FMG - Fortescue Ltd

[Value Collector]

Anyone know what is holding up Fortescue's Quarterly Report?

There is no hold up, the calendar of events on their website says it's due on the 23rd of July.

You can see the dates of reports months in advance, he September report will be released on the 15th of oct

 

[dat111]

There is no hold up, the calendar of events on their website says it's due on the 23rd of July.

You can see the dates of reports months in advance, he September report will be released on the 15th of oct

Thanks...

 

[stit]

There is no hold up, the calendar of events on their website says it's due on the 23rd of July.

You can see the dates of reports months in advance, he September report will be released on the 15th of oct

So what do you think? I thought it was pretty impressive reading. Once again management has delivered all promised and even exceeded in some areas. Realised price of $52/mt - $39 delivered costs x 42m shipped = $551m gross for the quarter roughly but yet share price drops by 3%. lol go figure.

 

[notting]

I thought it was pretty impressive reading. Once again management has delivered all promised and even exceeded in some areas. Realised price of $52/mt - $39 delivered costs x 42m shipped = $551m gross for the quarter roughly but yet share price drops by 3%. lol go figure.

The elephant in the room just blew it's trumpet.

"Fortescue have felt the full force of the bears by admitting that the current strip mining rates are unsustainable and these will likely rise,"

Figured.

 

[stit]

The elephant in the room just blew it's trumpet.



Figured.

sorry - I'm rely not up to speed on the ins and outs of strip ratios so don't understand how you've come to that conclusion. Can you point me to the part in this report that indicates such a dire piece of information?

As a result, life of mine strip ratios have also been revised and are now expected to average 2.3 at the Chichester Hub and 1.7 at the Solomon Hub over a 20 year period.
These sustainable improvements in strip ratio reflect
the strategic investment which Fortescue has made in processing capacity and focus on mining efficiencies. Specifically, lower strip ratios have been achieved through:
• product blending strategy – Firetail and Chichesters
• enhancing processing capacity – 85 per cent of product beneficiated
• low strip ratio Firetail operations
• improved ore body modelling and ore recovery
Strip ratios have been lower through the June 2015 quarter and will continue at low levels through the September 2015 quarter before gradually reverting to the life of mine averages in FY16.
The improvement in strip ratios is not expected to have any material impact on Reserves and Resources with an updated Reserve and Resources statement scheduled for release in the Annual Report on 24 August 2015.

 

[Value Collector]

So what do you think? I thought it was pretty impressive reading. Once again management has delivered all promised and even exceeded in some areas. Realised price of $52/mt - $39 delivered costs x 42m shipped = $551m gross for the quarter roughly but yet share price drops by 3%. lol go figure.

Yeah, the report is pretty good I am happy with it.

just on your calculations, keep in mind that every dollar over the break even price does not generate a dollar of profit.

Eg, if their production cost was $39 and the iron price was $40, they would be making about 80cents profit margin, because that extra $1 needs to be discounted by the 15% grade discount and royalty.

The elephant in the room just blew it's trumpet.



Figured.

That strip ratio is not bad, have you seen the strip ratios of the Chinese mines? Some are more than double that and lower grade ore.

Also the strip ratios always fluctuate as they work the mine plan, if you look bad over the last few years, strip ratios are never steady.

 

[notting]

Strip ratios have been lower through the June 2015 quarter and will continue at low levels through the September 2015 quarter before gradually reverting to the life of mine averages in FY16.
The improvement in strip ratios is not expected to have any material impact on Reserves and Resources with an updated Reserve and Resources statement scheduled for release in the Annual Report on 24 August 2015.

Reading between the lines - what this says is that costs are unsustainably low and will rise. Margins are in danger over the medium term if the IO price remains subdued.

 

[Value Collector]

Reading between the lines - what this says is that costs are unsustainably low and will rise. Margins are in danger over the medium term if the IO price remains subdued.

Did you read the report?

Break even Costs are still forecast to be $39 or less, any rise due to the strip ratio will be offset buy the continued reduction in other areas.

If FMG can't earn a decent margin, then a lot of other capacity is going to be making losses, that capacity will close and prices will rise to a sustainable margin for FMG, FMG is not atlas Iron.

 

[notting]

Did you read the report?

Break even Costs are still forecast to be $39 or less, any rise due to the strip ratio will be offset buy the continued reduction in other areas.

If we consider the market reaction today, it seems that there is some doubt about that offset ability, probably in the light of the fact that FMG have put a cap on production and most of the cost savings are generated from economies of scale. I guess for your sake, we hope the market got that wrong today!

 

[stit]

Did you read the report?

Break even Costs are still forecast to be $39 or less, any rise due to the strip ratio will be offset buy the continued reduction in other areas.

If FMG can't earn a decent margin, then a lot of other capacity is going to be making losses, that capacity will close and prices will rise to a sustainable margin for FMG, FMG is not atlas Iron.

You still on this or cutting your losses after such a sh*tty report?

 

[Value Collector]

You still on this or cutting your losses after such a sh*tty report?

It was roughly inline with what I expected, I mean this report includes the period with the biggest part of the price fall, and the cost cutting kind off lagged the price fall, So I wasn't expecting miracles, As I said this is a 3 year play, I expect future reports to be better from here on, I believe we have reduced cost to a low enough level to ensure sustainable margins.

What exactly was it that you thought was so sh*tty?

Free cash flow was 65cents pershare, for the year we have had that's pretty good.

 

[notting]

The report was good under the circumstances.
BHPs profit was down over 80% so their doing no better really but are not so leveraged.
FMG are surviving and not loosing money.
What's happening at the moment is going to show us how bad the price action may get.
Then there will need to be a pick up in demand from China and IO price will need to lift, to get some positive price action.
I got some at 1.64 and sold em yesterday, the next day, at 1.765.

 

[Value Collector]

When you take a closer look at the numbers, FMG's report is actually pretty good.

If you add back the depreciation and amortisation to the net profit after tax, and then minus a more realistic figure which I calculated at $480million ($2 per tonne sustaining capital + $1 per tonne allowance for future projects) then the actual underlying profit comes to around $0.50 AUD per share.

That's pretty good for a year like we have just come through.

 

[stit]

It was roughly inline with what I expected, I mean this report includes the period with the biggest part of the price fall, and the cost cutting kind off lagged the price fall, So I wasn't expecting miracles, As I said this is a 3 year play, I expect future reports to be better from here on, I believe we have reduced cost to a low enough level to ensure sustainable margins.

What exactly was it that you thought was so sh*tty?

Free cash flow was 65cents pershare, for the year we have had that's pretty good.

To be honest I was expecting a much better net profit, but am struggling to make any great real sense of it as the true merit in the report can easily get convuluted in accounting. Broadly speaking $330m net profit in the previous six months with higher costs - I was expecting the same or better in the following six months

 

[Value Collector]

To be honest I was expecting a much better net profit, but am struggling to make any great real sense of it as the true merit in the report can easily get convuluted in accounting. Broadly speaking $330m net profit in the previous six months with higher costs - I was expecting the same or better in the following six months

They actually made a lot more than that, the net profit figure is not an accurate representation of the value generation. The reason for this is because the depreciation and amortisation charges, are accounting charges that don't reflect the actual situation.

The D and A charges amount to about $8.5 per tonne, but the actual sustaining capital required to maintain the assets is only about $2 per tonne, in my numbers I increased this to $3.

The reason for this is that the depreciation charges is an accounting charge based on the original cost to build the infrastructure, such as the rail lines and port, so over a set period of time these costs will be written off, reducing the reported earnings each year.

What makes the difference in accounting charge and actual maintained cost, is the fact that it cost a lot more to build a green field rail line, than it does to maintain one, costs such as design, environmental studies, various other legal permitting etc, major earth works (carving through hill sides, leveling land), foundations for bridges etc are largely once of costs, which are written off against income each year, when the reality is all that really needs to be spent is the cost of replacing some track.

And a lot of the assets such as heavy duty bridges etc have lives much longer than their accounting life.

so the best way to deal with this is to add back the depreciation charges to the net profit after tax, and then minus a more realistic maintaince cost, they quote $2 per tonne in their break even price, I raised this to $3 in my numbers.

Fmg has build a lot of infrastructure, and it's all quite young, hence the depreciation charges on it are quite high, so you have to adjust you figures to take it into consideration.

 

[stit]

They actually made a lot more than that, the net profit figure is not an accurate representation of the value generation. The reason for this is because the depreciation and amortisation charges, are accounting charges that don't reflect the actual situation.

The D and A charges amount to about $8.5 per tonne, but the actual sustaining capital required to maintain the assets is only about $2 per tonne, in my numbers I increased this to $3.

The reason for this is that the depreciation charges is an accounting charge based on the original cost to build the infrastructure, such as the rail lines and port, so over a set period of time these costs will be written off, reducing the reported earnings each year.

What makes the difference in accounting charge and actual maintained cost, is the fact that it cost a lot more to build a green field rail line, than it does to maintain one, costs such as design, environmental studies, various other legal permitting etc, major earth works (carving through hill sides, leveling land), foundations for bridges etc are largely once of costs, which are written off against income each year, when the reality is all that really needs to be spent is the cost of replacing some track.

And a lot of the assets such as heavy duty bridges etc have lives much longer than their accounting life.

so the best way to deal with this is to add back the depreciation charges to the net profit after tax, and then minus a more realistic maintaince cost, they quote $2 per tonne in their break even price, I raised this to $3 in my numbers.

Fmg has build a lot of infrastructure, and it's all quite young, hence the depreciation charges on it are quite high, so you have to adjust you figures to take it into consideration.

Once again I appreciate your insight.

Do you know why there has been a discounting of finance and leases of $1.3b by $830 million? Why would this have been done?

 

[Value Collector]

Once again I appreciate your insight.

Do you know why there has been a discounting of finance and leases of $1.3b by $830 million? Why would this have been done?

Not sure, where abouts did you see that? If it's in the annual report, is there a number corresponding to a section in The notes?

I know as part of the cost reduction process they have been going back to service providers and renegotiating service fees etc, not sure if this is what's caused it or not, a lot of the deals that we originally signed in the heat of the construction boom when services were in tight demand had a lot of fat in them, as these roll over, service providers wanting to maintain contracts are offering deals at much lower rates and better terms, My cousin and uncle are involved in haulage contracts, a few years ago they could easily get away with raising prices each year, now contracts are sometimes 30-40% less, due to so many contractors just wanting the work, and less contracts available now construction has slowed right down.

 

[Gringotts Bank]

Was busy posting... duh...

 

[Value Collector]

Very good quarterly report released today.

Production costs reduced again, and a healthy margin is currently being made.

over the quarter debt was reduced to by over $380 Million, the debt was bought on market at a 20% discount to face value, cash on hand was increased to 2.6Billion while also amortising $100Million of prepayments.

There is a lot of value generation happening, inside this company, I am very happy to hold the stock.

 

[skc]

A good article on FMG. Plenty of details inside the operations which is difficult for outsiders to know.


http://www.afr.com/business/mining/...-head-off-the-iron-ore-plunge-20151123-gl62um