Fortescue Earnings: Profit Declines on Lower Iron Ore Prices

No-moat Fortescue’s FMG fiscal 2023 result broadly met our expectations. Adjusted net profit after tax of USD 5.5 billion, or USD 1.79 (AUD 2.77) per share, was down around 10% on last year but similar to our estimate. Adjusted EBITDA fell 6% to roughly USD 10 billion, driven by 5% lower realized iron ore prices to USD 95 per metric ton. Modestly higher sales volumes and lower shipping costs offset a 10% increase in unit cash costs due to inflation to about USD 18 per metric ton. Fortescue will pay an AUD 1.00 final dividend in September for a fiscal 2023 total of AUD 1.75 per share fully franked. This was 6% below our estimate but met the middle of Fortescue’s 50%-80% target payout ratio. Free cash flow of USD 4.3 billion rose 19% on last year and the balance sheet is very strong, with minimal net debt of USD 1 billion, or 0.1 times trailing 12 months EBITDA.

We retain our AUD 15 per share fair value estimate with the shares trading around one third higher. In our view this reflects optimism for its expansive green energy ambitions and elevated near-term iron ore prices. However, we remain more circumspect, with the company having large exposure to China’s troubled real estate sector, given that almost all of its iron ore is sold to customers in China.

We forecast fiscal 2024 iron ore sales of about 192 million metric tons (Fortescue’s share) and 5% higher unit cash costs excluding Iron Bridge. With the 69%-owned Iron Bridge mine ramping up to full production, likely in fiscal 2026 or 2027, we forecast sales rising to about 210 million metric tons (its share) in fiscal 2028.