Australia | Jun 21 2013
– FY13 shipments slightly weather impacted
– Cash costs falling
– Delay to The Pilbara Infrastructure equity sale no drama
– Brokers upbeat
By Greg Peel
It’s a long held adage that if you’re going to announce to the market your production has fallen behind guidance, it’s best not to do it on the day the Fed announces a wind-back of QE3 and an independent estimate of Chinese manufacturing suggests contraction. But such is life.
It’s hard to gauge in isolation just how the market might have responded to the update from Fortecue Metals ((FMG)) management yesterday given nothing was going to prevent the general carnage, not even a big jump in the iron ore price. But if we remove ourselves from the reality of the current rout for a moment we find that FMG’s update was really quite positive, and well received by analysts.
The production downgrade amounted to a shift in FY13 guidance from an 82-84mt range of shipments to an 80-82mt range. Not exactly devastating, and all to do with the weather. Macquarie is ready for a lot more weather-related downgrades in the upcoming quarterly report season for the miners.
There was also some disappointment FMG is yet to find a buyer for a minority stake in its rail and port assets, which it calls The Pilbara Infrastructure or TPI. Given the volatility of iron ore prices the market would like to see the company reduce its gearing from a current lofty 66%, and a sale of 30-40% could net around US$3-4bn and reduce gearing immediately to 55% and make the end-FY14 target of below 40% quite viable.
But after spending years pouring vast sums into ramping up production at a rapid clip, FMG will turn cash flow positive by the end of the month. Cash on hand should increase to $1.7-2bn from $1.5bn by June 30 on Citi’s estimates. Thus a failure to sell a piece of TPI will not affect the company’s capacity to keep funding the expansion, and TPI is expected to sell equity in TPI in the September quarter. It’s a delay on previous guidance but as JP Morgan points out, recent stronger iron ore prices have offset any urgency and FMG need only sell if the terms are desirable.
Meanwhile, cash costs are likely to come in at the bottom of the US$45-50/t range which pleasantly surprises JP Morgan and comfortably beats (to the downside) Macquarie’s expectations. Falling costs reflect FMG’s growing scale, says Macquarie, and lower cost tonnes coming in from Solomon.
CIMB notes that even with the shipment downgrade, shipments in FY13 will be up 40% on FY12. Guidance for FY14 has also now been provided at 127-133mt, which while matching the long held target still surprises some brokers to the upside. Capex in FY14 will only be US$1.9bn, down from US$6.3bn in FY13.
Then there’s the currency. Citi is forecasting free flow cash generation in FY14 of US$700m but were the analysts to mark both the iron ore price and the AUD to spot, that would rise to US$1bn. Looking at it another way, UBS still has an Aussie input of 104 in estimating an FY14 cash cost of US$44/t, but at 93 that would fall to US$40/t.
Thus if we ignore the macro picture at present, and market volatility, yesterday’s update from Fortescue was a positive one. There’s been a slight trimming of the consensus target on the lower near-term production but outer year earnings forecast have received a boost. The target falls to $4.60 from $4.75 but there have been no changes to ratings in the FNArena database.
Deutsche Bank had called the stock price fairly valued before this week, and remains on Hold. UBS has always taken a conservative stance on FMG’s ambitious ramp-up target, and is on Neutral. Otherwise it’s Buy or equivalent ratings across the board. Macquarie is currently advising Fortescue and is thus restricted from offering a recommendation but today published an upbeat report.
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