Shares in Twiggy Forest’s mining giant Fortescue Metals Group are down 3.28% over the past twelve month’s, however with shares down 41% since their 52-week high’s it begs the question, Should I Buy Fortescue Metals Group Shares?
Should I Buy Fortescue Metals Group – About
Fortescue Metals Group is one of the worlds largest and most profitable mining companies.
The group generated the majority of their income from the mining of Iron Ore, however, in more recent years have started investing in the exploration of other materials such as copper and the production of green hydrogen.
Western Australia is the largest iron ore supplier in the world, accounting for 39% of global supply in 2020, followed by Brazil (17%). In 2020 Iron ore produced from Western Australia was 909mt given FMG produced around 178mt in 2020 means that the group was responsible for ~20% of the Iron ore produced in WA and about 7% of the worlds Iron Ore for that Year.
Should I Buy Fortescue Metals Group – Share Price
The FMG ASX Share price is currently down 3.58% over the past 12-months to sit on a market capitalisation of $47.2billion (making the company a large-cap).
Fortescue Metals Group has a 52-week range of $14.15 – $26.58 and currently sits just 8% above the 52-week low.
FMG IRON Ore Price
The recent crash in FMG share price can likely be attributed to the spot price of Iron Ore, of which FMG is a significant producer. In a broader sense, the price of Iron ore in recent years has been heavily linked to China and the recent spat may be due to the Evergrande debt crisis which is unfolding.
Interestingly enough the price of Iron Ore seemed to peak from 2008 – 2011 which coincided with the back of the 2008 global financial crisis. The recent peak also seems to have coincided with the COVID-19 pandemic!
The Bank of America’s global research team is lowering its price forecast for iron ore fines in 2022 by 45% to $91 per tonne (down from its previous forecast of $165 per tonne) on the back of enforced steel production cuts in China.
Regarding commodity prices, typically the price should not fall below the cost of production (marginal price). Currently, the marginal cost for Iron Ore is around $80/t so this means we would need to see, should the price of Iron trend back to the marginal cost, would FMG still be profitable?
Will FMG Be Profitable at Lower Iron Ore Prices?
FMG in the group FY21 results presentation to the market mentioned that the group has an industry-leading C1 cost of production for iron ore at US$13.93/wmt. This means that to convert this to dmt we would need to reduce this by ~8% meaning the cost of dry production is about US$12.82dmt.
Regarding the pricing of Iron Ore:
- Production is usually quoted in terms of wet metric tonnes (wmt), and the iron ore price is based on dry metric tonnes (dmt)
- To adjust from wet to dry tonnes, an 8% reduction is applied to the wet tonnes to adjust for moisture content
The group in FY21 generated the below metrics
FMG ASX 2021 Revenue: USD$22.3 billion
FMG ASX 2021 Underlying EBITDA: USD$16.4 billion
FMG ASX 2021 Net Profit After Tax: USD$10.3 billion
The group also go as far as mentioning that they made about US$99/dmt in underlying EBITDA for the year from the shipment of 182mt of Iron Ore for the year. The average revenue for FY21 was US$135/dmt.
Doing a little bit of sensitivity analysis on the revenue per dmt of Iron Ore you could come up with a table similar to the below: (revenue is based from 182mt) The below of $67.5/dmt is also supported by the group FY2020 result which was delivered an EPS of $1.54 on an average of US$79/dmt.
|Average Price||Revenue||Underlying EBITDA||NPAT||EPS (US$)|
However, it is believed that the price of US$45 would be an absolute worst-case as this is actually below the cost of production for a large majority of suppliers. The average total cash cost of Western Australia’s iron ore exports was US$34.5 a tonne in 2020, below the world average of US$45.3 a tonne, and below its main competitor in Brazil (US$36.0 a tonne). Iron Ore also has not traded below $US45 per tonne since before 2008 GFC.
Being one of the lowest-cost producers in the market also allows investors the security that should price continue to fall the higher cost producers would end up stopping production which in turn would actually raise prices.
Should I Buy FMG Shares for the Dividend?
FMG typically announces a dividend with the release of its half-year results in February and full-year results in August as seen in their financial calendar.
FMG Dividends are typically paid twice a year, in March (interim dividend) and October (final dividend). Check out our detailed FMG Dividend Report
FMG has paid biannual dividends every year since 2011. Including 2020 during the COVID-19 recessionary period. All dividends have been fully franked. They also offer a Dividend Reinvestment Plan (DRP).
|DPS (Trailing 12-Month)||$2.47|
|Gross DPS (Trailing 12-Month)||$3.5286|
Our ASX research report found that the average dividend yield across the ASX is 3.22% (net). Hence, FMG dividend is significantly higher than the ASX average and significantly larger than bank interest.
We never purchase a company based solely on their dividend as this is often not a reliable metric for overall performance. Not all dividend stocks are solid investments. A massive dividend yield can be a red flag as it may be altered due to a massive fall in share price, poor prospects, or a special one-off dividend. For this reason, it is important to consider the business as a whole.
Based on the above sensitivity analysis and FMG's payout ratio of 80% of NPAT to shareholders the group even at $45/dmt would be looking to pay ~$1 per share to holders. This equates to about a 6% yield at current prices.
Should I Buy FMG Shares - Fundamentals
FMG ASX has significantly reduced the group's debt load since 2015 when the total debt was nearly $9billion this has now reduced to just over $3billion. However, at the same time, total shareholder equity has increased significantly and the companies cash position has strengthened.
FMG ASX must not be too concerned with rushing to reduce the debt load early as FMG has conducted a series of share buy-back and paid special dividends previously.
The company seems to have a reasonably strong balance sheet with over $6.9billion in cash and short term investments. This is just over 10% of the groups market cap in cash and short term investments.
FMG ASX produced a free cash flow of just under $10billion for the FY21 financial year, from revenues of over $20billion. The group's debt is also well covered by operating cash flow at over 300%.
FMG ASX has been growing the group's revenue and Net Income for a number of years. The year ended 2021 was a record result for the company bringing in over US$29billion of revenue for the period. This resulted in an operating margin of over 70% meaning an EBITDA of US$21.6.
The group currently have Net tangible assets of $7.66 per share. This means that each FMG share is backed by $7.66 of assets. At the current price of $16 per share, this means that every share is backed by just shy of 50% net tangible assets.
Should I Buy FMG Shares - Ownership and Insider Transactions
FMG ASX Company Ownership
Shares in Fortescue Metals Group are predominantly owned by institutions at 55% followed by the General Public and Public Companies at 32.7% and 8.8% respectively.
Individual Insiders only retain about 2.2% of the company, with John Andrew Forrest owning about 0.3% under his own name. It's important to look a little deeper into this as Forrest's investment firm Tattarang Ventures owns 36.4% of the company or at the current share price about $17billion worth of stock.
FMG ASX Top Shareholders
The top shareholders are notably Twiggy's investment arm Tattarang Pty. Ltd. and the Hunan Valin Steel co. The Top 3 shareholders own over 50% of the company.
|36.46%||Tattarang Pty Ltd||1,122,131,637||$17.2b|
|8.75%||Hunan Valin Steel Co., Ltd.||269,395,477||$4.1b|
|4.92%||Capital Research and Management Company||151,324,088||$2.3b|
|3.02%||Emichrome Pty Ltd.||93,045,000||$1.4b|
|2.65%||The Vanguard Group, Inc.||81,614,514||$1.3b|
|0.75%||Norges Bank Investment Management||22,991,410||$352.7m|
|0.35%||State Street Global Advisors, Inc.||10,842,381||$166.3m|
|0.3%||John Andrew Forrest||9,233,363||$141.6m|
John Andrew Forrest retains about 0.3% of the company under his own name.
FMG ASX Recent Insider Transactions
Andrew Forrest's Investment Arm Tattarang Pty Ltd has purchased $100million worth of shares in September 2020 around a price of $16. This is a significant portion of shares.
However, more recently John Forrest (twiggy) and Jenifer Morris have been buying shares on the market from around $20 - $25 per share. This may indicate that they see potential upside in the group share price even at around the higher valuations?
|02 Sep 21||+$5,994||Jennifer Morris||I||295||AU$20.32|
|26 Mar 21||+$193,271,514||John Andrew Forrest||I||10,000,000||AU$19.33|
|23 Feb 21||+$29,987||Jennifer Morris||I||1,219||AU$24.60|
|30 Sep 20||+$97,082,408||Tattarang Pty Ltd||C||6,000,000||AU$16.18|
Should I Buy FMG ASX Shares - Prophets Take
The Iron Ore price is expected to return to its long-term annual average of US$64 a tonne in 2022-23 and 2023-24. This would still likely mean that FMG despite the underlying commodity forecast to fall nearly 70% from the recent high's the company should still be able to maintain a profitable position.
FMG is one of the lowest-cost producers of Iron Ore in the world only behind Rio Tinto in 2016. The latest data could not be easily found for this however, FMG has further reduced their C1 cost since 2016.
In commodities, it helps to be the lowest-cost producer, as when price begins to retract the higher-cost producers will feel the impact more and potentially stop production until the price returns.
A slide from the group FY19 presentation to Macquarie shows the average underlying EBITDA per dmt and the average Fortescue realised price. These figures are significantly below the current prices for Iron ore, however, there may be a number of buying opportunities ahead as investors will certainly misprice the adjustments at some stage. Fortescue would have planned for this impact.
Fortescue should continue to produce strong results even at the forecast Iron Ore levels of $64 a tonne. In fact, they have done this previously when the group realised an average price of $65/dmt in 2019 and reported an NPAT of over US$3billion
Prophet will be looking to add FMG shares should investors misprice the stock in the short term. We are confident the group will continue to pay a market-beating dividend and be sustainable for the long term. It is very important to point out the cyclical nature of a commodities company.