Iron Ore Worries Overshadow Fortescue’s FY26

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Fortescue’s June quarter beat on most metrics and two costly green energy projects have been abandoned, but there is concern over the trajectory of iron ore prices.

-Fortescue’s June quarter beats on several fronts
-Arizona and Gladstone hydrogen projects not to proceed
-FY26 production guidance positive
-Concerns linger about lower iron ore prices ahead

By Greg Peel

By Greg Peel

Fortescue ((FMG)) posted an impressive June quarter report, as production, costs and net debt all bettered market expectations by a large margin, while shipments also came in ahead. Shipments and production for both the quarter and FY24 set new records for Australia’s number three iron ore miner.

Hematite production of 52.4mt was 5.5% above consensus. Hematite shipments of 52.8mt were 5.6% above. Costs of US$16.3/wmt were -8.4% below consensus, helped by a lower strip ratio (the amount of overburden that must be removed to access a given quantity of ore) of 1.3x compared to previous FY25 guidance of 1.7x, allowing ore mined of 61.5mt, beating consensus by 9.7%.

Looking forward, Macquarie believes Fortescue is taking advantage of current demand for low grade and falling Pilbara grades, hence lowers its strip ratio expectation across the forecast horizon, trimming  hematite unit costs by -15% from FY26-30, -10% below consensus.

FY25 net debt of US$1.1bn was well below consensus of US$2.0bn.

The one blip was Iron Bridge, where production of 2mt was 5.2% above consensus and shipments of 2.4mt 22.5% above, but ore of 2.9mt mined fell short by -42.5%.

Too Hard Basket

Fortescue has decided not to proceed with the Arizona Hydrogen Project in the US and PEM50 (photon exchange membrane) Project in Gladstone, another hydrogen project. The second half FY25 will reflect a pre-tax write down -US$150m.

Perversely, to use the broker’s own words, Macquarie believes the -US$150m writedown of Fortescue’s electrolyser factory and once subsidised hydrogen hub is a step forward. The company now has committed to a more conservative technology- and innovation-based strategy rather than outcompeting low-cost manufacturing businesses (PEM50) or cheaper green energy (Arizona).

Macquarie hopes a more prudent approach to R&D and innovation allows the company to fail fast and fail small in its “noble quest” to decarbonise, focusing on areas for which competitive advantage can grow and economic rents can be captured.

Guidance

FY26 guidance for total shipments of 200mt at the mid-point is in line with consensus, with costs expected at US$18/t -5% below.

Opex and capex combined came in US$150m higher than Morgan Stanley had estimated. Total capital spend of -US$3.95bn is US$200m above consensus, primarily driven by decarbonisation spend of -US$0.9bn-US$1.2bn compared to Morgan Stanley’s -US$750m expectation. Energy opex guidance of US$400m is -US$400m lower.

The company also guided to a strip ratio of 1.7x in the short-to-medium term, versus its previous estimate of 2.0x (noting 1.3x was achieved in the June quarter).

On balance, Ord Minnett sees FY26 guidance as positive, with lower unit costs and a forecast for a lower strip ratio, which would drive costs further down, outweighing the increase in capital expenditure guidance.

The company referenced commentary that Beijing was planning to impose output curbs on Chinese steelmakers, but none had been implemented so far. Management also highlighted tight discounts for its typically lower-grade ore versus the 62% iron ore benchmark price (as mined by its major competitors), and solid demand for its ore.

Iron Ore Price Impact

When it comes to broker views and ratings, expectations for where iron ore prices are headed from here are dominant.

Prices hinge on the Chinese economy, which is presently moribund as Beijing fails in its persistent attempts to simulate domestic consumption. The housing downturn continues, and lack of new investment is weighing on steel demand. The announcement of a major new hydroelectric project is positive, but construction is very long-dated.

Beijing has vowed to address overcapacity in Chinses steelmaking, but as Fortescue management noted, nothing has happened yet.

Meanwhile, the end-2025 commencement of production at Rio Tinto’s ((RIO)) enormous Simandou mine in Guinea will substantially increase global supply, further pressuring high-grade iron ore prices.

Neither Ord Minnett nor Morgan Stanley seem fazed, maintaining Buy (target $20.00) and Overweight (target $18.60) ratings respectively.

While Citi has lifted its target to $18.40 from $16.00, this broker sees lower iron ore prices in the second half of 2025 and has a short-term downside view. Hence, Neutral retained.

Macquarie is also anticipating lower prices in the second half and had set a Neutral rating. Although Macquarie expects the company to continue its cost-out focus, the recent iron ore price rally has seen Fortescue’s share price push through the broker’s valuation. Hence, while lifting its target to $16.00 from $15.00, Macquarie downgrades to Underperform.

Other brokers monitored daily by FNArena covering Fortescue have recently been fiddling their iron ore price forecasts but are yet to update on Fortescue’s June quarter. Morgans and Bell Potter are sitting on Hold or equivalent ratings.

UBS this morning has responded by downgrading its rating to Sell from Neutral with this broker’s outlook dominated by downward pressure on the price of iron ore (forecast) in combination with elevated capex spending. On anticipation of declining returns, Fortescue is UBS’s least preferred large cap iron ore miner in Australia, behind (in order of preference) BHP Group ((BHP)) and Rio Tinto ((RIO)). UBS’s price target is $16.20.

That leaves two Buy or equivalent, three Holds and two Sell ratings on Fortescue. The consensus target price is $17.51, up from $16.58 prior, but suggesting -4.6% downside from Friday’s closing price.

Higher operating costs at Iron Bridge weigh down on Jarden’s outlook for the company. Jarden sticks with a Neutral rating and has slightly lowered its price target to $16.25 from $16.49.

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