Australia's 3rd largest iron ore miner, Fortescue Metals Group Limited (ASX: FMG), reported a 45% rise in revenues and a 56% jump in net profit for the 2014 financial year, compared to 2013, earlier this week.
Net profit was a whopping US$2.73 billion, on revenues of US$11.8 billion, thanks mainly to a 54% rise in iron ore shipped at 124 million tonnes.
But that was this year, what about next year…
The company has achieved its target annualised run rate of producing 155 million tonnes, so production next financial year should be slightly higher than the current year. Operating costs fell 23% with C1 cash costs at US34 per tonne, and Fortescue is predicting costs of around US$31 to US$32 a tonne in 2015. The miner says its total delivered cost was US$56 per tonne and it received an average price during the year of US$106 per tonne.
But Fortescue will receive less than that this financial year, given the current iron ore price is around US$92 per tonne, and has been around that price for some time. Fortescue also sells its iron ore at a discount to that price, because it contains a lower grade of iron ore. The company says it expects the discount to narrow as balance is restored between demand and supply.
A massive amount of iron ore supply, mostly from high cost Chinese miners, has been knocked out of the market according to a number of the major miners, including Rio Tinto Limited (ASX: RIO).
So lower production costs, at least an additional 30 million tonnes of production and a lower average iron ore price all need to be factored into what Fortescue can achieve next financial year.
Can Fortescue pay off more debt…
Capital expenditure is expected to fall again to US$1.3 billion from US$1.9 billion this year, as the rapid expansion phase slows. Another plus was the US$6.25 billion in operating cash flow, which allowed Fortescue to pay off US$3.6 billion in debt in less than a year. The company says it expects to pay off between US$0.5 billion to US$1.0 billion next year, but that's probably conservative. Fortescue currently has net debt of US$7.2 billion, after accounting for US$2.4 billion in cash.
Interestingly, analysts are forecasting a 38% fall in net profit next financial year, which appears overly pessimistic in my view. Based on last year's earnings, Fortescue is now trading on a P/E ratio of around 5 times earnings.
The closer Fortescue gets to paying off its huge debt load, the better it looks. The question for investors is this: Does the current share price give me a decent margin of safety for the risks involved?
In my view, I'm not sure, but it's certainly getting more interesting.
