to Fortescue's reported second-quarter iron ore shipments, Morningstar raised its earnings forecast 7 per cent to 95 cents a share earlier this month.

"With the balance sheet strengthening, we expect a greater proportion of the current windfall cash flows to be returned as dividends," said Hodge.
 
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Glenn Freeman is Morningstar's senior editor.

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