Iron ore, which stood tall against the COVID-19 outbreak in the wake of supply concerns is now retracing back as the supply woes from the Australian port ease. However, Fortescue Metals Group Limited (ASX:FMG) is facing dual challenge of declining iron ore prices and the pricing information controversy.
The stock is under pressure on the exchange and witnessed a ~ 2.50 per cent gap down opening on 1 May 2020 post the emergence of the news that the Company kept contract prices behind curtains. FMG has been accused by the global financial data giant- S&P Global Platts and Argus Media for censoring the price deal and breaching the right to free press.
The accusation came in the limelight post the Company announced its March 2020 quarterly update and suggested that it would increase the annual shipment from 170-175 million tonnes to 175-177 million tonnes, which took stock of the Company to a 9-week high of $12.370 (as on 30 April 2020).
However, soon after reaching $12.370, the stock came under pressure in the wake of the recent injunction filed by S&P Global Platts and Argus Media against the Company in the United States, in response to the lawsuit filed by the miner against the data publisher.
S&P Global Platts received numerous letter from the Company to stop publishing the details of contracts it secured with its customer, however, as the data provider declined to remove the published pricing data, quoting that its data remains public and has been acquired with standard journalism practices.
Previously a United kingdom court had ordered the global financial data publisher to stop publishing the information, which the Company claimed to be confidential as it hampers the competitive advantage.
FMG cited on the fact the iron content of the Company’s product is smaller as compared to the big rivals such as BHP Group Limited (ASX:BHP) and Rio Tinto Limited (ASX:RIO), and preventing the pricing information is important in managing the competitive advantage.
The Company also suggested that it has inserted new convents or legal clauses into the sales contract during December 2019 to prevent its customers from disclosing the iron ore pricing.
Apart from that, Fortescue has directed S&P to take down the previously published data; however, the data provider has responded in a United States court seeking a ruling against injunction imposed by the United kingdom court, citing that it breaches the right of the free press in the United States.
What is being quoted as the move to protect the competitive advantage against the rivals by the Company, the ongoing legal tussle seems to be denting the image, inferred from the price behaviour of the stock post the news emerged in the market.
While this is just one challenge the Company is facing, another challenge for the Company is to revamp the lost production in the wake of COVID-19 outbreak and devise plans to deal with the systematic risk of the possibility of the second wave in China.
To Know More, Do Read: How Prudent is the Bet on Iron Ore Miners Over China’s Recovery? – BHP, Rio, and FMG
FMG March 2020 Quarterly Performance
The Company mined 41.9 wet metric tonnes of ore during the quarter, down 23 per cent as compared to the previous quarter and processed 42.4 wet metric tonnes of ore, which remained 8 per cent down against the previous quarter.
FMG shipped 42.3 wet metric tonnes of iron ore during the period, down 9 per cent against the previous quarter; however, up by 10 per cent against the previous corresponding period, and witnessed a 6 per cent increase in the cash cost against the previous quarter, which stood at USD 13.27 per wet metric tonne.
The Company suggested that tough the cash cost declined by 2 per cent against pcp, reflecting strong performance and sustained cost management, the quarterly 6 per cent increase was mainly due to the higher strip ratio during the period.
Source: Company’s Report
On the market counter, FMG informed that the crude steel production in China remained resilient during the first quarter of the year 2019 standing at 234.5 million tonnes, up by 1.2 per cent on a year-on-year basis, which supported the demand for iron ore well, while the supply remained disrupted due to weather challenges faced by the Australian miners across the Pilbara region.
FMG mentioned that higher steel production supported the demand for the iron ore, and the Company secured an average price of USD 72.69 per dry metric tonne during the period, reflecting 82 per cent of the average Platts 62% CFR Index price of USD 89.00 per dry metric tonne.
The snippet of the shipment during the period is as below:
Source: Company’s Report
As on 31 March 2020, the Company held cash of USD 4.2 billion, up by ~ 27.28 per cent against the previous quarter, including a reserve of USD 1.6 billion for FY20 interim dividend.
The gross debt at the end of the quarter stood at USD 4.0 billion, while the total capital expenditure for the quarter was at USD 414 million, including all sustaining capital, exploration and development, and the Company reduced the pre-payment balance to USD 87 million, which would be amortised by 30 June 2020.
Fortescue kept the FY20 annual production guidance in the range of 175-177 million tonnes with the cash cost guidance of USD 12.75 to USD 13.25 per wet metric tonne, and also decided to keep the dividend policy unchanged at 50 to 80 per cent of the full-year net profit after tax or NPAT.
The stock of the Company last traded at $10.980, down by 8.19 per cent against its previous close on ASX (as on 1 May 2020).