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Fortescue Metals Group: Iron Ore Miner Unveils Record Low Costs -- Barron's Blog

27 Jul 2017 4:56 am

By Robert Guy

Fortescue Metals Group ( FMG.AU) has delivered a solid June quarter production report and committed to driving its iron ore production costs even lower.

The Australian company shipped 44.7 million tonnes of iron ore in the June quarter, a 13% increase from the March quarter and a 3% rise from the same time last year. The company shipped 170.4 million tonnes in the 2017 fiscal year and is aiming to maintain shipments around the same level in 2018.

Cash production costs fell to a record low cost of $12.16 a tonne, which is a 15% year-on-year improvement. Fortescue is aiming to cut its cash cost of production, known as C1 costs, to between $11 a tonne and $12 a tonne in the 2018 fiscal year.

However, analysts focused on the prices the company was able to realize for its iron ore. Fortescue's ore is lower grade and it sells at a discount to the industry benchmark which is based on ore with 62% iron content.

The company's average realized price in the 2017 fiscal year was 77% of the benchmark price but the average realization on contracts inked in the June quarter was 73%.

RBC Capital Markets analyst Paul Hissey is one analyst closely watching the company's price realizations given the impact on the stock's valuation:

The sticking point of the announcement is the significantly lower price realisation FMG has received (versus the 62% Platts CFR Index) which we think the market may not have truly appreciated. The company has provided price realisation guidance for FY18 of 75-80% (historically, guidance has been 85-90%, we recently lowered our forecast to 80-85%) with a soft first half expected to be slightly below this range (and recover in 2H17). It may still be too early (or complex) to ascertain whether this downgrade is a function of structural change in the steel industry or the result of shorter term cyclical factors. However, FMG's sensitivity should not be overlooked - on our estimates each 1% of permanent decline in price realisation could equate to A$1bn in reduction to NPV.

Iron ore prices have rebounded over the past month, rising from a low of $53 a tonne in June to around $70 a tonne currently amid signs of continued growth in China's economy.

Fortescue shares are down 10% so far this year, but the stock has rallied roughly 17% from its June lows. The stock last traded up 0.2% at AUD5.31 a share.
 More at Barron's Asia Stocks to Watch blog, http://www.barrons.com/asia-stocks-to-watch 

(END) Dow Jones Newswires

July 27, 2017 00:56 ET (04:56 GMT)

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