Fortescue Metals Group Limited reports full-year results: Can it deliver massive returns?

The world's fourth largest iron ore miner, Fortescue Metals Group Limited (ASX:FMG), fell despite a massive profit.

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What: Fortescue Metals Group Limited (ASX: FMG), Australia's third largest iron ore miner, has posted an impressive 56% rise in full-year net profit to US$2.73 billion. Despite this, shares were still trading 3 cents or 0.7% lower in mid-afternoon trade.

So What: Although iron ore prices have fallen sharply this year (iron ore is currently priced at around US$93 a tonne), a 54% boost in shipments from its Pilbara mines helped bolster Fortescue's profits for the year. Its US$2.73 billion net profit came in slightly below consensus estimates of roughly US$2.8 billion.

The average price recognised for iron ore in 2014 was US$106 per tonne, which compares to US$114 a year earlier.

In light of tumbling iron ore prices, Fortescue's debt situation has been a key area of concern for many investors. Total revenue of US$11.8 billion, a 45% increase compared to last year, allowed the miner to pay down its debt considerably from US$8.6 billion six months ago to just US$7.2 billion as at June 30, 2014. Fortescue will repay another US$500 million in October – and possibly up to US$1 billion more, depending on iron ore prices – striving towards a gearing target of 40%.

In addition, Fortescue announced a 10 cent final dividend, taking its full year dividend to 20 cents fully franked. While this represents a payout ratio of 21%, Fortescue wants to increase that to 30-40% when the targeted gearing levels are achieved.

Now What: Fortescue, which maintains a breakeven price just above US$70 a tonne, will continue to focus on reducing costs and strengthening its balance sheet over the coming year. While Fortescue could be a big winner for investors should iron ore's price stage a recovery, I would be reluctant to buy its shares based on its heavy reliance on the commodity, preferring more diversified miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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