Fortescue Metals Witnessed An Improvement In The Realized Price


On 25 October 2018, Fortescue Metals Group Limited (ASX: FMG) released its September 2018 quarterly production results, reporting iron ore shipments of 40.2 million tonnes and cash production costs of US$13.19 per wet metric tonne. Following this news, the share price of the company decreased by 5.699 percent as on 25 October 2018.

The company witnessed an improvement in realized price through the execution of its marketing and product strategy. Further, the sustained cost performance has generated strong cash flows for the company. Over the past 18 months, the company has suffered big price penalties as Chinese steel mills have shown a preference for ores with higher grades such as Rio Tinto’s product with 62 percent iron content compared to Fortescue’s products, which have iron grades between 56 percent and 59 percent. Fortescue reported that the discount applied has narrowed to 33 percent in the three months to September 30, although it is still a large discount by historical standards, it is an improvement on the 37 percent discount applied to Fortescue’s product in the June quarter. 

In the September quarter, the company announced the establishment of an on-market share buy-back program for up to AUD$500 million. The company is planning to fund the program from the operating cash flows of the company and the program is expected to be in place for a period of up to 12 months from now. As per the company’s CEO Ms. Elizabeth Gaines, it was a great opportunity for the company to seize on the weakness in its share price in the current bearish market.

At the end of the September quarter, the company was having Cash on hand of US$972 million and net debt of US$3.0 billion. As per the quarterly production report, the guidance for FY 2019 is unchanged targeting total shipments of between 165-173mt, C1 costs between US$12-13/wmt and total capital expenditure of US$1.2 billion.

The company has delivered a strong start to FY19 with shipments of 40.2mt for the quarter. The Shipments of the company’s 60.1 percent iron grade product, West Pilbara Fines (WPF) are planned to commence from December 2018 which will further enhance the company’s product mix.

Due to the weaker export volumes, higher overburden removal, scheduled maintenance, and higher fuel costs, the Fortescue’s unit costs tonne increased by 8 percent to $US13.19 per wet metric. Due to the rising oil prices, the company is facing difficulty in keeping the unit costs between $US12 and $US13 per tonne for the full year. The company has rebuilt iron ore inventories and it has arranged new areas for mining due to which the total material moved increased by 11 percent during the quarter which has put the company in a better place to achieve FY 2019 targets.

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In the last six months, the share price of the company decreased by 15.54 percent as on 24 October 2018, traded at a PE level of 10.120x. FMG’s shares traded at $3.640 with a market capitalization of circa $12.02 billion as on 25 October 2018 (AEST 4:00 PM).


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