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Fortescue at peak after record full-year profit, higher dividends

Prashant Mehra  |  24 Aug 2020Text size  Decrease  Increase  |  
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Fortescue Metals Group (ASX: FMG) has posted a record full-year profit and lifted its payout, helped by a surge in iron ore prices amid resurgent demand in China.

The world's fourth-biggest iron ore miner reported net profit of $US4.74 billion ($6.6 billion) for the 12 months to 30 June, a 49 per cent increase from the previous year.

Revenue rose by 29 per cent to $US12.82 billion.

Morningstar’s director of equity research Mathew Hodge called it “a strong result overall”, with net profit just a few percent shy of his forecast—due to higher taxes and the impact of realised prices—and full-year payout better than expected.

“Total dividends of $1.76 per share fully franked are slightly better than our $1.60 per share forecast, a material bump from last year’s $1.14 per share,” he said.

Fortescue shares jumped more than 3 per cent to $18.64, taking them even further from Hodge’s fair value estimate of $7.70 each.

Chief executive Elizabeth Gaines termed the numbers “a year of outstanding performance for Fortescue, with record results achieved by the team across all key operating and financial measures.”

The company shipped a record 178.2 million tonnes of iron ore in the 12-month period, ahead of its own guidance, and benefiting from an economic recovery in China following the coronavirus outbreak as well as supply disruptions in Brazil.

Strong demand for the steel-making ingredient following renewed infrastructure spending in China has helped push prices above $US100 a tonne.

That has helped iron ore outperform other commodities by far, even as much of the rest of the world is still gripped by the coronavirus pandemic.

Fortescue Metals Group (FMG) - 1YR

FMG - 1YR

Source: Morningstar Premium

Iron ore prices are currently around $US126.50 a tonne, and are up more than a third so far this year.

Morningstar’s Hodge said the miner has enjoyed the best of the conditions.

“It’s hard to imagine external conditions getting materially better for Fortescue, and we see longer-term downside from here,” he said.

“Both on the demand side—as infrastructure stimulus to offset the covid-19 downturn in China abates and as urbanisation and infrastructure requirements generally reduce.

“And on the supply side—seeing incremental additions from Fortescue, Vale, the return of more normal production from Vale over time after the 2019 tailings dam failure, and longer-term, the development of the high-grade Simandou deposit in Guinea.”

The better-than-expected profit helped Fortescue raise its final dividend to a fully franked $1 per share, from 84 cents a share a year ago.

That took total dividends for the year to $1.76 per share, up 54 per cent from the previous year and near the top end of its 50-80 per cent target range for payout ratio to shareholders.

It also meant a windfall of more than $1 billion for Fortescue’s founder and chairman Andrew Forrest, who owns a 36 per cent stake in the company.

The company had net debt of just $US300 million at the end of June, even as it invests in growth projects such as Iron Bridge and the Eliwana Mine and Rail Project that will boost the proportion of higher-grade ore in its mix.

Fortescue last month flagged capital spending of $US3 billion-$US3.4 billion in FY21, mostly in the Eliwana project.

“Fortescue is well placed to push ahead with modest growth plans, including the 22 million tonne-a-year Iron Bridge development, which will add higher grade 67 per cent ore to the company’s product mix,” Hodge said.

The miner expects to ship between 175 million tonnes and 180 million tonnes of iron ore the current financial year with cash costs forecast to be in a range of $US13.00-$US13.50 per wet metric tonne, slightly higher than in fiscal 2020.

Visit Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

is a freelance journalist.

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