Fortescue’s (ASX: FMG) 2026 first-quarter shipments are 49 million metric tons, up 4% on a year ago but 10% lower than the previous quarter. Increased volumes, along with favorable inventory movement and foreign exchange, see 10% lower unit cash costs on last year, at around USD 18.20 per metric ton.

Why it matters: Guidance is reiterated, and its year-to-date performance is in line with our expectations. While there is likely to be some variability over the remainder of the year, volumes are around a fourth of our estimate for about 195 million metric tons, similar to fiscal 2025.

  • Unit cash costs are also close to our USD 18.50 full-year estimate, at the top end of guidance and modestly higher than last year.

The bottom line: We make no change to our $16.60 fair value estimate for no-moat Fortescue. Shares trade 23% above our intrinsic assessment, likely due to higher China steel prices as the country works to remove excess steelmaking capacity, allowing steelmakers to pay more for steel inputs.

Big picture: It received a reduced discount of 13% to the 62% benchmark price for its hematite ore (that is, excluding Iron Bridge), down from 17% a year ago. It incurs a discount due to its hematite ore averaging about 57% to 58% iron content.

  • By contrast, its 67% grade Iron Bridge ore received an 18% premium to the 62% benchmark, albeit on minimal volumes. Once Iron Bridge reaches capacity of about 15 million metric tons (its share), likely in fiscal 2028, its average iron content will modestly rise to between 58% and 59%.
  • Iron Bridge and incremental hematite volumes mean we expect it to produce around 210 million metric tons in fiscal 2030. Even so, it will remain behind larger competitors Vale, Rio, and BHP in terms of volumes as well as average iron content (63% to 64% for Vale, and 61% to 62% for BHP and Rio).

Fair valued raised due to strong iron ore prices

Fortescue is the world’s fourth-largest iron ore exporter. Margins are well below industry leaders BHP and Rio Tinto, and some way behind Vale, meaning Fortescue sits in the highest half of the cost curve. This is a primary driver of our no-moat rating. Lower margins primarily result from price discounts from selling a lower-grade (57% to 58% iron) product compared with the 62% iron ore benchmark. The lower grade is effectively a cost for customers through a greater proportion of waste to transport and process, additional energy/coal per unit of steel and lower blast furnace productivity. This results in a lower realized price versus the benchmark. In the 10 years ended June 2025, the company realized an approximate 22% discount versus the 62% benchmark.

Fortescue increased production rapidly thanks to favorable iron ore prices, aggressive expansion, and historically low interest rates. Expansion from 55 million metric tons of capacity in fiscal 2012 to around 195 million metric tons by 2025 is unprecedented. It built much of its capacity around the China boom peak and baked in a higher capital base than peers. This means returns are likely to lag the industry leaders who benefited from building significant capacity when the capital cost per unit of output was lower.

Fortescue has done an admirable job of reducing cash costs materially versus peers. However, product discounts remain a competitive disadvantage. The addition of about 22 million metric tons a year of iron ore production from the 69%-owned Iron Bridge joint venture allows Fortescue blending options. Iron Bridge grades are much higher, around 67%, meaning Fortescue could blend most of its iron ore to increase its average grade to between 58% and 59%.

Fortescue is a China fixed-asset investment play, with practically all of the company’s iron ore sold there. In the long term, we see demand for steel in China declining as the country’s stock of infrastructure matures and with the rate of urbanization past its peak.

The company’s strategy is to transform into a diversified iron ore and clean energy company. Its green energy initiatives are at an early stage, but it has big ambitions in the space.

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.

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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.