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Fortescue's profit surges despite iron ore price slump

Anthony Fensom  |  22 Aug 2016Text size  Decrease  Increase  |  

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The Perth-based miner's revenue slumps on a 29 per cent fall in iron ore prices but net profit surges, helped by a 43 per cent fall in operating costs.


Iron ore miner Fortescue Metals Group (ASX: FMG) has posted a profit surge in the full year to 30 June after successfully slashing costs to offset lower prices, with its results beating analyst expectations.

The Perth-based company reported a 17 per cent fall in revenue to around US$7 billion for fiscal 2016, reflecting a 29 per cent fall in prices.

However, net profit after tax surged by 212 per cent to US$985 million, helped by a 43 per cent fall in its "C1" operating costs to an average of US$15.43 per wet metric tonne.

C1 operating costs dropped to US$14.31 in the June 2016 quarter for the 10th straight quarterly reduction on the back of productivity and efficiency initiatives, while capital expenditure dropped to US$304 million compared to US$626 million in fiscal 2015.

Underlying EBITDA (earnings before interest, tax, depreciation and amortisation) rose by 27 per cent to US$3.2 billion, while net cash flow from operating activities increased by 48 per cent to about US$3 billion. Basic earnings per share amounted to US$0.316, up 210 per cent.

Fortescue declared a final dividend of 12 cents a share, fully franked, up from 2 cents in the previous period. This brought the full-year dividend to 15 cents per share for a payout ratio of 36 per cent of net profit, "in line with guidance of 30 to 40 per cent," the company said.

The company's break-even price on a Platts 62 per cent CFR basis was reported at US$28.30 per tonne, well below current prices of around US$60.

Fortescue chief executive Nev Power said the "outstanding" result was built on achieving safety, production and cost targets.

"Successful cost improvement measures and lower capital expenditure have more than offset the impact of falling iron ore prices to generate strong free cash flow. We have repaid US$2.9 billion of debt in fiscal 2016, reducing net debt to US$5.2 billion, and will continue to repay debt from operating cash flows," he said.

The company said it expected to ship around 165 to 170 million tonnes in fiscal 2017 compared to the 169.4 million tonnes shipped in fiscal 2016.

It is aiming for even lower costs in fiscal 2017, targeting an average C1 cost of US$12 to US$13 per wet metric tonne.

Fortescue reportedly exceeded analyst expectations on nearly every metric including its dividend, which was tipped at 7 cents per share based on an average of 16 analysts, according to The Australian Financial Review.

The company's unit cost measure compared with Rio Tinto's (ASX: RIO) recent US$14.30 for the first half of 2016 and BHP Billiton's (ASX: BHP) US$15 for fiscal 2016, putting Fortescue among the nation's lowest-cost iron ore producers, the financial daily said.

However, according to a 16 August report by Morningstar senior equities analyst Mathew Hodge, Fortescue is "vulnerable to cyclical weakness" due to its high leverage, with a "legacy of debt-funded rapid expansion" and lower margins than its peers.

"Fortescue built its assets during the iron ore boom, meaning that the cost of its installed capital base is higher than the established majors, who benefit from investments made when capital costs were much lower," Hodge said.

Morningstar expects the 2016 iron ore price to average US$51 per tonne, based on a bearish long-term outlook for Australia's biggest export commodity.

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Anthony Fensom is a Morningstar contributor.

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