Fortescue Metals Group Limited shares sink lower on half-year result release

The Fortescue Metals Group Limited (ASX: FMG) share price has been amongst the worst performers on the market on Wednesday following the release of the iron ore producer’s half-year results.

At the time of writing Fortescue’s shares are down 4% to $5.15.

Here are key takeaways from the release (US$):

  • Half-year revenue fell 18% on the prior corresponding period to $3,679 million.
  • Underlying EBITDA declined 31% to $1,828 million.
  • Net profit after tax sank 44% to $681 million.
  • Cash generated from operations of $1,391 million.
  • C1 costs of $12.11 per wet metric tonne (wmt).
  • Net debt of $3.3 billion, inclusive of $892 million in cash
  • Basic earnings per share of 21.9 cents and an interim dividend of A$0.11 per share declared.
  • Outlook: Shipments of 170mt and C1 costs of $11 to $12 per wmt.

Whilst this result look like a bit of a disaster at first glance, I believe it was largely in line with expectations.

As many readers will be aware, Fortescue’s lower grade ore has fallen out of favour with steel mills lately, leading to a larger than normal discount between low grade at the benchmark 62 fines ore. This is because high steel mill profitability has incentivised blast furnaces to maximise production by using higher iron content ores.

Ultimately, this led to Fortescue ending the period with realised revenue of US$47 per dry metric tonne (dmt), compared to the average 62 fines price of US$68 per dmt. As a comparison, in the prior corresponding period Fortescue was commanding US$56 per dmt, while 62 fines averaged US$65 per dmt.

But there is reason to be optimistic. Based on current market expectations management believes that the discount will lessen to 70% to 75% of the 62 fines price over the full-year from 69% in the first-half. Management has also forecast C1 costs reducing to between US$11 and US$12 per wmt for the full-year. This could put Fortescue in a position to deliver a much-improved second-half.

Should you invest?

Whilst my preference remains BHP Billiton Limited (ASX: BHP) and then Rio Tinto Limited (ASX: RIO), I still think that Fortescue is an attractive option in the resources sector. Especially after today’s decline.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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