The Fortescue Metals Group Limited (ASX: FMG) share price is under the spotlight as its reporting time gets close.
Fortescue is one of the biggest iron ore miners in the world. It's expected to make a fairly large profit in the upcoming result and pay a pretty big dividend.
As a resources business, Fortescue's short-term success is heavily linked to the performance of the iron ore price. If the iron ore price rises, it doesn't cost much more for Fortescue to mine the iron, aside from government payments, so extra revenue can largely fall to the net profit line of the accounts. But, the reverse is true when iron ore prices fall.
Insights into FY22 update
In the production report for the three months to June 2022, Fortescue said that it achieved average revenue of US$108 per dry metric tonne (dmt) and an average of US$100 per dmt in FY22.
The C1 cost was US$17.19 per wet metric tonne (wmt) for the fourth quarter and US$15.91 per wmt for FY22. As readers can see, there is a sizeable profit margin between the revenue and costs.
The company shipped 189 million wet metric tonnes of ore, up 4% year over year. The iron is shipped with 8% to 9% moisture, according to Fortescue.
Fortescue has already provided guidance for FY23 of iron ore shipments of between 187mt to 192mt, including approximately 1mt from Iron Bridge (its new, high-grade project).
There are a number of different analyst estimates for what Fortescue may reveal for FY22. Let's look at one of them before getting into whether the Fortescue share price is a buy.
According to the numbers on CMC Markets, the market predicts Fortescue to generate $2.91 of earnings per share (EPS) in FY22. That would put the miner's current valuation at under 7x FY22's estimated earnings.
The projection for the annual dividend is $2.07 per share, which would represent a dividend payout ratio of just over 70% of net profit after tax (NPAT). In terms of a dividend yield, that would be a grossed-up yield of 15.4%.
Is the Fortescue share price a buy?
Before getting to some broker views, I'll just share my two cents, seeing as I'm a Fortescue shareholder. I plan to own my shares for years to come because of the company's green energy initiatives, as it aims to build up a green hydrogen industry and become a major exporter with a global network of projects.
However, considering Fortescue generates nearly all of its earnings from iron ore, and will continue to do so for multiple years, I think it's important to ensure any investing is done with the iron ore operations and iron ore price in mind.
I think it's possible that the iron ore price could fall to the US$90s – like it did in November 2021. Or even lower due to the weakening Chinese economy and issues facing the construction sector.
If the iron ore price and Fortescue share price were to suffer, I think that could prove to be an opportunistic time to buy. And I would consider buying more. My average purchase price of Fortescue shares is materially lower than where it is today, which is partly why I'm being picky about any further investing.
But, I'm not the only one being cautious on the iron ore price.
The broker Macquarie has an underperform rating on Fortescue, with a price target of just $14.50. It thinks the iron ore price could fall below US$90 by the end of 2022 due to lower demand from China.
UBS rates Fortescue as a sell, with a price target of $15.80. Higher mining costs is one of the reasons for the negativity, as well as uncertainty for the iron price. Fortescue's guide is that the FY23 C1 cost is likely to be between US$18 and US$18.75 per wmt.
Fortescue share price snapshot
Over the last month, Fortescue shares have risen by around 5%.
