Fortescue Metals Group Limited (ASX: FMG) has slashed its half-year dividend to just 3 cents after it reported a massive 81% decrease in net profit after tax (NPAT), which fell to just US$331 million from US$1.723 billion in the prior corresponding period (pcp).
Although the profit actually beat some analysts' expectations, investors still sold the stock down 2.6% to $2.61 early in the session.
So What: In the six months ended 31 December 2014, Australia's third-largest iron ore miner made a number of provisions to offset the crashing iron ore price. With the commodity having more than halved in price over the last 14 months, the miner has focused on increasing production whilst also heavily reducing costs.
It shipped 82.7 million tonnes during the six months, reflecting a 53% increase on the pcp, whilst it also recorded a 9% improvement in C1 costs, which it said averaged US$30 per wet metric tonne. It also said that its realised price through the period was US$66 per dry metric tonne, while C1 costs should fall to between US$25-$26 per tonne in the second half.
Despite these provisions, Fortescue's revenues and earnings still took a big hit. Total revenue declined by more than 17% to US$4.858 billion, while underlying earnings before interest, tax, depreciation and amortisation (EBITDA) fell 55% to $1.44 billion.
Of concern, Fortescue's cash flow also declined significantly, falling to just US$905 million. Given Fortescue's net debt of US$7.5 billion (including cash on hand of US$1.6 billion), this is a big worry for investors – should the iron ore price fall any further, Fortescue may struggle to repay its dues.
Perhaps surprisingly, Fortescue still managed to declare a 3 cent per share (fully franked) dividend, down from 10 cents in the same half last year. The market will now turn to BHP Billiton Limited (ASX: BHP) which will report its half-year earnings on Tuesday, 24 February.
Now What: The iron ore price has rebounded over the last couple of days, but most analysts believe it has further to fall over the course of 2015. Although Fortescue will continue cutting costs and increasing production in the second half, the miner remains a very risky prospect and one that investors should think twice about before committing to a buy.