Fortescue (ASX:FMG) share price lower following Q2 update

Fortescue’s shares are falling on Tuesday…

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Key points

  • Fortescue delivered record shipments during the first half
  • The discount for its low grade iron ore product is widening
  • Costs are up 20% year on year but flat quarter on quarter

The Fortescue Metals Group Limited (ASX: FMG) share price is falling on Tuesday.

In morning trade, the iron ore producer’s shares are down 1% to $20.32.

Fortescue share price falls following second quarter update

Investors have been selling down the Fortescue share price this morning following the release of its second quarter update.

For the three months ended 31 December, the company recorded iron ore shipments of 47.5 million tonnes (mt). This led to a 3% increase in first half shipments to a record of 93.1mt.

However, taking the shine off these strong shipments was further weakness in the price Fortescue is commanding for its low grade iron ore.

The release reveals that the company recorded average revenue per dry metric tonne (dmt) of US$74.36. This represents revenue realisation of 68% of the Platts 62% CFR Index for the quarter, which is down from 73% in the first quarter.

And while Fortescue’s C1 costs were up 20% year on year, they remained flat quarter on quarter at US$15.31/wet metric tonne (wmt). The year on year jump in costs reflects the price escalation of key input costs. These include diesel, other consumables and labour rates, the integration of Eliwana, and mine plan driven cost escalation.

Looking ahead, management expects its costs to remain broadly in line with current levels over the rest of FY 2022 and is guiding to full year C1 costs of US$15.00 to US$15.50 per wmt.

As for shipments, Fortescue expects a similar performance in the second half. This will lead to full year shipments of 180mt to 185mt.

However, Fortescue has warned that its capital expenditure is likely to be US$200 million higher than previously planned at between US$3 billion and US$3.4 billion after incorporating the acquisition of Williams Advanced Engineering. This doesn’t include any costs relating to the highly divisive Fortescue Future Industries business.

Management commentary

Fortescue’s Chief Executive Officer, Elizabeth Gaines, was very pleased with the first half.

She said: “The Fortescue team has again delivered an outstanding performance for the first half of FY22 with mining, processing, rail and shipping combining to deliver record second quarter shipments of 47.5 million tonnes, contributing to record performance for a half year of 93.1 million tonnes. “

“Our C1 cost was in line with the previous quarter, reflecting our strong focus on cost management to mitigate inflationary pressures associated with strong demand for labour and resources, as well as supply chain constraints due to COVID-19. We are proud of the entire Fortescue family who continue to deliver record operating performance and achieve key project milestones,” Ms Gaines added.

The Fortescue share price is down 20% over the last 12 months.

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