Fortescue has posted another strong quarterly production report despite falling iron ore prices, highlighted by record low production costs for the company, an increase in cash position and reduction in net debt. With a strong cash position of US$2.3bn, the company is well positioned to undertake further bond buybacks
Fortescue has been able to generate continued positive operating cashflow in the face of falling commodity prices. After allowing for the US$750m of bond principal repurchased, Fortescue was able to generate about US$300m positive cashflow during the quarter and retain a strong cash balance of US$2.3bn at 31 December 2015. We note the company’s average realised iron ore price for the quarter was only slightly above US$40/tonne (at a 13% discount to the benchmark price) highlighting the challenging conditions in the commodities sector.
The Western Australian miner shipped 42.1m tonnes of iron ore at a record low cash production cost for the company of US$15.80 per wet metric tonne (wmt), a 6.5% improvement on cost versus the previous quarter. The company’s cost performance is six months ahead of its guidance with the targeted FY16 exit cost rate of US$15/wmt achieved in December 2015.
Net debt fell by a further US$0.5bn during the quarter to be US$6.1bn. After progressive debt reduction activities Fortescue is well positioned repurchase more bonds given its healthy cash position. The figure below shows the company’s remaining debt maturity profile, with US$577m of 2019 bond principal and US$478m of 2022 bond principal remaining after the company originally issued about $2.5bn of these bonds in aggregate:
![[Graph] FMG Remaining Debt Maturity Profile](https://thewire.blob.core.windows.net/web/images/default-source/default-album/graph-fmg-remaining-debt-maturity-profile.png?sfvrsn=571eb65a_1 "[Graph] FMG Remaining Debt Maturity Profile")
Source: Fortescue
Pricing on the Fortescue bonds is relatively volatile but has rallied to since the release of the production report. With a yield to maturity in the double digits, we see the 2019 unsecured bond as showing good value with the prospect for an early tender offer from Fortescue. Given the high risk exposure and volatility in commodity markets, we continue to prefer the 2019 Fortescue unsecured bond over the longer dated Fortescue lines and expect the company to apply further cash to reduce the 2019 bond principal outstanding. The Fortescue bonds have been volatile but we take confidence from the continued progress the company has made on costs and its ability to generate positive operating cash flow in what is a very challenging environment for commodities.
A link to the company’s quarterly report is available here.
Please contact your FIIG representative for further information and current pricing levels on the Fortescue bonds. Available to wholesale investors only.