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FMG - Fortescue Ltd

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Total debt isn’t as important as the duration and interest rate, bonds can be a quasi permanent part of the capital structure just like shares, for example one of the companies on the ASX I invest in has a 60 year bond on its balance sheet, at that point it’s just a stable as share holders equity.

You can see the bulk of FMG debt doesn’t mature till after 2030, it’s a very stable capital source, and next maturity isn’t till 2026, and it’s less than one dividend.

 
This is the bond I mentioned above, it matures in the year 2072 (Although APA can pay it off sooner at each 5 year interval I believe)

But it certainly shows that bonds can be a very long term source of capital.

 
So what do we all see as the driver to push up the price of FMG?
The critical part is the price they get for the commodity they produce.
Iron ore is going down, and has been for a while.
Looking at the Singapore futures, Its down 8% this month, and 22% for the year.
Chinese Iron ore has been stockpiling for months.
I can't see anything in the above that would push the SP up, other than of course broker spruiking.
Mick
Edited:
The announcement by Plibersek that Labour was considering a Greens’ demand for a climate trigger under its new environmental laws in a reversal of an original pledge is just another potential roadblock for any sort of mining in Australia.
 
Last edited:
mullokintyre said:
So what do we all see as the driver to push up the price of FMG?
...
Click to expand...
Good afternoon @mullokintyre
Reckon the Chinese economy and has allot to do with it. If Jim Chalmers is to be believed the lad warned last month that China’s slowing economy would dampen iron ore prices and hit the federal budget bottom line by up to three billion.



Have a very nice day, today.

Kind regards
rcw1
 
mullokintyre said:
So what do we all see as the driver to push up the price of FMG?
Click to expand...
Pretty much all it will take is business as usual and the price of Iron Ore not crashing to $60 for ever.

I mean, the share price has crashed this far mostly out of fear that Iron Ore “could” fall to really low levels and never recover, this is not very likely at all.

FMG’s break even point is about $35 per tonne, so current levels are not the end of the world, $90 a tonne is awesome, $80 a tonne still produces enough cashflow to pay dividends that would make the company worth $28 per share.

So, it’s not that we need to see big improvements in the iron ore price for FMG share price to shift, we probably just need the market to realise that the world isn’t ending, and the dividends will keep flowing.

The current share price is based on really negative outlook, which probably won’t happen.
 
Basically what I have noticed over the years is that pessimism is very quickly priced into FMG’s share price, but the good times are never really priced in.

For example when the good times are rolling, the FMG share price never really factors that in as if it will last forever (which is probably a good thing), but the moment the Iron Ore price corrects the price drops quickly to doom and gloom levels as if the bad times are coming in a big way and will be around forever.
 
As an example of what I mean.

In 2021 the Iron Ore price was so strong it caused FMG to pay dividends inc franking of $5.11 per share, but its share price peaked at only $25, which is a dividend yield of 20%. So the market was never pricing in those high Iron ore prices as if they were here to stay, the $25 share price was a prediction that dividends would more than halve, other wise the share price would have been over $80 a share.

However, the moment that Iron prices did correct, and dividends did halve, rather than accepting that the $25 share price already priced in a lower iron ore price, and meant that the halving of dividends would still make it a 10%+ dividend. The share price fell to $15 meaning the dividend yield was still 20% .

And it’s being repeated right now.

It’s not that FMG was hugely over valued at $29, and it needed Iron Ore to stay elevated to justify it, because it can justify that share price on a much lower earnings and dividend yield.
 
Just to point out another example of really long dated debt that can be used, APA issued more debt today with a 20 years term. So as I said debt can become a quasi-permanent part of the capital structure.

And really this is a good thing for investors, because it allows pension funds and insurance companies that want fixed interest on their books to get more access.

Some people want to own fixed interest some people want to own equity, big companies have the ability to build both into their capital structure, it’s not a bad thing.

 

Iron ore price soars to over one-week high on upbeat seasonal demand outlook​

September 12, 2024
Iron ore futures prices surged on Thursday to hit their highest in more than a week, as prospects of improved seasonal demand in China outweighed concerns over the top consumer’s economic recovery.

The most-traded January iron ore contract on China’s Dalian Commodity Exchange (DCE) ended daytime trade 3.97% higher at 707.0 yuan ($99.25) a metric ton.

The contract hit an intraday high of 709.0 yuan, its strongest level since Sept. 3.
The benchmark October iron ore on the Singapore Exchange was 1.95% higher at $94.55 a ton, as of 0732 GMT.
“While China’s economy continues to face headwinds, we see pockets of growth that should provide some support to commodity markets,” said ANZ analysts in a note.

Steel demand is expected to return to growth in 2025, as a rise in non-property sectors, such as machinery, shipbuilding and transport, is helping offset the sharp fall in demand from the property sector, ANZ said.
Chinese steelmakers have built up their inventory of imported iron ore recently to prepare for the upcoming Mid-Autumn Festival holiday over Sept. 15-17, as replenishment is expected to become less convenient during holidays, Chinese consultancy Mysteel said.
The restocking of inventories may lead to a rebound in iron ore demand in the short term, Chinese financial information site Hexun Futures said.
Analysts have differing opinions on the ‘Golden September’ peak period of the steel industry, with some believing the downward trend in demand and cost reduction is difficult to change, while others believe demand may recover, and the key lies in steel transactions and building materials demand, added Hexun Futures.
Other steelmaking ingredients on the DCE jumped, with coking coal and coke up 5.04% and 4.87%, respectively.
Steel benchmarks on the Shanghai Futures Exchange gained further ground. Hot-rolled coil climbed 3.44%, rebar gained about 3.1%, wire rod added 1.87%, and stainless steel advanced 1.75%.
($1 = 7.1237 Chinese yuan)
(By Gabrielle Ng; Editing by Mrigank Dhaniwala)
 
Interesting that you use $35/ton as break even and this article today mention $65 as the break even price, that's a large discrepancy.

A commodity slump has run a bulldozer over our miners, and our export income

Commodity prices are being walloped. For a nation like Australia that relies upon mineral exports, the consequences could be significant.
www.abc.net.au

From the article:


BHP reportedly has a break-even price of around $US45 a tonne with Rio Tinto around the same level, so both are still making huge margins on their iron ore price at today's prices.

Fortescue break-even price has been reported to be around $US64 a tonne and, given its reliance on the one product, a sustained drop would seriously damage its profits.

Mineral Resources break-even point, however, is above $US80 a tonne. At current prices, it is barely eking out a living. Given it has more than $4 billion in debt, it is the company most likely to feel the squeeze on the current commodity slump.

For the time being, it should be fine, having just sold around $1.5 billion in assets.
 

sptrawler said:
Interesting that you use $35/ton as break even and this article today mention $65 as the break even price, that's a large discrepancy.
Click to expand...
it’s probably just that who ever wrote that article doesn’t know how to do the math properly, I think I know the mistake they made.

But Macquarie uses $40 as their estimate as I show in the picture below, which is pretty close to my estimate, I think Macquarie are including some non cash costs that I don’t, or Macquarie could be being conservative. but $65 from your article is just wrong.

I think where your $65 number went wrong is that they are adding some costs, that actually change as the price reduces, eg if they looked at the royalty and grade discount etc paid last year per tonne and just included it as a fixed cost, it will give a funky result because those costs reduce as the price reduces, also you need to add back deprecation and deduct a more accurate sustaining capital.

 
@sptrawler

Just to give you a bit more colour as to how I go about my estimate of break even price.

You can see in the picture below that FMG estimates their C1 costs which is the basic cost of pulling the ore out of the ground, and sending it to port to be less than $20 per tonne, but then we have to add in some costs that aren’t included in that figure, and we have to allow for the grade discount and royalties.

So if we take my $35 estimate, and deduct the grade discount of 15% we get $28.75, then minus off the royalty paid in the $28.75 leaves FMG with $26.70, so then they have a bit over $7 to pay the non c1 costs,

So that’s how I determine $35 to be the break even, and even $1 the price is above those break even costs raises produces about $0.50 in cash flow.

Why only $0.50 in cash flow and not the full $1 ? Well when you raise the price of iron ore by $1 it raises the royalty by 7.5 cents, the grade discount by 15 cents, may increase some payments to native title groups and causes company tax to be paid on any profits. So $1 increase in price causes “owner earnings” to grow by $1 per tonne and $1 shrinkage in price causes owner earnings to shrink by only $0.50.

——————-
But saying all that, if you wish to use Macquarie’s $40 break even instead of my $35, that’s fine too but $65 is crazy.

Also, these are all USD numbers, and as I originally said just a rule of thumb, actual break even price moves around a little because the grade discount fluctuates through out the year from 5% to 20% sometimes and the USD moves around, but FMG has a big margin at current prices.

And some of those factors are offsetting eg when iron ore price drops a lot so does the Aussie dollar and the grade discount normally shrinks etc, so some of the factors are self limiting in their effect.
 
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