Company Reports

Base metals prices surged earlier in the June quarter of 2024 before partially reversing due to concerns over China’s economy. Iron ore prices are broadly stable despite China's struggling property market and weak infrastructure spending, leading to questions over China's steel demand. After updating our commodity price assumptions, no-moat Iluka is the cheapest miner we cover, trading 31% below its unchanged fair value estimate of AUD 9.50.

Inclement weather and a train derailment meant no-moat Fortescue’s third-quarter fiscal 2024 was modestly behind our expectations. Shipments of 43 million metric tons were 7% down on the same quarter of fiscal 2023 and 11% below the prior quarter. Shipments for the first nine months of fiscal 2024 were 138 million metric tons, 4% down on last year, with a contribution from the new 69%-owned Iron Bridge mine remaining immaterial.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Fortescue is the world's fourth-largest iron ore exporter. Margins are well below industry leaders BHP and Rio Tinto, and some way behind Vale, meaning Fortescue sits in the highest half of the cost curve. This is a primary driver of our no-moat rating. Lower margins primarily result from price discounts from selling a lower-grade (57% to 58% iron) product compared with the 62% iron ore benchmark. The lower grade is effectively a cost for customers through a greater proportion of waste to transport and process, additional energy/coal per unit of steel and lower blast furnace productivity. This results in a lower realized price versus the benchmark. In the 10 years ended June 2023, the company realized an approximate 23% discount versus the 62% benchmark.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

A monster AUD 1.08 per share fully franked dividend was the highlight of no-moat Fortescue’s first half of fiscal 2024, up 44% on last year’s AUD 0.75 per share interim payout. The dividend boost largely reflects higher earnings with net profit after tax rising 41% to USD 3.3 billion, or USD 1.08 per share. Depreciation of the Australian dollar provided a modest benefit to the Australian dollar dividend, with the payout ratio steady at 65% of USD earnings.

Fortescue is the world's fourth-largest iron ore exporter. Margins are well below industry leaders BHP and Rio Tinto, and some way behind Vale, meaning Fortescue sits in the highest half of the cost curve. This is a primary driver of our no-moat rating. Lower margins primarily result from price discounts from selling a lower-grade (57% to 58% iron) product compared with the 62% iron ore benchmark. The lower grade is effectively a cost for customers through a greater proportion of waste to transport and process, additional energy/coal per unit of steel and lower blast furnace productivity. This results in a lower realized price versus the benchmark. In the 10 years ended June 2023, the company realized an approximate 23% discount versus the 62% benchmark.

We retain our fair value estimate for no-moat Fortescue of AUD 17.30 per share after the company shipped about 49 million metric tons of iron ore in the second quarter of fiscal 2024. This was in line with our expectations and 2% below the same quarter of fiscal 2023 but 6% above the previous quarter. First-half fiscal 2024 shipments were roughly 95 million metric tons, 2% lower than last year, with shipments from its new 69%-owned Iron Bridge mine remaining immaterial. We continue to forecast sales of roughly 192 million metric tons (its share) in fiscal 2024, similar to last year. While Fortescue broadly maintained fiscal 2024 guidance, Iron Bridge shipments and costs were lowered. Iron Bridge is being affected by defective infrastructure that will require modest additional capital expenditure to fix. However, these changes are immaterial to our fair value estimate.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

Fortescue is the world's fourth-largest iron ore exporter. Margins are well below industry leaders BHP and Rio Tinto, and some way behind Vale, meaning Fortescue sits in the highest half of the cost curve. This is a primary driver of our no-moat rating. Lower margins primarily result from price discounts from selling a lower-grade (57% to 58% iron) product compared with the 62% iron ore benchmark. The lower grade is effectively a cost for customers through a greater proportion of waste to transport and process, additional energy/coal per unit of steel and lower blast furnace productivity. This results in a lower realized price versus the benchmark. In the 10 years ended June 2023, the company realized an approximate 23% discount versus the 62% benchmark.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

No-moat Fortescue shipped about 46 million metric tons of iron ore in the first quarter of fiscal 2024. This was in line with our expectations but 3% below the same quarter of fiscal 2023 and 6% below the previous quarter. Shipments from its new 69%-owned Iron Bridge mine were immaterial. Fortescue's average realized price was USD 100 per metric ton, up 14% on last year, driven by higher benchmark prices and a lower discount, which fell to 13% from 15%. With its generally lower-grade ore, around 57% to 58% iron content, Fortescue incurs a discount to the 62% benchmark price. Discounts tend to shrink when steelmaking margins contract, as has happened. Then steel mills act to minimize costs by using cheaper, lower-grade iron ore, rather than maximizing steel volumes by using higher-grade iron ore when steelmaking margins are high. Iron ore prices remain elevated on strong Chinese steel production.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.

Fortescue is the world's fourth-largest iron ore exporter. Margins are well below industry leaders BHP and Rio Tinto, and some way behind Vale, meaning Fortescue sits in the highest half of the cost curve. This is a primary driver of our no-moat rating. Lower margins primarily result from price discounts from selling a lower-grade (57% to 58% iron) product compared with the 62% iron ore benchmark. The lower grade is effectively a cost for customers through a greater proportion of waste to transport and process, additional energy/coal per unit of steel and lower blast furnace productivity. This results in a lower realized price versus the benchmark. In the 10 years ended June 2023, the company realized an approximate 23% discount versus the 62% benchmark.

Commodity prices have generally stabilized after falling on concerns that China’s reopening would underwhelm, along with worries over a recession in the West. Even so, they remain elevated versus history and cost-curve support. The Russian invasion of Ukraine and subsequent sanctions on Russia support energy prices and reinforce the importance of energy security.

No-moat Fortescue’s fiscal 2023 result broadly met our expectations. Adjusted net profit after tax of USD 5.5 billion, or USD 1.79 (AUD 2.77) per share, was down around 10% on last year but similar to our estimate. Adjusted EBITDA fell 6% to roughly USD 10 billion, driven by 5% lower realized iron ore prices to USD 95 per metric ton. Modestly higher sales volumes and lower shipping costs offset a 10% increase in unit cash costs due to inflation to about USD 18 per metric ton. Fortescue will pay an AUD 1.00 final dividend in September for a fiscal 2023 total of AUD 1.75 per share fully franked. This was 6% below our estimate but met the middle of Fortescue’s 50%-80% target payout ratio. Free cash flow of USD 4.3 billion rose 19% on last year and the balance sheet is very strong, with minimal net debt of USD 1 billion, or 0.1 times trailing 12 months EBITDA.

No-moat Fortescue shipped about 46 million metric tons of iron ore in the third quarter of fiscal 2023, 6% below the second quarter of fiscal 2023, but in line with our expectations and the prior corresponding period, or pcp. Its generally lower-grade ore (around 57% to 58% iron content) means it incurs a discount to the 62% benchmark price. The company’s average realised price was USD 109 per metric ton, up 9% on the pcp, helped by Fortescue incurring a lower discount, which fell to 13%, down from 30% in the pcp. Discounts tend to shrink when steelmaking margins contract, as has happened. Then steel mills act to minimise costs by using cheaper lower-grade iron ore, rather than maximising steel volumes by using higher-grade iron ore when steelmaking margins are high. Iron ore prices have moderated recently on worries over the stability of the world’s financial system and a potential recession.

We retain our AUD 15 fair value estimate for no-moat Fortescue, with shares trading at a 50% premium to fair value. We think this partly reflects current iron ore prices, which remain elevated compared to the cost curve, and which have risen recently due to expectations of rising demand from China as it reopens after abandoning its zero-COVID-19 policy. We also think enthusiasm over Fortescue’s bold green energy ambitions is another driver of the premium. Yet green energy is an expensive and capital-intensive space, so we remain more circumspect. In our view, iron ore will remain the main driver of Fortescue’s earnings for the foreseeable future.

No-moat Fortescue’s fiscal 2022 profit declined, but was still strong and reflective of above-cycle iron ore prices. Adjusted net profit after tax was USD 6.2 billion, or USD 2.01 per share—around AUD 2.77—down from USD 10.3 billion in the prior year. The decline was driven by lower iron ore prices, with increased cash operating costs offset by higher sales volumes. Adjusted EBITDA was USD 10.6 billion, 36% below the USD 16.4 billion earned in fiscal 2021. The USD 5.8 billion sequential decline in adjusted EBITDA reflected the lower average iron ore price. The company’s lower-grade ore, around 57%-58% iron content, receives a discount to the 62% benchmark price. Fortescue achieved an average realised price of about USD 100 per metric ton in fiscal 2022, down from USD 135 in the prior year and discounts of 28% and 12% versus the benchmark respectively. Modestly higher iron ore sales volumes of 189 million metric tons, up from 182 million metric tons, offset higher cash operating costs due to rising labour, fuel, and logistics expenses.