Fortescue Metals Group Limited shares plunge as profit collapses

Fortescue Metals Group Limited (ASX:FMG) reported a steep fall in profits on the back of a sinking commodity price.

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Shares of Fortescue Metals Group Limited (ASX: FMG) are in a tailspin.

Down 7.5% in morning trade, the ASX reacted mercilessly to both global market concerns and the miner's falling profit.

In the year to 30 June 2015, Fortescue generated sales revenue of $US8.57 billion, down just 27% on the prior period, but it also posted a steep 88.5% fall in profit after tax.

Despite a 33% increase in shipped ore, to 165 million tonnes per annum, a swift 42% fall in Fortescue's realised price for iron ore outweighed the efficiency gains. Remember that Fortescue's ore is lower quality than the market's average 62% Platts index.

Therefore, it receives a 'percentage' of the index price from customers in return for a lower quality product. In 2015, Fortescue's realised price was $US57 a tonne, or just 79.17% of the index, down from $US106 a tonne and a realisation of 86% of the market price in the prior period.

However, the group said in its media release that: "Price realisations on a contractual basis were maintained at 85% or US$57/dmt, based on an average contractual price of US$67/dmt."

In 2015, a number of cost benefits were realised.

Total delivered costs fell from $US52 a tonne to just $US38 a tonne. All up, the group says it made $1.596 billion in savings using the group's underlying EBITDA (earnings before interest, tax, depreciation and amortisation) as a profitability metric.

Fortescue CEO, Nev Power, said: "In a challenging environment of lower iron ore prices, this focus on efficiency and productivity from our world class assets will continue to see operational improvements and cost reductions while we maintain production at 165mtpa to create long term value for Fortescue shareholders."

At 30 June 2015, the group had around $US9.5 billion in total debt, but during the year it produced positive cash flow of $US2.037 billion before investing and financing cash flows are included.

Pleasingly (depending how you look at your investments), the company announced a fully franked dividend of 2 cents per share, on earnings per share of 10 cents. The company said the Board's decision to pay cash to shareholders demonstrates its "confidence in the long term market for iron ore and ability to drive down costs to improve its position on the global cost curve."

Should you buy Fortescue shares?

Looking ahead into 2016 the group set shipping guidance at 165 million tonnes, an average C1 cost of $US18 per tonne and capex per tonne was maintained at $US2.

Despite its best intentions, however, the reality is that Fortescue cannot control the market price for its product, and future earnings will be at the mercy of ongoing demand from China. Personally, I think – if you haven't decided to do so already – it's time to get out of iron ore miners altogether.

Motley Fool contributor Owen Raskiewicz has no position in any stocks mentioned. Owen welcomes your feedback on Google+ (see below), LinkedIn or you can follow him on Twitter @ASXinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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