Since the release of its FY2013 profit results on August 22, there has been a noticeable shift in sentiment toward Fortescue Metals Group (ASX: FMG).
Not only did it beat consensus earnings as a result of declining costs, but prospects are for a further reduction in unit costs. This may be achieved by increasing production over the longer term, while reducing unit costs across a fixed asset base.
The company has shown several signs of increased confidence in its ability to generate cash flow going forward. One surprise upon the profit release was the dividend of 10 cents, which was expected to be 4 cents. Subsequently, this confidence has been reinforced by a repayment of $140 million of its most expensive debt, along with three recent global credit rating agency upgrades. Finally, Andrew Forrest, non-executive chairman and former CEO of Fortescue, has also revealed his personal assuredness by purchasing an additional $23 million worth of shares.
Perhaps the most significant comment was by BA-Merrill Lynch, which noted that FY2014 guidance was conservative for both production and costs. This is not to be understated as investors, both professional and private, place a premium on stocks that have a record of underpromising and overdelivering. In this respect, the company has been less than conservative in the past and in combination with a prior corporate failure at Anaconda Nickel presided over by Andrew Forrest, the investment community has been understandably wary.
Finally, a recent reduction in IMF growth rates for the world economy has been somewhat countered by the Bureau of Resources and Energy Economics forecast of continuing strong Chinese growth. This led to an estimated uptick for Australian iron ore export volumes, to an annual growth rate of 10.2% for the next five years. This has been somewhat validated by a record month for exports of iron ore from Port Headland, which is also a result of increased production by BHP Billiton (ASX: BHP).
Foolish takeaway
Fortescue is starting to overcome some reservations about its debt levels, costs and less than conservative forecasts of prior years. While we are investing for the long term, a 10% share price outperformance since its profit result, compared to both BHP and Rio Tinto (ASX: RIO), may well be a sign of things to come.
However, one must bear in mind that Fortescue lacks diversification as a single commodity company, beholden to daily fluctuations in the spot iron ore price.
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More reading:
- BHP, Rio, Fortescue shareholders to benefit from solid iron ore outlook
- BHP, Fortescue achieve record exports
Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.
