$1 Billion to Flow to Australian Businesses, Thanks to Fortescue’s Rail Project

The recent grants of special Rail License for construction and operation of Eliwana railway to the Fortescue Metals Group (ASX: FMG) are set to benefit local businesses through A$1 billion contracts awarded to the vendors. Eliwana Mine and Rail Project worth US$1.275 billion including the construction of 143 kilometres of rail, a new 30mtpa dry ore processing facility (OPF) and infrastructure is expected to boost the Australian economy.

In line with the commitment to support the local businesses, Fortescue has committed for local procurement of material. For the same around 82% of the project capital expenditure has been awarded to the 290 Western Australia businesses and the remaining 9% to the local vendors across the country.

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~ 2,600 tonnes of structural steel is fabricated to manufacture the needed requirements for the project. Kiwana Based, Pacific Industrial, is the contractor of the rail and road bridge girder modules for Eliwana. Additionally, the contract has created a job opportunity for 100 people involving some apprentices during the fabrication period.

Given this backdrop, it is worth to glance through Fortescue’s view toward the Eliwana project.

Elizabeth Gaines, Chief Executive Officer and Managing Director

Ms Gaines stated that the company is delighted to offer prospects for ingenious small and medium-sized businesses. And in turn propel economic and employment growth across the country through the FMG’s strong focus on local content. Further, the CEO thanked the WA Government for its support to the Eliwana project.

She also stated that as of now 19 contracts worth A$25.5 million have been awarded to Aboriginal contractors as part of the company pioneering Billion Opportunities Program - an initiative that encourages sustainable business opportunities for Aboriginal people by building the capacity and capability of Native businesses.

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Flick Through the Eliwana Project

Eliwana project, as discussed above, consists of iron ore mining assets, development of railway and OPF. The project is in continuation to the Fortescue's initiation of West Pilbara Fines, i.e. 60.1% iron content product to validate the agility of the company's processing and blending strategy and the flexibility of its 100% owned integrated mining operations and infrastructure.

In FY19, West Pilbara Fines produced and shipped ~9 million tonnes and targeting ~17 to 20 million tonnes in FY20. The annual capacity of West Pilbara Fines is likely to increase to ~40 mtpa with Eliwana running at full ramp-up. Eliwana is expected to ship its first ores via train in December 2020.

The Eliwana project will help FMG in maintaining its low operational expenditure status, greater flexibility in capitalising the market dynamics while managing the total production rate of at least 170mtpa over 20 years. The Eliwana mine resources have a total of 1,001 million tonnes with an average of 58.6% of Fe grade with low 3.14% Alumina, 5.52% Silica and 0.110% Phosphorus. Where 35% of the total resources belong to Measured and Indicated Mineral Resource groups.

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Let us now gauge through the Company’s performance.

The Company in its recent December 2019 quarterly report stated that a total of 46.4 million tonnes at C1 cash costs of US$12.54 per wet metric tonne (wmt). The shipment during the quarter was 9% more than the previous quarter along with reducing cash cost this may send positive sentiments to the market. With the December quarter result included, H1 2020 records the higher shipments of 88.6 million tonnes at below industry cash cost of ~ US$13/wmt.

During the quarter the Company record a price realisation of 86% of the benchmark 62% CFR Index. The closing Platts 62% CFR Index price on 31 December 2019 was US$92/dmt.

Production Summary

Source: Company’s December Quarter Report

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FMG Financials

The capital expenditure during the quarter was US$431 million inclusive of sustaining capital, exploration and development investment. The cash in hand at the end of 31 December 2019 was US$3.3 billion, and the FY19 final dividend of US$0.5 billion was paid and the FY19 final tax instalment of US$0.6 billion was paid during the quarter.

The total lease liabilities at 31 December 2019 were US$829 million. Also, Iron ore prepayments reduced to US$218 million at 31 December 2019. FMG expensed US$136 million in amortisation cost during the quarter with the remainder to be amortised by 30 June 2020. Fortescue operated a low-cost structure, while maintaining investment grade for future growth and retaining flexibility for further repayment, with no debt maturing until 2022.

The Company reported EBITDA margin of 61% and an nPAT of ~$3.2 billion during FY19, delivering a healthy ROE of 31%.

Eliwana Mine and Rail Project Expenses- Dec 2020 Quarter

The Company incurred around US$ 124 million in FY19 in expenses, and it is estimated to be around ~ US$ 700-800 million in FY20 and ~ US$ 350-240 124 million in FY21.

Therefore, with outstanding company performance, there is no denying that the project is very well funded and also all the critical approval in hands helping the projects to be sailing smoothly and with no hurdle to reach the peak of its construction by mid-2020.

Stock Performance- 31 January 2020

FMG was trading at $11.29 on ASX. Its 52 weeks high and 52 weeks low stand at A$12.87 and A$4.485, respectively, with a market cap of $34 billion.

P/E: 7.84

EPS: $1.47

Dividend yield -3.91%