On 27 July 2016, Fortescue released its quarterly production report for the June quarter
A link to the report is available here. A summary of the key points from the quarterly report is outlined below.
- Fortescue reported shipments of 43.4 million tonnes (mt) of iron ore, or an annualised rate of ~174mt. Direct cash production costs (C1) of USD14.31 per wet metric tonne (wmt) represented a reduction of 3% compared to the March 2016 quarter and 35% over the prior twelve months
- Fortescue was able to generate very strong operating cash flows during the year, aided by the above reduction in operating costs as well as the recovery in iron ore prices seen over 2016. Through this cash flow generation, Fortescue was able to make USD2.9bn of total debt repayments during FY16, bringing net debt down by approximately 28% to USD5.2bn at 30 June 2016
- Guidance for FY17 has also been released, targeting shipments of between 165-170 million tonnes and direct (C1) costs in the range of USD12-13 per wet metric tonnes (wmt). This was slightly better than market consensus
Iron ore prices have rallied over 50% from the lows seen earlier in the year to approximately USD62 per dry metric tonne (dmt). Prices have averaged around USD53/dmt in the year to date, which have exceeded market expectations. If iron ore prices were to remain at this average level, and Fortescue was able to achieve direct costs of USD13/wmt per its guidance, we estimate that Fortescue could be generating around USD20 in free cash flow per tonne of production, or USD3.3-3.4bn of free cash flow in FY17.
However, we note that iron ore prices have historically been volatile and Fortescue’s ability to generate these levels of cash flow will hinge on iron ore prices staying at current levels. Having said this, Fortescue has a healthy level of buffer to withstand falls in the iron ore price while remaining free cash flow positive. Its last reported (May 2016) estimated breakeven price was USD28-29/dmt, which is more than half the current spot iron ore price.
With net debt now at USD5.2 billion, Fortescue is fast approaching its initial balance sheet targets and the company has stated that it will continue to apply cash flows to further reduce debt. Given the expectation of further positive free cash flow generation we expect positive momentum on Fortescue’s credit rating.
The Fortescue lines are currently indicatively offered at the following yields to worst: Secured 2022 line: 6.10%^ Unsecured 2022 line: 6.50%^^
^In the case of the secured 2022 bond, the yield to worst represents the yield to first call (March 2018 at USD109.75)
^^In the case of the unsecured 2022 bond, the yield to worst represents the yield to the 2020 call date (at USD100)
Please contact your FIIG representative for further information on the Fortescue bonds. Available to wholesale investors at a minimum face value of USD10,000. Yields are indicative and subject to change.