Fortescue: Higher Pricing the Highlight in Third-Quarter Sales

No-moat Fortescue FMG 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. 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 realized price was USD 109 per metric ton, up 9% on the prior corresponding period, helped by Fortescue incurring a lower discount, which fell to 13%, down from 30% in the prior corresponding period. 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 have moderated recently on worries over the stability of the world’s financial system and a potential recession.

We keep our fair value estimate of AUD 15 per share for Fortescue, with its shares currently trading at about a 36% premium to our intrinsic assessment. The premium reflects current iron ore prices, which remain elevated compared with the cost curve despite recent declines, as well as enthusiasm around the company’s bold green energy ambitions. However, in our view it is too early to get excited about green energy, with commercially viable options not yet proven. We continue to forecast sales of about 190 million metric tons in fiscal 2023, a modest 1% improvement on fiscal 2022. With construction of its new Iron Bridge mine nearing completion, we expect continued volume growth from 2024, primarily driven by Iron Bridge ramping up to full production of around 22 million metric tons per year, likely in 2024 or 2025.

Unit costs rose around 12% compared with the prior corresponding period, driven by inflation, partially offset by a weaker AUD/USD rate. We retain our estimate for fiscal 2023 unit costs of between USD 18.00 and USD 18.50 per metric ton for its existing operations—excluding Iron Bridge.