Fortescue Metals Group Limited posts US$319 million profit: Is it a buy?

Credit: Chatham House

Australia’s third-biggest iron ore miner, Fortescue Metals Group Limited (ASX: FMG), has announced its half-year earnings results today, reporting a net profit after tax (NPAT) of US$319 million.

Here’s a summary of some of the highlights:

  • Sales revenue of US$3,344 million, down 31%
  • Net profit of US$319 million, down 3.6%
  • Operating cash flows of $1,388 million, up from $905 million in the pcp
  • Diluted earnings per share of 10.24 cents, down from 10.62 cents in the pcp
  • Net gearing level of 44%, down from 49% in the pcp
  • AU 3 cent per share fully franked dividend, unchanged from the pcp

Like most other miners in the sector, Fortescue has been battered in recent years by the plummeting iron ore price which fell from US$185 in 2011 to a low beneath US$40 a tonne in December 2015. In response, it has desperately gone about reducing operating costs and increasing production rates to offset the impact and, admittedly, it’s done a pretty decent job.

In today’s report, it provided an improved cost guidance of US$13 per wet metric tonne by the end of financial year 2016 (FY16), while it also achieved a record low C1 cost of roughly US$16 per wet metric tonne during the half year just finished – a 47% improvement on the prior period. It also showed that its breakeven price has fallen to US$28.80 a tonne.

Source: Fortescue Metals Group presentation

Source: Fortescue Metals Group presentation

Meanwhile, it shipped 84 million tonnes during the period (up from 82.7 million tonnes in the prior corresponding period, or pcp) with a full-year target of 165 million tonnes.

Despite the low price environment, Fortescue still managed to achieve strong operating cash flows and even repaid US$1,134 million of debt, resulting in annual interest savings of US$88 million. With US$2,318 million of cash and cash equivalents as at the end of the period, it also has US$8,448 million in debt, putting it in a net debt position of US$6,130 million.

It’s still a huge debt load (much of which falls due in 2019), and one that will need to be monitored (closely) by investors, but it is doing a reasonable job in reducing the burden.

Source: Fortescue Metals Group

Source: Fortescue Metals Group

Shares of Fortescue, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have all risen strongly in recent weeks as a result of the soaring iron ore price. It rose to US$51.60 a tonne overnight, according to The Metal Bulletin, putting it on a gain of around 34% since it hit a six-year low in mid-December.

Of course, a higher iron ore price is great for the miners and their shareholders, but whether it lasts is another question altogether. Before buying shares in any of the miners, you need to ask yourself whether the current iron ore price rise can be sustained, or if the headwinds facing the industry will force it lower over time. Although shares might be rising now, I’m not confident enough to buy shares in the sector just yet.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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