Please note all of the figures below are quoted in USD which is the base currency in which the company reports.
Key Points
- Fortescue’s revenue of US$4.86bn is down by 17% from the prior period and slightly below consensus estimates of US$4.91bn
- Fortescue's EBITDA performance of US$1.4bn was ahead of consensus estimates of US$1.355bn, while its net profit of $331m was ahead of the consensus amount of $329.3m
- It reported positive net operating cashflow of US$905m and free cash flow of US$469m over 1H15
- From 30 June 2014, net debt is up US$300m to US$7.5bn, while gearing has come down to 54% from 56%
- Credit metrics have slightly worsened from FY14 but this was expected as the production cycle of iron ore commences
- Dividends are down to US$274m versus US$293m in the prior period
Source: Fortescue Metals Group Ltd
Commentary & Outlook
While the performance is negative compared to last year, it needs to also be viewed in the context of the current iron ore price environment. Last year's record profit was a bumper performance off the back of the high iron ore price at the time, which isn’t expected to be repeated in the short to medium term.
Fortescue has beaten consensus estimates for 1H15 on a number of fronts. However, there will be a lot of clickbait headlines such as ‘Fortescue profit slumps 81c despite surge in shipments’ but this really isn’t a surprise and markets have already priced this in – the share price is largely unmoved on morning trading.
We are now in a very different environment for iron ore and so looking ahead will be more important than comparing against prior period performances. Despite the challenging headwinds in iron ore, Fortescue made nearly US$1bn in positive net operating cashflow in 1H15 and would be expected to remain free cash flow positive over 2H15 at an average iron ore price of US$65/dry metric tonne (dmt).
Fortescue has made significant headway in lowering its cost base, and this is expected to continue over the course of FY15. Its quoted guidance for its all in costs is US$45/dmt over 2H15. Assuming that Fortescue realises a 15% discount to the index price on its iron ore, we roughly estimate the cash breakeven price for Fortescue to be around US$55/dmt in the second half of FY15. Note Fortescue’s cost estimates rely on an exchange rate of $0.80 and low oil prices therefore if exchange rates land even lower than these levels then, Fortescue’s breakeven price will fall even lower.
If average iron ore prices stay at US$65/dmt, then Fortescue is in for a broadly similar performance over the second half of FY15 as per 1H15, which would be an impressive result under very challenging price conditions. Having said this, the major risk for Fortescue remains a sustained downturn in the iron ore price.
Source: Fortescue Metals Group Ltd