Fortescue Metals Group Limited (ASX: FMG) yesterday delivered a solid set of results for its first half which included a net profit after tax (NPAT) of US$1.714 billion, more than tripling the US$478 million it recorded in the prior corresponding period (pcp).
As was the case with Fortescue's two larger rivals, namely BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), the iron ore miner's strong results were driven by a combination of cost cutting initiatives, increased production rates and a resilient iron ore price throughout the reporting period. The commodity's price tag remained significantly higher than most analysts had predicted which resulted in heavily increased margins.
Production
The world's fourth largest iron ore miner shipped 53.9 million tonnes of the commodity which reflects a 51% increase compared to the prior period. It also announced that its Port is operating at 155 million tonnes per annum capacity.
Fortescue maintained its full-year shipment guidance of 127 million tonnes of the commodity, although it said that weather conditions could impact on that figure. Meanwhile, Fortescue increased its amount of ore mined by 91% to 66.9 million tonnes, compared to the prior period .
Here are some of the other highlights for the half:
- Revenue climbed 77% to US$5.87 billion compared to the $3.32 billion recorded in the pcp
- Diluted earnings per share soared 258% to 55.01c from 15.35c
- C1 costs decreased by 34% to US$33/wmt. This was aided by cost improvements as well as a lower Aussie dollar
Reduced Debt
One of the primary concerns amongst Fortescue's shareholders in recent years has been its enormous levels of debt which it may not have been able to repay had iron ore prices dropped considerably. The debt figure was one of the factors that management focused on over the period, cutting it from US$10.5 billion to US$8.6 billion. Pleasingly, the company also said it was a "reasonable expectation" that a further US$2 billion would be repaid in 2014 which would help it reach its target gearing level of 40%.
Dividends
While the miner did not distribute an interim dividend in 2013, the miner shocked the market with a 10c dividend for its first half this year which was consistent with its FY13 full-year dividend. Further increased payouts could be possible over the coming years, as the company continues to work towards achieving its target gearing level.
Outlook
Unlike BHP's Andrew Mackenzie, Fortescue's CEO, Nev Power, delivered a very optimistic outlook for iron ore. Although he recognised that Australia's and Brazil's iron ore miners are heavily ramping up supplies, he also believes that steel output in China is on track to hit last year's average of 2.1 million tonnes a day rate.
As such, he predicts that the commodity's price will range between US$100 and US$120 a tonne for the remainder of the calendar year while its break-even price remains at around US$70 a tonne (although that will likely fall lower as it continues to produce more and reduce costs).
Foolish takeaway
Despite the strong results, Fortescue's shares dropped 2.3% in value yesterday, perhaps due to the fact that its profit numbers were slightly lower than some in the market had expected.
Whether Fortescue is a good investment prospect rests on each investor's own opinion regarding the future of iron ore. If you think iron ore will remain strong for the long term then Fortescue or Rio Tinto both present as good options for your portfolio. Investors who are not so confident could consider buying shares in BHP, which maintains far more diversified operations, or may choose to avoid the sector altogether.
