Australia | Oct 18 2011
– Fortescue quarterly production report well received
– Management confident in maintaining annual production rate of 55Mtpa
– Brokers continue to see value at current levels
– Buy ratings retained
By Chris Shaw
The September quarter production report from Fortescue Metals ((FMG)) has been well received by the market, with both tonnes and costs coming in either in-line or better than most expectations. Total ore shipments for the period were 12.4 million tonnes at a unit cost of around US$50 per tonne. The only disappointment was a slightly lower than expected achieved price of US$160 per tonne.
Post the production report brokers have made minor changes to earnings estimates, UBS the most significant in lifting its net profit after tax estimate for FY12 by 6%. Consensus forecasts in earnings per share (EPS) terms stand at US72.3c in FY12 and US78.1c in FY13.
Along with the production report, management has expressed confidence in being able to maintain an annualised production rate of 55 million tonnes per annum. Citi estimates this equates to shipments for the December quarter of 13.5-14 million tonnes.
According to BA Merrill Lynch, Fortescue is likely to have surplus port capacity by the end of this year, this due to the installation of a second ship loader and third loading berth. This presents an opportunity to truck additional material from site or via third parties. This will allow Fortescue to bypass the current train unloader bottleneck, which suggests potential additional throughput of several million tonnes.
The September quarter also saw Fortescue's capital commitments for the planned expansion to output of 155 million tonnes per year increase by a little more than 50% to US$4.3 billion. Macquarie expects total capex for the rest of FY12 of around US$4.6 billion, offset by operating cash flow for the year of around US$3.6 billion.
For Macquarie this means Fortescue won't need to raise debt in the shorter-term for the next stage of the expansion process. An amount in the order of US$5.2 billion will be spent on capex in FY13 on the broker's estimates.
Goldman Sachs noting the project expansion budget of US$8.4 billion overall remains essentially unchanged, with financing for US$1.0-US$1.5 billion of this budget expected to be finalised by the end of the year.
As RBS Australia points out, the market at present is placing a large discount on Fortescue's expansion plans. This presents an opportunity, as the project moving from concept to reality over the next 12-18 months should see this discount unwind.
While a weak macro environment presents some headwinds there remains value in Fortescue at current levels, suggest stockbrokers. This view is backed up by a perfect 8-for-8 Buy ratings among brokers in the FNArena database. Goldman Sachs is not in the database but also rates Fortescue as a Buy.
UBS explains the value argument clearly, pointing out on its forecasts Fortescue is trading on an earnings multiple of 6.0 times in FY13 and at a 35% discount to net present value. The positive views of brokers also reflect Fortescue's very high leverage to iron ore demand, as well as improving bond market conditions that should assist in sourcing needed funds for expansion.
The consensus price target according to the FNArena database stands at $7.76, with targets ranging from $7.25 for BA-ML to $9.00 for JP Morgan.
Shares in Fortescue today are weaker in a generally weak market. As at 11.25am the stock was down 42c at $4.69. This compares to a trading range over the past 12 months of $3.95 to $7.34, the current share price implying upside of better than 60% to the consensus price target in the FNArena database.
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