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Despite the uncertainty around the impacts of Covid-19 or coronavirus, the iron ore prices in the market have steadied at high levels, as supply problems offset demand worries. As per Department of Industry, Science, Energy and Resources, in 2019–20, iron ore is expected to be the first commodity to top $100 billion in export earnings in a single year and due to higher export volumes and a lower-than-expected Australian dollar, Australia’s resource and energy exports are expected to be around $299 billion.
Bulk commodity prices
Notes: Prices are in US dollars, and are the international benchmark prices (Source: Bloomberg)
Fortescue Metals Group Ltd (ASX: FMG)
Fortescue Metals Group Ltd, a global leader in the iron ore industry, reported record shipments of 88.6 million tonnes (mt), net profit after tax of US$2.5 billion and underlying EBITDA of US$4.2 billion in the first half of FY20. Over the period, the company generated strong margins, driven by its industry leading cost position and product strategy while both of its significant growth projects, Eliwana and Iron Bridge, progressed on schedule and budget.
For the half-year period, the company declared a fully franked interim dividend of A$0.76 per share, representing a 65% payout ratio of 1H20 net profit after tax. As at 31 December 2019, the company had cash on hand of US$3.3 billion, gross debt of US$4.0 billion and net debt of US$0.7 billion.
FMG’s FY20 guidance is as follows:
- Shipments at the upper end of the range of 170 – 175mt
- C1 costs in the range of US$12.75 – US$13.25/wmt
- Average strip ratio 1.5
- Total capital expenditure of US$2.4 billion incorporating the Pilbara Energy Connect program
- Depreciation and amortisation of US$7.70/wmt
- Dividend pay-out policy is a ratio of 50 to 80 per cent of full year net profit after tax
In the last six months FMG’s stock price increased by 21.13% on ASX. By AEDT 12:51 PM, FMG stock was trading at a price of $11.030, up by 0.731% intraday, with a market cap of $33.71 billion. The stock is currently trading near to its 52 weeks of $12.870.
Rio Tinto Limited (ASX: RIO)
Metal and mining giant, Rio Tinto Limited also holds a significant interest in iron ore processing. The company’s business comprises a portfolio of world-class assets which includes an integrated portfolio of iron ore assets as well as certain salt assets. The company continues to invest in high-return projects to sustain and grow its production capacity, including in its iron ore operations in Australia and the Kennecott copper mine in the US.
From an operational perspective, in the first half of FY19, the group had experienced some challenges in its iron ore business in the Pilbara, in Western Australia, which it proactively addressed, closing the year with solid production momentum. Overall, shipments for the year were 3% lower than in 2018, primarily due to these operational challenges and weather-related incidents. Despite this, the company’s Pilbara iron ore operations delivered a 72% underlying free on board (FOB) EBITDA margin in 2019.
Rio’s Stand on Covid-19 virus –
- Potential Q1 impact. Recovery dependent on the rate of normalisation of logistics & transport plus size and type of stimulus.
- Stimulus being deployed to drive recovery
- Front-loaded local government special purpose bonds, majority of which for infrastructure projects
- Interest rate cuts, accelerated lending to SMEs, extended repayments for property developers and other industry
- Commodity intensity of China’s GDP growth could rise from Q2 as stimulus may be relatively commodity intensive
Looking ahead, the group continues to face significant geopolitical uncertainties and is currently evaluating the impact of the Covid-19 virus on its business, however, it is of the view that it is well positioned to create long-term, sustainable value for all of its stakeholders.
By AEDT 12:51 PM, RIO stock was trading at a price of $80.710, up by 0.236%, with a market cap of around of $29.89 billion. The stock is trading at a PE multiple of 11.480x with an annual dividend yield of 7.06%.
BHP Group Limited (ASX: BHP)
In the first half of FY20, BHP Group reported a net operating cash flow of US$7.4 billion and free cash flow of US$3.7 billion reflecting higher iron ore prices as well as a solid operating performance. The stable operating performance of the company can be seen in the underlying attributable profit which amounted to US$5.2 billion for 1H FY20. As a result of operational stability, favourable exchange rate movements and higher iron ore prices, BHP reported profit from operations of US$8.3 billion in 1HFY20.
On the back of solid cash flow, the Board of the company declared an interim dividend amounting to 65 US cents per share.
Despite the near-term uncertainty, due to the coronavirus outbreak, trade policy and geopolitics, the company remains convinced about the positive underlying fundamentals of its commodities and has decided to maintain its focus on advancing its exploration programs in petroleum and copper, with the 3rd phase of the drilling program at Oak Dam in South Australia (SA) in progress.
The company expects global growth to register between 3 and 3.5 per cent in the 2020 calendar year, however if the viral outbreak is not demonstrably well contained within the March 2020quarter, the company might revise its expectations for economic and commodity demand growth downwards.
By AEDY 2:42 PM on 20 March 2020, the stock of BHP group was trading at a price of $27.610 with a market cap of around $80.54 billion. The stock is trading at a PE multiple of 10.3x and an annual dividend yield of 7.79%.
