Fortescue’s (ASX: FMG) fiscal 2026 second-quarter shipments of 50 million metric tons are 2% higher than a year ago. Unit cash costs are USD 19.10 per metric ton, up 5% from the first quarter and the same quarter last year, driven by unfavorable inventory movements, higher diesel prices, and foreign exchange.

Why it matters: Guidance is reiterated, and its year-to-date performance is tracking in line with our unchanged full-year forecasts. We still expect fiscal 2026 shipments to be about 195 million metric tons, similar to last year.

  • We also maintain our unit cash cost forecast of USD 18.50 per metric ton, at the top end of the guided range. However, they came in 3% above this for the quarter and are modestly above our estimate so far in fiscal 2026.
  • This is likely why shares have fallen 5% since the announcement, and a stronger AUD/USD exchange rate could further affect unit cash costs in USD terms. However, we think a lower strip ratio in the second half will likely broadly offset and maintain our unit cash cost estimate for now.

The bottom line: Our fair value estimate for no-moat Fortescue remains $16.60. Shares are overvalued, trading 40% above our intrinsic assessment. This is likely due to spot iron ore remaining strong at about USD 105 per metric ton.

  • However, we are bearish on iron ore prices in the longer term. Chinese steel production is likely peaking, and alongside increasing iron ore supply led by Vale and Simandou, this will likely pressure prices.
  • Hence, our assumed long-term or midcycle price is about USD 75 per metric ton, based on our estimate for the long-run marginal cost of production.

Between the lines: The discount Fortescue receives relative to the 62% benchmark price has fallen to 12%, down from 16% in fiscal 2025. It receives a discount on its hematite ore due to its lower average iron content of about 57% to 58%.

We don’t believe Fortescue has a sustainable competitive advantage

The iron ore produced by its mines generally has less iron content than the 62% iron ore benchmark while also having higher percentages of impurities such as sulphur, alumina and phosphorous. As a result, Fortescue’s iron ore is lower quality than that produced by its major competitors such as BHP, Rio Tinto and Vale. This competitive disadvantage results in its iron ore tending to sell at a material discount to the 62% benchmark price, with the average discount over the 10 years to fiscal 2025 being about 22%. The exception is Iron Bridge, which will produce a 67% product. As it is a magnetite deposit, once mined the ore requires beneficiation(where the mined material is crushed into smaller particles and then the valuable ore is separated from the waste). This means cash operating costs for Iron Bridge are materially higher than for the company’s other conventional mines. Moreover, Iron Bridge will only account for around 10% of total production on a 100% basis once fully ramped up.

As a commodity producer, Fortescue is a price-taker and needs low-cost mines with long lives and a low installed capital base to support the longer-term excess returns needed to justify an economic moat. Once product discounts are taken into account, and assuming Vale’s costs normalize, Fortescue sits around the 75th percentile of the industry cost curve.

We note that the company averaged ROIC of about 25% in the 10 years, and around 33% in the five years, ended June 30, 2025. However, the last decade has been characterized by average iron ore prices that are far in excess of our long-term midcycle estimate of USD 72 per metric ton. Iron ore prices averaged about USD 125 per metric ton over the five years to 2024 and around USD 95 per metric ton over the 10 years to 2024. These prices have mainly been driven by generally increasing crude steel production in China, helped in recent years by the iron ore majors expanding production at much slower rates than they did in the early part of the last decade.

If we assume prices instead converge toward our midcycle estimate of roughly USD 72 per metric ton from 2029, we estimate that Fortescue will generate a ROIC below its WACC of around 9.5%. Accordingly, we don’t assign a moat to Fortescue.

Given the Chichester, Solomon, and Western hubs are hematite mines and also share the same railway and port infrastructure, we treat them as one integrated production center when assessing their moatworthiness. Most of the assets—approximately 70% of the invested capital base—sits within port and rail, essentially in perpetuity infrastructure assets. The remainder of the invested capital base sits with the mines. New mines are periodically developed to continue to feed and utilize the installed infrastructure base.

We assess the Iron Bridge mine separately. It is a different type of mine (magnetite) with materially different product price, unit operating costs, unit capital costs and margins. Also, it uses separate infrastructure (namely, a pipeline) to transport its concentrate to Port Hedland.

Looking at these hubs/mines in turn:

Chichester, Solomon, and Western hubs: These mines produce ore with an iron content of around 57%-58%, lower than the 62% benchmark. This lower-quality ore generally receives a discounted price from steelmakers as they have to use more iron ore and coking coal to produce a metric ton of steel compared with higher-grade iron ore, while also resulting in higher CO2 emissions. Once we adjust for the lower iron ore content, the cash costs for extracting ore from these mines place Fortescue’s conventional operations well into the upper half of the iron ore cost curve. We also note that Fortescue’s assets are relatively new compared with those of BHP, Rio, and Vale, who constructed much of their mines’ infrastructure when unit capital costs were far lower, resulting in Fortescue having a higher unit capital cost, too. This lack of cost advantage, and our reticence to forecast iron ore prices remaining above the marginal cost in the longer term, means we don’t think they will generate excess returns in 10 years, and so we don’t deem them moatworthy.

Iron Bridge: Producing ore with an iron content of 67%, we estimate it will represent around 10% of midcycle volumes. We assume that Iron Bridge ore will earn a premium of around USD 35 per metric ton above our assumed midcycle 62% benchmark price of roughly USD 72 per metric ton. However, with unit costs more than double those of the company’s conventional mines, we don’t think it will generate ROIC above WACC for at least 10 years and so also don’t deem it moatworthy.

Fortescue Energy: After sensibly winding back its ambitions recently, we estimate that it will spend about USD 3.5 billion on Fortescue Energy over our five-year forecast period. Fortescue Energy is focused on investing in green energy and materials, specifically in relation to green hydrogen and green ammonia. Its efforts in this regard are at an early stage and have no certainty of success. However, given the expenditure is small on a relative basis, we assume that Fortescue will earn its cost of capital. Hence we believe that Fortescue Energy doesn’t contribute nor detract when determining whether Fortescue is moatworthy.

Exploration projects. These are an immaterial part of Fortescue and it is way too early in their potential development to assign any of them a moat.

Bulls say

  • Fortescue provides strong leverage to the Chinese economy. If growth in steel consumption remains strong, it’s also likely iron ore prices and volumes will, too.
  • Fortescue is the largest pure-play iron ore company in the world and offers strong leverage to emerging world growth.
  • When steel industry margins contract, it’s likely that product discounts narrow significantly relative to historical averages, reducing Fortescue’s competitive disadvantage relative to the majors.

Bears say

  • We think that ultimately Chinese fixed-asset investment will slow, and future iron ore volume growth and prices are likely to be much less favorable.
  • Margins are significantly lower than those of diversified peers BHP, Rio Tinto, and Vale, and this could see Fortescue’s margins fall much more than peers if iron ore prices fall.
  • Fortescue produces an inferior, lower-iron-grade product, which attracts a discount to the benchmark 62% iron ore fines price. Lower-grade reserves mean this discount is likely to persist.

Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.