Rising Costs Hit Fortescue Hard

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After a strong FY26, cost inflation, increased capex, and the ongoing slow ramp-up of Iron Bridge will drag on Fortescue's FY27 earnings and dividend.

• Fortescue’s FY26 iron ore shipments again hit a record
• FY27 cost inflation, particularly diesel, higher than expected
• Decarbonisation moving slower than hoped
• Shareholders should expect a lower FY27 dividend

By Greg Peel

Australia’s third largest iron ore miner, Fortescue ((FMG)), reported total iron ore shipments of 52.7 metric tonnes (Mt) for the June 2026 quarter, taking total FY26 shipments to a record 201.3Mt, in the middle of 195–205Mt guidance and in line with consensus.

Realised prices were US$89/dry metric tonne (dmt) for Fortescue’s lower grade haematite for the quarter, and US$91/dmt in FY26, averaging 88% of the benchmark 61% iron ore fines price.

Cost pressures are building, with the haematite C1 unit cost rising 6% in the quarter, chiefly due to higher diesel prices. For FY26, the cost came in at US$18.74/wet metric tonne (wmt), a touch outside the company’s guidance range of US$17.50–18.50/wmt.

(A dry metric tonne measures mass of a material without moisture, whereas a wet metric tonne includes moisture content. Thus not quite apples to apples, as a wet metric tonne contains less dry mass net of moisture content.)

FY26 capital expenditure hit the low end of the guidance range of US$3.6bn-US$4.3bn.

At quarter end, Fortescue held cash of US$5.1bn, up from US$4.2bn last quarter, while gross debt was unchanged at US$5.8bn. Net debt dropped to US$0.8bn from US$1.6bn last quarter.

All good news, as anticipated, but…

Guidance

Fortescue provided FY27 guidance for shipments of 197-207Mt, including 11-14Mt from Iron Bridge, little changed from FY26.

However, FY27 cost guidance of US$20.50-21.75/wmt is 7.8% above consensus at the midpoint and 13% above FY26, or 8.5% higher adjusting for an US$0.80/t exchange rate impact, with the balance from higher diesel, wages, and inflation.

Morgan Stanley suggests the cost reset is also consistent with rising work index across haematite operations, including longer haul distances, likely increasing absolute diesel consumption.

Bell Potter notes a stronger AUD is a key negative sensitivity for Fortescue.

FY27 Metals capital expenditure is guided to US$3.7bn-US$4.7bn (inclusive of decarbonisation US$900m-US$1,300m) and compares with US$3.6bn in FY26. Energy project capex and opex is guided to a combined US$450m.

The impacts of the diesel fuel increase have bitten hard, Macquarie notes, with decarbonisation benefits (including electrifying the haulage fleet) not materially lowering diesel consumption until FY28.

FY27 guidance does not reflect the decarbonisation benefits Macquarie had expected, with costs tracking 10% higher than forecast on higher diesel costs.

Ord Minnett notes FY27 capex guidance reflects a mixture of inflationary pressures, sustaining capital expenditure (including for planned maintenance work), elevated spend on decarbonisation programs, and exploration spend.

The mid-point of the range is about 9% higher than consensus estimates of US$4.0bn.

Iron Bridge

Fortescue’s US$6.2bn Iron Bridge project, which has been beset by cost overruns and engineering setbacks, won’t be fully operational until 2028, five years later than was originally expected.

Iron Bridge uses an energy-intensive process to turn low-grade iron ore into a high-grade “magnetite concentrate”, which contains 67% iron and sells at higher prices than most Australian iron ore.

Fortescue will book a -US$750m pre-tax non-cash impairment to Iron Bridge and a one-off charge of -US$104m compensation to the Yindjibarndi Native Title claimants with the FY26 results.

Management outlined the outcomes of its Portfolio Optimisation assessment which provides “flexibility” for Fortescue to alter product mix through the bottleneck to optimise product mix for prevailing market conditions.

Macquarie suggests it is hard to see where Fortescue would favour Iron Bridge over lower-grade haematite, in absence of severe discounting of lower grade Fe products.

Macquarie waits to see how the company’s product mix evolves and, for now, takes a conservative view on Iron Bridge’s share.

Dividend Impact

On the back of higher costs and capex plus a slower Iron Bridge ramp-up, Morgan Stanley sees FY27 earnings per share down -45% year on year to US$0.66, with the earnings margin falling to 40% from 49% in FY26.

Return on invested capital should fall to 8% from 14%, while return on equity declines to 10% from 18%. Morgan Stanley’s’ dividend forecast falls from 112.9cps in FY26 to 60.6cps in FY27, implying a 3.3% FY27 yield on a 65% payout ratio.

Although Fortescue maintains a healthy balance sheet, borrowing to fund dividends appears likely, Morgan Stanley suggests. Net gearing is seen rising from 4% in FY26 to 7% in FY28 and net debt from US$0.8bn to US$1.6bn.

Even at an 80% payout (top end), yields reach only 4.1%/4.8% in FY27/FY28 under Morgan Stanley’s base case, 4.6%/5.4% at spot and 5.7%/6.2% at US$100/t iron ore, versus an historical yield in excess of 6%.

Mixed Views

Fortescue shares trade on 7.1x FY27 and 6.5x FY28 forecast enterprise value to earnings multiples on Morgan Stanley’s numbers versus an historical 12-month forward average of 5.0x, and iron ore rival BHP Group ((BHP)) at 8.0x/8.5x for FY27/FY28.

Morgan Stanley’s discounted cash flow valuation sits at $16.10/share using a long term real iron ore price of US$90/t. In terms of implied iron prices, the current share price implies US$98/t, while Rio Tinto ((RIO)) and BHP imply US$86/t and US$81/t.

Declining yields and a rich valuation keep Morgan Stanley on Underweight.

All brokers covering Fortescue have used FY27 guidance to lower their earnings forecasts and target prices.

UBS notes the core haematite business continues to perform overall very well, but creeping opex/capex, softening price realisations, caution towards iron ore, and further delays at Iron Bridge see a balanced risk/reward.

UBS retains Neutral.

Bell Potter agrees Fortescue’s core iron ore operations continue to perform very well and benefit from an elevated iron ore price. However, higher costs, broad input cost inflation, a subdued iron ore price outlook and potential impacts to price realisation all put pressure on earnings and dividend forecasts.

Bell Potter lifts its rating to Hold from Sell on recent share price depreciation but does not yet see the positive catalysts to re-enter the stock.

On the sunny side of the street, Ord Minnett maintains an Accumulate recommendation.

Ord Minnett expects Fortescue’s upcoming full-year result to also include an update on its Portfolio Optimisation review, which is looking into options to ease port outload capacity constraints, unlock incremental volumes, and rebalance product mix to maximise value.

While Macquarie expected some cost inflation, this broker had expected decarbonisation benefits to accrue more rapidly. While Macquarie has deferred the ramp-up profile, it still remains confident Fortescue could be a cost leader now and in the future.

Macquarie sticks with Outperform.

Among the six brokers monitored daily by FNArena covering Fortescue there are now two Buy or equivalent ratings, three Hold and one Sell. That includes Morgans (Hold) who is yet to update on the June quarter update.

The consensus target among the six has fallen to $19.25 from $19.73, also including Morgans’ unchanged $21.80, which is now the high marker.

The consensus target otherwise ranges from $15.55 (Morgan Stanley) to $20.00 (Macquarie and Ord Minnett).

For more details: see Stock Analysis on the FNArena website.

Fortescue reports its full-year result on August 20.

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