The Fortescue Metals Group Limited (ASX: FMG) share price is on the rise on Thursday.
The iron ore producer's shares are up 3% to $8.95 following the release of its first quarter update.
How did Fortescue perform in the first quarter?
Fortescue has started FY 2020 in a very positive fashion.
During the first quarter, the company recorded a 5% increase in shipments to 42.2 million tonnes (mt).
Also heading in the right direction was its costs. Fortescue's C1 costs reduced 2% over the prior corresponding period to US$12.95 per wet metric tonne (wmt).
But perhaps best of all was the price it commanded for its iron ore. Due to a spike in prices, Fortescue's average revenue received was US$85 per dry metric tonne (dmt). This was a massive 89% higher than the US$45 per dmt it recorded in the first quarter of FY 2019.
This led to strong free cash flow generation and allowed Fortescue to continue repaying its debt. At the end of the period Fortescue's net debt stood at US$0.5 billion, compared to US$2.1 billion at the end of June.
It has also allowed the company to renew its $500 million share buy-back program for a further 12 months to October 2020.
Management commentary.
Fortescue chief executive officer, Elizabeth Gaines, was very pleased with the strong start to FY 2020.
She said: "Fortescue's outstanding operational performance across mining, processing, rail and port delivered shipments of 42.2mt, a five per cent improvement on Q1 FY19, at a C1 cost of US$12.95/wmt. Through the quarter we maintained our enhanced product mix with strong demand for our range of products, including our 60.1% iron content West Pilbara Fines. This is reflected in Fortescue's contractual price realisation which averaged 89 per cent of the benchmark 62% CFR Index price during the quarter."
"The combination of operational performance and realised price has generated exceptional operating cashflows and lowered net debt to US$0.5 billion at 30 September 2019. This has provided the capacity to further strengthen the balance sheet through debt reduction and refinancing of the Term Loan on improved terms," she added.
Outlook.
Looking ahead, Fortescue's guidance for FY 2020 remains unchanged. This includes shipments of 170-175mt and C1 costs in the range of US$13.25-13.75/wmt.
Overall, I thought this was a very strong update. Whilst I still have a preference for BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) at current levels, I do believe Fortescue could be a great option if iron ore prices remain favourable.
