Post a splendid performance the Fortescue Metals Group Limited (ASX: FMG) is under slight pressure on the exchange amid fears over epidemic threat presented by the coronavirus in China, which is expected by market participants to reduce the demand for iron ore.
The stock rose to multi-year high recently and also reached very close to its prior peak value of $13.150 (high in June 2008) to trade at $12.860 on 23 January 2020. However, the new year holidays seasons coupled with the outbreak of coronavirus in China and its related impact on the domestic steel and iron ore consumption of red dragons kept a lid on FMG gains, and the stock last traded at $11.290, down by over 2 per cent against its previous close on ASX.
In the middle of the turmoil caused by the coronavirus, FMG presented some pivotal updates, and it would be worth looking forward if the development across projects and quarterly performance assessment could help the stock to regain its lustre.
FMG Quarterly Performance Assessment
FMG presented its December 2019 quarter report for stakeholders today, which also marked the completion of the second quarter of the financial year 2020 (Q2 FY20) for the miner.
- Operational Highlights
FMG mined 54.6 million tonnes of ore during the quarter, which remained 8 per cent up against the previous quarter, and 11 per cent up against the previous corresponding period of Q2 FY19 (or pcp).
While the quantity of mined ore surged, the processing also witnessed an increase with the quantity of processed ore standing at 46.2 million tonnes, up by 10 per cent against the previous quarter, and 9 per cent up against pcp.
The processing, mining, and production all surged during the quarter with a decline in cash cost, which stood at USD 12.54 per wet metric tonne, down by 3 per cent against the previous quarter, and down by 4 per cent against the pcp.
FMG shipped 10 per cent higher ore against the previous quarter, and total shipped ore stood at 46.4 million tonnes during the quarter, which also remained 9 per cent up against pcp.
On the product front, all the iron ore products of the company witnessed a decent surge on a quarterly basis and from pcp.
The product shipment breakup for the quarter is as below:
(Source: Company’s Report)
Whilst the production and shipment both remained strong, the average realised price for the iron ore stood at 86 per cent of the average 62 per cent CFR Index price of USD 89 per dry metric tonne to stand at USD 76 per dry metric tonne.
- Corporate Financial Position
As on 31 December 2019, FMG had cash on hand of USD 3.3 billion, unchanged as compared to pcp. The gross debt for the quarter stood at USD 4.0 billion with net debt of USD 0.7 billion. FMG recognised an additional commitment of USD 107 million as lease liabilities under AASB 16, which took the total lease liabilities to USD 829 million (as on 31 December 2019).
The capital expenditure for the quarter stood at USD 431 million with an exploration expenditure of USD 38.9 million.
The prepayments related to iron ore decreased by USD 218 million, with an amortisation of USD 136 million. The balance of these prepayments would be amortised by Q3 FY20.
- Iron Ore Projects Development and Exploration
FMG mentioned that the USD 1.275 billion Eliwana Mine and Rail Project is on budget and schedule and the first iron ore train from the project is anticipated at the December end of this year. The company secured the Special Rail Licence in January 2020 and secured other relevant key approvals and is currently ramping up the prospect with peak construction anticipated for mid-2020.
The capital expenditure associated with the Eliwana Mine and Rail Project is as below:
(Source: Company’s Report)
FMG also suggested that the USD 2.6 billion Iron Bridge Magnetite Project is also on budget and scheduled to produce 67 per cent concentrate product in the first half of the year 2022.
The capital expenditure associated with the Iron Bridge Magnetite Project is as below:
(Source: Company’s Report)
- Future Guidance
FMG upgraded its shipment guidance for FY20, and the shipment guidance now targets the upper range of 170-175 wet metric tonnes. The company reduced its cost guidance for FY20 from USD 13.25 – USD 13.75 per wet metric tonne to USD 12.75 – USD 13.25 per wet metric tonne.
FMG Bullish Over Iron Ore Demand
The crude steel production reached to stand at 996 million tonnes in 2019, which remained 8.3 per cent higher against the previous year. As per the company, the current steel outlook indicates continued strong demand for iron ore.
In a nutshell, the production, shipment, and operational metrics improved substantially during the quarter, and in the wake of it, FMG revised and upgraded the shipment guidance and reduced the cash cost guidance or C1 cost guidance.
The stock is facing the heat of strong market pessimism over the impact of the epidemic threat in China, which has significantly hampered the demand sentiment for iron ore, which in a cascade had exerted considerable pressure on FMG.
However, the company has delivered a strong performance and is bullish on the iron ore demand, which would make it interesting to see, how would the market fathom out and factor-in various factors.
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